Minister Announces Closure of Tax Loophole on Films

Finance and Revenue Minister Sir William Birch today announced a proposed amendment to close down, with effect from today, a tax-driven structure involving films.

The Minister made a submission today to the Finance and Expenditure Select Committee to have the amendment included in the Taxation (Annual Rates and Remedial Matters) Bill, which is currently before the committee.

The submission asks the Committee to ensure that taxpayers have the opportunity to make submissions to the Committee on the amendment. The Minister said the Government wanted to send a strong message to the people involved in such tax-driven structures that it will not allow deals of that kind to erode the tax base at the expense of the rest of the community.

'I will take other similar action as necessary, to protect the tax base, where tax structuring of this kind is found to be occurring.

'The tax structure in this case is targeted at high income individuals. It involves arrangements where investors obtain deductions for expenditure which may be effectively reimbursed tax free,' the Minister said.

'Legislation was recently enacted to address this problem. The Government
is concerned about arrangements emerging which structure around that legislation.

'The proposed amendment will disallow part of the original expenditure deductions if there is a tax-free economic reimbursement of the expenditure.

'It is important to note that the amendment will not apply to a film arrangement that is commercially successful,' he said.

Technical details of this amendment are contained in the attached annex. Technical Annex

The Government is aware of a structure which circumvents a recently enacted provision, section EO 4A, in the film expenditure regime that is intended to protect the tax base. Section EO 4A reduces deductions for expenditure taken under the film expenditure regime if there is an effective tax-free economic reimbursement of the expenditure. The section is dependent on investors coming within the definition of 'film owner'.

The arrangement structures around section EO 4A by giving investors rights relating to the exploitation of the film that are not caught by the current film owner definition. The proposed amendments address this problem by widening the definition of
'film owner' so that all expenditure relating to films can be deducted only under the film expenditure regime in sections EO 3 and EO 4.

This gives all genuine film expenditure the same special treatment it is presently allowed. In general, film expenditure is deductible in the year the film is completed. However, if there is a subsequent tax-free economic
reimbursement, section EO 4A will apply to disallow the original deductions to the extent that the expenditure is economically reimbursed. It is important to note that the amendment will not apply to a film arrangement that is commercially successful. A further amendment ensures that a loss attributing qualifying company and its shareholders are associated persons for the purpose of section EO 4A. The amendments will apply to any expenditure incurred, or depreciation recognised, from today.