ATO Ruling Could Crush Australian Film Industry

by Mary Swire, Tax-News.com, Hong Kong

03 August 2001

It was revealed on Wednesday that the Australian Taxation Office has knocked back a product ruling for the film 'Moulin Rouge' which means that the Australian investors who funded the film to the tune of $53 million are not entitled to a tax deduction.

In making this landmark decision, the ATO may have seriously jeopardised the country's appeal as a production centre for international films. In the usual way, investors (usually although not always institutions) put in 20-30% of the budget, and borrow the rest from banks, thus allowing them to claim the whole amount as a tax write-off. This is a financing avenue which has been utilised by several recent US-backed films, although most notably by 'The Matrix', a Warner Brothers production. Warner Brothers had intended to use the same mechanism for the second and third editions of 'The Matrix', but it looks like the latest heavy handedness on the part of the ATO may have stalled this arrangement.

A spokesman for the Australian investors said after the announcement was made that they were considering taking the matter to the Federal court to appeal the decision, and threatened darkly that if investors were denied the deduction, they would 'just invest in something else', leaving the studios which are still interested in filming in Australia to shoulder the entire burden.

Experts familiar with what is known as '10B financing' (the mechanism is contained within division 10B of the Tax Act), say that the ATO does not want 10B used to finance big pictures. 'They say it is being used as an entrepreneurial tax (device); we say it is a commercial transaction, which cauterises the downside (for investors) and creates an upside,' one such expert told Daily Variety.

However, there is little hope for investors and the Australian film industry that there will be a quick resolution to the matter, as the government cannot overturn ATO decisions without enacting new legislation or administrative measures, and it is thought to be unlikely that this will happen before the forthcoming general election in November or December.

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