Income Tax - Deduction - Australian Films - financing arrangements - investment of moneys after large proportion of production work complete - whether moneys constituted capital moneys expended by way of contribution to the cost of producing a film - Income Tax Assessment Act 1936 s. 124 ZAF - test to be applied - meaning of "production" - meaning of "directly" expended s. 124ZAA(6) - whether investor "at risk" s. 124ZAM.

Income Tax Assessment Act 1936: Div. 10B, Div. 10BA.

Mr A.J.P. Reynolds

Solicitors for Applicant: Freehill, Hollingdale & Page

Counsel for Respondent: Mr A.R. Emett Q.C.

Mr S.T. McMillan

Solicitors for Respondent: Australian Government Solicitor

The assessment for the year of income ended 30 June 1981 be set aside.

The Commissioner of Taxation reassess in accordance with this judgment.

The Commissioner of Taxation pay the costs of Faywin Investments Pty. Limited of the appeal.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

The question in these two appeals is whether Faywin Investments Pty. Limited ("Faywin") is entitled to a deduction under s. 124ZAF of the Income Tax Assessment Act 1936 ("the Act") in respect of the sum of $600,000 paid by it on 19 January 1981 to the producer of an Australian film "Hoodwink". The case turns primarily on the interpretation of the relevant sections in Division 10BA of the Act and the application of those sections to the facts of this case. Faywin's case was put in the alternative by asserting deductibility under Division 10B. One appeal (No.G1230 of 1988) relates to the 1981 year of income, the other appeal (G1231 of 1988) relates to the 1982 year of income.

2. The facts are not in dispute. CB Films Pty. Limited ("the producer") carried on business at relevant times as a producer of films. In 1978 and 1979 the producer commenced the preliminary work for the production of a film initially to be known as "Blind Mans Buff" but later as "Hoodwink".

3. The New South Wales Film Corporation ("the Film Corporation"), a body corporate constituted under the New South Wales Film Corporation Act 1977, agreed on 11 December 1978 to invest $16,600 in the project development of the manuscript for the film. That sum was invested and a further investment was made by the Film Corporation in May 1980 of $10,500.

4. A deed was executed by the Film Corporation and the producer on 27 June 1980 which recited, amongst other things:

. that the producer was a film producer which had acquired the film rights of the cinematograph film script provisionally entitled "Hoodwink" based on and developing certain works written by Carl Synnerdahl;

. that by earlier agreements the Film Corporation had agreed with the producer to invest the sums earlier mentioned.

5. Under the deed the Film Corporation agreed to pay the further sum of $80,000 as an investment into a special banking account. The deed contained detailed provisions relating to writing the script for the film (clause 4), procuring actors and a director (clause 5) and giving warranties and indemnities by the producer (clauses 6 and 7). The deed envisaged the possibility of other investors in the project (clause 8). It was agreed that the beneficial ownership in "the project" belonged as to nine-tenths to the Corporation and one-tenth to the producer (clause 9). The "project" is an expression defined by the definition clause (clause 1) as meaning:

"The total undertaking of producing and marketing

the Film and Script and any rights whatsoever

connected therewith or arising or in the course of

development thereof. Without limiting the

generality of the foregoing the expression

includes the works the script the music

cinemetograph film and the copy in which it is

embodied concepts designs camera and other

equipment sets props costumes options assignments

copyrights licences contractual rights of service

and for services."

6. By letter dated 3 October 1980 from the Film Corporation to the producer the former confirmed that it would invest the sum of $750,000 in the film on terms and conditions there set out which so far as relevant are as follows:

"1. Production Budget: $1,000,000.00 (Aus)

2. Commencement of

Principal Photography: On or about 10 November 1980

3. Private Sector $250,000.00 - to be under

Investment: written by the Corporation

4. The Corporation may elect to lay off part of its

$750,000.00 (Aus) investment to third parties

5. That the Corporation has key cast and director approval

6. That the Corporation recoups its investment pari passu

and pro rata with the private investments and be

entitled to the portion of 100% of the net profits

of the film represented by:

Producers 30% Investors including Corporation 70%

7. The Corporation will provide up to $150,000.00 (Aus) to

meet any overages on the production budget on

condition that any sums so provided bear interest

thereon at the rate of 12% per annum recoverable

immediately before the investments. The production

budget shall be increased to incorporate any fee

charged by the Corporation.

