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Part 1: The Producer, Location and PDV Offsets

Many want the Producer Offset pushed up to 40% for all television that’s currently eligible. Who wouldn’t want government money if it’s on offer … ?

The existing situation

Ensuring that Australians have a chance to see their own film and television is done by both force and encouragement. The three offsets – also referred to as tax rebates – fall into the latter category. They are financing mechanisms that enable producers to claim back a proportion of the money they spend making film and television in Australia.

The relevant legislation is the Income Tax Assessment Act 1997.

Each offset has a particular purpose:

  • The Producer Offset (PO) is for Australian production only. Most Australian drama and documentary from the last 10 years that’s familiar to the public would have accessed the PO. Note that things don’t have to look Australian to be Australian: think Hacksaw Ridge and Mad Max: Fury Road.
  • The Location Offset is one of the reasons high-profile foreign films are sometimes filmed in Australia, recent examples being Alien: Covenant, Aquaman and Thor: Ragnarok.
  • The Post, Digital and Video Effects (PDV) Offset helps attract visual effects work from abroad – recently Spider-Man: Homecoming and Game of Thrones – and is also accessed by some Australian television that is ineligible for the PO.

The Australian Tax Office (ATO) pays the offsets and only after a production is completed. Nevertheless they are a key to financing because the producer can take out a loan against what is a guaranteed tax rebate and put most of that loan into the production budget.

The offsets are set at a fixed percentage of what is spent on goods and services in Australia. They are not based on total budget.

Making the PO 40% across the board is the loudest and most commonly repeated specific recommendation across all submissions.

The Producer Offset

Example: A $10m Australian feature film is entirely made in Australia. The ATO would pay the producers up to $4m upon completion of the film. (The words “up to” are used because some expenditure will not fall under QAPE.)

The Location Offset

  • For feature films, telemovies and television series (including documentary, reality and animation) of any nationality wholly or partly filmed in Australia.
  • Set at 16.5% of QAPE.
  • QAPE must be at least $15m or, in the case of TV series, average at least $1m per hour.
  • The Department of Communications and the Arts administers the Location and PDV Offsets. More info.

Example: A $150m US feature is filmed in Australia and post-produced in the US. If the QAPE is $70m, the ATO would pay the producers $11.55m upon the film’s completion.

The PDV Offset

  • For feature films, telemovies, miniseries and television series (including documentary, reality, animation and live action) of any nationality and filmed anywhere that undertake PDV work in Australia.
  • Set at 30% of QAPE.
  • QAPE must be at least $500,000.

Example: A Hollywood superhero movie is filmed in Canada. Top-tier companies from around the world, including from Australia, are contracted for the visual effects. If the QAPE is $9m the ATO would pay the producers $3m.

None of the offsets are capped: in other words, there is no upper limit on how much is paid out on an individual project or, say, a year’s worth of projects.

In contrast to direct funding from government agencies, which sees assessors pick and choose projects and subjectivity involved, the offsets are available to all comers providing they meet the eligibility guidelines. This delivers certainty.

The 20% and 40% rates applicable to the PO have been in place since the PO was introduced in 2007. The Location and PDV Offsets were first set at 15% of QAPE but were increased in 2011. The expenditure threshold for the PDV Offset was once $5m and for the PO once $1m.

Ausfilm has a straightforward guide to all three offsets here. It spells out (submission 114) the interdependence of international and local production and notes that, over the past 12 years, international production has represented about 25% of the value of all film and TV drama production in Australia.

Anomaly: Television series made for free-to-air, cable or satellite services can claim the Location and PDV Offsets but series made for subscription video on demand (SVOD) services such as Netflix cannot.

Key recommendation: make the PO 40% for all eligible projects

Making the PO 40% across the board is the loudest and most commonly repeated specific recommendation across all the submissions.

This means the television formats that get the PO now at 20% – namely live action and animated drama, including drama for children, and documentary – will get it at the feature rate of 40%.

This is SBS’s (133) articulation of the value of this: “A 40% PO for TV would increase Australian screen content; lead to a stronger Australian television production sector, and new television production jobs; free Screen Australia to focus on areas of market failure including industry diversity, development of new talent, and innovative forms of content and Indigenous content, through its direct funding programs; and provide opportunities for commissioning broadcasters and producers to take more risks with ‘new and different’ programs, produced specifically for the Australian audience.”

What program makers and investors wouldn’t want more government money if it’s on offer? Answer: none.

If the 40% PO is applied across the board it would help producers greenlight their projects and the broadcasters wouldn’t have to stump up as much money for in-house production.

The Victorian Government (138) says a 40% PO for television may encourage unregulated platforms such as Stan to commission additional drama and documentary as the Government would be making a bigger contribution.

But the Government doesn’t lose out either according to PricewaterhouseCoopers Australia, which has modelled the economic impact of changing the PO in seven different ways. It found that a rate of 40% across the board would cost a maximum of $15.5m per year in foregone tax revenue but the overall economy would be better off by $103.9m. The report can be accessed by going to the Australian Subscription Television and Radio Association (ASTRA) submission (61).

