Income tax treatment of the screen production industry under the Income Tax Act 2004: Part VI - Large budget screen production grants

Chapter 11 - The large budget screen production grant scheme

General Information

11.1 The Taxation (GST, Trans-Tasman Imputation and Miscellaneous Provisions) Act 2003 introduced tax provisions relating to the large budget screen production grant ("LBSPG") scheme with application from 1 April 2003. Those provisions were first introduced by Supplementary Order Paper No. 170, dated 18 November 2003.

11.2 The LBSPG scheme, in essence, provides for a rebate of 12.5 per cent of the Qualifying New Zealand Production Expenditure (as defined for the purposes of the LBSPG scheme) to film and television production companies if certain requirements are satisfied. The purpose of the LBSPG scheme is to provide an additional financial incentive for the production of large budget film and television projects in New Zealand.

11.3 "Large budget screen production grant" is defined in section OB 1 and means a payment that:

1. is in the nature of a large budget screen production grant; and
2. is made in relation to a film or television production; and
3. is authorised by the New Zealand Film Commission in relation to a company that-
   1. is resident in New Zealand; or
   2. has a permanent establishment in New Zealand.

11.4 The New Zealand Film Commission ("NZFC") has the responsibility for administering the grant and, essentially, determining the entitlement of such grant to film or television production companies. The criteria developed by the NZFC are available on the NZFC's website (http://www.nzfilm.co.nz). This paper will refer to these criteria as "the Guideline" in this chapter. The criteria described below were current as at August 2005, but reference should be made to the NZFC website to confirm that these have not been altered. 

11.5 It should be noted that the Inland Revenue Department ("IRD") does not administer the entitlement to grants or set the criteria for grants. The IRD does have a role in the validation of the information that is provided by screen production companies in support of their applications for grants. The contact person in the IRD for the LBSPG at the present time is Vince Costa, Screen Production Industry Desk leader in the Corporates segment of IRD. Vince can be contacted by telephone on (04) 802 7240 or by email: vince.costa@ird.govt.nz.All external inquiries in relation to the screen production industry should be directed to the Screen Production Industry Desk at screen@ird.govt.nz or 0800 SCREEN (0800 727 336).

11.6 Appendix C includes a diagram showing how the LBSPG scheme works.

Some basic definitions

11.7 The LBSPG scheme is based on the concepts of Qualifying New Zealand Production Expenditure ("QNZPE") and Total Production Expenditure ("TPE"). The definitions of these terms are set out in the Guideline published by the NZFC.

Qualifying New Zealand Production Expenditure

11.8 QNZPE is generally defined as the production expenditure spent by the applicant on the screen production where that expenditure is incurred for, or is attributable to:

• goods and services provided in New Zealand;
• the use of land located in New Zealand; or
• the use of a good that is located in New Zealand at the time that the good is used in the making of the screen production.

11.9 The following New Zealand expenditure items are specifically included in QNZPE:

• New Zealand development and pre-production expenditure, which is defined as expenditure incurred in New Zealand on the development and pre-production stages of the screen production i.e. prior to the commencement of principal photography, including expenditure to cover:
  • location surveys and other activities undertaken to identify and assess locations for possible use in the production;
  • storyboarding and script writing;
  • research for the production;
  • casting actors;
  • developing a budget;
  • developing a shooting schedule for the production and
  • those legal costs relating to writers' contracts or to copyright issues, including chain of title.
• New Zealand copyright acquisition (provided the cost is allowed as a deduction or depreciation is allowable under the 1994[1] Act);
• New Zealand business overheads, to the extent that the amount does not exceed the lesser of:
  • 2% of the total of the company's TPE on the screen production; or
  • NZ$500,000
• New Zealand copyrighted publicity and promotion expenditure, if:
  • The expenditure was incurred by the applicant company before completion of the production; and
  • Copyright in the publicity material is held by a person the Income Tax Act 1994 treats as either being resident in New Zealand under section OE 1 or OE 2, or who carries on a business in New Zealand through a fixed establishment.
• Travel to New Zealand, where that travel relates to incoming journeys:
  • For non-cast personnel whose remuneration qualifies as QNZPE and who work on the screen production in New Zealand for a period totalling fourteen days or more; and
  • For cast personnel whose remuneration qualifies as QNZPE, regardless of the number of days spent working on the screen production in New Zealand.
• Advances, where they satisfy the criteria specified in the definition of QNZPE;
• Production insurance and completion bonds (with the exception of Errors and Omissions insurance);
• Freight (provided that it is paid in New Zealand).