8. That the Corporation has the exclusive North American

and Australasian marketing agency of the film for a

commission of 10% off the top and reasonable agency expenses.

9. That the Corporation has the conduct of the film at the

Cannes Film Festival in all matters dealing with the

competition. Publicity generated there will have an

important bearing on the film's reception in Australia.

10. That the Corporation has complete control of all

marketing of the film.

11. That the Corporation has a first presentation credit.

12. That the Corporation has its usual supervisory role in

production vis a vis (jointly operated) bank

accounts, reporting, etc."

7. The shooting of the film commenced in November 1980 and was completed by 30 April 1981. The principal photography was completed by 3 January 1981 and most of the expenditure incurred in the production of the film was incurred by then. The production budget for the film was $1,115,000. Prior to 3 January 1981 the producer incurred the following outgoings in connection with the production of the film:

Script, producers and director's

fees $176,348

Amounts payable to principals

of cast $ 45,000

Production unit fees and salaries $161,235

Other "below the line" costs $424,632

Indirect costs $ 28,427

$835,642

8. The Film Corporation paid the producer a total of $1,115,000 of which amounts totalling $915,000 were paid between 24 January 1979 and 31 December 1980 and a further $200,000 was paid during March 1981.

9. The Film Corporation decided to "lay off" part of its investment in the film and in the result the investors of the film became:-

The Film Corporation $300,000

Faywin $600,000

Messrs. Dominguez & Barry $100,000

Mr. Peter Hains $115,000

$1,115,000

10. Messrs. Dominguez, Barry and Hains were other investors.

11. On 19 January 1981 a deed was entered into between the Corporation, parties described as "the other investors", namely, Faywin, Messrs. Dominguez & Barry and Mr. Hains, the producer and two guarantors.

. the producer was desirous of producing the film "Hoodwink" as a feature length cinematograph film (as defined in s. 10 of the Copyright Act 1968);

. the production budget for the film was $1,115,000 to be satisfied as to $515,000 (maximum) by the Film Corporation and as to the remaining $600,000 by the other investors (Recital F). Recital F also recognised that the category of investors could be altered thereafter;

. Hoyts Theatres Limited agreed to distribute the film in Australia and elsewhere (Recital G);

13. The operative provisions of the deed provided, so far as relevant, as follows:-

. the producer convenanted that it would commission a composer or composers to write the manuscript comprising original music and/or lyrics which when recorded would be embodied in the sound track of the film (clause 2.1);

. that the producer assign to the investors its relevant rights in the film (clause 2.4);

. the producer agreed to establish bank accounts (clause 4.1) and agreed that all moneys in the accounts number 1 and 2 shall be held on trust (clause 4.1(h));

. the moneys in the banking account must be used to pay the budgeted expenses (clause 4A);

. the producer agreed to proceed with the production of the film (clause 5.1);

. upon completion of the film the copyright in the film shall be held and owned by the investors absolutely as between themselves in the proportions that their respective investments bear to the budgeted cost (clause 9.1);

. after recoupment by each investor of its investment in full, copyright shall be held by the producer which shall own 30% of the copyright and the investors shall share the remaining 70% in proportion to their investments (clause 10.1);

. the producer was entitled upon the completion of the production to have the sole and exclusive right to market and distribute the film (clause 11);

. provision was made for the distribution of the proceeds from the film (clause 12);

. nothing in the deed shall constitute any of the parties as partners (clause 16.1).

14. The Second Schedule to the deed stated the budgeted costs and expenses which may be summarised as follows:-

15. These are enumerated and include in the main "production unit salaries", music, costumes and wigs, sets and properties, equipment and stores, hotel and living expenses, travel and transport, insurances and publicity. The total of the "below the line" costs is $726,140. There then followed "indirect costs" being finance and legal charges - $24,500, overheads - $18,000, a total of $42,500. The total of the budgeted costs was $1,042,340 plus a contingency of 10%.

16. On 19 January 1981 Faywin paid $600,000 to the producer and on the same day Messrs. Dominquez and Barry paid to the producer $100,000. Also on the same day the producer paid $700,000 to the Film Corporation.

17. By reason of the payments made on 19 January 1981 by Faywin to the producer, Faywin became one of the first owners of the copyright in the film.

