Creation Ministries International Ltd and Screen Australia

[2015] AATA 250

[2015] AATA  250

Division	GENERAL ADMINISTRATIVE DIVISION
File Number	2014/4749
Re	Creation Ministries International Ltd
APPLICANT
And	Screen Australia
RESPONDENT

DECISION

Tribunal	Deputy President P E Hack SC
Date	24 April 2015
Place	Brisbane

The decision under review is affirmed.

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Deputy President P E Hack SC

CATCHWORDS

TAXATION – refundable tax offsets – “qualifying Australian production expenditure” – definition of production expenditure – whether expenditure “incurred” – “presently existing liability” – “definitively committed” and “completely subjected” – identity of entity that incurred liabilities – incorporation of “stalking horse” entity  – relationship of “lender” and “borrower” – decision under review affirmed

LEGISLATION

Income Tax Assessment Act 1997 (Cth), Div 376

Income Tax Assessment Act 1936 (Cth), s 51

CASES

Nilsen Development Laboratories Pty Ltd v Commissioner of Taxation (1981) 144 CLR 616

Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492

REASONS FOR DECISION

Deputy President P E Hack SC

24 April 2015

Introduction

1. The applicant, Creation Ministries International Ltd, is a not-for-profit corporation.  As is evident from its name, its purpose is to affirm the reliability of the Bible, in particular, the account of creation contained in Genesis. In 2006, and in anticipation of the bicentenary of the birth of Charles Darwin, Creation Ministries decided to make a film concerning the impact of the life and work of Darwin.

2. The film, which was called “The Voyage that Shook the World”, was produced. It was first exhibited publicly in about May 2009. Because the controlling minds behind Creation Ministries were concerned about the public response to the notion of a creationist entity producing a film about Charles Darwin, it was determined to set up a stalking horse, Fathom Media Pty Ltd, to be the public face of the production of the film.

3. In November 2010 Creation Ministries made application to the respondent, Screen Australia, for a final certificate for producer offset pursuant to s 376-65 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). Screen Australia is the agency having statutory authority to administer the scheme created by Division 376 of that Act. It is a sufficient explanation for present purposes to say that Creation Ministries claimed to have incurred “qualifying Australian production expenditure” totalling $780,069. In May 2014, after a good deal of correspondence between the parties, Screen Australia determined the qualifying Australian production expenditure to be $452,518. Of the balance, $47,463 was held not to qualify for reasons not in issue in these proceedings and $288,008 was held not to have been incurred by Creation Ministries. That sum, according to Screen Australia, had been incurred by Fathom Media.

4. The issue in these proceedings is whether Creation Ministries “incurred” (as that term is used in s 376-125 of the ITAA 1997) expenditure of $288,008.

   The legislation

5. The legislation need only be briefly noticed. Division 376 of the ITAA 1997 is explained by s 376-1 in this way:

   Companies may be entitled to 1 of 3 refundable tax offsets in relation to Australian expenditure incurred in making films. The offsets are designed to support and develop the Australian screen media industry by providing concessional tax treatment for Australian expenditure.

   The particular offset in issue in this case was a “producer offset” pursuant to s 376-55 of the ITAA 1997. On application, the film authority viz. Screen Australia, was obliged by s 376-75 of the ITAA 1997 to make a determination in writing of the total of the applicant’s “qualifying Australian production expenditure” on the film for the purposes of the producer offset. A company’s qualifying Australian production expenditure is defined by s 376-145 of the ITAA as the Company’s production expenditure on the film to the extent to which it is incurred for, or is reasonably attributable to, goods and services provided in Australia, the use of land located in Australia or the use of goods that are located in Australia at the time they are used in the making of the film. A company’s production expenditure on a film is described in s 376-125 of the ITAA 1997 in these terms:

   (1)A company’s production expenditure on a film is expenditure that the company incurs to the extent to which it:

   (a)is incurred in, or in relation to, the making of the film; or

   (b)is reasonably attributable to:

   (i)the use of equipment or other facilities for; or

   (ii)activities undertaken in;

   the making of the film.

