Count Out Loud managing director Carmel Creswell runs through what individuals and businesses must be mindful of come tax time when choosing to reinvest their fees in a project.
Since the introduction of the Producer Offset in 2007, it has become common practice to see reinvestments make up a portion of a film’s finance plan. Reinvestments generally occur from the key creatives and stakeholders in the film (producers, directors, post-production houses and even distributors).
What is a reinvestment?
To forego or pay back to the production services vehicle a portion of your contracted fee for service on a film. In return, you become an “interested party” or someone who has a financial interest in the film, receiving either a percentage of the copyright or future income.
What should I consider before deciding to reinvest?
Assessing the following risks before agreeing to reinvest your fees:
Is my service fee above market rate? If, during final certificate assessment, your or other interested party fees are considered ‘above market rate’, there is a risk that QAPE (Qualifying Australian Production Expenditure) may be reduced to a level considered commercially reasonable for the film. If this is the case, and the production receives a lower-than-expected Producer Offset, will this impact on your likelihood of being repaid your investment amount? The answer to this question is directly tied to your next consideration.
What is my position in the recoupment schedule or ‘waterfall’? Am I going to eventually be repaid for my reinvested amount? Your position in the recoupment schedule will directly impact how likely you are to receive back your reinvested monies. If you sit at the Producer Offset level, where repayment is likely, you would still want to ensure market rates for interested parties are being adhered to and that a provisional certificate or QAPE opinion has been sought from an accountant. How likely is it that the QAPE spend and in turn, the Producer Offset amount, will be reduced?
What income do I need to declare? If, like most businesses, you account for income tax on an accrual basis, then you need to include in your tax return all income you have earnt in a given period. If you have completed a film in the financial year, then you may have earnt your contracted fee in that year, even though you have given it back to the production as a reinvestment.
As an example: A first time producer may have a contracted producer fee of $200,000. The producer has agreed to reinvest $100,000 of the fee back into the film. The producer accounts for income tax on an accrual basis:
- Taxable Income (TI) $200,000
- Tax on TI (25 $50,000 (assuming corporate tax rate)
In the above scenario, the producer has only received $100,000 in cash from the film but has been left with a tax bill of $50,000 on the income earnt that year.
That being the case, the question that we are then often then asked is:
Do I get a tax deduction for the amount I reinvest? This will come down to your personal or business circumstances. Your tax adviser would be best placed to give advice specific to your situation.
Generally, deductibility will fall into two categories. However, you may not have a choice as to where your business falls.
1. Deductible business expense (Uncommon). If you are able to demonstrate that you are in the business of buying and selling copyright or contractual rights in a film with a profit motive, this may be an arguable position for you to take. The result would be a 100 per cent deduction for your reinvestment.
2. Asset Acquisition (Most common). Copyright and contractual rights to future income are generally considered to be intangible assets, with future benefits expected over a number of years.
What’s the problem with asset acquisition?
Having acquired an asset has not solved the $50,000 tax problem for the producer from our earlier example. The deduction that we are looking for may come about as a result of depreciation or amortisation of the asset being acquired. In order to depreciate the asset you need to consider the date it was first ‘used’ for a taxable purpose. If completion, presales or income for the film have occurred, then the asset may have been first ‘used’ at that date and be able to be depreciated.
Which depreciation method do I use?
When depreciating an asset, consider the most appropriate and beneficial method available to you.
- Temporary full expensing or instant asset write off methods may be available. Both of these methods, if able to be used in the same financial year as the service income was declared, would have the effect of reducing your taxable income to the net amount of cash you actually received and retained from the production. WIN.
- Effective Life. You may depreciate your asset over its useful life (generally three – five years for film copyright). In this situation you will be able to reduce your taxable income by the allowable depreciation deduction from the asset acquired. You will be able to continue this over the useful life of the asset. Partial Win.
Does the production company bear any risk?
Reputation, reputation, reputation. The biggest risk the production company has is potentially a reputational one. If the production company “sells” a reinvestment strategy to key individuals or businesses to bolster their finance plan and pay out less cash without mentioning that investors should seek their own tax advice, then come tax time they may have a lot of key creatives very unhappy with them for not “making them aware” of the situation they find themselves in.
For production companies responsible for financing the film, understanding the tax issues reinvestors could face, acknowledging them and helping them work through them, will allow the reinvestor to be fully aware, informed and comfortable with their decision from the outset. A win-win for all involved.
In summary, I think it is safe to say that reinvestments are tricky business. There is no one-size-fits-all; each deal will be different. The advice, however, is the same. Ask questions, assess your risks and above all else, seek independent tax advice for your own peace of mind.
This story originally appeared in IF Magazine #208. Subscribe here.