Income tax treatment of the screen production industry under the Income Tax Act 2004: Executive summary

Executive summary

The New Zealand screen production industry has been subject to a special tax regime since the early 1980s. This paper provides a comprehensive analysis of the income tax treatment of the screen production industry under the Income Tax Act 2004 (the "2004 Act"). All statutory references in this paper are to the 2004 Act, unless otherwise stated.

Where a person has a "right or interest" (as defined in section CC 10(2)) in tangible assets relating to a film (i.e., the film, film prints, publicity material, etc), the amount received or receivable from the disposal, licensing, use, rental, or other exploitation of the film, is the income of that person in the income year in which it is derived (section CC 10).

Expenditure incurred in acquiring a "film right" (as defined in section OB 1) is allowed as a deduction under section DS 1. Section EJ 4 provides for a write-off for feature films over a period of 24 months. Section EJ 5 deals with non-feature films, and allows a write-off over two income years.

Section DS 2 provides for an accelerated write-off for "film production expenditure" (as defined in section OB 1). Film production expenditure incurred up to the completion of New Zealand films (as provided for in section EJ 6) can be 100 per cent deducted in the year the films are completed (section EJ 7). Film production expenditure incurred up to the completion of other films can be spread over two income years (section EJ 8). Film production expenditure incurred after the completion of films (whether or not New Zealand films) is deductible in the income year in which the expenditure is incurred. Section DS 2, however, does not apply to films for which a Large Budget Screen Production Grant is claimed.

It should be noted that expenditure on films that is allowed as a deduction under section DS 1 or DS 2 is accumulated until the film is completed (as defined in section OB 1).

Deductions allowed under section DS 1 or DS 2 can be clawed back by section DS 3 under film reimbursement schemes (as defined in section DS 4). Where section DS 3 applies, the Commissioner of Inland Revenue is entitled to assess taxpayers outside the time bar (section DS 3(6)).

Deductions otherwise available under section DS 1 or DS 2 will be deferred under sections GC 29 - GC 31 (the deferred deduction rule) provided certain requirements are met. The deduction is deferred until the investors are personally at risk of the expenditure incurred relating to films.

Deductions otherwise allowed under section DS 1 or DS 2 may be reduced by specific anti-avoidance provisions in relation to films, including sections GC 11A, GC 11B, GD 12, GD 12A and GD 12B. These provisions target at non-arm's length transactions and arrangements which are aimed to manipulate sections DS 1 and DS 2.

In November 2003, the Government introduced the large budget screen production grant scheme, which provides a rebate of 12.5 per cent of the Qualifying New Zealand Production Expenditure to film and television production companies provided certain requirements are satisfied. The Large Budget Screen Production Grant Criteria can be viewed on the website of New Zealand Film Commission.

Date published: 18 Nov 2005

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