The case of Quirky Mama Productions Pty Ltd (Subject to Deed of Company Arrangement) v Screen Australia (Taxation) [2023] AATA 3089 is a significant decision for the Australian film and television industry, particularly regarding eligibility for the Producer Offset and the treatment of production expenditure under the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).
The case was in relation to the film Occupation: Rainfall, directed by Luke Sparke.
Quirky Mama Productions Pty Ltd (“Quirky Mama”), the production company of the film, sought to claim a Producer Offset by declaring over $30 million in Qualifying Australian Production Expenditure (QAPE). QAPE refers to expenditure associated with the Producer Offset, encompassing eligible production costs that qualify for a tax offset. Screen Australia are a government funding body for the Australian screen production industry. They determined that only about $10,127,187 of the claimed expenditure was eligible, leading Quirky Mama to appeal the decision.
Carly Sparke and Carmel Imrie are directors of Quirky Mama and producers of the film. In 2018, Carly Sparke and Carmel Imrie entered into an agreement with Quirky Mama regarding payments of production fees and proceeds of the film. In 2020, the agreement was revised to slightly restructure the payment obligation. The agreement entailed the payment of production fees upon receipt of QAPE.
The case also concerned a director and writer reinvestment agreement between Luke Sparke and Quirky Mama, outlining a payment of director fee in lump sums payable upon receiving QAPE.
Furthermore, the Post-Production Services Agreement between Green Smoke Digital Pty Ltd (“Green Smoke”) and Quirky Mama for the provision of VFX services for the film lacked the component of work of scope and method of settling the price. The incompleteness in the agreement gave rise to its contingency.
A shared characteristic of the three agreements was their conditional nature.
A central issue was whether certain expenditures, such as producer fees, director fees, and post-production costs, had been incurred within the meaning of section 376-125(1) of the ITAA 1997 (the general criteria of production expenditure). This is crucial, as only incurred expenditure can be counted as QAPE and thus qualify for the Producer Offset.
Quirky Mama argued that the expenditure can be incurred despite the payment have not been made. Screen Australia counterargued that the expenditure was contingent on causative events and was not truly incurred. The causative event occurs when the payable amounts are incurred, which happens once QAPE is determined.
The agreements stipulated that substantial fees would only be payable if the film generated sufficient revenue. The AAT held that Quirky Mama was not obligated to pay, as the causative event had not occurred. Payment was expressly made conditional, and fees were not incurred until this condition was satisfied. Until then, Quirky Mama was not definitively bound to pay.
Section 376-135 of the ITAA 1997 lists certain expenditures that are excluded from the consideration of production expenditures. Item 6 excludes ‘deferments’ (amount only payable out of the film’s receipt, earnings or profit) and Item 7 excludes ‘profit participation’ (amounts dependent on the commercial performance of the film).
The Tribunal found that the relevant agreements were indeed contingent or deferred, meaning these amounts could not be considered incurred expenditure for QAPE purposes.
The Tribunal held that the following amounts were incurred as QAPE:
The case underscores the need for clear, upfront agreements and careful structuring of payments to ensure eligibility for government incentives. Deferred and contingent fee arrangements will not satisfy the legal requirements for the Producer Offset unless the liability to pay is unconditional and not dependent on the film’s future success. Furthermore, it reinforces a strict, literal approach to what constitutes incurred expenditure under the Producer Offset regime. Relevant parties must consult legal and accounting specialists at an early stage to avoid costly mistakes.
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