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2010 REVIEW OF THE
AUSTRALIAN INDEPENDENT
SCREEN PRODUCTION SECTOR

February 2011
Minister’s foreword
Australia’s creative industries, including the screen sector, are undergoing great changes as the international
environment adapts to ever-changing technological advances and audience demands. This offers significant
opportunities, while also raising new challenges.

The rollout of the Australian Government’s National Broadband Network will offer exciting opportunities for
the Australian screen sector in the rapidly developing digital world, with particular benefits for regional
producers and audiences.

In this context, the 2010 Review of the Australian Independent Screen Production Sector provided an important
and timely opportunity to reflect on the viability of the local screen sector.

Australia’s screen productions play an important role in shaping our national identity. Film and television
productions help us define who we are, how we see ourselves and the image we project to the rest of the world.

The review shows expenditure on film and television in Australia is at an all-time high and we are seeing greater
production values in our feature films and television drama productions. There has also been an increase in the
average number of Australian productions, giving audiences access to a greater range of Australian stories.

This review has allowed the Government to consider its support for the viability of the independent screen
production sector. It has highlighted the strong achievements by the sector and provided an opportunity for
industry stakeholders to tell the Government about current challenges, particularly in relation to Australia’s
attractiveness to international productions.

The Government’s overall support for the sector is also at its highest level ever. There are early signs that the
Australian Screen Production Incentive, as well as the direct support by Screen Australia, are having a positive
impact on the sector’s viability and sustainability.

The production incentives marked a significant shift in Australian Government support for the sector to improve
its sustainability. This shift has been positively received by industry and feedback has highlighted the importance
of production incentives to a viable screen sector.

The sector has put forward a number of suggestions on how to improve the operation and efficiency of the
offsets. I thank those who made submissions and participated in the focus group discussions.

Given the short period since the introduction of the production incentives it is too early to measure their full
impact on the sector’s viability, though early signs are certainly positive. The Government will continue to
monitor the effectiveness of the offsets closely.

I encourage interested stakeholders to read this document and look forward to engaging with industry over the
coming months to develop a response to the review.

The Hon. Simon Crean MP
Minister for the Arts

ii
At a glance
 Government support for the film industry is at its highest level ever.
 In the three years since the introduction of the Australian Screen Production Incentive, the Government
has provided $412.1 million in support through the tax system, compared to $136.7 million in the three
years before the package.
 The strong uptake of the Producer Offset alone has provided $266.63 million in indirect Government
support to the end of 2010, and the Location and Post, Digital and Visual Effects Offsets have provided
$67 million in support.
 In 2009–10 Screen Australia provided $61 million in support through production investments.
 Early signs show that the Producer Offset is encouraging domestic feature film production, with total
production expenditure in 2009–10 of $265 million representing an 88 per cent increase above the five-
year pre-Producer Offset average.
 In 2009–10, total production expenditure in Australia was a record $731 million, well above the five-
year pre-Producer Offset average of $547 million.
 The Producer Offset is encouraging increasing interest in Australia as a co-production partner. Between
1986 and 1999 there was an average of three co-productions per year; from mid-1999 it increased to
seven, and in the three years after the introduction of the Producer Offset, 23 co-productions have been
made or are in progress.
 Production companies are becoming more focused on market and audience needs. Since the
introduction of the Producer Offset the average share of the local box office has increased.
 There are indications that the Producer Offset is having a solid impact on television production. From
2007–08 to 2009–10, total Australian television drama expenditure averaged $295 million, some
35 per cent above the five-yearly Pre-Offset average of $218 million.
 The industry expressed concern about some aspects of the Producer Offset. The main concern related to
the timing of payments through the tax system. In addition, the administrative burden in applying for
the offset was raised, especially for non-feature documentary productions.
 It is too early to know whether the Producer Offset is encouraging greater private investment. Early
signs are positive, especially in light of the global financial crisis.
 Some agreed indicators have been developed for use in tracking industry development towards a more
competitive and sustainable sector.
 While the Government’s international film tax offsets attract large-budget offshore productions to
Australia, the evidence indicates that the success of the Location and PDV Offsets is closely related to
global financial circumstances, the exchange rate and competition from incentives available in other
countries.
 There was strong sector support for greater transparency of Producer Offset decisions; they currently
remain bound by tax secrecy laws.
 The sector strongly advocated the continuation of the Australian Bureau of Statistics service industry
survey.

iii
CONTENTS

MINISTER’S FOREWORD ......................................................................................... II

AT A GLANCE .......................................................................................................... III

INTRODUCTION ........................................................................................................ 1

The background .................................................................................................................................................... 1

The process ............................................................................................................................................................ 1
Terms of reference ............................................................................................................................................. 1
Submissions........................................................................................................................................................ 2
Focus groups ...................................................................................................................................................... 2

The commitment ................................................................................................................................................... 2
The Australian Screen Media Support Package ................................................................................................. 2

The support............................................................................................................................................................ 5
Other support mechanisms ................................................................................................................................. 6
Regulation .......................................................................................................................................................... 8

OBJECTIVE 1: ENCOURAGE AUSTRALIAN STORIES .......................................... 9

Overview ................................................................................................................................................................ 9
Production levels ................................................................................................................................................ 9
Uptake of the Producer Offset .......................................................................................................................... 14
Australia’s international co-production program ............................................................................................. 15
Challenges ........................................................................................................................................................ 19
Challenges experienced by the documentary sector ......................................................................................... 23

OBJECTIVE 2: ASSIST PRODUCTION COMPANIES TO BECOME MORE
FOCUSED ON MARKET AND AUDIENCE NEEDS ................................................ 28

OBJECTIVE 3: INCREASE THE SUSTAINABILITY OF PRODUCTION
COMPANIES ............................................................................................................ 43

Overview .............................................................................................................................................................. 43
Ensuring equity for producers .......................................................................................................................... 43
Stable and sustainable production companies .................................................................................................. 46
Increase private sector support ......................................................................................................................... 49
Challenges ........................................................................................................................................................ 51
Cash-flowing the Producer Offset .................................................................................................................... 53

iv
OBJECTIVE 4: ENSURE AUSTRALIA REMAINS COMPETITIVE FOR LARGE-
BUDGET PRODUCTIONS AND IN THE POST, DIGITAL AND VISUAL EFFECTS
SECTOR................................................................................................................... 59

Overview .............................................................................................................................................................. 59
Location Offset ................................................................................................................................................. 59
Post, Digital and Visual Effects (PDV) Offset ................................................................................................. 60
Enhancements to the Location and PDV Offsets ............................................................................................. 67
Administration of the offsets ............................................................................................................................ 71

OTHER ISSUES IDENTIFIED IN THE TERMS OF REFERENCE ........................... 74
Adequacy of data on the sector ........................................................................................................................ 74
Tax secrecy....................................................................................................................................................... 74
ABS service industry survey ............................................................................................................................ 76
Impact of free trade agreements on levels of Australian content ..................................................................... 77
Current policy regarding levels of local content .............................................................................................. 80
Outcomes from the statutory review ................................................................................................................ 82
Sixty-five episodes ........................................................................................................................................... 84

APPENDIX A: HISTORICAL OVERVIEW OF AUSTRALIAN GOVERNMENT
SUPPORT FOR THE SECTOR................................................................................ 89

APPENDIX B: DIGITAL AND ONLINE MEDIA OPPORTUNITIES ......................... 91

SHORTENED FORMS ............................................................................................. 95

v
Introduction
The background
The Australian Government funds Australian screen content principally because it is considered culturally
beneficial to the nation. Given the small size of our market and the sheer quantities of screen content produced in
larger English-language markets such as the United States, United Kingdom and Canada, Australia would not
produce the quantity, quality and variety of Australian content required to achieve cultural benefits without
significant funding incentives and regulation by governments.

To produce this content, Australia requires a viable independent screen production sector. On 22 March 2010,
the then Minister for Environment Protection, Heritage and the Arts, the Hon. Peter Garrett AM MP, announced
the 2010 Review of the Australian Independent Screen Production Sector (the review) fulfilling a commitment
made in the 2007 policy paper New Directions for the Arts.1

The review examined the ongoing viability of the sector and considered how it is faring under the Australian
Government’s film support arrangements, in particular the Australian Screen Production Incentive.

The review provided an important opportunity to highlight recent successes for the sector and to identify current
and potential challenges since the production incentives were introduced.

In New Directions for the Arts a commitment was also made to review the effect of free trade agreements
(FTAs), in particular the Australia–United States FTA, to determine what effect they had on levels of Australian
content, including drama, documentaries, and children’s programming on free-to-air and subscription television
services.

The review was conducted by the Office for the Arts.

The process
Terms of reference
The review examined the extent to which Australian Government support measures, principally the production
incentives, have helped the sector to achieve cultural objectives including:

 promoting the development of a sustainable independent production sector

 ensuring the creation of a diverse range of quality Australian film and television productions that appeal
to audiences

 developing and reflecting a sense of Australian identity, character and cultural diversity.

The detailed terms of reference are available at http://www.arts.gov.au/film.

1
Australian Labor Party, New Directions for the Arts: supporting a vibrant and diverse Australian arts sector, policy paper,
September 2007.

1
Submissions
In releasing the review’s terms of reference, Minister Garrett invited public submissions. A discussion paper to
help the sector with submissions, the terms of reference and a link to a full list of organisations and individuals
who made submissions are available at: http://www.arts.gov.au/public_consultation/submissions-
closed/review_aus_ind_screen_sector.

Focus groups
To supplement the submissions, the review also included a series of focus groups with producers and service
providers.

The primary purpose of the focus groups was to discover how the introduction of the production incentives, in
particular the Producer Offset, had affected the viability and sustainability of screen production businesses. The
focus groups were facilitated by Mr David Court, Head of Screen Business, Centre for Screen Business, the
Australian Film, Television and Radio School (AFTRS).

Twelve focus groups, involving 79 producers, were held in Melbourne, Perth, Adelaide, Brisbane, Canberra and
Sydney. To fully gauge the impact of the incentives, sessions targeted at television and documentary producers
were held in Melbourne and Sydney. Specific focus groups were also held with producers of large-budget
features and leading service providers and post, digital and visual effects companies.

An overview of the key issues discussed in the focus groups can be viewed at http://www.arts.gov.au/film.

The commitment
The Australian Screen Media Support Package
In the 2007–08 Budget the Australian Government introduced a comprehensive package of measures to boost
support for the Australian film and television industry. Collectively these measures are the Australian Screen
Media Support Package and include:

 the establishment of Screen Australia and the National Film and Sound Archive

 the Australian Screen Production Incentive.

The package was designed to support the industry in meeting the challenges of a changing global environment.
Under the production incentives Government support moved from providing direct benefit to private investors to
placing the producer at the centre of a rebate scheme.

An historical overview of Government support measures for the sector before the introduction of the Australian
Screen Media Support Package is at Appendix A.

Screen Australia and the National Film and Sound Archive (NFSA)
Screen Australia is the Government’s primary funding and support body for the Australian film, television and
documentary sector. The Screen Australia Act 2008 states that one of Screen

2
Australia’s key functions is to support and promote the development of a highly creative, innovative and
commercially sustainable Australian screen production industry.2

Screen Australia was formed from the merger of the three film agencies, the Australian Film Commission
(AFC), the Film Finance Corporation Australia (FFC) and Film Australia Limited. Since this time, partly
reflecting the expected efficiency savings resulting from the merger, overall Government appropriations to the
film agencies have slightly declined. Previously, the three film agencies received the following appropriations:

Table 1. Australian Government film agency appropriation ($m), 2003–04 to 2007–08

Pre-merger Government film
agency appropriations 2003–04 2004–05 2005–06 2006–07 2007–08

Australian Film Commission 44.67 48.73 52.08 52.49 53.07
(including the NFSA)

Film Australia 9.99 10.85 13.01 13.17 13.29

Film Finance Corporation 60.50 65.50 70.50 70.50 70.50

TOTAL ($m) 115.16 125.08 135.59 136.16 136.86

Source: Office for the Arts.

It is important to note that the NFSA was previously a part of the AFC. The Government funds the NFSA to
ensure the collection and preservation of the nation’s audiovisual heritage.

The current Government appropriations are:

Table 2. Australian Government film agency appropriation ($m), 2008–09 to 2010–11

Post-merger Government film agency 2008–09 2009–10 2010–11
appropriations

Screen Australia appropriation 102.89 93.64 89.40

NFSA annual appropriation 25.17 25.23 25.34

TOTAL ($m) 128.06 118.87 114.74

Source: Office for the Arts, Portfolio Budget Statements.

In New Directions for the Arts the Government committed to ensuring that any efficiency gains from the merger
of the former three film agencies would be used by Screen Australia to increase support for the industry. The
consolidated operating costs of the three former agencies were approximately $32 million in 2007–08. In Screen
Australia’s first year of financial operation in 2008–09, its operating costs were $29 million, which included
some one-off costs associated with the merger. The operating costs for 2009–10 were $24 million reducing to an
expected $23 million in 2010–11, a 28 per cent reduction on pre-merger levels.

2
Screen Australia Act 2008, ComLaw, p. 4.

3
Australian Screen Production Incentive
The production incentives are designed to support and develop the Australian screen industry by providing
concessional tax treatment for Australian expenditure. The production incentives consist of three tax offsets
assessed against a film’s qualifying Australian production expenditure (QAPE):

 the Producer Offset provides a 40 per cent rebate for feature film or 20 per cent for television and
other media for projects with significant Australian content

 the Location Offset provides 15 per cent for large-budget foreign film (with a QAPE of at least
AU$15 million) and television projects (with a QAPE of at least AU$1 million per hour)

 the PDV Offset currently provides 15 per cent for PDV production work in Australia regardless of
where a project is shot (with a minimum QAPE of AU$5 million).

Screen Australia administers the Producer Offset, and the Office for the Arts administers the Location and PDV
Offsets. The legislation governing the offsets is Division 376 of the Income Tax Assessment Act 1997 (ITAA97).

The production incentives were introduced in 2007 with previous arrangements phased out over subsequent
years. Since the production incentives were introduced:

the Producer Offset has provided $266.63 million in sector support (to 31 December 2010)
the Location and PDV Offsets have provided over $67 million in sector support.

These offsets are paid directly through the tax system and are exempt from tax, which represents an additional
benefit for recipients.

Policy aims of the production incentives
The production incentives are underpinned by a number of policy objectives aimed at supporting and
strengthening the screen production sector. The Explanatory Memorandum of the Tax Laws Amendment (2007
Measures No. 5) Bill 2007 outlined the objectives of the Producer Offset 3:

 to encourage greater private sector investment in the industry and improve the market
responsiveness of the industry.

 [to] provide a real opportunity for producers to retain substantial equity in their productions and
build stable and sustainable production companies, and aims to increase private investor interest in
the industry.

The Explanatory Memorandum also stated the objectives of the Location and PDV Offsets:

 to encourage large-scale film productions to locate in Australia, and is aimed at providing greater
economic, employment and skill development opportunities.

3
Explanatory Memorandum for the Tax Laws Amendment (2007 Measures No. 5) Bill 2007.

4
 to attract post-production, digital and visual effects production to Australia as part of large budget
productions, no matter where the film is shot. 4

For the purposes of the review, these objectives have been summarised as:

 Objective 1: Encourage Australian stories

 Objective 2: Assist production companies to become more focused on market and audience needs

 Objective 3: Increase the sustainability of production companies, and

 Objective 4: Ensure Australia remains competitive for large-budget overseas productions and in the
post, digital and visual effects sector

The support
The funding the Australian Government provides to the sector is at its highest level following the introduction of
the production incentives. To 31 December 2010, the Producer Offset alone has provided $266.63 million in
indirect Government support to the sector. From 2004–07 (the three years before the introduction of the
production incentives) the Government provided $136.7 million in total indirect support through domestic and
international incentives. From 2007–10 this support significantly increased to $412.1 million.

The table below compares the three years before and after the introduction of the Australian Screen Media
Package.

Table 3. Australian Government indirect support ($m)

2004–05 to 2006– 2007–08 to
07 2009–10

Domestic rebates 50.4 242.2
Includes 10BA and Producer Offset

International rebates 86.3 169.9*
Includes Refundable Film Tax Offset, and Location and
PDV Offsets

TOTAL ($m) 136.7 412.1**

Source: Office for the Arts and Screen Australia.

Note: This figure includes funding through both the Producer Offset and the 10BA scheme in 2007–08.
* This figure Includes funding through the Refundable Film Tax Offset.
** The figures include the total amount of the offsets but not the amount of tax revenue foregone associated with these offsets being
tax exempt.

4
ibid.

5
The Government also provides sector support as direct investment through Screen Australia.

Screen Australia has allocated a budget of $60 million for investment in features, television drama and
documentaries in 2010–11.5 This amount has been notionally distributed as $22 million to $26 million for
features; $18 million to $20 million for television drama; and $16.5 million for documentaries. Additional funds
(approximately $25 million) have been allocated to Indigenous development and productions, feature
development, innovation, marketing and enterprise programs.

It is clear that while there has been a drop in direct production investment, total Australian Government support
has increased due to the strong uptake of the Producer Offset.

Other support mechanisms
There are a range of other mechanisms through which the Australian Government provides support to the screen
production sector.

In addition to the offsets, the Government will provide the following funding to benefit the sector in 2010–11:

Table 4. Australian Government funding to the sector ($m)

Organisation 2010–11 Australian Government
funding ($m)

Screen Australia 89.50

National Film and Sound Archive 25.34

Australian Film, Television and Radio School 23.75

Australian Children’s Television Foundation 2.98

Ausfilm 1.62

Australian Broadcasting Corporation 956.07

Special Broadcasting Service 211.45

TOTAL ($m) 1310.71

Source: Office for the Arts and Department of Broadband, Communications and the Digital Economy 2010–11 Portfolio Budget
Statements.

5
Screen Australia e-bulletin, 20 July 2010,
http://www.screenaustralia.gov.au/news_and_events/bulletins/SAEbulletin_100720.asp.

6
Australian Children’s Television Foundation (ACTF)
The ACTF has made a significant investment in local children’s programs. For the three years from July 2007 to
June 2010 the ACTF committed $2.66 million in investment for children’s productions. Over the same period
the organisation also provided $0.72 million in development support.

Australian Broadcasting Corporation (ABC) and Special Broadcasting Service
(SBS)
The Government committed to providing more than $2.5 billion in ongoing funding and additional new funding
of $185.3 million over three years to the national broadcasters in the 2009–10 Budget.

Of the additional funding provided to the ABC over the current triennium, $136.4 million is expected to assist
the independent screen production sector. In its submission to the review the ABC indicated that its new funding
is being used to:

 support ABC3, the dedicated new digital children’s channel ($67 million)

 significantly enhance Australian programming on the ABC ($70 million for drama production).
It is anticipated that the additional funding of $20 million over three years for the SBS will enable the
broadcaster to provide up to 50 hours of new Australian content annually.

In its submission SBS noted that from July 2006 to April 2010, it had commissioned 131 separate companies to
produce a total of 230 drama, documentary and entertainment programs.

The Australian Film, Television and Radio School (AFTRS)
The Government also provides indirect support to the sector through training and development activities at
AFTRS. The school provides full-time and part-time graduate and post-graduate courses, a program of industry
short courses and seminars, a training program for Indigenous Australians, and publishes research of relevance to
the film and broadcast industries. In addition to its training courses, AFTRS delivers a range of outreach
activities and industry events, including workshops and free forums.

Ausfilm
To promote the Location and PDV Offsets to international companies, the Australian Government provides
funding to Ausfilm to market Australia’s incentives, locations and capabilities worldwide. Ausfilm advises the
Australian Government about attracting offshore-financed film and television production and post-production to
Australia, as well as issues relating to official co-production.

Its membership is comprised of Australia’s federal, state and territory screen agencies and more than 30 private
sector companies. Ausfilm has received annual Australian Government funding since the 2002–03 financial year.

Creative Industries Innovation Centre (CIIC)
The CIIC is a $17 million initiative and part of the Enterprise Connect network (run through the Department of
Innovation, Industry, Science and Research). It helps small-to-medium size businesses in the creative industries,
including the production and post-production sector, to increase their productive capacity, improve their ability
to develop and market Australian creative content and services. The CIIC provides a comprehensive business
review and a related dollar-matching program to help businesses implement recommendations from the business
review.

Up to October 2010, CIIC had approved applications for more than 193 business reviews, including 26
businesses engaged in film, television and radio services.

State and territory government funding
In their joint submission to the review, state and territory government film agencies indicated that they had

7
provided combined direct funding support in 2008–09 of approximately $40 million, contributing to total
production of over $500 million.

The state and territory governments offer a range of incentives and direct funding investment to encourage
producers to film in their region.

Regulation
Through a number of regulatory mechanisms, in particular the Australian Content Standard and Foreign Actor
Certification Scheme (FACS), the Government provides indirect support to the Australian independent screen
production sector.

Australian Content Standard
The Broadcasting Services (Australian Content) Standard 2005 requires commercial television broadcasters to
broadcast minimum levels of Australian content and reflect a sense of Australian identity, character and cultural
diversity.

Other regulatory mechanisms include:

 the Broadcasting Services Act 1992

 the Children’s Television Standards 2009.

The Australian Communications and Media Authority (ACMA) regulates the broadcast of Australian content.