11.10 The following expenditure items are specifically excluded from QNZPE:

• Financing expenditure
• Costs relating to Short-term Visits for Non-cast Personnel
• Costs of Services embodied in Goods (This is where the costs of certain services are embodied in the cost of a good that is delivered to the applicant company, and those services were predominantly performed outside New Zealand.)
• Deferments, Profit Participation, Residuals
• Others (including Errors and Omissions insurance, cast perks, gifts, entertainment and gratuities).

Total Production Expenditure

11.11 TPE is defined as the production expenditure incurred in, or that is reasonably attributable to, actually making the screen production whether in New Zealand or elsewhere, to bring the production up to the state that the production is ready to be distributed, broadcast or exhibited to the general public.

11.12 TPE includes all expenditure items calculated as part of QNZPE.

11.13 TPE, however, does not include the following expenditure items:

• Financing expenditure, including returns payable on amounts invested in the screen production and expenditure connected with raising and servicing finance for the production, such as interest payments;
• Development and pre-production expenditure (except where it qualifies as QNZPE);
• Copyright acquisition (except where it qualifies as QNZPE);
• General business overheads (except where it qualifies as QNZPE);
• Publicity and promotion expenditure (except where it qualifies as QNZPE);
• Deferments, profit participation, residuals, including:
  • Payments deferred until the screen production provides financial returns through box office receipts, earrings, or profits (e.g. bonuses paid to directors);
  • Payment dependent on eventual profits made on the production; and
  • Amounts payable in relation to the residual rights of cast members concerning the commercial exploitation of the production through future exhibition and distribution.
• Advances (except where it qualifies as QNZPE and is non-recoverable);
• Acquisition of depreciating asset (except for copyright acquisition expenditure that qualifies as QNZPE);
• Other exclusions, including Errors and Omission insurance, cast perks, gifts, entertainment and gratuities.
• Nominated exclusion - remuneration, travel and associated costs of one individual to be disregarded.

Criteria for the LBSPG

11.14 The eligibility criteria for the LBSPG include:

• Time of completion
• Expenditure thresholds
• Format
• Relevant entity
• Residency status

Time of completion

11.15 The LBSPG scheme applies to productions completed after 1 July 2003. Productions substantially completed before 1 July 2003 will not be eligible for the grants.

11.16  Where screen productions are completed after 1 July 2003, QNZPE incurred from 1 April 2003 will be eligible for the grant. Any expenditure on a screen production incurred before 1 April 2003 is excluded.

Expenditure thresholds

11.17 Access to the LBSPG requires a minimum level of QNZPE of NZ$15 million on the production of a film or television project.

11.18 If the film or television project's QNZPE is between NZ$15 million and NZ$50 million, that QNZPE must be at least 70 per cent of the film or television project's TPE.

11.19 If the film or television project's QNZPE is NZ$50 million or more, it will qualify for the grant, regardless of the percentage ratio of QNZPE to the film or television project's TPE.

11.20  For television series, individual episodes which have completed principal photography within any 12 month period and with a minimum average spend of $500,000 per commercial hour may be bundled to achieve the total of NZ$15 million.

Format

11.21 Eligible screen production must be in one of the following formats:

• a feature film (including those shot direct-to-video) where the film is:
  • a film commonly screened as the main attraction in commercial cinemas;
  • no less than 60 minutes, or in the case of a large format (IMAX) film no less than 45 minutes; and
  • is shot and processed to commercial release standards for exhibition to the public in cinemas, by way of telecasting (including broadcasting by way of the delivery of a television programme by a broadcasting service), or for distribution to the public as a video recording (whether on video tapes, digital video disks or otherwise).
• a television movie, being a drama (i.e. a composition which tells a story through the development of theme and plot, by means of dialogue and action and the portrayal of characters, settings, and life situations) of a like nature to a feature film capable of exhibition on television where television movie is:
  • no less than one commercial television hour in length, or in the case of a programme predominantly utilising cell, stop motion and/or computer animation not less than one half commercial television hour; and
  • is shot and processed to commercial release standards, for cinema exhibition or telecast.
• a television drama series or mini-series, being an episodic television drama, including animation, which is either:
  • an extended but self-contained drama made for television wherein the key dramatic elements of character, theme, and plot are introduced, developed and concluded so as to form a narrative structure (similar to that of a novel) which features a major continuous plot enhanced by minor plots and there is the expectation of an ending that resolves the major tensions and is arranged into consecutive episodes for screening purposes; or
  • an anthology of drama works for television where the key dramatic elements of character, theme and plot are introduced, developed and concluded so as to form a narrative structure within each episode (similar to that of a novel or a short story) but there is no continuity of plot between episodes (although there may be host elements common to each episode) and is made to be broadcast under one generic title; and
  • is shot and processed to commercial release standards, for telecast.