18. On 19 January 1981 Faywin expected to use the copyright in the film to produce assessable income from the grant of rights to exhibit the film to the public; and after that date and before 30 June 1981 Faywin used the copyright accordingly. During the year ended 30 June 1981 Faywin derived income from that source of $2,690.

19. It was agreed between the parties that, if Faywin is entitled to a deduction under s. 124ZAF of the Act in respect of the payment of $600,000, the sum of $2,690 shall be exempt income of Faywin pursuant to s. 23H of the Act.

20. It was not disputed by the Commissioner that the expenditure incurred by the producer was incurred under contracts made at arms length and that Faywin was "at risk" (to use the language of s. 124ZAM) in respect of the payment of $600,000 made by it.

21. The primary issue that arises is whether the sum of $600,000 paid to the producer on 19 January 1981 constituted capital moneys expended "in producing or by way of contribution to the cost of producing, a film" for the purposes of s. 124ZAF.

23. The original concessions relating to investment in Australian films commenced in 1978 when Division 10B was introduced and this permitted persons who expended capital moneys by way of contribution to the cost of producing a film to receive a two year write off of capital expenditure on those films. Division 10B has been largley superseded by the later division 10BA because of the latter's more generous provisions, but Division 10B still applies where:

. the taxpayer elects to write off the relevant capital expenditure under Division 10B (s. 124ZAE);

. the taxpayer acquires a copyright other than the initial copyright in the film;

. the amount contributed by the taxpayer is not "at risk" (s. 124ZAM).

24. The primary division for present purposes is Division 10BA of the Act which relates to Australian films. Division 10BA was inserted into the Act in 1981 by the Income Tax Assessment Amendment Act 1981 and came into operation on 24 June 1981. Both Divisions 10B and 10BA were designed to encourage Australian residents to invest in Australian films for the purpose of developing the Australian film industry. Subject to certain qualifying conditions, Division 10BA, as originally introduced, allowed a deduction of 150% of the capital expenditure in the production of an Australian film where the expenditure resulted in the acquisition of the initial copyright in the film. In addition, an exemption from income tax of an amount of net earnings by an investor in such a film up to 50% of the amount of his or her investment was allowable (s. 23H).

25. Division 10BA is divided into three Subdivisions: Subdivision A "Preliminary", Subdivision B "Deductions for Capital Expenditure" and Subdivision C "Miscellaneous". Section 124ZAA contains a number of definitions of terms used in the Division such as "Australian film", "copyright" and "qualifying Australian film".

26. Section 124ZAF is the operative provision of Subdivision B which allows the deduction of capital expenditure with which this case is concerned. Subject to the conditions which are specified, sub-s. 124ZAF(1) authorises the allowance of deductions on the 150% basis for capital expenditure by a taxpayer where the taxpayer has

"under a contract entered into on or after 28 May

1981, expended capital moneys in producing, or by

way of contribution to the cost of producing a

film . . ." (para. 124ZAF(1)(a))

27. Sub-sections 124ZAF(3) and (4) permit a deduction where the relevant contract was entered into on or after 1 October 1980 and thus apply to this case where the contract was made on 19 January 1981. To be eligible for deduction under sub-ss. 124ZAF(3) and (4) the same substantive requirements of sub-ss. 124ZAF(1) or (2) must be met.

28. Sub-section 124ZAA(6), an interpretive provision, provides:

"(6) A reference in this Division to moneys

expended in producing a film is a reference to

moneys expended to the extent to which those

moneys are expended directly in producing a film."

29. Paragraphs (b) to (d) of sub-section (1) of s. 124ZAF specify further conditions that must be satisfied for a taxpayer to become entitled to the deduction. At the time of the expenditure the taxpayer must have been an Australian resident and there must be in force a provisional certificate or a final certificate referred to in ss. 124ZAB and 124ZAC respectively (para. 124ZAF(1)(b)). Faywin at all relevant times was a resident of Australia. A Final Certificate pursuant to s. 124ZAC was issued to the producer of the film on 30 August 1981 and by virtue of sub-s. 124ZAC(4) is deemed to have been in force at all relevant times prior to its issue.

30. The Commissioner must also be satisfied that, when the moneys were expended, the taxpayer expected to become the first owner or one of the first owners of the copyright in the film when that copyright came into existence and that the taxpayer intended to use that copyright or his interest in the copyright for the purpose of producing assessable income from the exhibition of the film to the public in cinemas or by way of television broadcasting (para. 124ZAF(1)(c)).