Playing devil’s advocate: maybe The Bachelor or MasterChef Australia defines our national identity and strengthens our values more than The Wrong Girl or Here Come The Habibs!

Film and television has no impact if it’s not seen

It is unknown how inclined the Government is to put more money into film and television but what it wouldn’t want to do is put more money into local content that no-one sees.

When a producer wants to access the 40% PO for a feature film, a series of factors relevant to whether the film really will be made available in commercial cinemas is considered, including whether the distributor will make money available for marketing – see section 2.5.4 of Screen Australia’s Producer Offset Guidelines. The same level of stringency is not applied to how producers applying for the 20% PO intend to find audiences.

Distribution arrangements will have to be carefully thought through if the 40% is applied to all formats. This is largely ignored in the submissions.

Questions will also have to be asked around QAPE thresholds and whether taxpayer dollars should only go towards projects of scale that are more likely to attract audiences. That said, pinning down the relationship between budget, quality and popularity is fraught and becoming more so.

Screen Producers Australia (86) suggests lowering the current minimum QAPE threshold of $500,000 per hour for “drama”. (Quote marks are used because the creative teams behind half-hour fully scripted comedy would particularly benefit, says SPA.)

Perhaps other formats should be favoured

Create NSW (142) puts forward other options for changing the PO: all eligible projects could get 30% – representing a reduction for features – or the 40% rate could be limited to those programs least able to rely on the marketplace. It says those programs would be premium high budget drama, documentaries under five episodes and children’s drama.

The Review consultation paper states that “as far as possible market solutions and competition should be harnessed to deliver the policy outcomes”. And bear in mind that a Coalition Government can be expected to support free enterprise.

Drama, documentary and children’s programming have always received favourable treatment from governments compared to other types of programming: adult Australian drama is expensive to make and broadcasters can choose from a smorgasbord of cheaper options abroad; commercial free-to-air channels are restricted in how much advertising material they can pack around children’s television which dampens their interest in it; and it can be challenging to fit more traditional forms of documentary into television schedules.

The consultation paper also says these formats are “traditionally identified” as having more cultural bang for their buck, and asks whether it is still appropriate to privilege them. The paper’s focus on children’s content implies it’s greatly valued; documentary is hardly mentioned.

Playing devil’s advocate: these days maybe The Bachelor or MasterChef Australia “help define our national identity” and “strengthen social cohesion and values” more than The Wrong Girl or Here Come The Habibs! Those who disagree are welcome to say so in a submission.

Seven West Media (128) says there’s no clear rationale for limiting the PO to drama and documentary genres.

Referring to the transmission quota, the Media Entertainment and Arts Alliance (MEAA) submission (125) argues that reality television should be given less weight because it has low production costs and displaces genres that employ actors.

Feature distribution is a subject of concern

Expanding the PO to 40% across the board would further blur the once distinct line between films made for cinemas and programs made for the box in the lounge room.

Many submissions argue that it is outdated to insist that feature films must have a cinema life in order to access the PO and/or that this is a significant barrier to getting more features made, particularly at the low budget end, and/or that film distributors have too much power.

“The cost of marketing and promotion to ensure a successful theatrical (cinema) release is prohibitive for the majority of Australian films,” reads the Victorian Government’s submission (138). It argues that a direct to SVOD release or similar, perhaps with screenings on the festival circuit, could be a more appropriate way to reach audiences. “One of the aims of the Australian Screen Production Incentive (the umbrella name for all three offsets) is to ‘assist the industry to be more competitive and responsive to audiences’. Limiting eligibility for the 40% Producer Offset to films that have a theatrical release is at odds with this objective and no longer reflects the reality of the marketplace. The legislation should be reviewed to ensure definitions reflect and respond to the current marketplace and the way in which audiences of different demographics prefer to view content. This will help stimulate the industry and better meet the needs of audiences, particularly those in regional areas.”

There’s so many conundrums around feature films. It’s often said that only the over 40s watch Australian films at the cinema but the under 40s prove again and again that they embrace them in film festivals. The rules around the PO give one experience more validity than the other. And does a feature really lose its feature status if it’s only shown online?

Other selected recommendations relevant to the PO

  • DROP THE 65-HOUR RULE: Once 65 commercial hours of a particular television program have been made, that program is no longer eligible for the PO. Several submissions argue that industry sustainability relies on long-running shows and financing subsequent seasons is challenging.
  • FEATURES SHOULD GET 50% UNDER THE PO: Independent Screen Producers of WA (59) argue for this because of “the reduction in TV presales, the problem of static production budgets and cuts to Screen Australia”. The organisation also says the PO should be linked to business activity statements and paid quarterly. If that’s impossible, the time taken to get the approvals necessary to access the rebate need to be reduced. Others lobby for a 50% rate too.