Foreign Actor Certification Scheme (FACS)
The FACS is intended to achieve key cultural objectives by ensuring that Australian industry personnel are given
a fair chance in securing employment in film and television productions shot in Australia. Further background on
the scheme is available at http://www.arts.gov.au/film.

8
Objective 1: Encourage Australian stories
Overview
The principal reason the Government funds the screen sector is because of the cultural benefits to the nation. A
viable domestic sector is essential if audiences are to have access to quality Australian content.

Overall, the quantity, quality and diversity of Australian productions have increased in recent years. Increased
production levels provide a stronger base for Australian producers to make a diverse range of Australian stories
for Australian and international audiences. The Government’s primary funding mechanism, the Producer Offset,
is intrinsically targeted towards achieving this objective.

The significant Australian content test of the Producer Offset ensures that those productions that qualify for the
offset are culturally beneficial to the nation and involve Australians telling Australian stories.

Production levels
In 2009–10 total expenditure in Australia on film and television drama productions was $731 million, its highest
level ever. This expenditure included domestic feature film and television drama production as well as
international activity. The results for 2009–10 represented a two per cent increase from the previous year
($717 million) and are well above the average for the five years before the Producer Offset was introduced in
2007 ($547 million).6

6
Screen Australia, The Drama Report 09/10 Production of Feature Films and TV Drama in Australia, November 2010, p.
3.

9
Figure 1. Total Australian annual drama expenditure

Note: 5-year average pre-July 2007 excludes PDV-only expenditure by foreign projects.
Source: Screen Australia, The Drama Report 09/10 Production of Feature Films and TV Drama in Australia.

Feature film
Total Australian feature expenditure in 2009–10 was $265 million, well above the five-year pre-Producer Offset
average (2002–03 to 2006–07) of $141 million.

In 2008–09 there was a significant increase in the overall expenditure on Australian feature film production. This
expenditure included Legend of the Guardian: The Owls of Ga’Hoole and Happy Feet 2. It was the first time that
two large-budget Australian productions began in the same year. Other examples include Australia, Knowing
and The Killer Elite (currently in production), with Mad Max 4: Fury Road and The Great Gatsby both reported
to start production in 2011–12.

10
Table 5. Australian feature film production 2004–05 to 2009–10

Feature film
Includes Australian
domestic and co-
productions 2004–05 2005–06 2006–07 2007–08 2008–09 2009–10

Number of productions

TOTAL 29 32 30 39 34 37

Production value ($m)—spend in Australia

TOTAL 93 112 234 172 366 265

Source: Screen Australia’s National Survey of Feature Film and TV Drama Production 2008–09 and The Drama Report 09/10
Production of Feature Films and TV Drama in Australia.

Based on available data large-budget Australian productions (over $50 million) are being produced more
regularly. Feedback from the sector has been that the 40 per cent offset is attracting offshore studio finance for
large-scale domestic productions.

Submissions noted that large-budget Australian productions have alleviated some of the decline in offshore
production by providing employment opportunities and the use of production facilities. However, the sector
argued that sustainability requires both domestic and international productions. See objective 4 for more detail.

Feature films usually have development times of at least two to three years; therefore it will be a few more years
before the full impact of the Producer Offset can be accurately measured.

Finding
There are early signs that suggest the Producer Offset is encouraging increased domestic feature
film production and also diversity of production, reflected by the increase of large-budget
Australian productions backed by international finance.

Television
Television production levels are traditionally relatively stable and tend to align with the Australian content
quotas for free-to-air commercial television networks. The sector indicated that the content standard ensures a
certain level of television production each year and this has helped in sector viability.

The three-year average in television drama expenditure since the offset’s introduction (2007–08 to 2009–10) is
$295 million, well above the five-year pre-offset average of $218 million.

11
Table 6. Television drama production 2004–05 to 2009–10

Television DRAMA*
Includes Australian
domestic and
co-productions 2004–05 2005–06 2006–07 2007–08 2008–09 2009–10

Total number of productions

TOTAL 33 42 45 46 44 36

Production hours

TOTAL 620 583 615 710 669 564

Production value ($m)—spend in Australia

TOTAL 202 205 253 269 328 286

Source: Screen Australia’s National Survey of Feature Film and TV Drama Production 2008–09 and The Drama Report 09/10
Production of Feature Films and TV Drama in Australia.
*Television drama includes adult drama series and mini-series, adult telemovies and children’s drama.

While the above data would indicate a decline in Australian television production in 2009–10, this result is
largely linked to the requirements under the Australian Content Standards for children’s television. The number
of children’s program titles dropped from 17 productions expending $111 million in 2008–09 to nine
productions expending $53 million in 2009–10. As children’s content quotas for free-to-air television are
measured over a three-year period, the high result in 2008–09 may have affected the 2009–10 figures. Screen
Australia has advised that a number of children’s programs have been commissioned in 2010–11 which means a
stronger result this financial year.

According to The Drama Report 09/10, the average cost per hour for adult television drama series has been
steadily increasing since the Producer Offset’s introduction. In 2007–08 the average cost per hour was $285 000,
increasing to $324 000 in 2008–09 and $345 000 in 2009–10.7

Finding
Australian television production levels remain stable over time and are closely linked to
requirements under the Australian Content Standard. Since the Producer Offset was introduced,
Screen Australia data indicates that there has been an increase in the production values for adult
drama series.

7
ibid, p. 9.

12
Documentary
The most recent results for documentary production indicated that hours and budgets for documentary
productions are above the annual average of 331 hours and $74 million over the 13-year survey. 8 The results for
2009–10 were not available at the time this report was prepared.

Table 7. Documentary production

DOCUMENTARY 2004–05 2005–06 2006–07 2007–08 2008–09

Production hours

TOTAL 331 285 406 509 423

Production titles

TOTAL 193 169 196 239 194

Production budgets ($m)

TOTAL 71.3 73.4 97.2 138.6 106.4

Source: Screen Australia’s Documentary Production in Australia 2010.

Production peaked in 2007–08 due largely to the continuation and commissioning of new television
documentary series.

Finding
While documentary production is vital to ensuring a diversity of Australian stories, it has not been
possible from the data available to asses the trend for documentary production since the
introduction of current Government support arrangements.

8
Screen Australia, Documentary Production in Australia 2010, p. 3.

13
Uptake of the Producer Offset
In the first three years of the Producer Offset, 1 July 2007 until 30 June 2010, Screen Australia has issued the
following final certificates:

Table 8. Number of final certificates

Feature Documentary TV/other TOTAL

No. certificates issued 34 91 47 172

No. co-productions 3 0 4 7

Total rebate to Australian
productions ($m) 139 15 50 203

Total QAPE ($m) 346 75 248 669

Source: Screen Australia submission to the Australian Government’s 2010 Review of the Independent Screen Production Sector, p.
50.

A significant proportion of Australian television and feature films have accessed the Producer Offset. Screen
Australia data in The Drama Report 09/10, indicated that 49 per cent of features and 59 per cent of television
drama titles qualified for the offset in 2007–08. In 2009–10 this figure increased significantly to 78 per cent of
total Australian features and 75 per cent of television drama projects. 9 The lower uptake in 2007–08 is most
likely because a number of productions were ineligible for the offset as they had used the 10BA scheme before
its phase-out or accessed funding from the AFC or FFC before 1 July 2007.

In the past three years, Australian productions accessing the offset have accounted for 90 per cent of total
expenditure by Australian features. In the past two financial years this has been 98 per cent and 99 per cent
respectively with the remaining expenditure from low-budget films that did not meet the offset’s threshold.

Feedback from the sector
Submissions and participants in the focus groups viewed the Producer Offset as very positive. Sector feedback
did suggest some amendments to the operation and administration of the offset.

Some submissions noted that the introduction of the offset had been particularly beneficial to the larger budget
productions. The Screen Producers Association of Australia (SPAA) noted:

There is no doubt that the PO [Producer Offset] is working at the top end of production budgets with
films like Australia, Knowing and future releases like Mad Max: Fury Road, Tomorrow When the War
Began and Legend of the Guardian.10

However, the sector indicated these benefits were less pronounced for lower budget productions, particularly
documentaries.

9
Screen Australia, The Drama Report 09/10 Production of Feature Films and TV Drama in Australia, November 2010, p. 3.
10
Screen Producers Association of Australia submission, p. 8.

14
Finding
There has been an increase each year in the feature films and television productions receiving the
Producer Offset since its introduction in 2007–08.

Australia’s international co-production program
Australia’s film co-production program contributes to the sector’s viability by:

increasing the output of high-quality productions by enabling investment and risk to be shared between co-
producers
giving Australian producers the opportunity to develop skills in managing larger productions
providing increased production and employment opportunities by opening up new markets for Australian
audiovisual works
fostering creative development and cultural exchange between screen practitioners.

Australia currently has co-production treaties, administered by Screen Australia, with the United Kingdom,
Canada, Italy, Ireland, Israel, Germany, Singapore and China; as well as memorandums of understanding
(MOUs) with France and New Zealand. A treaty with South Africa has been signed and is likely to enter into
force in 2011. The most used arrangements have been: Canada (43 productions), United Kingdom (34
productions) and France (28 productions).

Negotiations for new co-production treaties are being pursued with Malaysia, India, Denmark and the Republic
of Korea.

A co-production arrangement allows an approved project to be considered a national production in each of the
co-producing countries. This means producers can apply for any benefits or programs of assistance available to
national films of either country. Australian productions can also access the Producer Offset without having to
pass the significant Australian content (SAC) test.

Production levels
Since the inception of the program in 1986, over 127 productions worth over $1.16 billion have gone into
production.

In the 12 years between mid-1986 to mid-1999, there was an average of three co-productions per year. In the
past 11 years (from mid-1999) this average has increased to 7.1 productions per year and in the past three
financial years, 23 official co-productions have been made or are in production, at an average of 7.7 productions
per year.

15
Figure 2. Co-productions completed or in production

Source: Screen Australia.

Importantly, these productions are providing Australian producers with opportunities to work with higher
budgets and an opportunity to tell Australian stories to a wider international audience. As demonstrated by the
data below, 73 per cent of past co-productions have had budgets greater than $6 million, compared with the 25
per cent of Australian productions with budgets greater than $6 million.

Table 9. Budget ranges of feature films (2009 dollars)

All official co- Australian productions 1988–89 to 2008–
Budget range ($m)
productions (%) 09 (%)

Less than 1 2 19

1 to 3 7 29

3 to 6 18 27

6 to 10 24 17

10 to 20 29 4

20 + 20 4

Total 100 100

Source: Screen Australia, September 2010.
Adjusted using the ‘non-farm GDP-implicit price deflator’; base year 2008–09.

16
Feedback from the sector
Overall, the feedback from the sector supported Australia’s international co-production program. Feedback
suggested that:

 there has been an increase in the level of interest in co-productions, but that this has not necessarily
resulted in a relative increase in uptake

 producers would like greater flexibility with program arrangements, particularly around the reporting of
financing arrangements

 there were opportunities for greater consistency between the co-production program and the Producer
Offset, particularly in terms of QAPE.
Increased interest in co-productions
Screen Australia noted that the shortage of international finance resulting from the global financial crisis (GFC),
in conjunction with the Producer Offset, has made Australia a more attractive co-production partner for overseas
filmmakers.11 However, Screen Australia also indicated that the high level of inquiries for possible co-
productions have not necessarily translated into productions. Reasons for this include the difficulty in sourcing
the generally higher levels of funding required for official co-productions, the complexity involved in meeting
the requirements of co-production status, and the lack of international finance available in recent years. 12

The ABC stated that over the last decade Asia has played an important role in supplying low-cost production
services to Australian animation producers and that countries such as Malaysia, China and the Republic of Korea
have become capable producers and stronger financial partners through a combination of government policy and
other factors. The ABC suggested that opportunities for treaties with India, Malaysia, the Republic of Korea,
China (television13) and the Philippines should be encouraged, especially for television. As outlined above, treaty
negotiations with a number of these countries are underway.

Need for greater flexibility
In late 2009 Screen Australia initiated a review of its International Co-Production Program Guidelines. A
number of submissions to Screen Australia’s review made similar comments to those raised in this review about
the need for improved administrative efficiency in the co-production approval process, and the inflexibility of
the points test for assessing Australian creative contribution to a production. Screen Australia has responded to
these comments in its revised guidelines, which came into effect on 5 October 2010. 14

Screen Australia’s revised guidelines are intended to ensure that the co-production program is sufficiently
flexible to reflect the realities of financing markets and changing production techniques. Screen Australia is
working to adopt the level of flexibility that has been sought by the industry and has indicated it will continue to
monitor stakeholder feedback. Screen Australia has advised that industry’s reception of the revised guidelines
has been broadly positive and has had an immediate effect on the level of inquiries about official co-productions.

Qualifying Australian production expenditure (QAPE) on co-productions
Under the Producer Offset legislation, expenses on Australian elements of a production in another country can
only be considered QAPE if they are incurred during the period of principal photography and only when the

11
Screen Australia submission, pp. 86–87.
12
ibid.
13
At China’s request, its current co-production treaty with Australia excludes television.
14
http://www.screenaustralia.gov.au/documents/SA_publications/Guidelines/Glines_Copro.pdf.

17
subject matter of the film reasonably requires the use of the location outside Australia. 15

Feedback indicated there is a view within the sector that the current situation goes against the spirit of the official
co-production arrangements which require co-producers to demonstrate a balance of the creative and financial
contributions of each country. SPAA, for example, commented that legislation defining the Producer Offset
should be consistent with the underlying intention of Australia’s co-production treaties and allow claims of
expenditure on Australian elements incurred in the co-production partner country for official co-productions,
including pre- and post-production work. It should be noted that this would still be limited to expenditure
incurred by the Australian co-producer, so would not mean production companies would receive the offset
against all expenditure in the co-production partner country QAPE.16

This matter was also raised by a confidential submission which suggested that studio set work undertaken in the
co-production partner country for an official co-production should be eligible as QAPE. The submission noted
that cost efficiencies of localising studio work can outweigh the expense of relocating props, equipment, actors
and crew to an Australian location. At present, studio work in another country may not qualify as QAPE if the
subject matter of the film does not reasonably require the use of the location, as the work could have been
undertaken in Australia.

In its submission, Screen Australia identified a potential issue related to the structure of official co-productions
and the legislative requirements for certification as part of the Producer Offset. The legislation requires that
Screen Australia be satisfied that the applicant for the Producer Offset certificate carried out or made
arrangements to carry out activities for the production of a film. This means that, in theory, the applicant
company only ‘made the arrangements’ for the carrying out of the Australian side of the making of the project.

To date co-productions have been approved because the applicant company has been party to the ‘co-production
agreement’ and therefore has ‘made the arrangements’ for the making of the project. There could be a potential
issue if the applicant company is a special purpose vehicle (SPV) and not a party to the co-production agreement,
as there would be no direct link between the SPV and the ‘non-Australian’ side of the project. Screen Australia
has suggested that this could be addressed through a minor legislative amendment to the ITAA97, identified
below in bold:

… either carried out, or made the arrangements for the carrying out of, all the activities that were
necessary for [the] Australian proportion of the making of the film.

Findings
Co-productions contribute to the viability of the independent screen production sector as co-
productions on average tend to have higher budgets than domestic productions and also widen the
potential audience for Australian stories.

There has been increased interest within the Australian industry in establishing co-production
agreements with more partner countries since the establishment of the Producer Offset. There was
particular interest in developing co-production agreements with countries in the Asian region and

15
Under section 376-170(2) Item 4 of the Income Tax Assessment Act 1997.
16
NB-ITAA97, subs. 376-170 (1) provides that expenditure incurred by a co-production partner in the co-production country that
would have been QAPE if it had been incurred in Australia by the applicant company is QAPE for requirements in order to
receive the offset against it.

18
with countries with expertise in animation production.

There is potential for greater consistency between the operation of the International Co-production
Program and the legislative requirements of the Producer Offset. Minor amendments to Producer
Offset legislation would be required to improve consistency.

Challenges
Feedback from the sector noted the important contribution of Government’s support to its sustainability and
viability. However, the producer focus groups and submissions to the review identified a number of challenges
to achieving the Government’s objectives for the screen sector. Areas relevant to the production of Australian
stories related to:

 the significant Australian content (SAC) test for the Producer Offset

 challenges experienced by the documentary sector.

In feedback from the sector, the potential opportunities and challenges of maintaining levels of Australian
content in an increasingly digital and online environment were highlighted as an important factor in sector
viability.

Significant Australian content (SAC) test
For a film to be eligible for the Producer Offset, Screen Australia must be satisfied that the film has ‘a significant
Australian content’.17 (As noted above, official co-productions bypass the SAC test.)

Given the attractiveness of the Producer Offset, it is important to have strong safeguards to ensure clearly
offshore productions (other than official co-productions) are not able to access the Producer Offset. The SAC test
also ensures the Producer Offset encourages the increased production of diverse Australian stories.

The requirements for the SAC test are outlined in ITAA97 governing the Producer Offset and were developed
from the eligibility test for the former 10BA tax incentive scheme (see Appendix A for more information on
10BA). However, the SAC test for the Producer Offset is slightly broader in that it does not require a film to
be wholly or substantially made in Australia and the test does not automatically take into consideration the
holder of intellectual copyright in a film, or the source of finance for a film (although these two aspects may
be taken into consideration in determining eligibility for the offset). The broader approach adopted with
regards to the source of finance for a film has likely contributed to the increase in large-budget Australian
productions, which have been significantly funded by US studio investment.

As outlined in section 376-70 of the ITAA97, the SAC test takes into account the following matters:

(a) the subject matter of the film;
(b) the place where the film was made;
(c) the nationalities and places of residence of the persons who took part in the making of the film;
(d) the details of the production expenditure incurred in respect of the film;
(e) any other matters that the film authority considers to be relevant.

Screen Australia’s Producer Offset—Guidance on Significant Australian Content, which sets out in further

17
ITAA97 para. 376-65(2)(a).

19
detail how Screen Australia interprets and applies section 376-70, makes it clear that Screen Australia
considers all relevant factors as part of a ‘holistic test’ which is ‘applied on a case-by-case basis’. It states
that ‘no single factor is determinative; rather, Screen Australia will consider and balance all relevant factors
in coming to a decision’.18

The Producer Offset is administered by Screen Australia at arm’s length from the Government.

Feedback from the sector
Feedback from the sector regarding the SAC test can be divided broadly into three categories:

 concerns with the definition of ‘significant’

 issues related to a lack of certainty on what satisfies the SAC test
administration of the Producer Offset.

Definition of ‘significant’
Concerns from stakeholders ranged from Screen Australia being too restrictive to too broad on what constitutes
‘significant’.

In determining significant Australian content, Screen Australia takes into account whether the film:

 is about Australia or Australians

 reflects a cultural background that is particular to Australia or Australians

 reveals some aspect of Australia’s cultural background or experience or

 whether the project originated in Australia and/or was developed by Australians. 19

The concerns of organisations such as the Media Entertainment and Arts Alliance (MEAA) to tighten the
definition of ‘significant’ and to include aspects such as Australian accents may be too prescriptive and inhibit
the sector’s ability to achieve the offset’s objectives. Further, accents are partly considered when taking into
account the factors that already influence Screen Australia’s assessment of SAC.

Screen Australia has suggested minor legislative amendments on the parameters of significant Australian content
to ensure the requirements of qualifying for the Producer Offset is sufficiently differentiated from the Location
Offset:

Without limiting paragraph (c) [ie the ‘nationalities and places of residence’ paragraph], the nationalities
and places of residence of the persons:

i. who were principally involved in development of the film;
ii. under whose creative control the film was made; and
iii. who are entitled to receive revenue derived from the exploitation of the film. 20

Screen Australia argued that such an amendment would not have altered previous assessments of the SAC test,
as it would be consistent with Screen Australia’s decision-making to date. It would, however, ensure a more

18
Screen Australia, Producer Offset: Guidance on Significant Australian Content, September 2009, p. 2.
19
ibid.

20
Screen Australia submission, p. 70.

20
substantial level of Australian control over productions and safeguard the integrity of the Producer Offset.

Lack of certainty with the SAC test
Some submissions suggested that the SAC test has made it difficult for producers, particularly in the medium
budget range, to sell the offset to investors—especially to US studios. They argued that this was because there
was a lack of certainty about what would pass the SAC test and as such, investors were hesitant to commit to a
project in case the production failed to receive the offset payment.

Administration of the Producer Offset
Some submissions expressed concern that there were internal conflicts of interest within Screen Australia as a
result of its dual responsibilities for development and investment in domestic production and administering the
Producer Offset. Some industry stakeholders were concerned that information provided to one administrative
arm of the organisation (such as information about a production budget provided as part of an application for
provisional certification under the Producer Offset) would be accessed by another arm of the organisation (such
as its Production Investment Department) and adversely affect the level of investment Screen Australia may
commit to a production.

At the same time, a number of submissions expressed concern that there was not more efficient and effective
information exchange within administrative arms of Screen Australia because producers were being required to
provide two sets of similar financial and audit statements to acquit development assistance, production
investment and QAPE. This issue is also discussed under objective 3.

Possible solutions
Introduce a points test
The suggestion of changing to a points test, such as New Zealand’s Screen Production Incentive Fund (SPIF) or
the United Kingdom’s UK Tax Credit, is based on the assumption that such a test would provide greater
certainty and also reduce the subjectivity of a holistic test.