31. Paragraph 124ZAF(1)(d) requires as a further condition that for a deduction to be available the taxpayer must in fact become the first owner of the copyright or an interest in it as a consequence of the expenditure. Paragraph 124ZAF(1)(e) requires that the copyright has in fact been used for the purpose of producing assessable income from the exhibition of the film or that prior to the copyright coming into existence the taxpayer has derived income from pre-sale arrangements relating to the exhibition of the film on its completion.

32. It was common ground between the parties that on 19 January 1981 Faywin expected to, and prior to 30 June 1981 did, use the copyright in the film to produce assessable income from the grant of rights to exhibit the film. The income in question was the sum of $2,690 previously mentioned.

33. Once these conditions are satisfied an amount equal to 150% of the expenditure by the taxpayer is allowable as a deduction. Where the contract is entered into after 28 May 1981 the year in which the deduction allowed is determined by paras. 124ZAF(f) and (g). In relation to contracts entered into after 1 October 1980, but before 27 May 1981, the year in which the deduction is allowed is determined by sub-s. 124ZAF(3) as being the year of income in which the moneys were expended. In the present case, therefore, if a deduction is allowable at all under Division 10BA it accrues in the 1981 year of income.

34. The remaining sections of Subdivision B of Division 10BA impose a series of qualifications on the right to claim a deduction where the requirements of s. 124ZAF are met.

35. Section 124ZAG provides that where a taxpayer's qualifying expenditure is by way of contribution to the cost of producing a film the amount that is to be eligible for deduction is limited to so much of the amount contributed by him to the cost of producing the film as is expended in producing the film.

36. Section 124ZAH authorizes the Commissioner to attribute actual expenditure in producing a film to the contribution of a particular taxpayer where money is expended which includes the expenditure of the taxpayer. Section 124ZAJ provides a safeguard to prevent inflation of the cost of production of the film where the transactions involved are not at arms length. Section 124ZAK authorises the Commissioner to make the appropriate determination of how much of the cost of assets used for purposes other than the production of the qualifying film on which money has been expended is associated with the film.

37. Section 124ZAL reduces the amount of qualifying deduction if future copyright is assigned.

38. The "at-risk" qualification, introduced by s. 124ZAM, is a safeguard to limit expenditure qualifying for deduction to amounts in respect of which the investor is "at risk" of loss should the film venture fail.

39. Both parties posed the question as being whether the moneys expended by Faywin were by way of contribution to the cost of producing the film "Hoodwink".

40. Counsel for Faywin argued that the expenditure of $600,000 in the 1981 year of income by Faywin was a deduction available to it in that year because it represented the expenditure of capital moneys by way of contribution to the cost of producing the film "Hoodwink" within the meaning of para. 124ZAF(1)(a). Notwithstanding that shooting of the film was completed by the time Faywin contributed its money, there was still production work to be performed. It was submitted that it was sufficient to satisfy the deductibility provisions if the moneys paid by Faywin to the producer could be equated with the moneys laid out in the production of the film. It was suggested that if, for example, a producer borrowed the whole of the production costs from his banker and expended them in the production of the film and thereafter sought recoupment from contributors of the money so expended then, contributions made by contributors would be allowable deductions and fall within para. 124ZAF(1)(a) provided that the contributors obtained or expected to obtain the first copyright in the film.

41. Counsel for the Commissioner argued in essence that the purpose of the deduction afforded by Division 10BA is to require that moneys when expended by a contributor are expended in the cost of producing the film and not expended after the risk has been taken by the producer in producing the film and that the deduction is not allowable when in essence all that is being done is for the contributor to reimburse the risk taker, in this case the producer; otherwise the whole notion of the deduction being available when the contributor is at risk is set at nought. The submission sits logically though not easily with the Commissioner's concession that the "at risk" provisions of the Act do not themselves deny the deduction to Faywin.

42. Counsel for the taxpayer put an alternative argument based on ownership of a unit of industrial property pursuant to Division 10B. If the deduction is not allowable under Division 10BA then it was submitted that Faywin is entitled to the deduction under Division 10B and reliance was placed upon sub-para. 124L(1)(a)(ii) and the interpretation provision s. 124K. In the result, so it was said, the deduction of $600,000 is available but on the basis of $300,000 being deductible in the year 1981 and the remaining $300,000 in the 1982 year; this was said to be the effect of para. 124UA(1)(a).