6. The sole issue is whether the expenditure of $288,008 comes within the definition of production expenditure in s 376-125 of the ITAA. If it does, it should be included in the determination of Creation Ministries’ qualifying Australian production expenditure.

   Background

7. What follows emerges clearly enough from the material. I did not understand any of the factual background to be in dispute. It is taken, in the main, from Screen Australia’s written submissions,[1] supplemented, where necessary, by documents provided during the course of the hearing.

   [1]Exhibit 24.

8. The decision to produce the film was made in September 2006. Creation Ministries began pre-production activities associated with the film in February 2007. Fathom Media was incorporated on 23 October 2007. Ms Jean Swincer, a person associated with Creation Ministries, was the only member of the company and was appointed its sole director on incorporation. Fathom Media acted as the trustee of the Jean Swincer Family Trust, a discretionary trust that included Creation Ministries amongst its beneficiaries. The incorporation of Fathom Media was not coincidental; it was incorporated in connection with the production of the film.

9. On 30 October 2008, Fathom Media (described as FM in the document), Ms Swincer (described as JS) and Creation Ministries (described as CMI) executed a document called an “agreement”. By its recitals and operative parts it provided:

   Whereas:

   ·The parties have decided to collaborate in the production of a high-budget Christian Film documentary for the 2009 global Darwin celebrations, known as the Darwin Film and tentatively titled ‘The Voyage that Shook the World’ [‘the Film’].  The project of making and marketing the film and everything associated with that is in this document hereafter [‘the Project’].

   ·CMI wishes its involvement in the Film and the Project to remain anonymous, at least initially, so that the association might not prejudice the Film’s acceptance by the secular world.

   ·CMI is providing all the funding and staffing and expertise in the making of the Film and that Project generally and taking all the commercial risks inherent in the exercise.

   The parties agree that:

   1.FM exists for no other purpose and may not be used for any other purpose except at the request and sole discretion of CMI.

   2.CMI is to be solely responsible for any and all costs and outgoings associated with the Film and the Project, as well as all costs of operating and maintaining FM for this purpose.

   3.Provided that this agreement shall not have been breached by JS or FM, CMI indemnifies JS and FM from any and all expenses and liabilities incurred as a result of their involvement in the Film or the Project.

   4.CMI is to own, control and retain copyright at all times in the film and to have the sole entitlement to any and all proceeds, profits, royalties of any sort whatsoever, whether those payments are initially paid to FM or not.  Any proceeds or copyrights or other rights in the Film or Project which might arise or have arisen to the benefit of FM are hereby assigned to CMI, and the parties agree that any labelling of the film or its derivative products bearing the copyright as belonging to FM will not affect this assignment and in the alternative, should it be deemed to have reversed this assignment, the copyright will be immediately reassigned to CMI on demand.

   5.JS and FM will do everything in their power to protect CMI’s interest at all times, and will act as directed by CMI in the interest of the Film and the Project, including, herewith granting CMI the right to control and access FM’s accounts and determine the transfer of monies in and out of those accounts.

   6.JS agrees to transfer the shares in FM and otherwise deal with FM, including the Family Trust, as directed by CMI immediately upon request.

   7.All decisions concerning the Film and the Project, whether production, marketing, promotion, accounting, or any other area shall be at the behest and discretion of CMI.

   8.To the extent that any part of this agreement shall be found to be unenforceable or void for any reason, it is agreed that that part shall be severed from the agreement without affecting the validity or enforceability of any other part.

   9.This agreement is in force effective from the date on which FM was formed.

   10.This agreement is binding on the heirs, successors and assigns of each and all of the parties.

