Post and VFX companies fear PDV Offset threshold change is ‘short-sighted’

'Mortal Kombat'. (Photo courtesy Warner Bros. Pictures, © 2021 Warner Bros. Entertainment Inc. All Rights Reserved.)

The Federal Government’s impending media reforms have come under fresh scrutiny from the post-production sector, which is calling for a reassessment of the proposed changes to the Post, Digital and Visual Effects (PDV) Offset.

While the government backtracked on its initial plan to reduce the Producer Offset for feature films to 30 per cent last month at the behest of industry, there are still plans to double the minimum qualifying expenditure threshold to $1 million, both for that rebate and the 30 per cent PDV Offset.

In the case of the latter, the move may alter the scope of work available.

Animal Logic CEO and Ausfilm deputy chair Zareh Nalbandian told IF raising the minimum PDV spend could be the difference between winning a project that was a “good stepping stone” for a growing business and “never getting past first base”.

“It is really short-sighted if we want to leverage the opportunity we have not just to keep the sector healthy but to grow it and to get a bigger global market share,” he said.

“It’s almost counter-intuitive to impact new companies and start-ups that are fundamental to giving the sector a healthy footing.

“I don’t see the sense in it and I hope the government can see the sense in not doing it, even though they’ve announced it, because I actually think it goes against their policy to create jobs and support highly skilled future jobs for young people.”

The proposal to raise the offset threshold comes just over a decade since eligibility was reduced from $5 million to $500,000, during which time state governments have also introduced their own compatible PDV rebates.

NSW and Queensland each offer a 10 per cent PDV incentive with a minimum spend of $500,000, while South Australia also provides 10 per cent at $250,000.

Post-production work in Western Australia is eligible for a 20 per cent rebate on the first $500,000 and a further 10 per cent for all expenditure over that.

Victoria’s VFX rebate – 6-10 per cent with $1 million spend – is the closest to the Federal Government’s proposal, but the state also a separate post-production rebate of 10 per cent with a minimum spend of $500,000.

Minister for Communications, Urban Infrastructure, Cities and the Arts Paul Fletcher told IF the change aimed to “better target” post, digital and visual effects activity that was “technically ambitious”, while also being in line with the offset’s objective of encouraging offshore productions to undertake significant post-production and visual effects work in Australia.

“Australia’s post-production and visual effects businesses are highly-regarded around the world and our creativity, skills and expertise are sought after,” he said.

“This will continue to be the case.”

‘A seat at the table’

With the pandemic demonstrating the potential of remote post-production, Ausfilm CEO Kate Marks told IF there was now a “unique opportunity” for picture, sound, and music post-production businesses to bid on work previously not sent to Australia, identifying the offset as a “crucial lever” in securing this work.

“Picture, sound and screen music post budgets rarely exceed this [$500,000] threshold alone,” she said.

“Now, more than ever, Australia has an opportunity to attract and compete for this type of work against other highly skilled post-production territories like Los Angeles, British Columbia, Montreal, and London.”

The favourable climate has been confirmed by companies such as VFX and post-production house Cutting Edge, which has studios in both NSW and Queensland.

Cutting Edge worked on the 2018 film ‘Halloween’.

Head of features and television Marcus Bolton said a silver lining from COVID had been the rise of remote working.

“Traditionally many clients wanted that ability to ‘step into a suite’, which stopped us from winning that work, whereas COVID has shown and altered the course of the industry and how it operates.

“We have been able to engage with new technologies to service remote clients like never before.

“Clients have experienced it, and it sometimes works even better than before; you really could call it the ‘new normal’.”

A recent example of the shift towards remote post-production was Simon McQuoid’s Mortal Kombat, which utilised more than 13 Australian picture, sound, music, scoring, and visual effects companies across the country.

KOJO Studios served as the South Australian post lab. KOJO group general manager Dale Roberts told IF the company’s work on the project was an example of the opportunities available in today’s climate.

“The past 12 months have been a mix of delayed or cancelled work and a significant increase in international opportunities,” he said.