11.22 It should be noted that the definition of "feature film" under the LBSPG scheme is different from that contained in section OB 1 of the 2004 Act. (See paragraph 4.5 above for the definition of "feature film" for income tax purposes.)

11.23 Screen productions that are specifically excluded from eligibility include:

• a documentary
• reality TV
• bundling of screen productions (other than television mini-series and series as outlined above)
• an advertising programme or commercial
• a discussion programme, current affairs, news, a panel programme, a variety programme, or a programme of a like nature
• a production of a public event, including a sports event
• a training programme

Relevant Entity

11.24 An applicant must be the entity responsible for all activities involved in making the production in New Zealand, and must have access to full financial information for the total production worldwide, which can be made available to the NZFC upon request.

11.25 Only one entity per screen production can be eligible for the LBSPG.

Residency status

11.26  A film or television production company is eligible to the LBSPG if it is a New Zealand resident company or a foreign corporation operating with a fixed establishment in New Zealand for the purposes of lodging an income tax return.

11.27 A company is a New Zealand resident company if:

• the company is incorporated in New Zealand; or
• although not incorporated in New Zealand, it carries on business in New Zealand and has either its central management or control in New Zealand, or its voting power is controlled by shareholders who are residents of New Zealand.

Income tax provisions relating to the LBSPG

11.28  Income tax provisions in relation to the LBSPG in the 2004 Act include:

• Section CW 30: a large budget screen production grant is exempt income.
• Section DF 1(6): a recipient of a large budget screen production grant is not required to reduce claims for allowable deductions in respect of expenditure that is recouped by the grant. Nor will the depreciation value of any capital equipment acquired in the film production be lowered by the amount of the grant.
• Section DS 2(3)(c): the concessional deductions allowed under section DS 2 for film production expenditure are not available to a screen production for which a  large budget screen production grant is claimed. (See paragraph 5.4 above.)

11.29  The Commissioner has a role in validating information provided in support of applications for the LBSPG. Section 85F(2) of the Tax Administration Act 1994 authorises the Commissioner (from 25 November 2003) to communicate information held by the IRD to the NZFC for the purposes of enabling the NZFC to determine the entitlement of a company to a LBSPG. Upon request from the chief executive of the NZFC, the Commissioner may provide to any authorised officer of the NZFC all of the following information that is held by the IRD:

• Particulars relating to the amount of expenditure incurred in relation to a film that is the subject of an application for a large budget screen production grant;
• Particulars relating to the amount of expenditure incurred in New Zealand in relation to a film that is the subject of an application for a large budget screen production grant;
• The Commissioner's opinion as to the accuracy of any information provided by an applicant in relation to the application for a large budget screen production grant.

11.30 If any of the information specified in section 85F(2) is not held by the IRD, the Commissioner may use any of the Commissioner's powers contained in Part 3 of the Tax Administration Act 1994 to obtain information.

Applications for the LBSPG

11.31 An application for the grant can be made to the NZFC once:

• a screen production is completed or is regarded as having been completed when it is in a state where it could reasonably be considered ready for distribution, broadcast or exhibition to the general public; or
• the QNZPE has exceeded NZ $50 million.[2]

11.32 Film or television companies need to apply for the grants within 3 months of completion of the screen productions. Each application must be made in the Application Form provided on the NZFC's website. This can be obtained from http://www.nzfilm.co.nz/regulatory_approvals/large_budget_grant_scheme.aspx

11.33 The following information must be included on each application (refer to paragraphs 71-77 of the Guideline for detailed analysis of each item):

• Audited Expenditure Statement
• Sample Footage
• Documentation Requested in Annex A
• Statutory Declaration
• Further Information as Requested

Payment of the LBSPG

11.34 Payment of the final funding will be dependent on the IRD undertaking an audit and validation of the information provided to the NZFC and the decision of the NZFC.

11.35 Provided the application for a LBSPG is complete and has been validated, the NZFC will endeavour to approve payment within 3 months of application.

11.36 The Ministry of Economic Development will make payment of the grant upon advice from the NZFC.

Review of the LBSPG

11.37 The LBSPG scheme will be subject to a review conducted by the Ministry of Economic Development in 2006.

Footnotes

[1] 2004 Act effective 1 April 2005

[2] For screen productions where the QNZPE exceeds NZ $50 million, an application can essentially be made twice: once at any stage after QNZPE exceeds NZ$ 50 million and secondly on completion of the production.

 

Date published: 25 Nov 2005

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