21
The sector has suggested that under a points test producers are able to organise their productions to ensure the
minimum number of points are attained to receive the offset (subject to meeting expenditure thresholds).

One of the benefits of a holistic assessment is that it does not inadvertently create a minimum floor. By setting
the minimum points required to pass a significant nationality content test, there is potentially no incentive for the
production to achieve a higher points score. This also means that there is no incentive for productions to attempt
to ‘game’ the system—that is, artificially meeting the minimum points test by redesignating titles, for example.

Findings
Given the attractiveness of the Producer Offset to international producers the integrity of the SAC
test needs to be strongly maintained. Minor legislative amendments suggested by Screen Australia
would help to maintain the integrity of the offset, and would cement the current assessment
approach taken by the agency.

The holistic assessment of SAC by Screen Australia provides important benefits to the sector, and a
points test would not necessarily provide more certainty for producers.

Make the provisional certificate binding
The suggestion to increase the certainty of the Producer Offset by making the provisional certificate binding
would require a change to legislation and would also render the purpose of the provisional certificate void. To
assess applications for provisional certification to the same extent as applications for final certification would
impose additional administrative and compliance costs. It is also worth noting that originally the Producer Offset
legislation had compulsory binding provisional certificates; however, at the time the sector argued against this
requirement.

The current provisional certificate process provides applicants with increased flexibility in their productions.
Under the current arrangement, producers can formally approach Screen Australia with any production changes
and while there is a small ‘reconsideration fee’ involved, they will be advised if the changes would affect the
production’s ability to access the offset. Changing this process would essentially require applicants to make no
changes to the production of the film to ensure the provisional certificate does not become void.

Further, a provisional certificate assessment is necessarily based entirely on the applicants’ planned activities. It
is only at final certificate stage that a project can be accurately assessed.

Screen Australia considers significant Australian content at the provisional certification stage. If there are no
material changes that would decrease the level of Australian content, producers should be confident that a
provisional certification will receive a final certificate after completion of production. Screen Australia has
advised that no film which has received a provisional certificate has been denied a final certificate on the
grounds of not meeting the SAC test.

The sector acknowledged that it was still early days for the offset and that as more productions were certified,
international financiers could become more comfortable with the SAC test arrangements. This view is supported
by industry lawyers DLA Phillips Fox:

Provided that the film authority is consistent in its approach and its interpretations, then this should not
affect the contribution that the producer offset makes to creating sustainable businesses. 21

21
DLA Phillips Fox submission, p. 6.

22
Findings
Making the provisional certificate binding is not a workable option. It would require the final
certificate assessment to be undertaken at the provisional stage and this would limit a producer’s
ability to make changes during the production process.

The current application process provides a high level of confidence for producers that they will
receive the offset while providing flexibility to make modifications to a production during filming.

As more producers gain experience with the SAC test process, they could become more
comfortable with the SAC test arrangements.

Administration of the Producer Offset
A few submissions, such as that by SPAA, recommended that the Office for the Arts (formerly DEWHA) take
over administration of the offset, arguing:

... that DEWHA possessed the corporate wisdom on 10BA administration and the industry had full
confidence in the department’s ability to manage the function at arms length. 22

Under the arrangements for the 10BA scheme the Arts Minister was required to determine a film as an
‘Australian film’, based on whether it has significant Australian content, before the film could be certified for the
10BA benefit. The minister delegated this function to the department.

It is also important to note that a majority of submissions and producers within the focus groups indicated that
Screen Australia’s administration of the offset was well regarded within the industry. This would suggest there is
not a consensus view among industry practitioners as to whether or not Screen Australia should administer the
offset.

Any reallocation of administrative responsibility for the Producer Offset from Screen Australia to the Office for
the Arts would require legislative amendment to Division 376 of the ITAA97. The Office for the Arts would
have to acquire the film industry expertise that currently resides within Screen Australia to apply the SAC test.

Finding
Given the issues taken into consideration as part of an assessment of SAC and the expertise
required, Screen Australia is best placed to administer the Producer Offset.

Challenges experienced by the documentary sector
The Australian Government views documentary production as a vital component of the Australian film industry
because it contributes to national understanding, education and social values. The former Arts Minister, the Hon.
Peter Garrett AM MP made a commitment to keep funding for documentaries at current levels. 23

22
Screen Producers Association of Australia submission, p. 21.
23
The Hon. Peter Garrett, opening of the Melbourne International Film Festival, 25 July 2008.

23
As outlined in Screen Australia’s submission, documentary producers make up the largest segment of the sector.
Over half of the 394 active production businesses Screen Australia surveyed for its 2010 Business Survey were
involved in the production of documentaries only. 24

Figure 3. Breakdown of the Australian screen production industry

Source: Screen Australia submission to the 2010 Review of the Independent Screen Production sector, p. 28.

The Producer Offset rebate for non-feature documentaries is 20 per cent of QAPE with a threshold set at $250
000 per hour. The understanding is that productions below this rate would need to access direct funding from
Screen Australia or could be wholly commissioned by broadcasters.

Screen Australia found that most non-feature documentaries made in Australia do not qualify for the Producer
Offset because their QAPE is below $250 000 per hour:

24
Screen Australia submission, p. 27.

24
Figure 4. Federal Funding to the 2008–09 documentary slate

Source: Screen Australia’s submission to the 2010 Review of the Independent Screen Production Sector, p. 61.

Feedback from the sector
Sector feedback indicates a number of challenges being experienced by the low-budget documentary sector:

 the administration costs of applying for the offset for documentaries were too high given the often low
budgets

 difficulties in cash-flowing the offset with lending institutions and the prohibitive costs involved.

The sector put forward two suggestions to overcome the difficulties faced by the documentary sector:

 implementing an ‘overall’ $500 000 threshold on documentary access to the Producer Offset and
diverting the resources in the $250 000 to $500 000 budget range to Screen Australia to provide to
producers or

 increasing the value of the Producer Offset for documentaries to at least 30 per cent.25
Sector feedback also noted that the current cap of 20 per cent of QAPE on ‘above the line’ expenditure
negatively affects documentaries, particularly low-budget documentaries, where above the line costs are
generally greater than 20 per cent. Feedback suggested this cap should be removed or increased for
documentaries.

Possible solutions
$500 000 threshold on documentary access to the Producer Offset

25
ibid., pp. 62–3.

25
Instead of low-budget documentaries (under $500 000) applying for the Producer Offset and direct funding
through Screen Australia, they could receive combined support in the form of a grant. This would alleviate one
of the funding reporting processes and mean that low-budget documentaries would not need to cash-flow the
expected offset payment. Under this option documentary producers could still retain equity in their production.

This would be consistent with Screen Australia’s current practice of funding documentaries of $200 000 or under
as a grant, rather than as recoupable investment. It does not have to be repaid unless the terms of the grant
agreement are breached.26

Increasing the Producer Offset for documentaries to 30 per cent
Feedback from the sector suggested that an increased rebate of 30 per cent for documentaries would address
current financing and administrative difficulties. It would result in a higher proportion of the Producer Offset
payment being returned to documentary producers. The state and territory agency forum noted:

This would reduce dependency, and rebalance financing and administrative costs at a more acceptable
proportion of production costs.27

The general view was that any increase in rebate levels should only be for one-off single episode documentaries;
however, there were suggestions that the increase should be extended across the documentary sector.

Above the line
A cap has been placed on the level of ‘above the line’ costs (remuneration for the director, senior producers,
principal cast and development costs) which will be considered QAPE. Only above the line costs up to 20 per
cent of a production’s total production budget can be claimed as QAPE. The cap is intended to stop artificial
inflation of budgets, particularly excessive remuneration packages for executive producers. Producers will be
free to allocate more than 20 per cent of the budget to above the line, but the Government will not provide a
rebate on that expenditure.

The concern for low-budget documentaries was that as producer and director remuneration account for a larger
percentage of the budget than is the case for drama productions, the above the line costs are as a rule greater than
20 per cent. Therefore under current arrangements low-budget documentary producers are often unable to claim
their entire fee.

Sector feedback suggested that possible mechanisms through which to address this include:

 excluding documentaries from the 20 per cent above the line cap or

 as suggested by the State and Territory Agency Forum, increasing the cap to 40 per cent for
documentary producers or $200 000, whichever is the lesser.

26
Screen Australia Documentary grants: how will they work?
http://www.screenaustralia.gov.au/documents/SA_publications/DocoGrantsQA.pdf.
27
State and Territory Screen Agency Forum submission, p. 16.

26
The current above the line arrangements are stipulated in the offset’s legislation, and apply to all productions
accessing the Producer Offset. In its submission Screen Australia indicated that it has attempted to ameliorate the
problem by allowing documentary producers to allocate a reasonable proportion of their fee below the line, as it
is remuneration for work that would usually be carried out by below the line personnel.

Findings
There was a strong sector view that the equity provided through the offset was a significant benefit,
but the administrative costs associated with the offset are potentially prohibitive for the low-budget
documentary sector.

At this stage there is limited data available to assess the sector feedback and therefore it may be an
issue that requires continued monitoring by the Government and reassessment when further data is
available.

Current above the line arrangements do not appear to be consistent with the production practices
for documentaries, particularly low-budget documentaries. Any changes to current arrangements
would require legislative amendments and would need to be considered in terms of broader
implications for the Producer Offset.

27
Objective 2: Assist production companies to become more
focused on market and audience needs
Overview
The terms of reference state that the review will examine the extent to which the Australian Government’s
support measures are achieving the stated screen cultural objectives including:

 ensuring the creation of a diverse range of quality Australian film and television productions which
appeal to audiences.

For the industry to be viable, film and television productions need to appeal to a range of audiences.

The Explanatory Memorandum accompanying the legislation governing the Producer Offset states:

The package seeks to encourage greater private sector investment in the industry and improve the market
responsiveness of the industry.28

The offset requires QAPE of at least $1 million for feature films, meaning that the offset is targeted at
productions whose budgets will be of such a level that commercial returns would be of paramount importance.

Market responsiveness and audience engagement
Feature films
There are a number of measures that can be used to gauge whether the Australian screen industry effectively
engages with the audience. The most visible one for feature films is the domestic box office. 29

Since the introduction of the Producer Offset, there are some good indicators that the offset is improving market
focus and leading to better box office performance.

Over the past 20 years, the box office data for Australian films displayed a distinct tendency towards peaks and
troughs—with many of the peaks achieved through large-budget films financed by US studios—such as Babe in
1995, Moulin Rouge in 2001, Happy Feet in 2006 and Australia in 2008.

28
Explanatory Memorandum for the Tax Laws Amendment (2007 Measures No. 5) Bill 2007.
29
Vincent Sheehan, ‘Why Australian Directors should think more like distributors’, Lumina: Journal of Screen Arts and
Business, Issue 1, p. 25.

28
Figure 5. Australian film box office, 1990–2010

Source: Motion Pictures Distributors Association of Australia (MPDAA) Note: 2010 figures as at 1 December 2010.

29
In the past three years, the average share of the domestic box office earned by Australian films is 4.4 per cent
compared with a 3.8 per cent average for the three years before that. There has therefore been a definite upswing
in box office performance, especially in the past two years.

Table 10. Domestic box-office share

Total box office in Australian films’ box Australian films’ box
Australia ($m) office gross ($m) office share (%)

2004 907.2 11.9 1.3

2005 817.5 23.1 2.8

2006 866.6 40 4.6

2007 895.4 36 4.0

2008 945.4 35.5 3.8

2009 1090.0 54.8 5.0

2010 1132.9 50.6 4.5

Source: Screen Australia, Get the Picture.

However, the share is still well below the levels achieved in 2000 and 2001, when the share was around eight per
cent.

During the early 1990s with films such as Strictly Ballroom, Muriel’s Wedding, Priscilla Queen of the Desert
and The Piano, domestic films accounted for almost 10 per cent of the total box office.

The increase in the rolling five-year average since the offset is positive. It remains too early to point definitively
to a causal effect.

In 2007 no Australian film earned over $3 million at the domestic box office, and in 2008 only Baz Luhrmann’s
Australia achieved this mark. Since then there has been a marked increase in the number of films to exceed the
$3 million mark, and in 2010 the percentage of Australian films earning in excess of $3 million is comparable to
that achieved in 2002 and 2006.

The following table provides some interesting insights.

30
Table 11. Top six Australian box-office earners (domestic)

2007 2008 2009 2010

Tomorrow When the
Romulus, My Father Australia* Mao’s Last Dancer*
War Began*

Rogue Black Balloon Knowing* Bran Nue Dae*

Children of the Silk
Bra Boys Charlie and Boots* Animal Kingdom*
Road

Kings of Mykonos:
Razzle Dazzle Unfinished Sky Samson and Delilah*
The Wog Boy 2*

Legend of the
Hey, Hey it’s Esther
Clubland Bright Star* Guardians: The Owls
Blueburger
of Ga’Hoole*

Gabriel Death Defying Acts The Boys are Back Beneath Hill 60*

Source: MPDAA, * films earning over $3 million.

The past two years have shown that a variety of genres can be successful at the box office—and also that
Australians have an affinity for stories that reflect a sense of Australian identity, character and cultural diversity.
The success of Ten Canoes, Samson and Delilah and Bran Nue Dae are good examples. All three are Indigenous
stories, from three very different genres—and all three connected with Australian audiences. Bran Nue Dae for
example earned more at the Australian box office than the US-financed blockbuster, Knowing.

Total revenue at the Australian box office is small when compared with the United States and the broader
international market. International sales are therefore important in securing the viability of the independent
screen production sector.

The percentage of Australian films that has been released in the United States since 1985 shows a long-term
decline since the 1980s. During most of the 2000s less than 30 per cent of Australian features were released in
the United States. In 2009, the number of Australian films released in the United States was the lowest since
1996. However, both 2008 and 2010 are above the rolling five-year average.30

While in 1985 nearly 70 per cent of Australian features secured a release in America, only one (Mad Max:
Beyond Thunderdome) earned over $100 000 ($100 000 is used as a benchmark in this report given that
historically it has been difficult for Australian films to break into the US market). 2010 was only the fifth time
that six or more Australian features in one year have earned over $100 000 at the US box office.

30
The importance of the American market notwithstanding, it should be noted that the American box office data is used here as it
is the single biggest foreign market. The total non-American international market is, however, vitally important. Troy Lum of
Hopscotch, for example recently noted, ‘It used to be all about US domestic releases, but over the last five years that’s changed.
Overseas results are eclipsing the US ... The international market has become much more important to studios.’ (‘Distributor
goes global via Universal’, Australian Financial Review, 24 November 2010).
From 1985–2009 there were 183 Australian features released in the US, 152 in the UK, 111 in Italy, 97 in France, 95 in
Germany, 91 in Spain and 64 in Japan (Screen Australia, Get the Picture).

31
The list of top Australian box office films in America since 2000 highlights the difficulties of achieving box
office success, particularly for those productions without Hollywood backing. Films with significant box office
results (over $10 million) were largely funded by American studios with the exception of Wolf Creek.

Table 12. Top yearly performing Australian features, US box office, 2000–10

2000 Me Myself I $568 798

2001 Moulin Rouge $57 386 607

2002 The Crocodile Hunter: Collision Course $28 443 765

2003 Alexandra’s Project $752 148

2004 Danny Deckchair $160 276

2005 Wolf Creek $16 188 180

2006 Happy Feet $198 000 317

2007 Jindabyne $400 438

2008 Australia $49 554 002

2009 Knowing $79 957 634

2010 Legend of the Guardians: The Owls of Ga‘Hoole $55 046 030

Source: Screen Australia, Get the Picture; http://boxofficemojo.com/.

32
Finding
There are early signs to indicate that the Producer Offset is having a positive effect on the
engagement of audiences with Australian independently produced feature films.

Television
Given the range of genres it is not possible to meaningfully compare the total annual general television ratings
for Australian programs. Comparing the numbers of Australian drama programs that make it into the top ratings
each year does enable comparison between the performance of Australian productions in the years before and
after the introduction of the Producer Offset.

Over the period of the offset, apart from 2010, the number of series/serials and mini-series in the top rating lists
has increased or remained steady, while the number of telemovies has declined from the peak of 2006, though
numbers are increasing.31

In 2008 both Packed to the Rafters and Underbelly were the only drama programs to be in the top 20 most
watched programs of the year (excluding the Beijing Olympics). In 2009, the first episode of Underbelly: A Tale
of Two Cities, was the fifth most watched program of the year, the remaining 12 episodes of the series came in
14th, while all episodes of Packed to the Rafters were the 19th most watched. In 2010, once again Underbelly:
The Golden Mile and Packed to the Rafters were featured in the top 20 programs—numbers 11 and 17 for
Underbelly and 19 for Packed to the Rafters.32

The ability of the Underbelly series to engage audiences is also reflected in DVD sales. In 2008 Underbelly:
Series 1 was the second biggest selling DVD in Australia. In 2009, the DVD of Underbelly 2: Tale of Two Cities
was the 12th biggest selling DVD in Australia. 33

It is also clear that the popularity of Australian television documentaries has greatly improved since the early
part of the decade. Since 2006 there has been a noticeable shift in the popularity of such programs. This shift has
occurred with the introduction of Australian-based, factual programs such as Border Security, The Force,
Bondi Rescue and RPA.

Figure 6. Number of Australian documentary programs in the top ratings list

31
While the number of series titles appears to have declined this is somewhat due to the manner in which the data is compiled by
OzTam. For example, Packed to the Rafters is presented as an average, whereas Grey’s Anatomy and Criminal Minds are
presented per episode, and so get multiple listing. If Packed to the Rafters were treated on a per episode basis, it would
occupy the top 21 drama titles watched in 2010.
Similarly, one of the difficulties of measuring the performance of Australian telemovies, is the limited number of such films
each year, and that they compete with foreign telemovies such as the Agatha Christie series of telemovies, or the A Touch of
Frost series. While networks may market such telemovies as part of a series, they are treated by Screen Australia as individual
productions.
32
However, if Packed to the Rafters episodes were considered separately they would occupy positions 8, 14, 15, 19 and 20.
33
Screen Australia, Get the Picture.

33
Source: OzTAM, compiled by Screen Australia.

Finding
Since the offset’s introduction, Australian drama series/serials and mini-series have performed
strongly in all sectors—with the Underbelly and Packed to the Rafters series achieving
exceptionally strong audience engagement.

Challenges
The key areas identified as challenges for the offset to help production companies become more focused on
market and audience needs were the minimum QAPE threshold for:

 feature films and children’s television

 medium-budget feature films.

Thresholds
The Producer Offset has minimum expenditure thresholds aimed at encouraging higher production standards to
increase audience and marketplace appeal within Australia and internationally.

The thresholds were set to ensure administrative efficiency so that non-professional productions were not
eligible for the tax rebate and reflected the Government’s intention for the Producer Offset to encourage
commercially viable production.

When the offset was introduced the following thresholds were established based on industry practice:

34
Table 13. Industry practice thresholds

Format QAPE QAPE per hour

Feature film (including feature documentary) $1 million n/a

Documentary (other than a feature) n/a $250 000

A single episode program (e.g. telemovie) $1 million $800 000

Short-form animation $250 000 $1 000 000

Series or season of a series $1 million $500 000

It was also anticipated that lower budget productions would be better served by direct funding through Screen
Australia.

There are some early signs that the Australian screen industry is becoming more commercially focused since the
Producer Offset. In 2004, 16 Australian feature films were released in cinemas. In the past two years there were
43 and 29 films released respectively, (though not all were Producer Offset eligible productions). 34 More
significantly, the rolling three-year average has increased from 25 in 2002 to 35 films in 2010.

Of note are the box office returns of these films. The average box office return for the 294 films released since
2000 designated by the Motion Picture Distributors Association of Australia (MPDAA) as either Australian
produced, or Australian co-produced is $1.53 million.

However, of these films, only 82, or 28 per cent, grossed over $1 million. Only eight films in that time (2.7 per
cent) grossed over $10 million.

Feedback from the sector
Feature films
Feedback through the consultation phase suggested that an unintended consequence of the threshold is that some
production companies had artificially and unnecessarily increased the budgets for their projects to meet the
threshold levels to qualify for the offset.

Stakeholders also suggested that the $1 million threshold for feature films precluded:

 culturally significant films with budgets (or QAPE) lower that $1 million

 emerging producers as they tend to work on lower budget projects.

Possible solution
Lowering the threshold for feature and non-feature films to $500 000
A majority of submissions and attendees at the focus groups suggested that the threshold should be reduced to
$500 000 to address these issues.

34
The increase in 2007–08 may be due to an increase in production driven by the phase out of the Film Finance Corporation and
10BA tax incentive.

35
In its submission, Screen Australia also suggested reducing the threshold for single episode television programs
(that is, telemovies) to $500 000.

The benefit of having a consistent threshold for feature and non-feature films is that lower budget filmmakers
will have the option of receiving a 40 per cent rebate if they can negotiate a distribution deal. If not, the option of
receiving 20 per cent as a telemovie remains viable. It might not result in theatrical releases, but it does give
assistance to producers investigating distribution in the online space, where at this stage returns are likely to be
lower than theatrical or television distribution. This can contribute to industry diversification and sustainability.
It also helps create an environment in which the industry can maximise opportunities likely to be provided by the
National Broadband Network.

As set out in the table below, in 2009–10 there were six feature films produced with a budget less than
$1 million.

