SARS has, by way of the draft Taxation Laws Amendment Bill (draft Bill), proposed scrapping the controversial and awkward tax allowance provided by section 24F of the Income Tax Act, No 58 of 1962.
A new regime under section 12O of the draft Bill is intended to provide an easier and more effective tax exemption for filmmakers.
In the explanatory memorandum issued with the draft Bill in early June 2011, the National Treasury (Treasury) declares section 24F as a "deadweight loss", not only because it has failed to provide any incentive for the production of films in South Africa, but also because its complex provisions have "created fertile ground" for schemes as opposed to genuine film productions.
The proposal as currently drafted seeks to eliminate all income tax on film profits for a 10 year period and so has the intention (and promise) of providing a proper enticement to filmmakers to consider South Africa as a location for their productions.
In administrating this proposed tax benefit, Treasury seeks to rely on existing infrastructure within government, which regulates film and television productions. For example, one of the requirements to qualify for the benefits under the draft Bill is that the production has been approved as a domestic production or a co-production (in terms of one of the approved co-production treaties) by the already established National Film and Video Foundation (NFVF). In addition, the production must be one which would qualify as a production in terms of the Programme Guidelines for the South African Film and Television Production and Co-Production Incentive of the Department of Trade and Industry.
It is of some relief that Treasury appears to have avoided devising a host of new standards to meet in order to qualify for the benefits under the draft Bill. However, the reporting required is fairly onerous. The special corporate vehicle producing the film, or the collection agent managing the collection of the income from the film on its behalf, must report regularly to the NFVF on all receipts and accruals of the film for 10 years after completing the film. If it fails to do so, the taxpayer will become liable for a penalty payment.
The exemption from income tax is limited in a few ways:
- The exemption only applies to profits in the hands of those persons who were entitled to the profits at the time of production of the film. In other words, only the initial investors can claim this benefit, not those to whom the initial investors may have on-sold their rights to profits from the film.
- The exemption excludes income from guaranteed payments and fixed-amount salaries, retaining something of the "at-risk rules" of section 24F.
- The income accruing from the film will no longer be exempt after 10 years from the date on which the film is first ready for exhibition.
Provisions have also been proposed to deal with the losses incurred for non-qualifying films (ie losses incurred for qualifying films will not be deductible, since they are incurred for exempt income). As non-qualifying films will still produce taxable income, it is proposed that losses will be ring-fenced and may only be deducted against income derived from that same non-qualifying film.
The draft Bill proposes that this incentive will apply to films that begin production on or after 1 January 2012 and are completed before 1 January 2017.
These draft provisions will no doubt receive a standing ovation from the film-making fraternity.
Emma Kingdon and Andrew Lewis