43. The essential question is whether Faywin, under the contract of 19 January 1981, expended capital moneys by way of contribution to the cost of producing a film within the meaning of para. 124ZAF(1)(a). That paragraph has two limbs the first of which provides the deduction to the taxpayer who spends the money in producing the film which would ordinarily, if not always, be the producer of the film. The second limb with which this case is concerned recognises that persons may together contribute moneys to the cost of producing films whether by syndicates or other means. The Division recognises that partners may contribute moneys by treating any qualifying expenditure by the partnership as having been expended by the partners themselves according to their respective shares (s. 124ZAP).

44. Paragraph 124ZAF(1)(a) should be read in conjunction with sub-s. 124ZAA(6), an interpretive provision, set out earlier, which in terms applies only to the first limb of para. 124ZAF(1)(a), namely, where moneys are expended in producing the film. It is not an interpretive aid to the second limb which is central to this case where investors, doubtless often passive investors, contribute to the production costs of the film. This view is supported by the use of the word "directly" in this statutory context.

45. "Directly" is a word susceptible of various meanings and a glance at the Oxford English Dictionary illustrates this. The particular meaning to be ascribed to it must depend upon the context and circumstances of each case. "Directly" has been construed in many cases. See, for example, where used in the expression "directly or indirectly": Day & Riggs v Rugala (1978) 20 ACTR 3 and the same expression in relation to sums paid to a settlor where appearing in the Finance Act 1938 (UK) s. 40(1): Potts' Executors v Inland Revenue Commissioners (1951) AC 443; see also Hui v Cheung (1969) 1 AC 131. In the context of the expression "directly productive of profit" see Taff Vale Railway v Cardiff Union 95 LT 455. In the context of company law of a company applying "directly or indirectly" any of its shares or capital to underwrite shares see Hilder v Dexter (1902) AC 474.

46. Where used in sub-s. 124ZAA(6) the word means in my view "directly" in the sense of without the intervention of any intermediary or agent, or to denote expenses incurred by the producer himself; but not to denote expenses of the kind recognised by the second limb where the taxpayer contributes to the cost of production of the film which would in the ordinary course be paid to an intermediary, probably the producer himself.

47. A possible construction of sub-s. 124ZAA(6) (but not my preferred construction), when introducing the notion of moneys expended "directly" in producing the film, is that it emphasises the need for the line to be drawn between expenses that relate to production processes of the film ("directly") as distinct from other expenses; but I prefer the construction earlier mentioned. I should say at this point, however, that the conclusions which I draw in this case would be the same whichever construction is adopted and with or without resort to sub-section (6).

48. Division 10BA is concerned to allow as a deduction expenses incurred in the process of the production of a film. What constitutes producing a film and hence the cost of producing a film must again be determined in the light of the facts of each case. The Oxford English Dictionary defines the verb "produce" so far as relevant as

"to bring into being or existence from its raw

materials or elements, or as the result of a

process - to compose or bring about by mental or

physical labour (a work of literture or art); to

work out from raw materials"

"the action of or process of producing a stage

play, film or other performance. Also the

performance itself."

49. The word "production" has been considered in various cases in different contexts. See for example G.T.K. Trading Pty. Limited v Export Development Grants Board [1981] FCA 202; (1981) 40 ALR 375 at 382 in the context of producing goods within the meaning of the Export Expansion Grants Act 1978 (Cth), ss. 3, 4(1); and Secretary of State for Employment and Productivity v C. Maurice & Co. Limited (1969) 2 AC 346 in the context of the expression "production and distribution" for public supply under the Selective Employment Payments Act 1966 (UK) s. 2(2)(a)(3). In Division 10BA, in particular para. 124ZAF(1)(a), when talking of the cost of producing a film, the relevant elements of production of the film are all the steps in the process or processes of production of the film as a result of which the film is created. To produce the film is to bring it into existence from its constituent elements and as a result of the various processes whereby it is put together. It is the action or process of producing the film and all the ingredients involved in that.