Table 14. Budget range of Australian feature films 2007–10

Budget Offset Non-offset Total
range
$m 07–08 08–09 09–10 07–08 08–09 09–10 07–08 08–09 09–10

<1 n/a n/a n/a 8 8 6 8 8 6

1 to 3 6 6 7 9 2 2 15 8 9

3 to 6 7 11 7 0 0 0 7 11 7

6 to 10 3 4 7 1 0 0 4 4 7

10 to 20 2 1 5 0 0 0 2 1 5

20+ 1 2 3 2 0 0 3 2 3

Total 19 24 29 20 10 8 39 34 37

Source: Screen Australia, 2009/10 Drama Report.

Of the six films in 2009–10 that had a budget of less that $1 million:

 one received direct investment from Screen Australia

 none made it into the top 20 box office Australian feature films in Australia

 five were produced or co-produced by a ‘first-time producer’.

Kenny was an often used example by the sector to support a reduction in the Producer Offset threshold. Kenny
was released in 2006 and was made for less than $1 million. It earned $7.78 million at the Australian box
office.35 It was the second highest earning Australian film that year behind Happy Feet. While this was a
significant success, it appears to be the exception to the rule. Of the top 100 box office earning Australian films

35
Motion Picture Distributors Association of Australia.

36
since 2000, only Kenny had a budget of less than $1 million.36

Lowering the offset threshold for feature films to ensure access for emerging producers would to an extent alter
the intent of the offset, from one encouraging commercially focused features, to one that includes films less
likely to be market and box office driven.

Children’s television and animation
While the threshold for adult television series was not of significant concern in either the submissions or the
focus groups, the negative impact of the threshold on children’s television was a common theme. The issue was
most prominent regarding pre-school productions.

The significant decline in the number of children’s programs in 2009–10 is mostly due to the broadcasters
working within the three-year cycle of Australian content requirements as specified by ACMA. Given the strong
performance of children’s drama in 2007–08 and 2008–09, it is not surprising given the regulatory context
within which the broadcasters operate that there was a decline of production in 2009–10.

Further, while ABC3 has begun transmission, many of the productions it will commission are currently in the
development stage and it is therefore unlikely that it will have an impact on production numbers until 2010–11.

As Figure 7 demonstrates, due to the time lag between production and release there is a significant difference
between the production and release of children’s drama when examined on a yearly basis.

Figure 7. Hours of television drama by release date

Source: Screen Australia, Drama Report 09/10.

Short-form animation
A number of producers in the focus groups asserted that the threshold of $1 million per hour for short-form
animation and $500 000 per hour for children’s animated series was too high because it did not reflect actual
costs of production for television—especially that made for children—which the sector indicates is much
cheaper to produce than live action.

Since the introduction of the offset, Screen Australia advises that only two short-form animation productions
have received final certificates for the Producer Offset. This low uptake of the offset may suggest that the
threshold is too high, especially given that in 2007–08 to 2009–10 there was an average of 8.5 such titles per
year.

36
ibid.

37
Screen Australia’s submission also noted that the legislation clearly indicated that an eligible animation must be
a drama.37 This means that that an animated documentary would not qualify for the offset. Screen Australia
suggested that the drama requirement be dropped from the legislation to allow short-form animation
documentaries to be eligible. This could encourage the creation of innovative documentaries, particularly for the
online delivery platforms.

Possible solution
Amending the threshold
Despite the general view for a need to lower the thresholds for short-form animation and possibly for children’s
animated series, no consensus figure was suggested as being at an adequate level.

Findings
The thresholds for the Producer Offset were designed to encourage productions to adopt a greater
commercial focus. The thresholds were determined after consultation with the industry, and were
consistent with the standard production budgets for each format.

There has not been any significant change to the structure of the market since the introduction of
the Producer Offset to suggest the threshold is too high.

However, reducing the threshold of both feature films and single-episode programs to $500 000
could provide an opportunity for lower budget filmmakers to access different distribution and
revenue streams, such as online distribution or digital downloads.

A reduction in the threshold would seem to be at odds with the original intent of the Producer
Offset to encourage larger budget production, but would help to respond to demands for more
online Australian content in the context of the rollout of the National Broadband Network.

Given the low numbers of short-form animation productions that have received the offset, it does
appear that the threshold may be too high for typical productions in this sector.

37
Screen Australia submission, p. 64.

38
Challenges for medium-budget films
The Producer Offset was designed to encourage a more market-driven screen sector.

Feedback from the sector
One of the consistent messages in submissions and focus groups was that the global financial crisis (GFC) had
caused a significant and structural shift in funding mechanisms within the sector. The GFC had precipitated a
significant decline in the international pre-sales market, and many lending institutions withdrew from the role of
film financing.

The sector felt that as a result of the GFC, productions had to increasingly rely on Screen Australia’s direct
investment to raise enough finance. Feedback indicated that this was most pronounced for medium-budget
productions (industry classifies this category as films produced with budgets in the range of $10 million to
$30 million).

Feedback in relation to medium-budget productions noted that:

 they are a key element in overall sector viability and provide opportunities to retain Australian talent

 short-term additional government funding is required to support medium-budget productions.

Key element to overall sector sustainability
Submissions from screen agencies and producers noted that a diverse production industry comprises low-,
medium- and high-budget productions.

Industry has indicated that compared with lower budget films, medium-budget films invite greater audience
engagement and have greater cultural impact because their higher budgets enabled higher production values.

Industry suggested that opportunities to undertake a medium-budget production are vital to stem the loss of first-
time directors and emerging crew to Hollywood. An example is the Australian medium-budget vampire-action
film, Daybreakers, which was only the second feature to be directed by the Spierig brothers. The success of the
film—made for an estimated US$20 million and earning US$51.1 million worldwide—has given the brothers a
solid entry into directing large-budget Hollywood productions. 38

Medium-budget productions also create production companies with necessary experience and resources to attract
top Australian directors back from overseas. For example, Mao’s Last Dancer and Tomorrow When the War
Began were directed by Bruce Beresford and Stuart Beattie respectively, both of whom have worked in
Hollywood for a number of years. The films also recorded strong box office returns. Mao’s Last Dancer has
earned over US$20 million worldwide39 and Tomorrow When the War Began has earned over $13 million at the
Australian box office alone.40

Screen Australia analysis indicates that to achieve an overall box office share of five per cent or greater, the
Australian slate needs to include diverse budget ranges and associated release strategies. At present, a five per
cent share of total box office is viewed by industry as a strong performance for the Australian sector.

38
Their reported next production is The Power of the Dark Crystal—a film financed by Australian company Omnilab Media
and the Jim Henson Company. (‘Spierig Brothers to direct Dark Crystal sequel’ Encore, 5 May 2010).
39
http://boxofficemojo.com/
40
Motion Picture Distributors Association of Australia.

39
The scale of medium-budget films also provides much greater employment opportunities for service industries.
Medium-sized productions are also able to use infrastructure usually reserved for large-budget productions. If
there were an increase in the number of medium-budget productions there may also be scope for studios to
increase or upgrade current infrastructure.

The table below indicates the number of medium-budget feature films made annually from 2000–01 to 2009–10.
The 10-year average of such features is only 3.1.

Table 15. Australian and co-production feature films with budgets $10 million to $30 million (2009
dollars), 1999–2000 to 2009–10

No. features No. that had Screen No. that were co-
Australia (FFC) finance productions*

2000–01 3 3 1

2001–02 3 1 0

2002–03 3 3 2

2003–04 0 0 0

2004–05 7 5 3

2005–06 2 1 1

2006–07 3 3 2

2007–08 4 3 2

2008–09 1 1 1

2009–10 6 4 3

TOTAL 32 24 15

Source: Screen Australia. Additional short-term funding required.
*Co-productions are a subset of Screen Australia financed features.

Given their scale, medium-budget productions require significant private investment. This level of private
finance (often in excess of $10 million) has not traditionally been accessible in Australia and needs to be sourced
offshore and usually from the United States (or from an official co-production partner country).

As a result of the GFC, it has been more difficult to access this financing and as such, no medium-budget film in
the past two years has been made without direct support from the Government, through Screen Australia. 41

41
Screen Australia submission, p. 52.

40
From 2010–11, Screen Australia has reduced its investment cap per production from $5 million to $2.5 million.
It decided that the $5 million cap was not sustainable in light of a reduced government appropriation and the
$2.5 million cap ensures that an appropriate range of medium- and low-budget productions can benefit from
Screen Australia investment. There are sector concerns that this cap will not be sufficient funding for medium-
budget features.

Submissions strongly argued that additional direct support is required from the Government in the short term to
increase production of medium-budget films. Screen Australia and SPAA have each proposed separate
investment models for the review’s consideration, which specifically provide funding assistance to medium-
budget features in response to current financing difficulties.

It should be noted that given the current levels of infrastructure and crew and service providers, there exists a
natural cap on the numbers of medium-budget productions in Australia.

The Producer Offset is still in its infancy, and the opportunity it accords for co-production with foreign countries
has perhaps yet to be fully realised. Just under half of the 31 medium-budget features over the past 10 years were
co-productions. There may be opportunities for producers to further explore the production of medium-budget
films as part of official co-production arrangements.

Possible solutions
Commercial Film Fund
SPAA’s proposal is to establish a ‘market door’ facility to encourage distributor financing. This fund would
target medium-budget feature films and government funding (provided as a loan to the distribution company)
would only be provided once distributor funds has been secured. The government loan would match the amount
provided by the distributor up to a maximum of $10 million per film, secured against proceeds from the film's
distribution.

SPAA has proposed a funding amount set at $30 million per year for three years. This would involve an initial
outlay for the Government of $90 million. SPAA estimates that the actual cost would be less with a recovery of
around 73 per cent of total loans from the films financed.

Additional funding for Screen Australia
Screen Australia’s submission noted that additional funding was required to lift its current funding cap from
$2.5 million for investment in medium-budget films. It argued that this is needed to leverage more production,
increase employment in the sector and lead to greater audience engagement. While the lowering of the
investment cap reduced the availability of direct funding to producers per production, the decision also reduced
the investment risk to Screen Australia.

41
Findings
The data shows that the number of medium-budget films is largely unchanged from the pre-
Producer Offset funding period. However, since the Producer Offset there has been a significant
increase in the number of large-budget Australian features.

Industry agrees that medium-budget films, unlike the large-budget films financed within the
Hollywood system, will require some direct government investment.

It remains an important objective of the Producer Offset that films in the medium-budget category
should be able to demonstrate commercial potential (including international appeal) and therefore
attract sufficient private investment with little or no direct investment from Screen Australia.

42
Objective 3: Increase the sustainability of production
companies
Overview
As confirmed in the review’s terms of reference, a key objective of the Australian Government’s screen support
measures is to develop a sustainable independent production sector.

A sustainable sector involves a range of components, such as the role played by Government and the significant
role of producers and other industry players to broaden the commercial base of the sector, identify and develop
new markets, and increase revenue from both box office and new income streams.

Based on a survey of current production companies, Screen Australia has identified a number of criteria crucial
to the development of sustainable production business. This has resulted in the development of some indicators
to track industry development towards a more competitive and sustainable sector.

The objectives of the Producer Offset are two-fold: to increase production and market focus (covered in the
previous chapter), and to increase the sustainability of companies within the industry.

This second objective is outlined in the Explanatory Memorandum to the Producer Offset legislation:

The introduction of the producer offset represents a major new support mechanism for film producers
….[i]t provides a real opportunity for producers to retain substantial equity in their productions and build
stable and sustainable production companies, and aims to increase private investor interest in the
industry.42

The review has assessed:

 the extent to which producers are able to retain substantial equity in their productions

 what constitutes stable and sustainable production companies and the extent to which producers have
been able to establish or grow such companies

 whether private investor interest in the independent production sector is increasing.

Ensuring equity for producers
The offset was intended to enable companies to build a slate of productions in which they could retain significant
equity and not merely provide one-off financing assistance for a production. Through this retained equity
production companies would be able to earn ongoing revenue which could be used to finance future productions
and create sustainable businesses.

The level of the offset is the theoretical maximum level of equity the producer can retain per production. Given
that a small proportion of the overall budget is not counted as QAPE, the

42
Explanatory Memorandum for the Tax Laws Amendment (2007 Measures No. 5) Bill 2007.

43
equity stake realised through the offset will be a few percentage points lower than either the 40 per cent or 20 per
cent rebate.

Screen Australia provided data outlining the level of the rebate as a percentage of production expenditure which
provides an indication of the potential equity retained by the producer.

Table 16. Projects Issued with final certificates

Offset as % of budget Feature Documentary TV/other

Average 28% 18% 17%

Median 34% 18% 18%

Range 10%–39% 10%–20% 4%–20%

Source: Screen Australia submission to the Australian Government’s 2010 Review of the Australian Independent Screen Production
Sector, p. 50.

The median figure is the most reliable guide to the equity provided by the Producer Offset as the average can be
skewed by productions whose budget may involve considerable foreign and non-QAPE.

The lower figures in the range section likely reflect productions which were co-produced in a foreign country
and therefore reduce the percentage of production expenditure spent in Australia.

Feedback from the sector
Several submissions, including from the ABC, SBS and Premium Movie Partnership, called for the rebate to be
increased to allow greater equity—especially for television series—most commonly, to increase the offset rebate
for non-feature productions from 20 per cent to 40 per cent, in line with the rebate for features.

The ABC argued that by increasing the rebate to 40 per cent for non-features, television productions would not
require direct funding from Screen Australia. Similarly, SPAA recently (after lodging its formal submission to
the review) outlined a new approach to government support for television. SPAA suggested that productions
wishing to receive Screen Australia funding could receive a 20 per cent offset, while those productions which
did not receive Screen Australia funding could access a 40 per cent offset.

A couple of submissions called for the offset for features to be increased to 50 per cent using the same argument
that it would reduce the need for productions to go to Screen Australia for direct investment.

However, the view of industry was generally that the Producer Offset was working well for television,
particularly for adult drama.

This feedback is supported by the Drama Report 09/10, which indicated that adult drama has continued to
increase in average expenditure. In 2009–10 the average budget per hour of adult drama production was $945
000, well above the three-year average since the offset has been in existence of $807 000 per hour. Similarly
there has been a steady increase in the number of productions from 16 in 2007–08 to 20 in 2008–09 and 21 in
2009–10.

Broadcast licence fee negotiations
When the offset was introduced there were concerns that broadcasters would seek to appropriate the benefit of
the offset by reducing licence fees, or by demanding part of the equity gained through the offset.

44
The 2008 Statutory Review of the offset required by its enabling legislation examined this issue and found that
while submissions from the independent production sector claimed some broadcasters were seeking to use the
Producer Offset to justify lower licence fees, these claims were rejected by broadcasters.

This review’s terms of reference stated that any impact the Producer Offset has had on licence fee negotiations
with broadcasters would be considered.

Public broadcasters, the free-to-air commercial broadcasters (through Free TV) and the major pay-TV peak body
all stated in their submissions that the Producer Offset has not affected the way they negotiate licence fees.

However, SPAA and some independent producers raised concerns about the impact of the Producer Offset on
licence fee negotiations. SPAA wrote in its submission:

… there are fresh examples of at least one major commercial network continuing to act aggressively with
regard to the PO entitlement of independent producers.43

While the Government remains concerned about suggestions that broadcasters may be using the Producer Offset
to reduce their own contribution to the cost of a production, it is difficult to determine from the anecdotal
evidence available.

Findings
Available data suggests that current arrangements, including offset levels, are working reasonably
well for television, in particular adult drama.

The Producer Offset is providing producers with equity in their productions which will, in many
cases, allow them to receive ongoing revenue alongside other investors in the production.

At this stage it is too early to judge whether this equity will allow companies to finance new
productions and therefore build sustainable businesses. However, there has been some positive
feedback from the sector on the opportunities that the offset’s equity provides to attract private
investment.

Broadcasters continue to provide assurances that the Producer Offset is not having an impact on
license fee negotiations.

43
Screen Producers Association of Australia submission, p. 10.

45
Stable and sustainable production companies
The ability to transform content for a range of uses offers opportunities to diversify products and markets,
thereby contributing to more sustainable enterprises. Developing business models also offer opportunities for
new forms of collaboration and partnership. These enhance the ability of the sector to respond to new strategic
opportunities such as those offered by the rollout of the National Broadband Network.

Screen Australia’s new Enterprise Program is also helping to develop sustainable businesses. The program
provides funding of up to $350 000 per year for three years to support production companies to develop and
expand their business in terms of turnover, range and number of projects.

Hopscotch Features was awarded $1 million as part of the 2009 Enterprise Program and recently announced it
had forged a partnership with Universal International Pictures to ‘develop and fund a slate of Australian features
aimed squarely at the international market’. 44

The policy settings underpinning the offset and broader government support for the sector are consistent with
world’s best practice. Research undertaken by Olsberg/SPI Limited presented at the 2010 SPAA Conference45
has identified factors for building sustainable film businesses from an international perspective that:

 allow screen businesses to share in revenue success through a share in equity

 are targeted at corporate growth of businesses

 provide a consistent and reliable system of support

 work well together, such as tax arrangements and co-production agreements.

Sustainability of production businesses
Size of businesses
Overall, most independent production businesses would be classified as small businesses:

 a clear majority of businesses (76 per cent) employ less than 10 staff 46

 91 per cent of businesses in the sector have a revenue turnover of less than $2 million per annum47,
meaning they would be classified as a small business by ATO standards

 79 per cent of businesses that responded to the Screen Australia survey conducted for its submission
expected to earn less than $500 000 in revenue in 2009–10.48
Over half of drama and documentary production businesses are home-based, while 40 per cent of businesses
have leased premises. Six per cent have bought business premises. 49 Almost all

44
Brook Turner, ‘Distributor goes global via Universal’, Australian Financial Review, 24 November 2007.
45
Building Sustainable Film Businesses Yes We Can!, Jonathon Olsberg, Olsberg SPI, SPAA Conference,
19 November 2010.
46
Screen Australia submission, p. 29.
47
ibid., p. 29.
48
ibid., p. 32.
49
ibid., p. 30.

46
businesses are owned by the founder of the company (96 per cent) and for 13 per cent of businesses, family and
friends owned equity.50

Screen Australia’s Business Survey also found that just over half (56 per cent) of businesses recorded a profit in
either 2008–09 or 2009–10 while 44 per cent did not record a profit in these years. In the Business Survey
40 per cent of businesses were found to have consistent levels of production and 60 per cent intermittent levels.51

The link between having a slate of productions and a company’s sustainability was reflected in many of the
submissions to the review.

Indicators of business sustainability
Screen Australia has developed a number of indicators of business sustainability, based on its survey of current
production businesses. The survey results identified common factors in those businesses which were profitable
and had consistent levels of productions. These indicators are broadly consistent with the outcomes from
Olsberg/SPI Limited research of building sustainable film businesses.

Screen Australia’s indicators of business sustainability
Screen Australia found that businesses that had consistent production levels and were profitable
were more likely to:
have a formal business plan, a board of directors and an annual marketing budget of over $200 000
have production slates which included projects across various production types, such as features,
documentary and television
collaborate with other producers, engage in joint ventures and have multiple producers working for
the business
earn over $2 million a year, have accessed the Producer Offset and employ more people
produce a feature film that reached $1 million at the Australian box office and/or one million
viewers on free-to-air television in the last five years.

Source: Screen Australia’s submission to the Australian Government’s 2010 Review of the Independent Screen
Production Sector, p. 37.

These indicators are also consistent with the feedback from the sector on what makes production companies
viable.

50
ibid., p. 28.
51
ibid., p. 36. Note: Screen Australia defines ‘consistent’ as a business that has had a television series or two or more one-off
feature, television drama or documentary titles in production since 2006–07.

47
Some submissions noted that sustainability and viability will be achieved through different mechanisms for
different companies. As the Queensland Screen Industry Council stated, viability could be:

... 1 x $10m feature film per year. For another it could be 4 documentaries ... 52

Documentary producer, Alex West, noted that an investor-ready company has a strong slate of productions, a
successful international track record, and the experience and reputation of core creatives. 53

Income from other sources
According to Screen Australia’s Business Survey 84 per cent of respondents indicated they undertook additional
activities as a source of revenue. The main activities were providing production services (almost half), PDV
services (a third) and content distribution and rights management. 54 Producers also engaged in consultancy,
teaching, financing and exhibitions.

Carbon Media highlighted the importance of other revenue generating activities to its viability:

To ensure our viability we offer a wide range of commercial services—web development, television
commercials, social media and public awareness campaigns, advertising, animation and training. Our
business very much relies on these core services.55

The 2010 Screen Content Producer Survey, conducted by AFTRS in collaboration with RMIT University and
Bergent Research, found that 31 per cent of respondents, especially in the film and new media sectors, were able
to pursue screen production because they had another source of income, in many cases a second job. 56

Finding
Screen Australia’s indicators of business sustainability provide a strong basis from which
individual businesses can assess their current performance and amend current business practices to
improve sustainability.

52
Queensland Screen Industry Council submission, p. 5.
53
Alex West submission, p. 3.
54
Screen Australia submission, p. 32.
55
Carbon Media submission, p. 4.
56
AFTRS Centre for Screen Business, Screen Content Producers Survey, http://csb.aftrs.edu.au/survey/

48
Increase private sector support
The Producer Offset provides producers with equity in their productions that can help in negotiating private
investment arrangements.

