Little Monster Productions and Screen Australia (Taxation and business)

Case •

[2025] ARTA 1732

•

9 January 2025

Little Monster Productions and Screen Australia (Taxation and business) [2025] ARTA 1732 (9 January 2025)

Applicant/s:  Little Monster Productions

Respondent:  Screen Australia

Tribunal Number:                2024/1156

Tribunal:General Member R Smith

Place:Adelaide

Date:9 January 2025

Decision:The Tribunal answers the preliminary questions submitted for determination in the following way:

1.    Whether the "Reviewable QAPE Amounts" have been incurred by the Applicant: The Tribunal answers the question "no".

2.    Whether, if any or all of the "Reviewable QAPE Amounts" have been incurred by the Applicant, those amounts are excluded from the Applicant's production expenditure pursuant to s 376-135, items 6, 7 and/ 9 of the Income Tax Assessment Act 1997 (Cth): The Tribunal does not need to answer the question.

…..........................[sgnd]...........................

General Member R Smith

Catchwords

Producer Tax Offset - Qualifying Australian Production Expenditure - Whether Relevant Expense Incurred - Agreement did not require expenses to be paid within an identifiable amount of time - Whether, if the QAPE was incurred, it is excluded expenditure - separate question

Legislation

Income Tax Assessment Act 1997 (Cth)

Cases

Coles Myer Finance Ltd v Federal Commissioner of Taxation (1993) 176 CLR 640 Commissioner of Taxation v City/ink Melbourne Limited [2006] HCA 35 Commissioner of Taxation v Desalination Technology Pty Limited [2015] FCAFC 96 Crossman v Sheahan [2016] NSWCA 200

Emu Bay Railway Co Ltd v Federal Commissioner of Taxation (1944) 71 CLR 596 Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492 Klein v Official Secretary to the Governor General [2013] HCA 52

New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (1938) 61 CLR 179 Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation (1981) 144 CLR 616

Quirky Mama Productions Pty Ltd (Subject to a Deed of Company Arrangement) v Screen Australia [2023] AATA 3089

Other Materials

Producer Offset Guidelines

Statement of Reasons

  1. Little Monster Productions Pty Ltd (the Applicant) is a film producer. In 2023, the Applicant produced and released the film Don't Go Below (the Film). The Film has been described as a family fantasy set in the 1960s and includes a number of complex special effects.

  1. Screen Australia (the Respondent) administers the Producer Offset under Division 376 of the Income Tax Assessment Act 1997 (the ITAA 97).

  1. The Producer Offset is a refundable tax offset calculated on a film project's qualifying Australian expenditure (QAPE). For a feature film that was produced for commercial exhibition to the public in cinemas, the Producer Offset is 40% of an applicant's QAPE.

  1. Upon receipt of an application, if the Respondent is satisfied that the film meets the requirements of the ITAA 97, it will issue a final certificate and determine the applicant's total QAPE. The Respondent then provides the final certificate and QAPE determination to the Australian Taxation Office (ATO) and the ATO calculates the Producer Offset based on the Respondents QAPE determination.

  1. The ATO applies the Producer Offset against the Australian tax liability for the income year of the applicant in which the project was completed and refunds any remainder. In this regard, the Producer Offset can be an important contribution to funds for corporate film producers.

  1. The Applicant is seeking a review of a decision made by the Respondent in which it determined the total amount of QAPE for the purposes of the Producer Offset in respect of the Film produced by the Applicant was $1,079,383.00. The Applicant contends the total amount of QAPE should be $7,764,120.18. The amount in dispute is $6,684,737.18 (Reviewable QAPE).

  1. The parties seek to have two preliminary questions determined. The questions as formulated are:

(a)Whether the "Reviewable QAPE Amounts"1 have been incurred by the Applicant? and

(b)Whether, if any or all the "Reviewable QAPE Amounts" have been incurred by the Applicant, those amounts are excluded from the Applicant's production expenditure pursuant to section 376-135, items 6,7 and/or 9 of the ITAA 97?

  1. For the reasons set out below, I have decided that the Reviewable QAPE Amounts have not been incurred by the Applicant and therefore my answer to the first separate question is "no".

  1. In circumstances where I have determined the Reviewable QAPE Amounts have not been incurred, it is not necessary for me to determine the second question. However, should I be wrong about whether the expenses have been incurred, I have determined that the Reviewable QAPE Amounts would otherwise be excluded from the Applicant's production expenditure.

BACKGROUND

  1. The facts have been extracted the documents contained within the Tribunal documents together with the written submissions provided by the parties.

