Sonia Borella. Dan Pearce.
Two of Australia’s top media and entertainment lawyers – Sonia Borella and Dan Pearce from national law firm Holding Redlich – explore the topic of Production Company Structures for Producer Offset Projects. What is the best structure for your project?
When setting out to produce a new film or TV project one important task of a producer is to consider the most appropriate company structure for the project.
Each project is different and will have its own unique requirements but there are some key considerations which are likely to arise. These include:
- ï‚§ï€ Eligibility for and maximising the return from the relevant Australian Screen Production Incentive – for projects which intend to utilise the Producer Offset, Location Offset or PDV Offset.
- ï‚§ï€ Financing – Financiers and investors will often have certain company structure requirements.
- ï‚§ï€ Protecting the assets of the producer
Maximising the screen production incentives
Producers need to comply with the guidelines and eligibility requirements for the relevant offset. We will focus here on the Producer Offset. For the Producer Offset, the applicant must be an Australian company or a foreign company with an Australian permanent residency and an ABN.
While the amount of the Producer Offset which can be claimed for a project is determined by Screen Australia, the Producer Offset is a tax rebate administered by the ATO to an applicant company as part of that company’s tax return.
This means that the ATO will offset the Producer Offset amount claimed by the company against the company’s existing tax liabilities and the applicant will only receive a tax refund where the amount of the offset claimed exceeds the applicant’s tax liabilities.
This is one of the reasons why special purpose vehicle (SPVs) are often set up for new projects, although an SPV is not a requirement for the Producer Offset and ongoing companies may be eligible for the Producer Offset.
An SPV is simply a new company which has not previously traded and has been incorporated specifically for the project. This means that the SPV should have no existing tax liabilities at the time of its tax return.
In addition, to obtain the Producer Offset the applicant company must be the company which: “either carried out, or made the arrangements for the carrying out of, all the activities that were necessary for the making of the film”.
The importance of properly structuring a project to maximise the Producer Offset was illustrated in the recent decision of the Administrative Appeals Tribunal in Creation Ministries
International Ltd v Screen Australia [2015] AATA 250. In that case it was held that a critical element of the statutory scheme is that the applicant company is the company which “incurs” the production expenditure. If another company is incurring the expenditure then, depending on the arrangement, that expenditure may not count as qualifying expenditure for the purposes of the Producer Offset, even if that other company is related to the applicant company.
Financing Considerations
A financier or investor may require a certain company structure to ensure that a loan is repaid and/or to maximise the return on investment. This will often require a production company to use a SPV.
For example, the structure for cash-flowing the Producer Offset in Australia is well developed, and may involve the following:
he financier ensures it has appropriate safeguards in the transaction documents for the project (e.g. a loan agreement and a security agreement, a provisional certificate from Screen Australia, a completion guarantee, a priority deed and/or an interparty agreement).
The financier requires that an SPV is used which has no existing tax liabilities that will be deducted from the Producer Offset amount at the time of the tax return.
This ensures the accuracy of the calculation of the Producer Offset payment which is included in the relevant agreement, and upon which the interest calculation is made by the financier.
A tax agent is appointed and a tax agent direction is made so that the Producer Offset amount is paid to the financier as directly and seamlessly as possible.
From the producer’s perspective, using an SPV limits the liabilities of the production to the SPV (subject to any guarantees, securities or other assurances that an investor, financier or other party may require that a “parent” company provides).
Security interests and the PPSR
A financier will almost always take a security interest over the relevant production company or companies to secure the repayment of the loan amount. The security interest is often documented by way of a general security agreement (or deed) and, sometimes, there are additional securities such as a copyright mortgage (often required by a US financier) or other forms of security which are familiar to the particular financier.
Financiers will usually register their security interest on the Personal Property Securities Register (PPSR).
Financiers register security interests on the PPSR to secure priority over competing security interests and because a failure to do so may result in the financier losing its secured priority position in the event that the production company or companies became insolvent.
The PPSR is a national system of security interest registration created under the Personal Property Securities Act 2009 (Cth) (PPSA). The PPSR covers a wide range of security interests. For film financing this is relevant for all types of debt financing and it may also be relevant for other aspects of fil production, such as equipment leases.
Producers should be aware of (and know the status of) existing security interests which are registered on the PPSR in connection with any production company which is intended to be used for future projects.
A production company may have an existing security interest registered over all of its assets (for example, a security interest taken by a bank for a general business loan or a security interest taken by a financier for a previous film). A potential financier for a new project will conduct due diligence on the production company or companies and will not proceed unless it has comfort and certainty that an existing security interest does not impact on the rights of the financier in relation to the new project.
Dual SPV company structures
It is possible for producers to utilise what we refer to as a dual SPV company structure (and in fact some projects involve many more than two SPVs in the company structure). This means that a producer establishes two SPVs for a particular project, both of which are separate to the ultimate “parent” company.
We sometimes refer to these companies as the “rights holding company” and the “SPV”.
Under this structure the rights holding company enters into agreements with third party participants such as financiers, investors, distributors and networks (although those participants may require that the SPV is also a party to some of these agreements) and the rights holding company owns or controls the underlying rights and a share of copyright in the completed project.
The rights holding company licenses to the SPV all of the rights necessary to produce the film/TV project and the SPV incurs the production expenditure. The SPV is the applicant for the Producer Offset and accordingly will enter into the loan agreement and security agreement with a financier for Producer Offset cashflow funding (although it is common that the financier will also require that the rights holding company enters into these agreements to secure ongoing obligations).
If a Producer Offset project is set to complete early in the financial year, as long as the SPV is solvent the SPV can complete an early tax return by appointing a liquidator and voluntarily winding up.
The liquidator will lodge the tax return and distribute the Producer Offset amount to the financier. If a producer would like this option, it is essential that the company structure and project agreements are set up to ensure that the directors of the SPV will be able make the requisite declaration of solvency.
Using a dual SPV company structure can also assist producers to manage and isolate the risks associated with each project. For example, the “parent” company may not need to be a party to the transaction documents for each project (subject to the requirements of project participants). In addition, using a dual SPV company structure can also avoid the issue of having to release pre-existing security interests from previous projects or otherwise resolve the issue of competing security interests.
Tax considerations
Finally, producers should obtain tax advice to ensure that the company structures they are implementing on projects are appropriate for their circumstances. For example, a production company which is producing a slate of projects may have different tax considerations than a production company producing a single project.
Sonia and Dan would like to thank Sam Berry in assisting with the preparation of this column.