The Explanatory Memorandum states that the film tax offsets:

... seek to encourage greater private sector investment in the industry and improve the market
responsiveness of the industry.57

The Producer Offset replaced the 10BA film tax support program. Under the 10BA scheme, Australian private
investors were able to receive a 100 per cent tax concession on investments in Australian productions.

The GFC occurred shortly after the offset’s introduction. Industry has advised that this resulted in the contraction
of investment sources and made it difficult to secure private investment.

It is therefore too early to tell the true impact of the Producer Offset on the sector’s ability to attract private
investment.

There are positive signs in 2009–10 that the offset may be assisting feature film producers to attract private
investment, as the tables below demonstrate.

Table 17. Feature film investment—Australian and co-productions

2004– 2005– 2006– 3 yr 2007– 2008– 2009– 3 yr
05* 06* 07* average 08** 09** 10** average

Australian private
21 9 15 15 44.8 4.3 30.1 26.4
investors ($m)

Number of films 18 15 16 16 23 13 24 20

Foreign investors
47 43 198 96 98.8 211.3 67.9 126.0
($m)

Number of films 8 12 13 11 11 15 18 15

Source:
*Screen Australia’s National Survey of Feature Film and TV Drama Production 2008–09.
** Screen Australia’s The Drama Report 09/10 Production of Feature Films and TV Drama in Australia.

After a low of $4.3 million in Australian private investment in 2008–09, at the height of the GFC, the level of
private investment has picked up to $30.1 million in 2009–10. Screen Australia has indicated that some private
investment is being attracted by productions offering favourable recoupment positions to investors and some
projects have been able to attract investors through their subject matter.58
The commencement of a big-budget feature can have a significant impact on foreign investment figures.
Australia boosted the 2006–07 results and Happy Feet 2 and Legend of the Guardians: The Owls of Ga’Hoole
contributed to the strong result in 2008–09. As noted previously, feedback from the sector indicates that the
Producer Offset is helping to attract foreign studio investment for larger budget Australian features.

57
Explanatory Memorandum for the Tax Laws Amendment (2007 Measures No. 5) Bill 2007.
58
Screen Australia, The Drama Report 09/10 Production of Feature Films and TV Drama in Australia, November 2010, p.
6.

49
In 2009–10 there was a decline in the level of private investment in Australian television drama production.

Table 18. Television drama investment—Australian and co-productions

2004–05* 2005–06* 2006–07* 3 yr 2007– 2008– 2009– 3 yr
average 08** 09** 10** average

Australian private
5 15 10 10 7.5 7.2 0.3 5.0
investors ($m)

Number of films 4 4 3 4 2 2 2 2

Foreign investors
42 46 30 40 71.9 48.5 46.6 55.7
($m)

Number of films 18 20 12 17 17 15 12 15

Source:
*Screen Australia’s National Survey of Feature Film and TV Drama Production 2008–09
**Screen Australia, The Drama Report 09/10 Production of Feature Films and TV Drama in Australia, November 2010.

Feedback from the sector
Of the respondents to Screen Australia’s 2010 Business Survey, around 10 per cent (32 out of 322) had attracted
some sort of professional private investment. 59 Screen Australia noted in its submission that it considered a
business to be ‘investor-ready’ if it had at least one professional private investor, venture capitalist or private
equity firm and/or general public offering.

Interestingly, Screen Australia indicated that a higher proportion of businesses with a professional private
investor were likely to earn more than businesses that did not—14 per cent with a private investor expected to
earn more than $20 million compared with only one per cent of businesses without such investors.60

A number of submissions from the sector called for a government incentive aimed at encouraging private sector
investment.

Producers also called for the re-introduction of the 10BA tax concession scheme as well as the Producer Offset
to encourage investment and more broadly provide support for small-budget productions.

59
Screen Australia submission, pp. 28 and 46.
60
ibid., p. 46.

50
However, as noted in the introduction to this report, in terms of overall government investment to the sector, the
Producer Offset has provided four times more funding to the sector than that raised through the 10BA scheme.

Finding
It is too early to determine with any certainty what impact the Producer Offset has had in
encouraging greater private investment in the sector, especially given the GFC. However, there are
positive signs that the offset is being leveraged to attract private investment in feature films.

Challenges
All submissions noted that the Australian film industry is not sustainable without government assistance through
both direct funds from Screen Australia and indirectly through the various offsets.

The submissions also raised a number of issues related specifically to the operation of the Producer Offset which
were considered to affect the sustainability of businesses:

 the administration of the offset

 cash-flowing the offset

 the distribution test for the offset.

Administration of the Producer Offset
The Producer Offset as a tax rebate requires administrative rigour that is comparative with other elements of the
tax system. As part of the application process, producers must provide to Screen Australia:

 a final cost report

 the general ledger

 a spreadsheet of QAPE—which must be independently audited.

Many productions using the Producer Offset will also seek direct funding from Screen Australia, and this in
effect requires them to submit two applications—one for the offset and one for a direct grant. Due to tax secrecy
requirements, officers in Screen Australia administering the offset are unable to provide any application
information to the section within Screen Australia that administers direct funding.

Feedback from the sector
The rigorous application process, the time taken for Screen Australia to process an application and the need to
submit a separate application for direct funding were the most common administrative issues raised in
submissions.

While almost all producers who provided submissions to the review or who participated in the focus group
sessions were in favour of the Producer Offset, most found that the offset had resulted in increased
administrative burdens.

Submissions specifically noted that the Producer Offset meant increased reporting requirements, numerous audit
requirements (for the offset, Screen Australia direct funding, any state government funding and potentially
foreign banks if the expected offset payment is cash-flowed), increased financing costs due to the time taken to
process offset applications with Screen Australia and the ATO, and increased legal costs due to contracting
arrangements. These difficulties are particularly pronounced for productions in the lower-budget end, including
documentaries. From previous sector feedback there is apparently potential to examine the audit requirements for
the PDV Offset.

51
In its submission, Goalpost Pictures noted that some of these problems may be due to the fact that the offset is in
its early days and financiers are possibly imposing excessively onerous conditions on producers.

However, the overall focus group view was that the Producer Offset section of Screen Australia was generally
working efficiently. Screen Australia has indicated that over half of the provisional applications are assessed in
the two to three week time period and around 90 per cent of final certificate applications are issued by Screen
Australia in eight to 10 weeks. In a number of cases the assessment of provisional certificates is taking longer
than anticipated and as a result Screen Australia has revised its target timeframe for provisional certificate
assessments to four to six weeks from receipt of a complete application.

Possible solution
Screen Australia submitted that the complexities of QAPE definitions are an administrative burden for applicants
and evaluating offset applications against the QAPE requirements is also a complex task for Screen Australia.

Screen Australia indicated that some of the suggested changes to QAPE could reduce the administrative burden,
especially for low-budget productions, such as changing the current arrangements for calculating foreign
currency. Other aspects relate to the definition of QAPE to correlate more closely with the industry view of what
constitutes production expenditure.

The suggestions by Screen Australia to amend the definition of QAPE in many cases relate to addressing the
exclusion of standard production costs. However, the integrity of the offset must be maintained in that items
which are claimable are those that are generally considered deductible business expenses.

In calculating the amount of total production expenditure and QAPE, the GST-inclusive cost is used, irrespective
of whether the company is able to claim input tax credits. Screen Australia also stated that this is
administratively inefficient.61 It also noted that as film budgeting and cost reporting is generally undertaken
exclusive of GST, it is complex for applicants to calculate the QAPE GST when applying for a final certificate,
further raising the cost of compliance. Screen Australia stated that it incurs significant administrative costs in
ensuring that producers calculate the correct amounts.

61
ibid., p. 71.

52
Findings
The rigour required in the administration of the Producer Offset has resulted in some increased
reporting and costs for production business.

As production companies become more familiar with the application process it may potentially
become less onerous.

Due to tax secrecy provisions, it is not possible to streamline funding acquittal for direct Screen
Australia investment and the application for the Producer Offset into a single process.

Minor changes to QAPE definitions may improve administrative efficiency, but all claimable
expenses must be directly associated with the cost of production. Changes to QAPE definitions
would require amendment to tax legislation.

Cash-flowing the Producer Offset
When the Government introduced the Producer Offset it was decided that it should be administered through the
tax system rather than as a grant-based mechanism.

While the tax system provides a high level of certainty, it is more rigid than a grant mechanism. It essentially
means that producers can only receive their Producer Offset rebate after the end of the financial year in which
the production has been completed.

For productions which end early in the financial year, this can possibly mean a lengthy period between the end
of production and the receipt of the rebate. As many producers opt to cash-flow the anticipated offset payment
through obtaining a loan, this can result in large financing costs for producers.

Feedback from the sector
Overall, the certainty the tax system provided to the sector was viewed positively. However, the timing of
payments and associated concerns were a major issue raised in the submissions and focus groups.

Feedback from the sector highlighted the following concerns:

 it has been difficult to secure finance for a production after the GFC

 there have been increased costs for production budgets associated with financing arrangements for the
offset payment

 timing concerns, such as the bunching of productions at the end of the financial year.

Difficulties securing finance
Feedback from industry was that due to the GFC, lending institutions became more risk averse and therefore less
receptive to the prospect of lending against a new rebate scheme.

SPAA noted:

Since its inception, cash flowing of the PO [Producer Offset] has presented significant problems for
producers, especially those without access to cash reserves. The larger television producers and some

53
feature film producers with studio backing have cash flowed their own productions without recourse to
bank loans etc. Everyone else has had to find the funds from external sources using personal assets e.g.
house mortgage and share portfolios, as security in most cases. 62

Increased financing costs for producers
A number of submissions and focus groups noted that while the Producer Offset did encourage higher budgets,
the costs of cash-flowing the anticipated offset rebate were increasing costs for producers—costs which were not
claimable as QAPE and which were not ‘ending up on the screen’.

Anecdotally, this situation has apparently improved recently with more financial institutions prepared to lend
against the offset.

The South Australian Film Corporation (SAFC) has a fund of around $3 million for local producers to lend
against marketplace guarantees, bank guarantees and the Producer Offset. It involves loans of up to $1 million to
South Australian producers and $750 000 to others (shooting or undertaking a significant amount of post-
production in South Australia). The SAFC will mostly lend if it is also an investor.

Screen Queensland offers revolving film finance that provides up to $1 million per production to cash-flow
distribution guarantees, pre-sales, the Producer Offset or any other collateral security that is acceptable to Screen
Queensland.

The Export Finance and Insurance Corporation (EFIC) also announced that it will provide loans against the
offset for an amount up to 85 per cent of the estimated Producer Offset, based on the provisional certificate. The
only distinguishing eligibility criterion for applying for a loan through EFIC is that the relevant production must
have secured international distribution agreements.

Timing concerns
At the time the offset was introduced, industry was concerned about the delay in receiving payments if a
production is completed early in the financial year. The sector was also concerned that the timing of the payment
would lead to ‘bunching’ where all productions seeking to claim the offset would schedule production
completion in May/June each year—thereby creating a large demand for various specialised resources, such as
post-production and editing services.

To help the sector and in response to concerns raised by the industry, a working group comprising
representatives of the Office for the Arts, Department of the Treasury, the ATO and Screen Australia identified
administrative options for early access to the Producer Offset. Screen Australia issued a fact sheet on these
options on 18 November 2009.63 The options included:

 special purpose vehicles (SPVs)—producers could set up an SPV for each production; the SPV can be
liquidated when the production is completed to allow a tax return to be filed without having to wait till
the end of the financial year

 variation of ongoing ‘Pay as You Go’ (PAYG) instalments—where producers with a final certificate
can vary their PAYG instalments in anticipation of receiving the offset at the end of the financial year.

The SPV arrangements were felt to provide appropriate rigour to ensure that a company will not be engaging in
any further taxable activity in the income year after lodging the final certification application.

62
Screen Producers Association of Australia submission, p. 17.
63
Screen Australia, FACTSHEET: Timing of the Producer Offset Acquittal, 18 November 2009
http://www.screenaustralia.gov.au/producer_offset/offset-documents/POU_TimingOffsetAcquittal.pdf.

54
The cost of the liquidation is seen as a deterrent for the low-budget sector. The cost to set up an SPV is around
$1500 and to engage a liquidator is in the order of $5000. These costs are fixed and are non-QAPE—therefore a
$250 000 documentary would pay the same costs as a $10 million feature film. The average SPV set-up and
liquidation cost of $6500 represents 2.6 per cent of the budget of a non-feature production with QAPE of $250
000, but only equates to 0.65 per cent of the budget of a feature film that expends QAPE of $1 million.

Screen Australia’s submission included the number of films with provisional and final certificates for the
Producer Offset that has used the SPV process.

Table 19. Projects issued with final certificates

Feature Documentary TV/other TOTAL

Provisional

No. certificates issued 145 180 81 406

No. co-productions 9 0 6 15

No. SPVs 48 31 25 104

% SPVs 33% 17% 31% 26%

Final

No. certificates issued 34 91 47 172

No. co-productions 3 0 4 7

No. SPVs 22 12 16 50

% SPVs 65% 13% 34% 29%

Source: Screen Australia submission to the Australian Government’s 2010 Review of the Independent Screen Production Sector, p.
50.

Nearly two-thirds of all feature films with a final certificate were produced under a SPV; however, only 13 per
cent of non-feature documentaries used the process.

55
Bunching of productions
Feedback through the consultation phase suggests that the timing of payments of the Producer Offset had
resulted in ‘bunching’.

If bunching of productions occurred at the end of the financial year, it could create a logjam given the current
availability of production services.

Screen Australia noted:

There appears to be a peak in receipt of applications between June and October 2009 and in May 2010.
This would suggest a peak in the completion of films around the end of financial years. 64

Possible solution
Screen Australia suggested that one possible solution available to the Government is for the Commissioner of
Taxation to use discretion to assess a tax return at any time. A number of industry stakeholders, including SPAA
and the Australian Subscription Television and Radio Association (ASTRA), also recommended that the
ITAA97 be amended to allow acquittal of the Producer Offset once a production has been completed without the
need to liquidate an SPV.

Goalpost Pictures submitted that the rebate be cash-flowed through the business activity statement (BAS)
system:

An amount equivalent to 75% of the estimate QAPE cashflowed in to the production would result in an
enormous cost saving to the budget and, with the balance to be paid via the acquittal process, would be
relatively low risk.65

While the Commissioner of Taxation does have the power to grant this discretion, the reasons for granting it are
strictly applied.

Any amendments to current arrangements will need to be considered in terms of broader implications for the
ITAA97, in particular other government refundable tax offsets.

Findings
There is strong support from the sector for the Producer Offset as a tax incentive for film and
television production.

Operating within the tax system has some limitations, such as the additional costs to producers
associated with the timing of the offset payments. Timing of payments may also lead to bunching
of productions close to the end of the financial year.

These issues were considered when the offset was introduced and the Government took the position
that such concerns were outweighed by the benefits provided through the security of the tax
system.

There are opportunities to simplify the operation of the Producer Offset by making changes to the
definition of QAPE, though this will require legislative amendment.

64
Screen Australia submission, p. 51.
65
Goalpost Pictures submission, p. 10.

56
Distribution test
As outlined previously, the Producer Offset has two different rebate levels—a 40 per cent rebate for feature
productions and a 20 per cent rebate for non-features.

The mechanism used to separate the two categories and ensure that non-feature productions do not claim the
higher rebate, is a distribution test. This mechanism distinguishes between feature films and documentaries and
those productions made for television.

The Explanatory Memorandum that accompanied the Tax Laws Amendment (2007 Measures No. 5) Bill 2007,
articulates the legislative requirements as follows:

10.130 To be satisfied that a film is a feature film, the film authority will require evidence of an
Australian commercial agreement that provides a feature film with a theatrical release in a commercial
cinema. Such an agreement would be expected to be a bona fide arrangement for the theatrical release of
the film, and would not be justified by a contrived arrangement, for instance for release on one, or a very
small number of screens.66

Feedback from the sector
The feedback from the sector about the distribution test was that it was too restrictive and effectively reduced
producers’ bargaining position with distributors. The sector argued that this did not allow them to build
sustainable companies as it limited their ability to leverage the best deal for their project.

The sector, including peak body SPAA, suggested that the assessment of whether a production is a feature or
non-feature production could be based on the MEAA award rates, which are different for feature and non-feature
productions.

However, MEAA in its submission disagreed with this approach, arguing that the distribution test needed to be
more vigorously enforced:

The Alliance would note that the use of the Australian Feature Film Agreement alone would not indicate
theatrical intent. All this would demonstrate is that the production is seeking not to pay residuals.
Additionally crew contracts would not assist as they are based on the Motion Picture Production
Agreement which covers both television and film productions.67

Assessment by Screen Australia
Screen Australia’s decision on the theatrical intent at the provisional certification stage provides a significant
degree of certainty for financiers. That is, lenders can be sure that a project which was expected to receive a 40
per cent rebate does not, at the final certificate stage, only receive a 20 per cent rebate.

Screen Australia has indicated on its website that it will not question whether a film is in fact a feature film at
final certification stage if it is satisfied at provisional stage that there is a bona fide intent to make a feature film.
If sufficient information is not provided at the provisional stage, a producer must satisfy Screen Australia at the
final certification stage that there was a bona fide intent to theatrically distribute the film in Australia to receive
the 40 per cent offset.

Findings
The distribution test currently employed by Screen Australia provides productions with a high level

66
Explanatory Memorandum for the Tax Laws Amendment (2007 Measures No. 5) Bill 2007.
67
Media Entertainment Arts Alliance submission, p. 12.

57
of certainty as to which rebate they will receive. This is an important element in securing finance
for a production.

The concern of producers must be considered against the need for rigour in the decisions of Screen
Australia, given the need to differentiate clearly between the rebates for feature film and
television/other media. There is therefore a strong case for maintaining the distribution test in its
current form.

58
Objective 4: Ensure Australia remains competitive for
large-budget productions and in the post, digital and
visual effects sector
Overview
Offshore productions have always been important to the viability of the local Australian film and television
industry by providing:

 employment opportunities for local cast, crew and film production service providers

 skills transfer and development opportunities from working on productions with larger budgets,
experienced crews and technicians and more sophisticated technical equipment

 an incentive for service suppliers to invest in filmmaking infrastructure and equipment that benefits the
whole industry.

Australia's film industry has capacity for approximately three large-budget productions to shoot at any one time.
This is limited by the capacity of the three major studios—Fox Studios Australia in Sydney, Village Roadshow
Studios on the Gold Coast and the Docklands Studios, Melbourne. Australia is promoted as a location for
offshore production by Ausfilm, a government–private partnership organisation with offices in Sydney and Los
Angeles.

Australia has several world-class post, digital and visual effects (PDV) service providers. Industry stakeholders
have suggested that currently Australian PDV service suppliers can successfully secure a total of six to eight
significant parcels of offshore PDV work per annum. Screen Australia data 68 supports this. It indicates that seven
offshore PDV projects began in 2008–09 and five in 2009–10.

Location Offset
The Australian Government supports offshore production through the Location Offset, designed to encourage
large-scale film and television productions to Australia, and provide greater economic, employment and skill
development opportunities.69

The Location Offset is also designed to strengthen the Australian independent production sector’s business
viability, as well as its ability to deliver cultural screen product to Australian and international audiences. The
Location Offset provides a 15 per cent rebate on QAPE.

The Location Offset’s rebate rate of 15 per cent was determined after extensive industry consultation before the
introduction of the Australian Screen Production Incentive. A 15 per cent rebate had strong support from the
Australian film industry. Budget thresholds and other eligibility criteria were also supported.

68
Screen Australia, National Survey of Feature Film and TV Drama Production, 2009–10.
69
Explanatory Memorandum for the Tax Laws Amendment (2007 Measures No. 5) Bill 2007, p. 38.

59
The Location Offset is applied at a fixed rate of 15 per cent of QAPE on an eligible film or television production
that either began principal photography or production of the visual image on or after 8 May 2007. Unlike some
other incentives (such as those offered in Canada) the offset applies to all eligible QAPE, not just expenditure on
labour.

Post, Digital and Visual Effects (PDV) Offset
The Australian Government also provides an incentive for large-scale PDV through the PDV Offset. The offset
takes the form of a 15 per cent rebate on QAPE on post, digital and visual effects projects, regardless of where a
production is filmed. When it was introduced in 2007, the PDV Offset was a world-first incentive.

The PDV Offset is designed to attract post-production, digital and visual effects production to Australia as part
of large-budget productions, no matter where a film is shot.70 It is intended to provide further incentive for
offshore productions to contract Australia’s world-class PDV houses to provide services for offshore productions
and thereby generate additional employment and skills development opportunities within the Australian PDV
sector.

As a unique film incentive, the PDV Offset had strong support from industry when it was introduced. The rebate
level and the minimum expenditure threshold were also strongly supported by industry. It was expected the
$5 million expenditure threshold would encourage offshore productions to contract PDV work from one of
Australia’s larger PDV providers that has the capacity to undertake such large parcels of work, or a consortium
of two or three smaller PDV providers that would undertake component parts of the PDV project.

Since its introduction in 2007, a number of other countries such as Canada and New Zealand have also adopted
PDV incentives.

In the 2010–11 Budget the Government announced two enhancements to the PDV and Location Offsets with an
estimated cost of $6.9 million over the next four years. These aim to remove barriers to offshore productions and
to increase opportunities for PDV providers to compete internationally for work.

