Income tax: do moneys used to acquire financial securities or which are otherwise set aside to fund a guaranteed return to investors satisfy the 'expended directly' requirement of Division 10BA of Part III of the Income Tax Assessment Act 1936?

No.

Division 10BA of the Income Tax Assessment Act 1936 (ITAA 1936) authorises a deduction to a resident taxpayer for capital expenditure outlaid in the production of a qualifying Australian film where the taxpayer becomes one of the first owners of the copyright in the film. Subsection 124ZAFA(1) of the ITAA 1936 limits the amount of the deduction to capital moneys expended in producing, or contributed to the cost of producing, a film. Subsection 124ZAA(6) of the ITAA 1936 provides that a deduction is only available 'to the extent to which those moneys are expended directly in producing a film' (emphasis added). The practical application of the 'expended directly' requirement is explained at paragraphs 7 to 10 of Taxation Ruling IT 2111.

A common feature of many film investment proposals is the setting aside of a proportion of an investor's subscribed capital to fund a guaranteed return to the investor. For example, a proportion of the investment is used to purchase financial securities such as letters of credit and/or certificates of deposit in order to fund the guaranteed return. On maturity, the investment proceeds are used to repay in whole or in part the amount invested.

Moneys used to acquire securities or which are otherwise set aside for the purpose of funding a guaranteed return to an investor do not satisfy the 'expended directly' requirement of Division 10BA.

As stated in paragraph 8 of Taxation Ruling IT 2111: 'Direct expenses of a film production which qualify for deduction under section 124ZAFA can generally be described as those relating to the production process...Such expenses would typically include amounts paid for the acquisition of story rights and the surveying of locations, payments to producers, directors and cast, and the costs of insurance of production associated risks, drawing up performers' contracts and the building of sets and scenery.' It is the Tax Office view that moneys expended for the purpose of funding the acquisition of financial securities or which are otherwise set aside to fund a guaranteed return cannot be accepted as expenditure relating to the production process of a film.

Kate invests $10,000 towards the production of a qualifying Australian film. $7,000 of her contribution is applied to the purchase of financial securities with a face value of $10,000. On maturity, the $10,000 proceeds are paid to Kate as a guaranteed return.

Because only $3,000 of her total investment was available to be applied towards the cost of producing the film, Kate's maximum Division 10BA deduction entitlement is limited to $3,000.

This Determination applies to years commencing both before and after its date of issue. However, it does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of the Determination (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).