Key recommendation: increase the Location Offset to 30%

A loud chorus says the Location Offset has to increase to 30% because it is uncompetitive at 16.5%.

This recommendation sounds like a no brainer given that the consultation paper notes that The Wolverine, Unbroken, San Andreas, The King’s Daughter, Pirates of the Caribbean: Dead Men Tell Not Tales and Alien: Covenant spent $595m when filmed in Australia and business sustainability is a review objective. Producers might not gain from this but crew, cast and support companies have to be able to survive too in order to have an industry.

In recent years, “top up” grants have helped entice major US productions. Combined with the offset, they have delivered the equivalent of 30% but this case-by-case system is seen as unsatisfactory by many.

US-based Bill Draper, president of Worldwide Physical Production for Warner Bros Pictures (submission 44), says it (the grants) “introduces ambiguity into the complex calculus that we apply to each production when evaluating where it should film.”

He also notes that the discretionary top up is capped, so any additional QAPE incurred receives only the standard Location Offset rate of 16.5% and this is a disincentive. He copied many politicians into his letter including Prime Minister Malcolm Turnbull.

“Foreign production results in a thriving and vital indigenous production community,” says Draper. “Given your creative and technical crews are some of the best in the world, your geography diverse, and your visual effects and animation firms are market leaders, the country should be attracting more foreign productions.”

Putting the Australian point of view, Animal Logic Entertainment (113) says that foreign production: maintains Australia’s profile at the forefront of complex filmmaking; provides job training opportunities; allows specialist film businesses to invest in equipment and facilities which then becomes available for locals; and more.

The Victorian Government (138) bemoans the lack of “transparency, certainty and consistency” of the top up approach, saying the US studios plan their production slates two to three years in advance. The productions that have benefited from the top up are typically very large budget, studio-based productions with Australian expenditure of more than $100m, it says, and this disadvantages Victoria.

“Fox Studios in Sydney and Village Roadshow Studios on the Gold Coast are the only facilities of sufficient size to meet the needs of such productions,” the submission reads. “As a result, other state capitals and regional areas are missing out on opportunities to host small to medium sized footloose productions that are equally valuable in terms of economic impact.”

Fox Studios Australia (92) says “making the 30% Location Offset a consistent and defined policy will allow, and strongly encourage, Fox to make Australia its preferred production location.”

If the Government is concerned about the Location Offset blowing a hole in the Federal Budget, perhaps applying caps to claims is worth examining. But Animal Logic says Australia can’t support more than two US productions at the same time because crew and facilities are limited and this is a “natural cap”. Ausfilm says “two and possibly three” films depending on size and timing.

One submission warned: “Larger studio films represent short bursts of investment in the local economy but do not offer the same potential for long-term, sustainable growth. Also, these productions are susceptible to shifts in foreign currency, competing incentives offered by international Governments, and lower labour costs and business overhead in emerging economies. They can also drive up labour costs and impact the supply of creative and technical personnel to work on local production (feast and famine). Accordingly, policy makers should be cautious to promote foreign production ahead or in place of local interest, as history has demonstrated the US studios tendency to abandoned ship for places with higher incentives, better value for dollar and flexible labour conditions.”

Other selected recommendations relevant to the Location and PDV Offsets

  • FILMS SHOULD BE ABLE TO ACCESS BOTH THE LOCATION AND PDV OFFSETS: Currently they can’t and increasing the Location Offset to 30% would automatically fix what’s painted in many submissions as a significant problem. Currently a US blockbuster filmed in Australia has little incentive to stay on for post-production because the 16.5% Location Offset rate would be applied to the PDV work. “De-coupling” the incentives would be a solution if the Location Offset is not increased to 30%.
  • INCREASE THE PDV OFFSET: Iloura (94) says increase the PDV Offset to 43% to match what is available in Quebec. Rising Sun Pictures (140) argues for increasing the PDV Offset from 30% to 40%. As a PDV destination, Australia is disadvantaged by geography, time zones and more competitive financial incentives elsewhere, Rising Sun says.
  • SVOD SERVICES SHOULD BE ABLE TO ACCESS THE LOCATION AND PDV OFFSETS: Many want productions made for such SVOD/streaming services as Netflix and Amazon Prime to be eligible for the Location and PDV Offsets. These services aren’t specifically excluded but the terminology in the Income Tax Assessment Act 1997 is convoluted, hence some submissions mentioning a need for clarity rather than change. Says Warner Bros (44): “The production incentive programmes of jurisdictions such as Canada, New Zealand, UK and the US do not distinguish between traditional and internet distribution methods. The Australian legislation urgently needs to be updated to correct this anomaly or the Australian film and television industry will miss out on the boom in production worldwide that is being driven by these new distribution methods.”
  • MAKE PILOTS AND GAMES ELIGIBLE FOR THE LOCATION OFFSET. The minimum QAPE could be set at $1m for a scripted TV drama series pilot says Ausfilm (114) and others. Several say virtual reality and gaming should be eligible for both offsets.