   The parties further agree that:

   A simple summary of the understanding between them, as detailed in the above numbered clauses, is that FM is a vehicle by which CMI pays all costs, gets all the benefits, takes all the risks, and controls all the decisions concerning the Film and the Project.  The reason that JS and FM are doing this is because they wish to benefit the non-profit ministry of CMI in this way and understand that there is no consideration apart from the sum of $1 which is hereby acknowledged as paid and received.

   Mr Fisher, counsel for Creation Ministries, placed particular reliance on clauses 2, 3, 5 and 7 of this document.

10. Despite the document bearing the date 30 October 2008, the involvement of Fathom Media in the film, at least in a financial sense, had commenced much earlier, in December 2007. There is, in the material, a spreadsheet in the style of a cash payments/cash receipts journal of Fathom Media. The first entry, on 18 December 2007, shows a credit of $10, described as “opening funds”. I infer this to be the settlement sum. Thereafter the journal has a pattern, repeated frequently until July 2009, whereby funds, described as “Loan from CMI to Fathom Media”, are deposited, followed within a matter of days by expenditure on one or more items of approximately the same amount as the “loan”. The entries in December 2007 and January 2008 exemplify the pattern.

11. On 24 December 2007 a deposit of $8300, described as “Loan from CMI to Fathom Media”, was recorded. On the same day Fathom Media is shown as having paid $8265.60 for boat charter. On 10 January 2008, a further loan from Creation Ministries of $10,000 is recorded followed by payments on 11 January 2008 of $4531.46, described as “Galapagos National Park guarantee”, and $3406.09, described as “Galapagos National Park fee”, and on 15 January 2008 by a further payment of $1851.13 for “local guide hire”.

12. That pattern was, as I have said, repeated until the last transactions in July 2009.

13. The material demonstrates that in the year ended 30 June 2008 Fathom Media expended $209,543 on film-related expenditure and received $217,650, described as loans, from Creation Ministries. In the following year the expenditure was $199,433, the loans totalled $196,400.

14. Also in the material are the financial accounts of Fathom Media for the years ended 30 June 2008 and 30 June 2009. Those accounts record an unsecured loan from Creation Ministries with a balance of $217,651[2] as at 30 June 2008 and $414,050 as at 30 June 2009.

    [2]The $1 difference between the annual accounts and the journal is explained by rounding.

15. The film was completed by May 2009 and was screened in Australian cinemas by 25 May 2009. On 22 May 2009 Ms Swincer participated in a meeting, in her capacity as the only member of Fathom Media, by which it was resolved that,

    … In return for [Creation Ministries] extinguishing all outstanding loans to the company [Fathom Media] the company transfers all its rights and obligations whatsoever in relation to the film project “The Voyage that Shook the World” to [Creation Ministries] and it is noted that the sole member of the company will for the same consideration transfer all of the sole member’s shareholding in the company to [Creation Ministries] at the earliest opportunity.

16. That opportunity seemingly arose on 30 November 2009 when Ms Swincer participated in a meeting in her capacity as the director of Fathom Media. The minutes of that meeting record:

    It was noted that film project costs of $392,353.20 (excl. GST) in the books of the Trust as at 30 September 2009 be transferred to Creation Ministries International Ltd in return for extinguishment of the loan of $435,788.20

    The transfer of film project costs to Creation Ministries International Ltd is a taxable supply for which a tax invoice was raised for the consideration of $431,588.52 (incl. GST).  The balance of loan owing to Creation Ministries International Ltd of $4,199.68 was written-off as a bad debt.

    The minutes record that it was resolved to vest the Jean Swincer Family Trust and to transfer Ms Swincer’s share in Fathom Media to Creation Ministries.

17. Additionally, there is in the material a document that purports to be an invoice raised by Fathom Media, bearing the date 30 September 2009, and directed to Creation Ministries. The amount of the invoice is $392,353.20 and the description given is “Transfer of Film Project Costs to Creation Ministries International Ltd”.

