Producer Offset 101
What makes the Producer Offset so important in building the capacity of the screen production sector in Australia?
This short animation was produced for Screen Australia by Innit Digital in conjunction with Screen Australia's research report Getting down to business: The Producer Offset five years on.
Storytelling plays an important role in human culture. Yet for film and TV producers bringing Australian stories to life on screen, it can be challenging to build an ongoing business and keep it strong. Because of the way films and TV programs are financed, producers have not always ended up with much of a stake in the ongoing success of their projects.
To help rectify this, the Australian Government introduced a targeted tax incentive known as the Producer Offset.
For any eligible project, the offset is paid by the government to the production company through the company’s tax return after the project is completed, and represents a secure government contribution of up to 40 per cent of the cost for feature films and 20 per cent for television and other projects.
This gives producers a head start when stitching together the complex deals it takes to finance a film or TV project.
Most projects involve some combination of marketplace finance, loans, grants and equity finance.
At the outset, all ownership – or equity – in a project is held by the producer. Equity is a valuable commodity because parties with equity in a project are the ones who’ll benefit from any ongoing or future earnings.
A producer’s equity won’t change if they use grants, loans or their own capital to make up the budget. And the crucial advantage of the Producer Offset is that the producer keeps the equity its contribution represents, even though they may have to borrow the funds to cover it until the payment comes in.
The producer may also raise equity finance by selling a share of the project to other investors. This spreads the risk of potential losses between the parties, but also lowers the producer’s equity – and thus their share of potential rewards.
Marketplace finance, by contrast, doesn’t relate to project ownership. It simply gives the relevant contributor, whether a distributor, a sales agent or broadcaster, the ability to exploit the project in the market, or on-sell the right to do so.
And, their benefits are limited to recouping their costs and advance payments, and earning a fee or commission from handling the project.
This complex mix of marketplace, loans and equity finance is what creates the structure for distributing back to the investors any revenue the project earns. It sets up a kind of 'revenue waterfall'. Exactly what happens when the revenue starts flowing depends on the particular financing structure for each project, but as a general rule, the marketplace will take its share of revenue first; and loans are quickly repaid to minimise interest and because priority payment is often a condition of the loan.
Investors with equity, including the producer, will then start recouping their money, with some having priority over others, and percentage splits sometimes varying over time – all determined by the deals done when the film was financed. The bottom line is, the greater the equity share, the greater the share of any revenue the investor is likely to get.
That’s why the Producer Offset is so important. Not only is it a secure government contribution to a project’s budget, but it gives producers equity they wouldn’t otherwise have had, and more options when putting the finance together.
They might use a portion of their equity to entice potential investors with a more lucrative deal, such as a better position on the waterfall, or the offer of more equity than their investment alone would deliver. Or they may simply decide to take full advantage of any future revenue stream by holding onto their maximum equity share.
Whatever the choice, the flexibility offered by the Producer Offset can enhance the ongoing capacity of the Australian production sector in bringing Australian stories to our screens.