Total offshore production
In 2001, the Australian Government introduced the Refundable Film Tax Offset (RFTO) to attract large-budget
film and television productions to Australia. The RFTO provided a 12.5 per cent rebate to eligible productions
that spent a minimum of $15 million in QAPE. More information about the RFTO is available in Appendix A.

Screen Australia data shows the following levels of offshore production in Australia since 2001–02 when the
Australian Government introduced the RFTO.71

70
ibid., p. 49.
71
These figures are for productions with substantial shooting in Australia, not those which only obtained PDV services in Australia.

60
Table 20. Level of offshore production, 2001–02 to 2009–10

2001– 2002– 2003– 2004– 2005– 2006– 2007– 2008– 2009–
02 03 04 05 06 07 08 09 10

Number of productions

Foreign 12 17 12 10 7 11 8 8 7

% of Australian total 14 22 16 14 9 13 8 9 8

Production value (AU$m)—spend in Australia

Foreign 216 225 279 262 49 134 238 3 170

% of Australian total 33 44 41 47 13 24 35 0.4 23

Source: Screen Australia, National Survey of Feature Film and TV Drama Production, 2001–02 to 2009–10.

Since 2001–02 an average of 10 foreign productions were filmed in Australia per year. While there has been a
decline in the average number of productions since 2004–05, this can be attributed to:

 the higher value of the Australian dollar since 2005–06

 the effects of the 2007–08 writers’ and actors’ strikes in the United States

 the GFC.

Since the introduction of the RFTO and the Location Offset, the value of foreign production has averaged
AU$175 million per year. Production values have generally been lower than average since 2005–06, with the
exception of 2007–08 when Nim’s Island and X-Men Origins: Wolverine were both in production.72

The value of offshore production as a percentage of the total spend in Australia (on feature films and television
drama) peaked at 47 per cent in 2004–05. Titles such as Aquamarine, Charlotte’s Web, Ghost Rider and
Superman Returns all began production in that year.

The following table shows a breakdown of foreign production levels for feature films, including those that only
undertook PDV work in Australia:

72
Screen Australia, Get the Picture, title summaries for feature film and television drama.

61
Table 21. Levels of offshore feature film production, 2004–05 to 2009–10

Feature films 2004–0573 2005–06 2006–07 2007–08 2008–09 2009–10

Number of productions

Foreign 9 4 6 7 6 5

PDV only — 18 16 15 7 5

Feature total 38 54 52 61 47 47

% of Aust. total 24 41 42 37 28 21

Production value ($m)—spend in Australia

Foreign 258 23 105 105 2 169

PDV only — 5 9 13 19 9

Feature total 351 140 347 290 387 443

% of Aust. total 74 20 33 41 5 40

Source: Screen Australia, National Survey of Feature Film and TV Drama Production, 2004–05 to 2009–10.

While the number of offshore physical feature productions (not PDV) has remained steady since 2004–05, the
number of PDV-only projects declined in 2008–09. The value of offshore production dropped significantly in
2008–09, making up only five per cent of the total production in Australia that year. No large-budget film
located in Australia in 2008–09.

Indian filmmakers have been drawn to Australia for a number of years. Over the three years from 2007–08 to
2009–10, Office for the Arts records (for the Foreign Actor Certification Scheme) indicate that there were 18
Indian feature films shot in Australia. They have tended to be low-budget productions, mostly in the $1 million
to $5 million range.

Although the number of PDV projects was lower than in previous years, the PDV spend was higher in 2008–09.
This can be attributed to PDV production on Harry Potter and the Half-Blood Prince.74

The following table shows data for foreign television drama production in Australia including those that only
undertook PDV work in Australia75:

Table 22. Levels of foreign television drama production, 2004–05 to 2009–10

73
Data for PDV-only foreign production not available.
74
Screen Australia, Get the Picture, title summaries for feature film and television drama.
75
Screen Australia, National Survey of Feature Film and TV Drama Production, various years, updated November 2010 and
The Drama Report 09/10.
76
Data for PDV-only foreign production not available.

62
Television drama 2004–0576 2005–06 2006–07 2007–08 2008–09 2009–10

Total number of productions

Foreign 1 3 5 1 2 2

PDV only — 9 0 0 2 0

TV drama total 34 54 50 47 48 38

% of total 3 22 10 2 8 5

Production value ($m)—spend in Australia

Foreign 4 26 29 134 1 <1

PDV only — <1 0 0 <1 0

TV drama total 206 232 282 403 329 287

% of total 2 11 10 33 <1 <1

Source: Screen Australia, National Survey of Feature Film and TV Drama Production, 2004–05 to 2009–10.

Since 2004–05, the number of offshore television productions has been generally lower than the number of
offshore feature films. From 2007–08, only one or two offshore drama television productions have located in
Australia per year. The spike in Australian spend on offshore television drama in 2007–08 is attributable to one
production, The Pacific.77

Since 2004–05 the Australian spend on offshore television drama has equated to between less than one per cent
to 33 per cent (attributable to The Pacific). Offshore television drama has contributed less to overall Australian
production spend than feature films; however, like features, one large-budget television drama can make a
significant impact on the overall value of production in Australia.

It should be noted that other genres of production that also filmed in Australia during this period, such as
documentaries, reality shows and television commercials, are not included in this data. For this reason, the
overall levels of offshore production may be higher.

The Office for the Arts is aware of only one large-budget offshore television production (Terra Nova) starting
production in 2010–11.

Outcomes of the Location and PDV Offsets
A stated policy objective of the Location Offset is to provide greater economic, employment and skill
development opportunities. 78 The PDV Offset has similar policy objectives that are tied to its ability to attract

77
Screen Australia, Get the Picture, title summaries for feature film and television drama.

78
Explanatory Memorandum for the Tax Laws Amendment (2007 Measures No. 5) Bill 2007, p. 38.

63
offshore PDV production.79

Since the introduction of the Location and PDV Offsets, seven final certificates have been issued with a total
QAPE of approximately $452 million and a total rebate amount of approximately $67 million.

The following table illustrates the uptake of the Location and PDV Offsets in combination with the RFTO (data
is omitted for years where there were fewer than three certifications) 80:

Table 23. Uptake of RFTO, Location and PDV Offsets

2001– 2002– 2003– 2004– 2005– 2006– 2007– 2008– 2009–
02 03 04 05 06 07 08 09 10

Number of certificates — — 5 5 6 3 7 9 4
issued

Total estimated tax — — 35.1 31.1 41.8 13.4 68.6 67.8 33.5
rebate payable to
productions (in AU$m)

Source: Office for the Arts.

The certification date of a production reflects the year in which the Australian Government commits revenue to
the rebate, and therefore the data cannot be compared with Screen Australia’s production and expenditure
figures. Rebates are payable after the end of the financial year in which a production is certified through the
normal tax return process, unless a production company is liquidated before then.

Office for the Arts records show that applications for the offsets are submitted within three to 18 months after a
production is completed in Australia, equating to a lag in the data of up to two years from the start of production
and certification.

To date, only one production has been certified for the PDV Offset. The small number of productions certified
under the offsets and the lag between the time of production and time of certification make trend analysis
difficult.

79
Australian Government, Guidelines to the Australian Screen Production Incentive: Location and PDV Offsets, August
2010.
80
Office for the Arts data, totals may not tally.

64
The analysis of data for just the Location and PDV Offsets is limited because it only covers three years of
operation and two years in which certificates were issued.

The necessity to aggregate data relating to the offsets to prevent identifying specific productions as required
under the tax secrecy provisions in ITAA36 is also limiting. Data relating to production expenditure in Australia
(as published by Screen Australia in its annual drama production survey) cannot therefore be analysed against
offset data in the public domain, so the ability to determine the factors that are influencing peak and low uptake
of the offsets is reduced.

Tax payments
There is an additional lag between the time when productions receive certification and when they receive
payment through the tax system—mainly because of the time it takes to apply for the offsets, process the
application and for the applicants to lodge their tax return. ATO data and RFTO data are available for this
analysis. However, no data is available for the Location and PDV Offsets as yet.

Figure 8. Variation in payment of offset

Source: Office for the Arts, ATO.

ATO data for financial years 2006–07 and 2007–08 includes data processed up to 31 October 2008 and 31
October 2009 respectively.

The data reveals that changes in levels of eligible offshore production or PDV work in Australia will not be
reflected in the offsets’ certification statistics or ATO payment statistics until several years after production
activity is completed.

Economic opportunities
Location Offset applications demonstrate that large-budget productions acquire goods, services and facilities
from a wide range of Australian providers. These productions attract significant foreign investment in
infrastructure, such as studios, which in turn means new employment opportunities for the local production
industry.

65
Employment is generated directly within the film industry through the employment of cast, crew and film
production service providers, and indirectly through a range of support services (for example, accommodation,
catering and hospitality, transport, media, security, professional services including legal, financial and
accounting, and trades services including electricians, carpenters and hairdressers).

Location Offset applications demonstrate that wages are a large portion of production budgets. Moreover, as
productions are generally on location for three to 12 months they can have a significant impact on local
economies. Actors, crew and film production service providers who work on offshore productions can develop
relationships with overseas filmmakers that provide opportunities for further work domestically (on other
offshore and sometimes domestic productions) and overseas.

One submission noted that large offshore productions also have the potential to provide residuals to Australian
actors for the years following the release of a production.

Skills development
Large-budget productions provide skills development opportunities that go beyond what is available on smaller
budget productions. Australian-based crew and film production service suppliers that work on these productions
acquire equipment, skills and experience which can then be used to the benefit of local productions.

A survey of crew who worked on The Chronicles of Narnia: Voyage of the Dawn Treader found that for 71 per
cent of respondents (178 crew), offshore feature films were their principal source of work. Sixty-one per cent of
respondents stated that they would not remain in the industry if they did not secure employment on offshore
productions within the 12 months following the survey. 81

Findings
Large-budget offshore production is an important component of production activity in Australia. It
provides significant direct benefit to the Australian film and television industry.

Since 2001 offshore production has injected at least $2.2 billion of expenditure on film production
activity in the Australian economy. This foreign investment has generated jobs and developed skills
in the local film and television industry and in support service industries.

Given the limited data available for analysis and the significant changes in the global market since
the introduction of the Location and PDV Offsets, it is difficult to assess their effectiveness in
attracting large-budget offshore production to Australia over the relatively short period since their
introduction.

The certification of large-budget productions for the offsets in 2008–09 and 2009–10 indicates that
the offsets have played some part in attracting large-budget productions to Australia, despite the
rising value of the Australian dollar and competition from overseas film incentives.

The economic, employment and skills development opportunities afforded by large-budget films
accessing the Location and PDV Offsets have indirect benefits for the Australian independent
production sector and increase its viability due to the interdependence of these two parts of the
industry.

81
Ausfilm survey of The Chronicles of Narnia: Voyage of the Dawn Treader, included in the Ausfilm review submission.

66
Enhancements to the Location and PDV Offsets
In response to industry representations, two enhancements to the Location and PDV Offsets worth $6.9 million
over the next four years were announced by the Australian Government in the 2010–11 Budget. They are:

 reducing the minimum qualifying expenditure threshold for the PDV Offset from $5 million to $500
000

 removing the requirement for productions spending between $15 million and $50 million in Australia to
spend at least 70 per cent of the total production budget in Australia to qualify for the Location Offset.

The changes are intended to remove barriers preventing offshore productions from considering Australia as a
production destination and provide opportunities for PDV providers to bid for additional work. New work will
increase employment opportunities and build capacity and expertise in the local industry.

The changes will apply to productions starting principal photography, production of the animated image, or PDV
work in Australia on or after 1 July 2010. Legislation giving effect to the enhancements was introduced to
Parliament on 25 November 2010 and is scheduled for debate during the 2011 Autumn parliamentary sittings.

Feedback from the sector
As these enhancements were announced after the review’s submission period closed, submissions commented
that the $5 million threshold for eligibility to access the PDV Offset is too high. This may be because only a few
companies in Australia are large enough to undertake work of $5 million.

Eleven submissions advocated lowering the PDV Offset eligibility threshold—nine of those submissions
recommended a new level of $500 000 and the other two advocated a new level between $1 million and
$3 million.82 Ausfilm has estimated that six to eight PDV projects valued at $10 million to $20 million in QAPE
may be attracted to Australia by the lower threshold.

Ten submissions83 to the review supported removing the requirement for productions spending between
$15 million and $50 million of QAPE in Australia to spend at least 70 per cent of the total production budget in
Australia to qualify for the Location Offset. This enhancement removes a constraint on large-budget productions
that may otherwise be eligible to access the offset. The retention of the minimum expenditure threshold ensures
that productions accessing the offset are spending significant budget amounts in Australia.

Findings
There is strong industry support for the 2010–11 Budget enhancements to the Location and PDV
Offsets.

The sector anticipates that the enhancements will have a positive impact on the uptake of the
Location and PDV Offsets.

82
Screen Producers Association of Australia, Ausfilm, Deluxe and eight confidential submissions.
83
State and Territory Screen Agency Forum, Screen Producers Association of Australia, Ausfilm, Deluxe and six confidential
submissions.

67
Challenges
Recent decline in offshore production
Industrial unrest in the United States through 2007 and 2008 played a key role in reducing offshore production
when the Writers Guild of America went on strike for several months. The Screen Actors Guild subsequently
contemplated strike action for similar reasons. During this period the studios built up a stockpile of productions
for subsequent release in anticipation of protracted negotiations and possible strike action, causing a lull in new
production activity in 2008.

Total United States feature production contracted from 909 titles in 2007 to 677 titles in 2009 84 due to the GFC
and a resultant decline in available equity investment. Between 2005 and 2009 there was a 26 per cent
contraction in production.

Value of the Australian dollar
In its submission, Ausfilm indicates that the Hollywood studios regard an exchange rate of US$0.70–0.75 to the
Australian dollar as the tipping point at which Australia becomes an attractive location for offshore production.

The number of productions certified under the RFTO averaged between five and six per year while the
Australian dollar was around US$0.75 (through 2003–04, 2004–05, 2005–06). However in 2006–07, only three
productions were certified, even though the value of the Australian dollar stayed around US$0.75 over the
beginning of the period when production would have occurred.

This suggests that other factors, such as more countries offering rebates and incentives for productions, may
have been at play. As the value of the dollar increased through 2006–07, both of these factors combined may
have proved a disincentive for overseas filmmakers to locate productions in Australia.

Given the limited data and the factors that influence the application process, a link cannot necessarily be drawn
between the increase in certifications in 2007–08 and the rise of the Location and PDV Offsets to a 15 per cent
rebate. The rise in certifications could also be due to

84
Motion Picture Association of America, Theatrical market statistics 2009, published at http://www.mpaa.org.

68
the value of the Australian dollar when decisions to locate productions where made as well as the availability
and value of other incentives being offered around the world.

The date on which a project is ‘greenlit’ (approved for production) is an important consideration in examining
the uptake of the offsets. The decision to begin production is based on a number of factors, including location
requirements, cast and crew availability, studio facilities and available government incentives.

For American productions looking to locate in Australia, the exchange rate appears to be a key consideration.
Projects can be greenlit several months before production starts. However, this decision date is not reflected in
any of the available Australian Government data and is not reliably available through other sources.

One example of a project that was considering locating in Australia was Green Lantern, a DC Comics title.
Interest in Australia waned as the value of the Australian dollar rose steeply during the middle of 2009.

Competing incentives
Competition from incentives offered by other national governments and American state governments has
diminished Australia’s relative competitiveness.

When Australia first introduced its 12.5 per cent RFTO in 2002, there were only one or two competitors in the
‘soft money’ market offering tax incentives for film production. Today, there are approximately 20 other
national governments and over 40 American state governments offering tax offsets and other incentives to
offshore productions (although the definition of ‘qualifying spend’ may not be as inclusive as Australia’s).

The United States has approximately 55 local (city or municipal) and state government tax incentives. There are
approximately 30 incentives (excluding Australia’s) in operation at the national, state or local levels of
government around the world.

Louisiana is one of Australia’s strongest competitors for Hollywood productions. It offers a range of tax credits,
including a 25 per cent Motion Picture Investor Tax Credit and a 10 per cent Louisiana Employment Tax Credit.
Its proximity to California and skilled workforce adds to its attractiveness as a film destination. Other United
States incentives offer even higher rebates—over 40 per cent on qualifying spend.

Compared with other international incentives on offer, the benefits of the Location Offset are that the rebate
amount is not capped per production or per financial year and that there is no limit on the number of productions
that can receive the rebate in any year, including those from the same production company.

Australia’s 15 per cent rebate is broadly comparable with the rates offered by our major competitors such as the
United Kingdom, New Zealand and Canada.

The various Australian states and territories also have measures in place to assist productions in their
jurisdiction.

69
Feedback from the sector
The present lack of large-budget offshore projects filming in Australia has been identified as a major issue for
the sector.

Submissions and focus groups stated that the recent downturn in overseas productions using Australian locations
and services will lead to the loss of skilled practitioners to overseas and the closure of businesses due to lack of
work.

Submissions also asserted that a sustained break in offshore production in Australia could see a loss of industry
knowledge and expertise and reduced investment in essential infrastructure that may not be recoverable in the
short term. The downturn is predicted to reduce the ability for service providers to support both offshore and
Australian productions in the future.85

Submissions to the review stated that further enhancements to the offsets are required for Australia to remain
competitive as a filming destination. Submissions note that the high value of the Australian dollar is currently
precluding Australia from consideration.

Possible solutions
Ausfilm’s submission proposed raising the rebate of the Location and PDV Offsets to 30 per cent of QAPE, or
alternatively, to ‘peg’ the rebate to the value of the Australian dollar when it rises above US$0.70 up to a
maximum of 30 per cent.86 A number of other submissions87 supported one or both of these proposals.
Information provided in Ausfilm’s submission estimates that an increase in the rebate for the offsets to 30 per
cent would increase Australia’s GDP by $1.881 billion over 10 years. A pegged rebate (from 15 per cent to 35
per cent between US$0.70 and $0.90) would contribute an additional $1.085 billion in GDP. Ausfilm further
suggests that full-time equivalent jobs in Australia would increase by approximately 470 if the rebate level were
to be increased to 30 per cent and approximately 270 if the rebate were to be pegged. 88

An increase in the value of the offsets to either a fixed rate of 30 per cent or through the adoption of a pegged
rebate would increase their competitiveness internationally against incentives of other governments.

An increase to the rebate to 30 per cent would be a static increase and would apply no matter what the value of
the dollar was at any given time. It would double the cost to government for all eligible production activity.

By being tied to the exchange rate, a pegged rebate would retain the value of the incentive at its optimal level—
as the value of the Australian dollar increases against the US dollar, the rebate amount would increase
proportionally.

Ausfilm has suggested the rebate should be pegged at US$0.70. The historical average of the AU$ since the
RFTO was introduced is US$0.75.89 Office for the Arts data suggests there is a significant reduction in the level
of offshore production locating to Australia once the Australian dollar exceeds US$0.80. The additional cost to
government would depend on the exchange rate but would not be as great as if the rebates were increased to a
nominal value of 30 per cent.

85
Antony Tulloch submission, p. 1.
86
Ausfilm submission, pp. 7–16.
87
Deluxe, Showfilm, State and Territory Film Agency Forum, Screen Producers Association of Australia, DLA Phillips Fox and
seven confidential submissions.
88
Analysis by PricewaterhouseCoopers, ‘Australia’s Location and PDV Offset Incentives: Economic Impact Study’, p. 24, in
Ausfilm’s submission, Annexure 1.
89
Reserve Bank of Australia data, available at http://www.rba.gov.au/statistics/index.html.

70
MEAA submitted that some caution should be exercised if the rate of the offsets is increased to avoid an
unsustainable ‘race to the bottom’ to remain competitive with other territories. MEAA also stated in its
submission that it ‘believes that there needs to be a clear differential between the Producer Offset and the
Location Offset to ensure that private investment (being

local or foreign) is attracted to the local productions’. 90 The Music Council of Australia supports these views. 91

SPAA proposes additional enhancements to the offsets, including allowing large-budget (over $1 million of
QAPE) television commercials to access the Location Offset and introducing a ‘frequent spenders reward’,
where a company that brings a project to Australia worth over $50 million in QAPE automatically qualifies for
the offset for any projects applied for in the subsequent two years. 92

The Office for the Arts is aware from stakeholder representations outside of the review process that modifying
the audit requirements for the PDV Offset would reduce the financial burden on applicants. It has also been
suggested that expanding the scope of the PDV Offset to include ‘tests’ (research and pre-production work)
could help Australian PDV suppliers to secure further work on large-budget productions.

Findings
A range of factors have an impact on the uptake of the offsets, including the value of the Australian
dollar against the US dollar and competition from incentives on offer in other countries.

Data shows that when the value of the Australian dollar is above US$0.80, limited large-budget
offshore productions choose to locate to Australia at the current Location Offset rebate rate of
15 per cent.

The overall cost of production is an important factor for studios considering where to locate
offshore productions. Production cost is influenced by the value of incentives available in various
locations and current and likely fluctuations in exchange rates.

The two proposals to counter the recent decline in offshore large-budget production with the
greatest support are: to either increase the rebate level to 30 per cent; or to introduce a rebate level
range starting at 15 per cent and rising to 30 per cent, pegged to the value of the Australian dollar
against the US dollar.

Administration of the offsets
The current guidelines for the Location and PDV Offsets state:

... the process of assessing the application by the Department, including consideration by the Film
Certification Advisory Board, may take up to 15 weeks if all relevant documents are in order.

