Income tax treatment of the screen production industry under the Income Tax Act 2004: Part III - Deductions and timing rules

Chapter 6 - Clawback of deductions under film reimbursement schemes: sections DS 3 and DS 4

6.1  Deductions otherwise available under section DS 1 or DS 2 can be retrospectively clawed back if a person disposes of property under a "film reimbursement scheme" (as defined in section DS 4).

Film reimbursement scheme - section DS 4

6.2 Section DS 4 defines "film reimbursement scheme". For an arrangement to be a film reimbursement scheme, three requirements must be met:

• Deduction allowed: section DS 4(2)
• Disposal of property: section DS 4(3)
• Consideration not film income: section DS 4(4)

Deduction allowed: section DS 4(2)

6.3 The first requirement for a film reimbursement scheme is that it is a scheme under which a person may incur expenditure for which they are allowed a deduction, under-

1. section DS 1 or DS 2, or would be allowed a deduction if section DS 3 did not exist:
2. subpart DA (General rules), if the expenditure is for-
   1. a film right:
   2. a right to an amount that is dependent on or calculated by reference to income from the rental, sale, use, or other exploitation of a film.

Disposal of property: section DS 4(3)

6.4 The second requirement for a film reimbursement scheme is that there is a disposal of property under the scheme of any of the kinds as follows:

1. the scheme enables the person or an associated person to dispose of property; or
2. the scheme gives a right to the person or an associated person to dispose of property; or
3. the scheme gives a right, the right creates an obligation for the person or an associated person, and the person or the associated person may meet the obligation by disposing of property.

6.5  For the purposes of section DS 4(3), a shareholder in a loss attributing qualifying company and the company are associated persons, in addition to the associated persons described in section OD 7 (Defining when 2 persons are associated persons) or OD 8(3) (Further definitions of associated persons).

Consideration not film income - section DS 4(4)

6.6  The third requirement for a film reimbursement scheme is that it is a scheme under which some or all of the consideration for the property would not be film income (see Chapter 2 for income from films).

Reduction of deductions

6.7  The total deductions that have been allowed (or would be allowed) under section DS 1 or DS 2 must be reduced to an amount equal to the greater of zero and the amount calculated using the formula as follows (section DS 3(3)):

total deductions - total consideration

6.8  Deductions must be reduced in the same order as they have been allowed or would be allowed (section DS 3(2)).

No time bar for amendment of assessment resulting from section DS 3

6.9  Despite the time bar in section 108 of the Tax Administration Act 1994, the Commissioner may amend an assessment at any time in order to give effect to section DS 3 (section DS 3(6)).

Special return - section 44A of the Tax Administration Act 1994

6.10 If a taxpayer's deductions are reduced under section DS 3, that taxpayer and any other taxpayer who are affected by that reduction must file a special return. The special return is to be filed for the tax year in which the consideration is derived and by the date that the taxpayer's return of income for that tax year would be due (section 44A(2) of the Tax Administration Act 1994).

Exclusion - section DZ 11

6.11 Section DS 3 does not apply to a deduction for expenditure excluded under section DZ 11, which covers the circumstances set out as follows (section DZ 11(1))-

1. the film reimbursement scheme is entered into on or before 30 June 2001; and
2. the film has, under section EJ 6 (Certification of New Zealand films),-
   1. a final certificate that it is a New Zealand film; or
   2. a provisional certificate (not obtained by the provision of materially incorrect information to the New Zealand Film Commission) that it is a New Zealand film; and
3. the film had not been completed before 7 July 1999; and
4. before 7 July 1999,-
   1. one or more contracts had been entered into for the supply of goods or services in New Zealand in relation to the film; and
   2. at least $1,000,000 of expenditure had been incurred under the contract or contracts; and
5. on or before 1 November 1999, a person who entered into a contract referred to in paragraph (d)(i) gave notice to the Commissioner that the requirements in paragraphs (c) and (d) were met; and
6. the expenditure for which persons are allowed a deduction under section DS 1 (Acquiring film rights) or DS 2 (Film production expenditure) is no more than 140% of the physical cost of production of the film; and
7. without limiting the application of section BG 1 (Tax avoidance), on the date the film reimbursement scheme is entered into, there is an expectation based on reasonable commercial assumptions that the income to be derived by person A as a result of the expenditure will be at least equal to the sum of-
   1. all expenditure incurred by person A under the scheme; and
   2. a return on each amount of expenditure that is equivalent to the return on 5 year government stock measured on the date that the scheme is entered into; and
8. if the expenditure is incurred on depreciable intangible property of a kind listed in schedule 17 (Depreciable intangible property), the expenditure is an amount paid to person B in the circumstances described in [section DZ 11(2)].

6.12 Section DZ 11(2) sets out the circumstances, for the purposes of section DZ 11(1)(h), as follows:

1. the amount paid is income of person B; or
2. at all times in the tax year in which the payment is made, person B-
   1. is resident of one of the grey-list countries (as specified in schedule 3, part A); and
   2. is liable to income tax in that grey-list country or territory by reason by domicile, residence, place of incorporation, or place of management in that country; and
   3. has calculated its income that is liable to income tax in that country or territory without applying a feature of the taxation law of the country or territory specified in schedule 3, part B.

6.13 It should be noted that the exclusion contained in section DZ 11 is of very limited application. In order for the exclusion to apply, a significant amount of expenditure must have been incurred for an incomplete film as at 7 July 1999. The film reimbursement scheme in question must also be entered into before 30 June 2001.

Some definitions - section DZ 11(3)

6.14 "Government stock", for the purposes of section DZ 11(1)(g), means stock issued under Part 6 of the Public Finance Act 1989.

6.15 "Physical cost of production", for the purposes of section DZ 11(1)(f), means the expenditure incurred in producing a film (whether incurred in New Zealand or elsewhere), other than expenditure incurred-

1. in marketing or selling the film; and
2. on depreciable intangible property of a kind listed in schedule 17 (Depreciable intangible property).

6.16 A diagram showing how section DS 3 operates is included in Appendix B.

Other pages in: Part III - Deductions and timing rules

• Chapter 3 - Introduction
• Chapter 4 - Expenditure incurred in acquiring film rights: section DS 1
• Chapter 5 - Film production expenditure: section DS 2

Date published: 23 Nov 2005

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