50. The expenses deductible under Division 10BA include expenses related to the production processes themselves and plainly involve, for example, most of the expenses of the kind described in the Second Schedule to the deed of 19 January 1981 as "below the line" costs, including the salaries of production staff, costumes, sets and properties and living and travel expenses during production. They also include the "above the line" costs set out in the Second Schedule, namely, expenses on story and script rights and fees paid to producers, directors and cast.

51. I should say that my analysis of the expenses included in the Second Schedule to the deed of 19 January 1981 is intended to be of a broad kind because the particular items were not subjected to any detailed analysis in the course of argument. The parties were content to approach the matter on a general basis to support the conclusion, in which counsel for both parties agreed, that most of the relevant expenses relating to the process of production of the film "Hoodwink" had been incurred before 19 January 1981.

52. The costs of producing a film for the purposes of para. 124ZAF(1)(a) do not in my view extend beyond the costs involved in the processes of production of the film. Where the essential character of the expenses is concerned with the marketing of the film I doubt if they would be included, although, again, it must depend upon the facts of the case. Once a film has been produced and steps are taken to market it by the provision of finance, advertising and otherwise, it seems to me that these are expenses that do not fall within the notion of expenses relating to the production processes and would not ordinarily be included within the scope of expenses attracting the allowable deduction under Division 10BA. For example, in the Second Schedule to the deed, "indirect costs" are stated as including finance, legal charges and overheads. It is questionable whether they would qualify for the deduction. This interpretation is derived from the statutory provisions themselves as summarised earlier. The Second Reading Speech and Explanatory Memorandum relating to the Income Tax Assessment Amendment Bill 1981 do not assist as they do little more than recite the language of the Bill itself.

53. The second limb of para. 124ZAF(1)(a) concerns the situation where an investor contributes or investors contribute to the cost of producing a film but may not themselves be involved in its production. There may be, and doubtless often are, passive investors. Their contributions would be paid to the producer or someone on behalf of the producer as the source or one of the sources of the funds from which the film is produced. There are, of course, many ways in which a producer of a film may make the necessary financial arrangements to produce the film. He may approach investors at the formative stages, raise the necessary funds which are then contributed by the investors in a way which shows a precise link between the moneys actually contributed by them and their expenditure by the producer in the actual costs of production. But modern methods of financing would be more sophisticated in some, if not most, cases. It may be appropriate for a producer (he would often be a producer of a number of films at the one time) to arrange finance to cover certain stages of the production process (or all of them for that matter) and look for investors to reimburse him for the expenses thus incurred. In my opinion, the deduction under the second limb of the paragraph may be available to investors in these various circumstances. I do not construe the Division as placing upon contributors some form of obligation to police by a tracing process the actual expenditure of their contributions by the producer into the precise components involved in production expenses. The test is that there must be in a practical and commercial sense a link between the contributions of investors and the expenditure of film production expenses, a link which is not determined by applying technical rules of tracing developed by the courts for different purposes. In the end the facts must support the conclusion that the moneys contributed were expended on the production of the film.

54. Some matters to which regard may be had in applying this test may, I suggest, include the following, but they are intended as a guide not a prescript:-

. the temporal proximity of the contributions of investors to the incurring of the production expenses;

. the temporal proximity of the contributions to the performance of production work;

. whether the contributions, though not necessarily traceable to, may be identified or equated in a practical sense with, the moneys expended in production work;

. whether the contributors obtained or expected to obtain the first copyright in the film.

55. Whether the test is satisfied depends on the facts of each case.

56. Once the processes of production of the film are complete and what remains is essentially the marketing of the film and perhaps some financial packaging it becomes more difficult to characterise contributions by investors made thereafter as moneys expended by way of contribution to the cost of producing the film. Again this depends on the facts. In this case the Film Corporation acted as the financier for the producer to enable the film to be produced and during the production stages sought in effect to farm out liabilities for production; through the farming out arrangements were consummated at a time when the lion's share of the production expenses had been paid. The Film Corporation could not qualify for any deduction once the other contributors were substituted to the extent of the farmed out liability. But the investors who then stood in the shoes of the film corporation had, in my opinion, in a real sense financed the production of the film; or to use the words of para. 124AF(1)(a) "expended capital moneys . . . by way of contribution to the cost of producing" the film.