The same timeframe applied to the assessment of applications for the RFTO. Since October 2002 the Office for
the Arts has certified 33 applications for the RFTO. Of these, 24 were processed within 15 weeks. Seven

90
MEAA submission, p. 25.
91
Music Council of Australia submission, p. 4.
92
Screen Producers Association of Australia submission, p. 17.

71
applications were processed within 30 weeks and two were processed within 40 weeks.

The delay for those applications not processed within 15 weeks was due to the time taken by the applicant to
source documents requested by officials or the Film Certification Advisory Board to substantiate or complete the
application. The timeframe for assessing an application is often governed by the level of information provided in
the original application.

Since May 2007, seven applications for the Location and PDV Offsets have been certified. Of these, one was
processed within 15 weeks and six were processed within 30 weeks. Again, the delay for those applications not
processed within 15 weeks was due to the time taken to source documents requested by officials or the Board.

The one application that was processed within the stated timeframes was complete at the time of receipt and the
applicant had also contacted the Office for the Arts during production for advice on the requirements of the
application. Despite the large and complex nature of the production, it was certified within 13 weeks.

The Office for the Arts asks applicants to complete a client satisfaction survey at the end of each Location Offset
certification. The survey asks applicants to rate their satisfaction with the Office for the Arts’ performance on a
scale of one to five on the:

 conduct of the overall application process

 time taken for certification

 time taken to respond to inquiries

 staff knowledge of the issues involved

 clarity of the guidelines and application form

 usefulness of the offsets brochure.

To date, the Office for the Arts has received a 96 per cent client satisfaction rating from applicants overall.

After certification of each application, the Office for the Arts undertakes a minor review of the certification
process to ensure that any significant determinations on particular items of QAPE are noted in the guidelines.
This provides guidance for future applicants. Determinations are confirmed with Screen Australia, the Treasury
and the ATO through a co-administration committee.

The two main issues or items of expenditure that have caused most delays in processing applications are the
confirmation of eligible travel expenditure and the level of services provided in Australia by ‘above the line’
personnel such as producers, directors and key cast.

In consultation with stakeholders, the Office for the Arts has clarified these issues in the guidelines to ensure that
applicants are aware of the specific documentation that should be provided with their application. The Office for
the Arts has also developed an ‘airfare template’ to help applicants track their eligible travel costs.

The Office for the Arts actively encourages applicants to contact officials as soon as possible, preferably during
production, to help minimise any delays and make the application and certification process for the offsets as
efficient as possible. The guidelines, ‘airfare template’, application forms and officials’ contact details, are
available from the Office for the Arts’ website.

Feedback from the sector
Submissions to the review generally supported the administrative arrangements for the offsets. One submission
called for a streamlining of the certification process to reduce timeframes.

72
Findings
The data indicates that the offsets are administered in a timely and effective manner once a
completed application is received, in accordance with Australian Government performance
objectives.

The administration process is subject to ongoing review to enable continuous improvement.

73
Other issues identified in the terms of reference
Adequacy of data on the sector
Screen Australia’s annual Drama Report 09/10 on production of feature films and television drama is an
important source of data on the sector and has been used extensively throughout the report. A number of other
industry publications and ad hoc research papers are published to increase knowledge of the sector.

The Australian Bureau of Statistics’ (ABS) Television, Film and Video Production and Post-production Services
survey was last undertaken in 2006–07. The ABS also publishes statistics on the independent production sector.
These are often part of broader publications on the arts and culture sector.

Feedback from the sector
 Submissions from the sector indicated that more data would increase its capacity to identify areas for
improvement. In particular, the feedback argued for:

 increased transparency about the uptake of the tax offsets, in particular the Producer Offset, as only
limited data on the offset’s uptake is currently available due to tax secrecy provisions

 the continuation of the ABS’s service industry survey.

Tax secrecy
In the course of administering the production incentives, the Australian Government collects data on productions
certified under the Producer, Location and PDV Offsets. The offsets are established under Division 376 of the
Income Tax Assessment Act 1997 and as such, they are subject to tax secrecy provisions within the Taxation
Administration Act 1953 (TAA1953). These secrecy provisions apply to all tax information to protect the privacy
of individuals.

For the purpose of the TAA1953, officers within the Office for the Arts, Screen Australia and the ATO are
considered tax officers because they perform functions and exercise powers under or for the purposes of a tax
law, specifically in relation to Producer, Location and PDV Offset applications and determinations. Protected
information that tax officers receive or use can only be shared within agencies for purposes allowed by the
TAA1953. In this case, it cannot be shared between agencies for any purpose other than the administration of the
offsets. This information can only be published in a way that does not identify the private tax affairs of an
individual (by aggregation or de-identification).

Since 2007–08, the Australian Government has published aggregated and de-identified data on the offsets to
enable the longer term assessment of their performance. This data has appeared in annual reports, on the Screen
Australia website and in other publications and presentations to the public. In 2009–10 Screen Australia’s
National Survey of Feature Film and TV Drama Production was restructured to provide further information on
the uptake of the offsets, compared to overall production levels.

In accordance with the secrecy provisions, this offset data details the number of projects that receive
certification, the total budgets of all productions, the total QAPE amount and the approximate rebates payable.
These figures can usually be broken down to the relevant year of certification or the year when production began
(the exception to this is where the number of productions is low—under three—and as a result the tax rebate
amount for an individual production could be identified).

This means that only a limited amount of data on the number of productions certified and the value of the
productions and rebates are released. This makes analysis of the effectiveness of the offsets and government film
policy difficult, as the Office for the Arts and Screen Australia are unable to share data with officers in other

74
agencies, or with the Minister.

Feedback from the sector
Submissions recommended increased transparency of information on the offsets, particularly the Producer
Offset. MEAA stated:

Screen Australia needs to be empowered to release more detailed and comprehensive information relating
to the Producer Offset. This basic information is critical to both an understanding of the administration of
the Producer Offset and its transparency. 93

The state and territory film agencies also considered the matter to be of importance.94

One submission had no objection to the titles of films qualifying for final certification for the Producer Offset
being published by Screen Australia, provided that no reference was made to the quantum of QAPE certified for
a particular production. They argued that this would provide guidance to industry on which films are considered
to have ‘significant Australian content’. However, the secrecy provisions do not allow disclosure of protected
information even if the person to whom the information relates gives their consent.

Similarly, other submissions argued that the availability of more data about the Producer Offset would be a
useful tool to allow producers to secure additional investment.

Possible solution
The Office for the Arts is continuing to explore ways to increase the administrative efficiency of the offsets and
provide greater clarity about successful applications, particularly for the Producer Offset.

The publishing of offset data would provide greater transparency of the Government’s support measures for film
production and provide industry with greater understanding of how the offsets work for better informed
production decisions.

The tax secrecy provisions do not prevent a producer from acknowledging that they have been certified to access
the Producer Offset for a production. There have been some recent examples of producers publicly stating that
they have received a final certificate for the Producer Offset.

The voluntary release of final certification information could provide an increased level of data. There may be a
coordinating role for this process by sector peak bodies.

93
Media, Entertainment and Arts Alliance submission, p. 2.
94
State and Territory Screen Agency Forum submission, pp. 20–1.

75
Findings
The review has identified that it could create administrative efficiencies and enable greater
transparency on the performance and uptake of the offsets if additional information on applications
and determinations could be shared and published. This will maintain confidentiality for projects
certified under the offsets consistent with the tax secrecy disclosure provisions.

The publication of any additional offset information, such as titles, would need to be considered
against broader implications for tax secrecy provisions.

There may be a role for the sector in voluntarily releasing more information on the uptake of the
Producer Offset, such as titles.

ABS service industry survey
The ABS’s Television, Film and Video Production and Post-production Services survey provides the most
comprehensive source of data on the sector. The survey results are used by governments, screen agencies and
peak bodies to provide a clear snapshot of the sector’s size and composition, level of employment and
profitability. It also provides a comprehensive analysis of the sector’s growth in terms of production capacity and
economic contribution.

The last ABS survey was published in 2008 and based on data collected in 2006–07, before the introduction of
the production incentives. Up to this point, the survey had been undertaken every three years since 1993–94.

The review considered, as part of the assessment of the sector’s viability, the size and structure of the sector and
individual production companies and changes following the introduction of the Australian Screen Media Support
package. The review considered income and revenue of the sector.

Screen Australia’s 2010 business survey provided useful comparative data in relation to the ABS survey;
however, there were 320 respondents to Screen Australia’s survey, representing a 39 per cent response rate95 and
not all respondents answered every question in the survey. The survey has the potential to provide a valuable
benchmark for issues related to sector sustainability and to play a complementary role to the results from the
ABS service industry survey.

Feedback from the sector
Industry peak bodies, practitioners and government organisations outlined the importance of the ABS survey to
the sector in their submissions and recommended the survey be continued. MEAA noted:

The survey provides the only complete picture of all film and TV production in Australia. There is no
alternative source.96

Screen Australia commented in its submission:

With the last survey being conducted before the introduction of the Federal Government’s Australian
Screen Media Support Package in 2007–08, the capability to measure the full effects of the package are

95
Screen Australia submission, p. 11.
96
Media Entertainment and Arts Alliance submission, p. 21.

76
limited without this fundamental ongoing indicator.97

New Zealand and Canada undertake regular surveys of their respective film and television production sectors.
Statistics New Zealand notes that its survey provides information to government and industry to shape measures
and policy for the screen sector. Statistics Canada undertakes an annual survey of film, television and production
as part of its survey of service industries. It also targets businesses or organisations involved in film, video and
audiovisual production.

Submissions98 indicate that annual surveys, such as those conducted in Canada and New Zealand, are the best
way to evaluate trends in the sector.

Possible solution
The Australian Government could commission the ABS to undertake a survey of the sector, but at this time the
survey would need to be jointly or entirely funded by the Government. A survey every three years would provide
adequate regularity of data on the sector to identify growth and performance trends.

Finding
The ABS survey provides a valuable source of data on the sector. Much of the information
provided in this survey cannot be sourced from other mechanisms. The sector strongly supports the
continuation of the ABS survey.

Impact of free trade agreements on levels of Australian content
In New Directions for the Arts the Government committed to review the effect of free trade agreements (FTAs)
to determine their impact on levels of Australian content, including drama, documentaries, and children’s
programming on free-to-air and subscription television services. From the data and submissions received it is
clear that Australian free-to-air networks are meeting their Australian content requirements, and that significant
investment in Australian content is being made by subscription television providers.

In FTA negotiations, Australia has generally reserved the right to adopt or maintain any measure to support its
broadcasting and audiovisual services.

Background
Australia has six FTAs in place with New Zealand (1983), Singapore (2003), Thailand (2005), the United States
of America (2005), Chile (2009), and a regional agreement with the Association of Southeast Asian Nations
(ASEAN) and New Zealand (2010).

Agreements are currently under negotiation with China, Japan, the Republic of Korea, Malaysia, and there are
three regional agreements being negotiated with the Gulf Co-operation Council, Pacific Island Forum countries
and the Trans-Pacific Partnership countries (Australia, Brunei, Chile, Malaysia, New Zealand, Singapore, Peru,
the United States of America and Vietnam). In November 2010 Australia and Indonesia also announced they
would commence negotiations on a Comprehensive Economic Partnership Agreement. An agreement with India
is under consideration.

97
Screen Australian submission, p. 12.
98
Screen Australia, Media, Entertainment and Arts Alliance, Music Council of Australia and one confidential submission.

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Australia–New Zealand Closer Economic Relations Trade Agreement
(ANZCERTA)
Under the ANZCERTA Services Protocol, New Zealand audiovisual product is treated as Australian content, as
reflected in the Australian Content Standard 2005. Commercial free-to-air television licensees in Australia are
currently required to broadcast an annual minimum of 55 per cent Australian content between 6.00 am and
midnight.99 Data available to the review indicates that New Zealand programs currently account for less than two
per cent of local content and less than one per cent of overall content.

Since 1996 all networks have exceeded the mandatory local content quota and the total level of Australian
content across free-to-air networks has increased slightly from 56.87 per cent to 61.88 per cent. Broadcasting of
New Zealand programs between 2000 and 2004 was low with content remaining below 0.06 per cent of overall
content.100 From 2005 to 2009 there was a slight increase in the number of New Zealand programs broadcast,
although in 2009 there were fewer than 145 hours broadcast on the free-to-air networks.101

99
This ACMA compliance data is focused on results from the Seven Network, Nine Network and Network Ten. There are
currently no local content quotas requirements for the ABC or SBS. The current free-to-air requirements do not extend to free-
to-air digital channels such as GO!, 7TWO and One HD or subscription television. Specific data on levels of Australian content
on these channels is not available at this time.
100
Before 1998, Australian content quotas were comprised entirely of Australian content (not including New Zealand programs).
Reporting on New Zealand content was not separately recorded until 2000.
101
http://www.acma.gov.au/webwr/aba/tv/content/requirements/australian/documents/2009_comparison_of_
compliance_metro_commercial_tv_networks.pdf.

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Table 24. Transmission quotas—percentage of Australian and New Zealand content (totals for all free-to-
air networks)

1996 1997 1998 1999 2000 2001 2002

Australia 56.87 56.57 59.81 59.27 58.4 59.75 59.43

New 0 0 0.06
Zealand

2003 2004 2005 2006 2007 2008 2009

Australia 59.33 58.71 60.01 60.79 60.21 60.68 61.88

New 0.04 0.02 0.17 0.22 0.45 0.33 0.73
Zealand

Source: ACMA compliance results.
Note: 1996 and 1997 minimum content quota was 50 per cent. Reporting of New Zealand content began in 2000.

ACMA is responsible for overseeing the development of the codes of practice applicable for commercial and
subscription television broadcasters to meet their Australian content obligations.

Australia–United States FTA (AUSFTA)
The Australian Government retains its right in the AUSFTA to regulate Australian content, within certain
parameters, so that Australian programs remain available to all Australians. Local content requirements existing
at the time AUSFTA was negotiated were preserved under the agreement. The Government also ensured its
ability to take measures to ensure that Australian content on new media platforms is not unreasonably denied to
Australian consumers, should it determine that Australian material is not readily available to them. Full capacity
for subsidy and tax incentive programs for cultural purposes was also preserved.

Criticism of the agreement surrounds those AUSFTA commitments that restrict Australia’s capacity to increase
the degree or level of any potential new or additional local content requirements. In 2005 when the AUSFTA
came into force, local content quotas had not varied since March 1999 (when quotas were increased from 50 per
cent to 55 per cent). Moreover, the restrictions do not limit the degree to which free-to-air networks can exceed
their local content obligations, nor does the commitment limit Australia’s ability to vary sub-quota requirements
within the overall 55 per cent quota. Since 2003 all free-to-air networks have met or exceeded the requirements
of the Australian Content Standard and Children’s Television Standard. 102

102
In 2009, the Seven Network broadcast approximately 65 per cent Australian content while Network Ten averaged 57 per cent
in the five mainland state capitals. The Nine Network broadcast 62 per cent Australian content in Sydney, Brisbane and
Melbourne.

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Current policy regarding levels of local content
Free-to-air television
The current Australian Content Standard 2005 came into effect on 30 December 2005 and:

 states minimum levels of Australian programming to be broadcast by commercial television
broadcasting licensees

 requires minimum amounts of first-release Australian drama programs, documentary programs and
children’s programs (including children’s drama, but excluding pre-school programs, which are covered
under the Children’s Television Standards) to be broadcast by commercial television broadcasting
licensees

 requires pre-school programs broadcast by commercial television broadcasting licensees to be
Australian programs.

There are currently no local content quota requirements for the ABC or SBS.

Children’s and adult drama programs and documentaries
Since 2002, the number of hours for first-release Australian children’s programs has ranged from the 130 annual
hours required by the Children’s Television Standard, to 133.95 annual hours. 103 Three C mini-series from New
Zealand screened with a total of 26 hours screen time during this period.

The Australian Content Standard has a requirement that the drama scores for first-release adult drama programs
broadcast by a licensee in prime time in any year must total at least 250.104 ACMA data indicates that the
commercial free-to-air broadcasters have all met this requirement since 2003.

Table 25. Free-to-air adult drama scores

2002 2003 2004 2005 2006 2007 2008 2009

225 250 250 250 250 250 250 250
score score score score score score score score

Seven 369.00 393.20 370.90 430.27 290.16 272.59 276.71 387.32

Nine 231.87 298.80 301.76 278.30 268.65 318.70 286.17 300.16

Ten 225.70 400.68 254.57 285.23 335.63 259.67 268.58 265.07

Source: ACMA 2009 compliance figures.

There has been an increase in the broadcast of documentaries across all free-to-air networks since 2005. In 2009,
the metropolitan networks exceeded the annual quota of 20 hours for first-

103
ACMA compliance results from 2000–09.
104
Section 11 of the Australian Content Standard defines ‘drama score’ as ‘format factor’ x duration (in hours). The format factor
refers to the scoring system listed in the standard that is determined by the program format.

80
release Australian documentaries with the Seven Network broadcasting an average of 113.07 hours, the
Nine Network 47.67 hours and Network Ten 38 hours.

Subscription television
From 1992 to 1998 the Broadcasting Services Act 1992 contained a voluntary Australian content target for
subscription television drama channels. The introduction of the new eligible drama expenditure (NEDE)
requirement in 1999 obliged subscription television licencees and drama channel providers to invest at least 10
per cent of their total drama program expenditure in new eligible Australian and New Zealand drama.

Subscription television licensees and drama channel package providers are required to provide audited annual
returns to ACMA, and to acquit any expenditure shortfall from the previous year. If the eligible drama
expenditure does not meet the 10 per cent investment target in the reporting year, then at a minimum, an amount
that equals the shortfall must be spent in the next financial year (known as ‘make-up expenditure’). However, if
the eligible drama expenditure exceeds the 10 per cent target (and any make-up expenditure) in the reporting
year, the excess may be nominated as the ‘carry-forward expenditure’ and used in the following financial year,
but not any subsequent year, to acquit an expenditure obligation. 105

ACMA found that the sector had spent $28.47 million on Australian drama in 2008–09.

Table 26. New eligible drama expenditure results: subscription TV 2000–01 to 2008–09

2000–01 2001–02 2002–03 2003–04 2004–05 2005–06 2006–07 2007–08 2008–09

NEDE
requirement*($m) 19.49 20.58 19.93 18.86 18.98 20.58 20.79 23.10 25.98

Actual spend on new
drama ($m) 18.21 21.00 19.13 17.70 15.92 18.41 26.44 20.06 28.47

Source: ACMA compliance results for subscription TV;*(equals 10% of all drama program expenditure).

Data collected by the Australian Subscription Television and Radio Association (ASTRA) as part of the ASTRA
Australia content survey of 30 organisations representing 200 channels indicates that in 2009, these
organisations invested $541.4 million in the production, programming and broadcasting of Australian content
(including drama, news, sport and lifestyle programs) and directly employed 4643 people.106 The results also
indicate that from 2007 to 2009, the industry platforms and channels have increased their investment in
Australian content by 26 per cent and employment by 7 per cent.

105
If a channel provider’s expenditure does not acquit its make-up expenditure obligation, responsibility for acquitting the
obligation can be shared with the licensees broadcasting on those channels. For the 2008–09 reporting year all but one of the
scheme participants acquitted the 2007–08 expenditure obligations. ACMA will consider any further action that may be
required by licensees.
106
http://astra.org.au/pages/australian-content.

81
Feedback from the sector
Few comments were received from industry on whether FTAs have had an impact on the levels of Australian
content. The submissions generally tended to call for increased local content and future protection of local
content requirements, particularly in response to the commitments made in AUSFTA, without making any
specific comments on the current influence of FTAs on content.

In their submissions, the Australian Children’s Television Foundation (ACTF) 107, Australian Directors Guild
(ADG)108 and SPAA109 stated that there should be an increased commitment to screen Australian content on
digital multi-channels. The ACTF suggested that the requirement for first-release children’s drama should be
lifted from 96 hours over three years to 42 hours per year and that NEDE requirement for subscription TV be
increased from the existing 10 per cent of program expenditure on local content to 20 per cent. 110 SPAA also
recommends this increase and believes that the content quotas for adult drama and documentary should also be
increased.

Findings
Australia’s FTAs do not appear to have had a significant impact on levels of Australian content on
free-to-air television.

Free-to-air commercial networks have continuously met their local content requirements. The
networks are exceeding local content requirements for children’s and adult drama programs and
documentaries.

New Zealand programs represent a very small proportion of programming broadcast by the free-to-
air commercial networks.

Submissions reflect the view of some industry stakeholders that local content commitments in
AUSFTA may constrain the Government’s ability to protect Australian content in the future.

Outcomes from the statutory review
In-house and independent television production
The Producer Offset legislation required a review within 12 months of its introduction to examine the effect of
the offset on levels of in-house production by Australian television broadcasters in relation to levels of
production by the Australian independent production sector. 111 This requirement was a response to industry
concerns that broadcasters would increase

107
Australian Children’s Television Foundation submission, pp. 4–5.
108
Australian Directors Guild submission, p. 3.
109
Screen Producers Association of Australia submission, p. 6.
110
Australian Children’s Television Foundation submission, p. 5.
111
Section 376-275 of the Income Tax Assessment Act 1997.

