Emma Kingdon, consultant, Corporate and Commercial practice and Andrew Lewis, senior associate, Tax practice at Cliffe Dekker Hofmeyr, have written the following opinion piece: A new incentive for filmmaking was introduced in January this year with the coming into force of section 12O of the Income Tax Act, No 58 of 1962, which provides an attractive tax exemption for filmmakers in respect of all income tax on film profits for a 10-year period commencing on the date of completion of the film.
When this provision was first released in June 2011 for public comment, the National Treasury proposed scrapping the controversial and awkward tax allowance provided by section 24F of the Income Tax Act, which it declared as a deadweight loss, not only because it had failed to provide any incentive for the production of films in South Africa, but also because its complex provisions created fertile ground for tax schemes as opposed to genuine film productions. The proposed effective date of the scrapping was 1 January 2012.
However, while welcoming the new section 12O, the public commented that to eradicate the section 24F film allowance altogether would be unfair and overly harsh in a number of respects.
First, investors who had already invested in films on the understanding that the current section 24F allowance would apply but had yet to claim the benefit, would lose out. Treasury accepted this concern and instead of scrapping section 24F, it amended it so that films which commenced principal photography before 1 January 2012 will remain under the ambit of section 24F, in respect of expenditure incurred before 1 January 2013. Films which commence principal photography after 1 January 2012 will fall under the new regime.
The other concern dealt with by Treasury was that film investors should not be denied the ability to deduct from taxable income the total loss they make in respect of qualifying films. Treasury acknowledged this point and introduced limited protection in the form of a deduction from income of the net loss associated with acquiring the exploitation rights (being the rights to use or give permission to use the film) in a qualifying film after a period of two years has elapsed from completion of production. However, no loss can be claimed if the loss stems from borrowed funds, as the relief is intended only to benefit those who are at risk. Furthermore, if use is made of this deduction, no exemption can be claimed on income in respect of those exploitation rights thereafter.
The new regime has the intention of providing a proper enticement to filmmakers to produce South African content, by exempting from income tax all gains made from the performance of a qualifying film. (Gains made from guaranteed payments, such as minimum guarantees paid by distributors irrespective of performance of the production are not exempt from income tax.) Accordingly, to qualify for the benefits under section 12O the production must have been approved as a domestic production (in terms of a scorecard yet to be released) or a co-production (in terms of one of the approved co-production treaties) by the National Film and Video Foundation.
The production must also qualify as a feature film, documentary (or documentary series) or animation in terms of the Department of Trade and Industrys guidelines for the South African Film and Television Production and Co-production Incentive. This means producers of short documentaries (other than those in large IMAX format), reality shows and short television series will not enjoy this exemption, which is unfortunate given the demand for such content on local television channels and the significant value to be found in format rights.
The new regime also seeks to promote the investment of risk capital, and therefore focuses on initial or pre-production investors. However, investors who come on board after commencement of production, but before completion of the film in order to address a budget shortfall, can claim the exemption as long as the funds they invested were not used to compensate pre-production investors.