57. There is no statutory requirement that, for the investors' own contributions to be expended in the cost of producing a film, the actual moneys constituting the contributions must themselves be expended, so that they can be traced if necessary, into the acquisition of property or services involved in the production processes. That is the simplest case where the paragraph would apply; but expenditures may also be within para. 124ZAF(1)(a) in the circumstances referred to earlier. It should be mentioned that there may be circumstances, not this case, where pre-production expenses are financed and underwriting arrangements entered into which would either not fall within the terms of para. (a) or be excluded in whole or in part from qualifying for the deduction by sections of Division 10BA such as s. 124ZAM.

58. The intent of the legislation is to promote the production of Australian films. This is done by allowing deductions of the two kinds mentioned in paragraph (a) which do not in my opinion call for any narrow interpretation. On the other hand the deduction will not be available under the second limb to contributors if on the facts of the particular case they cannot point in a practical and commercial sense to their contributions as having been used to defray costs in the production of the film.

59. I do not regard the approach which I have taken as denying the operation of the "at risk" provisions of s. 124ZAM. I propose to briefly examine the "at risk" provisions because they shed some light on the purpose of the deduction conferred by Division 10BA, though I am conscious that the Commissioner does not call in aid these "at risk" provisions in respect of the payment of $600,000. The expression "at risk" is not defined in the Act and much is left to the discretion of the Commissioner to determine the circumstances in which investors are "at risk" of loss should the film venture fail. The Commissioner is required to have regard to all of the circumstances that have, at the time of the expenditure being incurred, the effect of reducing the loss to be suffered by the investor should the film derive no income. Plainly the purpose of the "at risk" provisions is to ensure that the deductions are available only to the extent that the taxpayer is truly at risk of commercial loss if the film venture should fail. The "at risk" provisions are designed to ensure that if the film fails to be a success then, if the investor is in some way assured of receiving a return on his investment, he is either wholly or in part no longer at risk. The concession by way of deduction is given to risk takers in the film industry. Application of this requirement must depend upon the facts of the case.

60. An investor in the production of a film is not "at risk" merely during the production stages. The ultimate measure of the financial success of the film must be the box office, often on an international scene. However, a film does not have to be a "bad risk" for an investor's money to be "at risk". The "at risk" provisions do not introduce the necessity of guessing the ultimate financial viability of the film. The basic test to be applied to determine if money is "at risk" is to ask whether, in the event that little or no income is derived from the film, the taxpayer stands to lose his or her investment; but the likelihood or otherwise of this possibility eventuating is not necessarily determinative of the question of whether the money is at risk.

61. It is probably true as a general rule that an investor is more "at risk" before production commences than after it has concluded when what remains is essentially the financial packaging and marketing of the film to the extent that this has not been worked out earlier. But the "at risk" element may subsist to a high degree thereafter in what is a high risk industry. In my opinion Faywin was "at risk" when it paid its $600,000 to the producer on 19 January 1981.

62. Obviously once copyright has been assigned and the film marketed so that one can measure with more accuracy the likely or indeed actual success of the film, the "at risk" provisions may more readily be brought into play.

63. It was submitted on behalf of the Commissioner that the provision for deductions which Division 10BA affords may be used for tax avoidance purposes and that care should therefore be taken in construing the relevant statutory provisions.

64. The revenue is protected by a number of provisions in Division 10BA including the "at risk" provisions of s. 124ZAM; also s. 124ZAL which provides that a deduction under the Division is to be reduced if future copyright is assigned. Section 124ZAJ is another such provision which operates to prevent the cost of production of the film being inflated where the transactions involved are not at arms length. Section 124ZAN provides an additional safeguard to the Commissioner entitling him to refuse any deduction where contracts have been rearranged or reconstructed for the purpose of changing the date on which they were entered into so as to otherwise bring them within the provisions of the division. The existence of these provisions denies the Commissioner's argument even if the premises on which it was based were otherwise valid.

65. In my opinion, the payment of $600,000 made by Faywin on 19 January 1989 to the producer of the film "Hoodwink" answers the description of the expenditure of capital moneys by it by way of contribution to the cost of producing the film. In these circumstances it is not necessary to reach any view on Faywin's alternative submissions based on Division 10B.

66. I would allow the appeals, set aside the assessments for the two years of income ended 30 June 1981 and 1982 respectively and direct the Commissioner to reassess in accordance with this judgment. The Commissioner must pay the costs of Faywin of the appeals.