    Consideration

18. The parties are agreed that “incurred” is to be given the meaning settled by the jurisprudence on s 51(1) of the Income Tax Assessment Act 1936 (Cth). Reference was made to cases in this context that speak of “presently existing liability”[3] to which the entity is “definitively committed” and “completely subjected”.[4] But this case does not depend on any nuances of the meaning of incurred; it turns on the identity of the entity that incurred the liabilities. Was it Creation Ministries or was it Fathom Media?

    [3]See Nilsen Development Laboratories Pty Ltd v Commissioner of Taxation (1981) 144 CLR 616, 627.

    [4]See Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492, 506.

19. The argument for Creation Ministries drew attention to s 376-65 of the ITAA 1997. That subsection requires Screen Australia to issue a certificate to a company for a film if satisfied that the company either carried out, or made the arrangements for the carrying out of, all the activities that were necessary for the making of the film. The use of the alternatives of carrying out, or making the arrangements for the carrying out, of those activities, it was said, allowed s 376-125(1) of the ITAA 1997 to be read as if it spoke of expenditure that the company incurred either directly or indirectly. Additionally, Creation Ministries drew attention to the words “incurred in, or in relation to, the making of the film” in s 376-125(1)(a) of the ITAA 1997. The words “in relation to” were of “broad import”, citing O’Grady v North Queensland Co Ltd[5]. So long as the expenditure in question, ostensibly born by Fathom Media, but in reality incurred by Creation Ministries, was referable to the film, the expenditure was incurred by Creation Ministries in relation to the film.

    [5](1990) 169 CLR 356, 374 per Toohey and Gaudron JJ.

20. In oral argument, Creation Ministries pointed to the agreement of 30 October 2008. That agreement operated retrospectively and prospectively it was said. Because Creation Ministries had agreed to indemnify Fathom Media, expenditure incurred nominally by Fathom Media was, additionally, incurred by Creation Ministries.

21. I am unable to agree. The argument fails on the facts because, despite the agreement of 30 October 2008, the parties did not act in accordance with its terms. They treated the relationship between Creation Ministries and Fathom Media as that of lender and borrower.

22. By the time the agreement had been executed, Fathom Media had incurred expenditure well in excess of $300,000 in costs associated with the film. Both before and after the execution of the agreement Fathom Media treated the payments by Creation Ministries as loans, not only in its accounts as kept from day to day, but in its annual accounts for the 2008 and 2009 financial years and, ultimately, in the minutes of Fathom Media in May 2009 and November 2009. There is no reason to suppose that Creation Ministries treated the payments differently in its accounts. Despite the terms of the agreement of 30 October 2008 the parties chose the relationship of lender and borrower. That was the position at the outset and it remained the position up to and including the Fathom Media minutes of 30 November 2009 with the references in that document to the loan from Creation Ministries.

23. I do not accept that the analysis of s 376-65 of the ITAA 1997 by Creation Ministries as persuasive. The critical, and relevant, element in the statutory scheme is the definition of “production expenditure” as “expenditure that the company incurs” [emphasis added]. It may be incurred in, or in relation to, the making of the film or it may be reasonably attributable to matters related to the making of the film, but it must be incurred.

24. Creation Ministries was never under a “presently existing liability”; it was not “definitively committed” nor “completely subjected” to, the amounts paid by Fathom Media to discharge its contractual obligations to suppliers and other third parties. Fathom Media was the contracting party; it was the entity that incurred the expenditure. Creation Ministries did not incur the expenditure by lending Fathom Media sufficient funds to discharge the contractual debts that Fathom Media incurred.

25. It follows that the decision under review was correct. It will be affirmed.

I certify that the preceding 25 (twenty-five) paragraphs are a true copy of the reasons for the decision herein of Deputy President  P E Hack SC

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Associate

Dated 24 April 2015

Date of hearing	31 March 2015
Counsel for the Applicant	Mr SC Fisher (directly briefed)
Counsel for the Respondent	Ms CA Burnett (directly briefed)