“Fortunately, KOJO provided a broad range of services on Mortal Kombat to help fill some gaps.

“The key is to expand the service offering to include VFX and the full-service offering across the picture post, sound and music.

“We need to push right now to open up the world-class talent we have in Australia and build a post-production sector that regularly completes remote export work for clients worldwide.”

Spectrum Films was also one of the local companies involved in Mortal Kombat, having completed DI, Final Mix, and deliverables on the film.

Managing director Josh Pomeranz said the company stood to be affected by the raising of the PDV threshold, which could halt the “real momentum” stemming from its ‘COVID safe’ bubble and reputation for quality work.

“We are enjoying a really busy period in this country across the film industry with footloose projects,” he said.

“It would be amazing to maintain the status quo regarding the PDV rebate to ensure that we can continue our positive trajectory.”

Nalbandian said work stemming from the pandemic had begun to create consistency in a notoriously cyclical sector.

“For the first time in a long time, companies can look ahead for years and not months and know that there is going to be a lot of production and post-production and digital effects,” he said.

“The PDV incentive has been incredibly successful in making our digital, post and VFX companies globally competitive. 

“It gives us a seat at the table, and based on our talent, capability, and reputation, we secure great projects.”

Progress potentially halted for smaller companies

The proposed threshold change comes at a time of increased growth and diversity within Australia’s VFX landscape, with a raft of new companies gaining a foothold in the market across the past five years.

Among them is the Fox Studios-based Stage 23, founded in 2018 by Christian Debney and Jonathan Harman.

With a core team of four, the company expanded the scale of its work this year via Antaine Furlong’s sci-fi thriller Ascendant, providing more than 400 VFX shots, including 2D composites, photoreal 3D environments, and complex supernatural effects sequences.

Despite the recent step up, Hairman said Stage 23 stood to be impacted by the change due to its tendency to work on projects where the VFX work is minor, adding that the doubling of the threshold “did not make financial sense”.

“A majority of ‘non-VFX’ films, dramas, etc have a VFX budget between $500,000 and $1 million which is generally used on invisible VFX such as location augmentation,” he said.

“These films form most of our client base and I am concerned about the impact this will have on our business.

“The $500k cap is appropriate within the business structure of a sub $15 million non-VFX film.”

More established businesses looking to take their operation to the next level may also feel the pinch.

Michela Ledwidge founded Mod in 2010 with Mish Sparks and has since supplied realtime and virtual production services for a range of film and TV projects, such Seth Larney’s 2067.

She expected the raised threshold to affect the company’s ability to produce original IP.

“From a work-for-hire perspective, I think people will come to us regardless of the PDV because we are ten years old and a lot of what we do has existed without there being a recognised market and without any support,” she said.

“But our plans for developing the studio as a original content studio would benefit from the PDV remaining as is because we are approaching the point where our productions can tap into that more regularly.

“So the change essentially pushes back the date where we can have an original production slate.”

‘A potentially unstable foundation’

There are also a number of businesses outside of the traditional post-production which stand to take a hit from the threshold change, according to Screen Producers Australia (SPA).

SPA CEO Matt Deaner said some of its members have a “mixed model”, whereby post-production work helps diversify their operation.

“One of the things about creating IP work is that it is a high-risk game and you don’t know when your next commission will be,” he said.

“There are different strategies to stabilise your business. If you are a large business, you may have formats to sell, you may have ongoing series, but smaller-mid size businesses try to diversify their work, and one of the areas that some of our businesses have are smaller PDV businesses alongside their IP creation work.

“In taking away one of the prongs of that business, you’ve got a potentially unstable foundation.”

By lifting the threshold to a higher level, Deaner suggested that the sector would likely consolidate, with very large projects worked on by a few select operators.

“We are taking away some of the opportunities for a lot of different elements of the industry that have established themselves as smaller PDV businesses,” he said.

“We have a services and facilities section of SPA and we know those people are quite concerned about the balance is going to operate.”