82
the level of in-house production as opposed to commissioning production from the independent sector. This
statutory review of Division 376 of the ITAA97 was published in April 2009. 112

The statutory review found that overall the balance of television production between independent and in-house
production had remained stable since the offsets were introduced. However, given the short time since the
introduction of the offsets and the limited data available, it was too early to draw any significant conclusions.

The terms of reference for the 2010 Screen Review indicated that it would consider the findings of the statutory
review.

Feedback from the sector
Feedback from the sector on the commissioning of in-house and independent television productions was varied.
SPAA’s submission states:

… the industry remains perplexed and frustrated by the Government’s decision not to withdraw
broadcaster access to the PO in respect of their own drama programming. 113

Free TV’s submission offered the contrary view on behalf of the commercial broadcasters:

Broadcasters make production and programming decisions based on new and creative concepts which
appeal to audiences—irrespective of whether they are generated in-house or externally. This has not
changed since the introduction of the Producer Offset. 114

Discussion
The National Survey of Feature Film and TV Drama Production shows that in the three years since the
introduction of the offset, there has been no significant shift in the average numbers of independent productions
of adult drama. While there was a decline in hours and total production spend on adult drama series in 2009–10,
the number of in-house productions has shown no increase.

112
See
http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2009/027.htm&pageID=003&min=ceb&Year=&DocTyp
e=0.
113
Screen Producers Association of Australia submission, p. 9.
114
Free TV Australia submission, p. 2.

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Table 27. Australian adult series and serials

Total
No. (in-house in Ave cost/hr
Hours Total budgets Australian
brackets) ($m)
spend

2004–05 14(4) 502 119 119 0.238

2005–06 14 (2) 389 87 87 0.223

2006–07 20 (3) 436 131 131 0.291

2007–08 18 (4) 465 142 141 0.305

2008–09 17 (4) 410 141 141 0.345

2009–10 14 (4) 350 127 125 0.362

Average 16 (3.5) 425 125 124 0.294

Source: Screen Australia, National Survey of Feature Film and TV Drama Production.

Finding
According to data available to the review, the Producer Offset has not encouraged television
networks to shift towards a higher proportion of in-house productions.

Sixty-five episodes
One of the aims of the Producer Offset for television series is to encourage the creation of new productions.
Eligibility for the offset for television series was aimed at giving producers sufficient time to allow productions
to become commercially viable and to secure alternate sources of support.

The offset legislation established an eligibility limit of 65 episodes for each series. The Explanatory
Memorandum stated:

10.39 The 65-episode limit is a cumulative cap on the support the producer offset will provide to a series.
It recognises that once a series has been in production for such a number of episodes, it should be capable
of being made without Australian Government support and effectively become self-sufficient.115

The 65-episode limit is based on the standard iteration of a season being 13 episodes long—
65 episodes allows for five series before the production is no longer eligible to receive the offset. The 13-episode
standard was also in line with that under the 10BA tax incentive.

Feedback from sector

115
Explanatory Memorandum for the Tax Laws Amendment (2007 Measures No. 5) Bill 2007.

84
Feedback from submissions and the focus groups suggested the 65-episode cap:

 was inequitable across the different television genres given the variable episode and series lengths

 has resulted in some series not continuing beyond the 65th episode.
Variable episode and series length
There was significant feedback from the sector on the inequity of the episode cap. Screen Australia’s submission
noted:

… while 65 commercial hours of a standard one-hour television drama may qualify for the Producer
Offset, if a producer is making an animated children’s series, only 13 hours of content can qualify (65 x
15 minute episodes). 116

Further, a children’s television producer noted in a focus group:

I think to be able to make 65 hours of Underbelly is fantastic but for me to be able to only make 32 and a
half hours of television, we’re not on a level playing field.

Children’s television
The standard format for children’s television commercial networks is a series of 26 by half-hour episodes. This
format is also the most marketable length overseas.

As such, children’s drama programs will generally reach the 65-episode cap much quicker than will one-hour
long adult drama productions. The series, H20: Just Add Water, for example, ran

for three series, each of 26 episodes, meaning that were it to receive the offset, only two and half series would
have been eligible after only 32 and a half hours of programming.

One issue that potentially affects the number of series for children’s television programs often surrounds the
cast—after three years the cast may have moved out of the target audience range for a program. Children’s
televisions series have historically run for shorter periods than adult dramas.

Of course, there are children’s dramas that run for longer periods. The format of Blue Water High where each
series involved a new set of characters and the school remains the constant would allow for an infinite number of
series.

For animation programs, especially in the pre-school category, the inequity in programming hours is further
exacerbated as an episode is often 15 minutes long. The Australian animation company, SLR, recently
announced sales for a 52 by 11-minute series for pre-schoolers. If such a series received the offset, it would
reach the cap after one and a quarter series, and after only 16 and a quarter hours.

The following table demonstrates that depending on the length of episodes and number of episodes per season, a
production may be eligible for the offset with a length ranging from one and a quarter series to nearly 11.

116
Screen Australia submission, p. 59.

85
Table 28. Eligibility period for television series

Number of Number of hours
Number of Length of
series potentially eligible
Example Genre episodes episode
eligible for for Producer
per series (minutes)
offset Offset

Adult
Sea Patrol drama 13 60 5 65

Packed to the Adult
Rafters drama 22 60 2.95 65

Adult
The Librarians comedy 6 30 10.8 32.5

Children’s
My Place drama 13 30 5 32.5

Children’s
Blue Water High drama 26 30 2.5 32.5

Children’s
Erky Perky animation 26 15 2.5 16.25

Children’s
I Got a Rocket animation 52 15 1.25 16.25

Source: Various.

The current episode cap suggests that some children’s animation productions could be made without government
support and become self-sufficient after less than two series. Given adult drama have potentially up to five
series; it does suggest a large disparity between different genres to establish themselves within the market.

Possible solution
Amend the Income Tax Assessment Act 1997 to allow for all television series to be eligible for the Producer
Offset for 65 broadcast hours.

Findings
The 65-episode cap is intended to help television productions become commercially viable once
they have reached the 65th episode.

The review found that different genres within the sector are treated differently. Children’s
productions are eligible for the Producer Offset for significantly less hours than adult productions.

On equity grounds, there may be a case for changing the cap to an hour rather than episode cap to
extend access for animation and children’s television. The impact this change would have on hours
of production may be minimal given that few children’s drama series traditionally extend beyond

86
65 episodes.

A change to an hourly limit may engender a change in the content and narrative of children’s drama
to take advantage of more episodes potentially eligible for the offset.

There is a strong case that the cap is disadvantageous to 15-minute animation series that have less
than two series of support from the Producer Offset before being expected to have achieved a
commercially viable position.

Viability after 65th episode
Some producers argued in their submissions or in the focus group sessions that the attractiveness of the incentive
made it more likely that broadcasters would prefer to commission a new production rather than continue a series
once the 65-episode limit has been reached, as a new series would in effect have a 20 per cent budgetary
advantage due to the availability of the offset.

The decision to commission an independent production or to extend a series beyond 65 episodes is a business
decision by broadcasters and depends on numerous commercial factors.

On 28 October 2010, it was announced that the Nine Network was not commissioning any further seasons of the
program Sea Patrol and that its final season would only be 13 episodes long rather than the usual 16. It was
revealed that after this final season Sea Patrol would have run for 68 episodes, and therefore it would no longer
be eligible for the offset.117
A spokesperson for the network stated:

Sea Patrol will go out on a high of consistently good ratings and with a loyal audience, but it is too
expensive to produce without government assistance. 118

Possible solution
Some submissions suggested that the offset could be continued beyond the 65 episodes at a decreasing rate.

The state and territory screen agencies suggested that a reduced 10 per cent offset could be provided for an
additional 65 episodes, from episode 66 to 130.

Screen Australia estimates the offset accounts for an average 18 per cent of the budget of television productions
and that it has been as low as four per cent.119 There is a strong likelihood that lowering the threshold to 10 per
cent would in effect mean a lowering of the return of the offset to seven or eight per cent.

Many documentary makers argued that 20 per cent was the bare minimum to be of any real value in terms of
negotiations with broadcasters. Some documentary producers explained that the equity of the offset was a strong
bargaining counter when negotiating with broadcasters and that reducing the offset to 10 per cent would reduce
the value of this counter to the point that it would no longer be effective.

117
Geoff Shearer, ‘Production costs sink popular Queensland-based Ch9 drama Sea Patrol’, The Courier Mail, 29 October 2010.
118
‘Nine announces end to Sea Patrol’, YahooTV, http://au.tv.yahoo.com, 28 October 2010.
119
It is likely that a production with such a low effective return on the Producer Offset would be a co-production where a majority
of the production was filmed in the partner country.

87
Finding
At this stage, there are relatively few programs that have reached the 65-episode cap since the
introduction of the offset. It is therefore too early to tell whether the introduction of the Producer
Offset can help create commercially viable series beyond 65 episodes.

88
Appendix A: Historical overview of Australian
Government support for the sector
Before the introduction of the Australian Screen Media Package in 2007–08, the Australian Government
supported the sector through film tax concessions Divisions 10BA and 10B and the Refundable Film Tax Offset
(RFTO) schemes. The 10BA and 10B schemes were administered under the Income Tax Assessment Act 1936
and the RFTO through the Income Tax Assessment Act 1997. The Government’s film agencies, Australian Film
Commission, Film Finance Corporation and Film Australia Limited were the other key elements of its support.

Division 10BA
Division 10BA of the ITAA36 was aimed at encouraging private investment in culturally relevant, high-quality
Australian film and television productions. Investors in 10BA-certified projects acquired an interest in the
copyright of new, qualifying Australian programs and could claim a tax concession in the year the investment
was made. When first introduced in June 1981, the available tax concession was 150 per cent, but this amount
was gradually reduced until it levelled at 100 per cent in 1988–89.

To qualify for support under the 10BA scheme, programs needed to be made wholly or substantially in Australia
or be an official co-production between Australia and another country, and have ‘significant’ Australian content.

The table below outlines the support provided through the scheme since 1996–97. During this 13-year period,
the 10BA scheme raised $211.87 million.

Table A1. Support from 10BA scheme
1996–97

1997–98

1998–99

1999–00

2000–01

2001–02

2002–03

2003–04

2004–05

2005–06

2006–07

2007–08

2008–09
10BA

Funds
20.1 13.2 16.3 25.6 39.1
raised 19.3 22.4 14.0 15.4 8.90 8.50 9.05 0.0
0 0 0 0 2
($m)

Source: Screen Australia, Get the Picture.

The tax concessional status for investment in productions holding a valid 10BA certificate ceased on 30 June
2009 after the introduction of the Producer Offset. Films already holding a valid 10BA certificate can apply for
final certification until the end of 2011 once the project has been completed.

Division 10B
The Government also provided support under Division 10B of the ITAA36. In 1978 to encourage greater private
investment in Australian films, the Government introduced section 124UA into Division 10B. This provided
investors with an option of writing off their capital expenditure on Australian films over two years. Investors
could claim a 100 per cent deduction over two years on investments, made in the course of obtaining copyright
in certified films, from when the project first earns an income. Films had to be assessed as wholly or
substantially made in Australia. This program was not heavily used by the sector, and the 10B scheme ended on
30 June 2009.

Refundable Film Tax Offset (RFTO)
The RFTO came into effect on 4 September 2001. The RFTO provided a 12.5 per cent rebate to eligible

89
productions that spent a minimum of $15 million in qualifying Australian production expenditure (QAPE). For
productions spending between $15 million and $50 million of QAPE, 70 per cent of the total budget needed to
be spent in Australia. For productions spending at least $50 million in QAPE, there were no additional
expenditure requirements. Eligible genres were feature films, telemovies and television mini-series.

The introduction of the RFTO was intended to provide certainty to offshore productions regarding the Australian
Government support that would be available if they located in Australia. Since the RFTO was introduced, 34
final certificates have been issued with a total QAPE of over $1.9 billion and total rebate payments of over
$239 million.120

A 2006 statutory review of the RFTO found that while it was a successful program, its effectiveness decreased
because of exchange rate fluctuations and the introduction of similar but more lucrative incentive schemes by
other countries and American state governments. As a result the Government raised the rebates for the Location
and PDV Offsets to 15 per cent.

120
Office for the Arts data.

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Appendix B: Digital and online media opportunities
The digital era has significant potential to change the way screen content is distributed. It has the potential to
open up new opportunities for the independent production sector which in turn could assist in establishing
sustainable businesses.

An examination of the impact of technology and the digital era on the screen sector is outside the scope of the
review. However, it is clear that technology is changing the way the sector operates and will affect the viability
of screen production businesses. The increased capability of the National Broadband Network (NBN) will
further expand the transformation of the media marketplace including the likely proliferation of innovative
distribution mechanisms such as internet/mobile TV, digital streaming and downloads, and online marketplaces.

Feedback
Several submissions commented on the effect of technology on the sector. Feedback from submissions and focus
groups suggests that the changing digital environment:

 provides opportunities and challenges to maintaining levels of Australian content
 provides opportunities in digital distribution and online business models
 is increasing diversity in the screen industry.

Australian content in a digital environment
Many submissions to the review noted the importance of the Australian Content Standard to the sustainability of
the sector. The sector argued that the standard ensures that a certain level of production is generated each year
and this contributes to the sustainability of the television production sector.

Feedback noted that the digital era will provide both opportunities and challenges for Australian content. To
safeguard Australian stories content quotas should include digital channels. In the digital era, content will
significantly increase reach to audiences Australia-wide and internationally. However, Australian content will
need to compete with international content.

The digital television switch-over across Australia is well underway and will be completed by the end of 2013.
According to the Digital Tracker Report on Quarter 3, 2010:

Seventy five per cent of Australian households have converted to digital television (that is, at least the
main television set has either an integrated digital tuner or a digital set-top-box or they view their main
television set through a personal video recorder, or similar device, with a digital tuner.121

121
Department of Broadband, Communications and the Digital Economy, Digital Switchover Taskforce, Digital Tracker Report
on Quarter 3, July to September 2010, p. iv.

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Suggestions were made by various submissions on measures to ensure appropriate levels of Australian content in
a digital era. Goalpost Pictures sets out that:

We support an initiatives [sic] to broaden the content quota for Australian television networks, including
to include first run Australian films as well as defined quotas for all networks for digital channels and for
broadcast via the New Broadband Network. 122

In April 2009 the Government announced that it will undertake a review of its overall approach to regulation in a
convergent environment in 2011. The Government has indicated that the review will include:

… a look at regulations for media ownership, free to air television, local content, and anti-siphoning
provisions across the full range of digital platforms.

The matters raised by the sector about content levels on digital platforms are best considered in the context of the
Convergence Review.

Finding
The standards for Australian content on free-to-air television contribute to the viability of the
independent screen production industry. The ongoing effectiveness of these standards needs to be
examined in the context of the current and emerging digital and online environment. This will be an
objective of the 2011 Convergence Review.

Digital distribution and online business models
Submissions commented on the pivotal role of the NBN in the future of Australian content distribution and
screen business models. For instance the State and Territory Screen Agency Forum submission stated:

In Australia the Federal Government’s decision to undertake the development of the National Broadband
Network means that Australia will move to the global forefront of online distribution capacity. This will
create opportunities for local content producers and perhaps enable local content entrepreneurs to develop
new, viable business models for content production and distribution. 123

Submissions have identified opportunities for screen producers in digital distribution and online business
models. For example a submission from Debra Allanson of Ish Media states:

New, direct-to-consumer interactive content delivery, convergent formats, and still evolving financing
and revenue models means growing need and opportunity for producers to take a more direct, active role
in exploiting the content they produce.124

The potential business models resulting from digital advances are not clearly articulated in submissions,
indicating there is a degree of uncertainty about how industry will adapt.

This uncertainty is reinforced in analysis prepared by PricewaterhouseCoopers in Global Media and
Entertainment Outlook 2008–2012 of the influence of convergence on entertainment and media industries:

The oft-reported death of traditional media remains greatly exaggerated, but that reality also underscores

122
Goalpost Pictures submission p. 17.
123
State and Territory Screen Agency Forum submission, p. 10.
124
Debra Allanson of Ish Media submission, p. 4.

92
the fact that while companies are making bold moves to follow consumers into the digital/mobile future,
they continue to wrestle with the challenge of creative business models that adequately monetize their
efforts. 125

Diversity in screen industries
It is becoming more difficult to delineate between the different components of the screen industry. Convergence
of technology and media has resulted in screen content being made available across different devices and
mediums. Screen content can be delivered over internet protocol networks to the lounge room, to cinemas, and to
myriad varieties of mobile devices.

Interactive media technology and personnel are being employed by traditional screen producers. Screen
Australia’s 2010 business survey indicates that 18 per cent of all respondents were involved in new media,
including interactive media, games or mobile content. 126

Some submissions suggested that silos, separating out screen into categories like film, television, website and
game, do not reflect the way screen businesses work. Screen businesses are often involved in production of a
variety of projects, including interactive digital media.

A number of submissions recognise the interactive digital media industry (which includes games) as an
important part of Australia’s screen industry. Screen Australia’s submission states:

… the games sector is an increasingly significant component of Australia’s screen content industry and
the success of the sector has the potential to contribute substantially to the overall sustainability of the
screen content industry. Game developers are not only at the forefront of innovative storytelling, but they
also make a significant contribution to Australia’s economy. In terms of the overall ecology of the screen
content industry, the games sector has an important role to play ... 127

Submissions provide a variety of suggestions on how policy developers should respond to the convergence of
digital technology to be more inclusive of the breadth of the screen sector. The suggestions range from a
government commitment to further investigate issues, altering current programs to better suit interactive digital
media and creating new government initiatives specifically for interactive digital media.

However, submissions do not clearly articulate how the expansion of, or creation of new government programs
will meet the Government’s objectives. As indicated in the Introduction, the Government’s objectives for the
screen programs, and in particular the Producer Offset, are principally related to the cultural benefits of screen
content.

The Creative Industries Economic Analysis report prepared for the Enterprise Connect Creative Industries
Innovation Centre in 2009 indicates that software development and interactive media was the largest creative
industries segment, contributing approximately 44 per cent of the creative industries’ gross product ($13.6
billion) and employing around 39 per cent of total creative industries workforce (over 100 000 people).128 While
it is unclear what proportion of these figures is directly due to interactive media (rather than software more
generally) it is understood that the interactive media sector is comparatively strong.

125
PricewaterhouseCoopers, Global Media and Entertainment Outlook 2008–2012, p. 20.
126
Screen Australia submission, p. 32.
127
Screen Australia submission, p. 88.

128
http://www.enterpriseconnect.gov.au/who/creative/Documents/Economic Analysis_Creative Industries.pdf, p. 24.

93
While games and interactive media projects are ineligible for the Producer, Location and PDV Offsets, a number
of Australian Government initiatives support the games and interactive media industry. Screen Australia’s
Innovation Program is designed to support innovative multi-platform/digital projects which can include
games.129 There are a number of more general government initiatives that the screen industry can access, for
instance the services of the Enterprise Connect Creative Industries Innovation Centre, Austrade and Ausindustry
and the Government’s tax incentives for research and development.

Findings
The digital era provides numerous opportunities for innovative distribution and business models for
the screen sector. The sector will have to consider how best to realise the commercial benefits from
these opportunities.

The Government supports the independent screen production sector due to the cultural benefits of
screen content to Australian society. Segments of the screen sector with a purely commercial focus
are helped through industry-focused incentives and programs.

129
http://www.screenaustralia.gov.au/industry_support/Development/Innovation.asp.

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Shortened forms
ABC Australian Broadcasting Corporation

ABS Australian Bureau of Statistics

ACMA Australian Communications and Media Authority

ACTF Australian Children’s Television Foundation

ADG Australian Directors Guild

AFC Australian Film Commission

AFTRS Australian Film, Radio and Television School

ANZCERTA Australia–New Zealand Closer Economic Relations Trade Agreement

ASTRA Australian Subscription Television and Radio Association

ATO Australian Tax Office

AUSFTA Australia–United States Free Trade Agreement

CIIC Creative Industries Innovation Centre

DBCDE Department of Broadband, Communications and Digital Economy

DEWHA Department of the Environment, Water, Heritage and the Arts

EFIC Export Finance and Insurance Corporation

FFC Film Finance Corporation

FACS Foreign Actors Certification Scheme

FTA free trade agreement

GBO gross box office

GFC global financial crisis

GST Goods and Services Tax

ITAA36 Income Tax Assessment Act 1936

ITAA97 Income Tax Assessment Act 1997

MEAA Media, Entertainment and Arts Alliance

MoU memorandum of understanding

MPDAA Motion Picture Distributors Association of Australia

NBN National Broadband Network

95
NEDE new eligible drama expenditure

NFSA National Film and Sound Archive

OzTAM Australian television audience measurement

PAYG Pay as You Go

PDV Offset Post, Digital and Visual Effects Offset

PO Producer Offset

QAPE qualifying Australian production expenditure

QSIC Queensland Screen Industry Council

RFTO Refundable Film Tax Offset

RMIT University Royal Melbourne Institute of Technology University

SAC significant Australian content

SAFC South Australian Film Corporation

SBS Special Broadcasting Service

SPAA Screen Producer Association of Australia

SPIF Screen Production Incentive Fund (New Zealand)

SPV special purpose vehicle

TAA 1953 Tax Assessment Act 1953

UNESCO United Nations Educational, Scientific and Cultural Organization

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