Private ruling: Producer tax offset
Date of advice: 16 September 2015
Published: September 2015
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the head company of a consolidated group entitled to claim a refundable Producer Offset under Section 376-55 where the Certificate issued under Section 376-65 was made to a subsidiary company of the consolidated group? | A1: Yes | Q2: If the answer to Question 1 is yes, is the Head Company's entitlement to the offset, or the amount of the offset, affected if the companies were not part of a consolidated group for the full year in which the film was completed? | A2: Yes

Relevant facts and circumstances: Special Purpose company (SPV) incorporated as a film production company to make a feature film. The Head Company and the SPV are part of a consolidated group under Division 700 of the ITAA 1997 during the year that the film is completed. Three different scenarios in relation to entitlement to the producer tax offset: If the date of consolidation occurred: 1. Before the SPV had incurred any QAPE (Qualifying Australian Production Expenditure) and thus before the final certificate is issued. 2. After the SPV had incurred some or all of the QAPE, but before the final certificate is issued. 3. After the final certificate is issued but before the end of the financial year.

Relevant legislative provisions: Division 376 of the Income Tax Assessment Act 1997 | Division 700 of the Income Tax Assessment Act 1997 | Section 67-25 Income Tax Assessment Act 1997 | Section 376-55 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Under the consolidation regime a subsidiary company loses its individual tax identity during its period of membership of a consolidated group as the head company is the entity for income tax purposes. Detailed reasoning Where a head company and subsidiary/subsidiaries are consolidated under Division 701-1 of the Income Tax Assessment Act 1997 (ITAA 1997), it falls within the Single Entity Rule (SER). The intended operation of the Single Entity Rule (SER) in section 701-1 of the ITAA 1997 is to apply the income tax laws to the consolidated group as if it were a single entity, with the head company being the entity for income tax purposes. Therefore the SER deems that the subsidiary members of the consolidated group are parts of the head company rather than separate entities. The SER in section 701-1 of the ITAA 1997 provides that: (1) if an entity is a subsidiary member of a consolidated group for any period, it and any other subsidiary member of the group are taken for the purposes covered by subsections (2) and (3) to be part of the head company of the group, rather than separate entities, during that period. The Commissioner's view on the consequences of the SER are provided in paragraphs 7, 8 and 9 of Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997 : | Detailed Reasoning - Consequences of the SER: 7. For income tax purposes the SER deems subsidiary members to be parts of the head company rather than separate entities during the period that they are members of the consolidated group. 8. As a consequence, the SER has the effect that: (a) the actions and transactions of a subsidiary member are treated as having been undertaken by the head company; (b) the assets a subsidiary member of the group owns are taken to be owned by the head company (with the exception of intra-group assets) while the subsidiary remains a member of the consolidated group; (c) assets where the rights and obligations are between members of a consolidated group (intra-group assets) are not recognised for income tax purposes during the period they are held within the group whether or not the asset, as a matter of law, was created before or during the period of consolidation (see also paragraph 11 and paragraphs 26-28); and (d) dealings that are solely between members of the same consolidated group (intra-group dealings) will not result in ordinary or statutory income or a deduction to the group's head company. 9. … | Detailed Reasoning - Conclusion: As a result of the single entity rule in section 701-1 of the ITAA 1997 the head company of a consolidated group is the only entity recognised for the group's income tax purposes and it is entitled to claim the refundable Producer Offset under Section 376-55 of the ITAA 1997 if all the requirements of Division 376 of the ITAA 1997 are met. | Summary: The Head Company would not be entitled to claim the producer's tax offset where the film has been "completed" as defined in section 375-55(1) of the ITAA 1997 in a period in which the entities are not consolidated. | Detailed Reasoning - Detailed reasoning: Where an entity joins a consolidated group part-way through an income year it ceases to be a taxpayer in its own right because of the operation of the single entity rule. A separate taxpayer is recognised (being the joining entity for the period prior to joining with a less than 12 month year of income ('stub' year). For the head company core purposes (working out the head company's income tax liability or loss for the year) things that happened in relation to an entity before it became a subsidiary member are taken to have happened in relation to the head company under section 701-5 of the ITAA 1997. An entity that is a subsidiary member of a consolidated group for only part of an income year must lodge an income tax return accounting for the period (or periods) in which it was not part of a group. In these circumstances, the entity lodges a single return for the entire income year at the normal lodgment time, but includes only income and deductions attributable to the non-membership period (or periods). The income year of entitlement to the offset is determined by when the film is "completed" in the income year and the following requirements are met: SECTION 376-55 Film production company entitled to refundable tax offset for Australian expenditure in making an Australian film (producer offset) | Detailed Reasoning - 376-55(1): A company is entitled to a *tax offset under this section (the producer offset ) for an income year in respect of a *film if: (a) the film was *completed in the income year; and (b) the *film authority has issued a certificate to the company under section 376-65 (certificate for the producer offset) for the film; and (c) the company claims the offset in its *income tax return for the income year; and (d) the company: (i) is an Australian resident; or (ii) is a foreign resident but does have a *permanent establishment in Australia and does have an *ABN; when the company lodges the income tax return and when the tax offset is due to be credited to the company. The claim referred to in paragraph (c) is irrevocable. "Completed" has a specific meaning under section 375-55(1). The term is defined in 376-55(2) as follows: | Detailed Reasoning - 376-55(2): A *film is completed : (a) for a film that is not a series or a season of a series - when it is first in a state where it could reasonably be regarded as ready to be distributed, broadcast or exhibited to the general public; or (b) for a series - at the earlier of: (i) the time when the episode in which the 65th commercial hour is reached is first in a state where it could reasonably be regarded as ready to be distributed, broadcast or exhibited to the general public; and (ii) the time when the series is first in such a state; and (c) for a season of a series - at the earlier of: (i) the time when the episode in which the 65th commercial hour is reached is first in a state where it could reasonably be regarded as ready to be distributed, broadcast or exhibited to the general public; and (ii) the time when the season is first in such a state. Therefore, the issue of the certificate is not the deciding factor in determining the income year that the entity is entitled to the offset. If the date of consolidation occurred in the following scenarios: 1. Before the SPV had incurred any QAPE (Qualifying Australian Production Expenditure) and thus before the final certificate is issued. In this situation the Head Company would be entitled to the offset as no expenditure was incurred prior to consolidation and it is reasonable to assume the film was not completed in the income year of the subsidiary company. 2. After the SPV had incurred some or all of the QAPE, but before the final certificate is issued. The head company may or may not be entitled to the offset subject to when the film was "completed" as defined in Section 376-55(2). As Section 376-55(1)(a) requires that the film was "completed" in the income year the issue of the certificate is not the determining factor. 3. After the final certificate is issued but before the end of the financial year. If the film was completed prior to consolidation then the entity that is to become consolidated is entitled to the offset as completion is the determining factor and must be in accordance with section 376-55(2) of the ITAA 1997. Once the company claims the producer tax offset in its income tax return for the income year in which the film was completed it is irrevocable (s376-55(1)(c). The ATO will then calculate the company's producer tax offset based on the final certificate issued by Screen Australia and its determination of the company's total QAPE on the film. We will then apply that tax offset against the company's Australian tax liability for the income year in which the film was completed, and refund any remainder to the company.