  1. The sole director of the Applicant is Megan Williams. Ms Williams together with her husband Matthew Drummond, are also shareholders. Although she is the director of the Applicant, Ms Williams does not take part in the day-to-day management of the company. These functions have been assigned to Mr Drummond.

  1. Hive Studios International Pty Ltd (Hive) is a Post- Production and VFX company. Matthew Drummond is the sole director of the company. He is also a shareholder together with Ms Williams.

  1. The Applicant commenced research and development on the Film in early July 2018. Preproduction took place between May and September 2019; principal photography from 7

1 As defined in the Applicant's Statement of Facts Issues and Contentions dated 7 May 2024.

October to 15 November 2019 and post- production between July 2020 and July 2022. The Film was completed on 20 March 2023 and was released in Australian cinemas on 27 April 2023.

  1. The post -production services were provided to the Applicant by Hive. A written agreement titled "Film Post Production Services Agreemenf'2 (the Services Agreement) was entered into between Applicant and Hive. Although the Services Agreement is dated 5 January 2018, this is not the date the agreement in the terms before the Tribunal was signed. I will come back to this issue later in these reasons.

  1. The services to be provided by Hive under the Services Agreement included "...visual effects, animation, film editing, sound post production, and color [sic] grading services" in connection with the Film. The specifications of the services were set out in Exhibit A of the Services Agreement.

  1. In accordance with the Service Agreement, the "Fee" for the services was the sum of

    $6,672,720.00 AUD. The Services Agreement also stated the Fee was:

    ".. .payable in accordance with the schedule set forth in Exhibit A. Client shall make all payments to Contractor in accordance with the payment schedule set forth in Exhibit A, unless otherwise agreed in writing between the parties."

  1. The Service Agreement also provided that "This agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, whether written or oral."

  1. Exhibit A of the Services Agreement comprises the following table:

VFX Supervision M Drummond

100,000.00

COLOUR GRADE&MASTERING DCP

12,000.00

SOUND POST PRODN DELIVERABLES

70,0000.00

2 T54.

EDIT AND CONFORM OF DON'T GO BELOW

60,000.00

VFX 43X ASSETS 31 C PROPS 33 X ENVIRONMENT & SHOTS

6,407,100.00

EQIPTMENT HIRE

23,620.00

TOTAL

6,672,720.00

  1. The Services Agreement was not the only document executed by the Applicant and Hive in respect of the Film. There is also a written agreement titled "Production Investment Agreement"3 (the Investment Agreement) dated 5 January 2018. As is the case with the Services Agreement, this does not appear to be the date the Investment Agreement before the Tribunal was actually signed.

  1. The Investment Agreement provides that Hive would invest $7,454,519.00 to assist with the production of the Film. Schedule 1 of the Investment Agreement states the budgeted costs are $7,785,829.00. The "Gross Receipts"4 were to be disbursed first, and at the same time any production debts or costs as agreed between the parties. Hive was to then recoup "senior equity".

  1. The Investment Agreement contemplates more detailed particulars in relation to some issues. For example, Clause 5.1 contemplated a Production Schedule, Budget and Cash Flow and Drawdown schedule. The exclusion of Schedule 4 (which relates to cash flow and the drawdown schedule) meant there was no provision which specified when contributions were due and payable.

  1. Clause 16.4 provided that the Investment Agreement comprised the whole of the agreement between the parties.


3 T6.

4 These are defined in the Investment Agreement as "...all money resulting from marketing the Project and received from any and all sources by the Produce or its nominee or any collections agent other than the contributions to the budgeted costs as set out in Schedule 3, and include any sequel, prequel, remake or spin off fees."

  1. Hive is recorded as an "equity investor" in the records produced by the Applicant. Hive is also referred to as having "senior equity" in the Investment Agreement.

  1. On 12 April 2023, the Applicant applied to the Respondent for a final certificate in relation to the Producer Offset for the Film with a claimed QAPE expenditure of $7,764,713.00 and total film expenditure of $7,785,829.00. The application included a copy of the Investment Agreement.

  1. From May 2023, the Respondent conducted a review of the application including the supporting material provided by the Applicant. As part of this process, the Respondent sought clarification and further information in relation to the application. The information and responses received were considered by the Respondent.

  1. Some of the further material provided included a copy of the Services Agreement, four "tax invoices" dated 1 November 2022 from Hive to the Applicant (which provided more details as to the cost breakdown attributed by Hive in relation to the Services Agreement)5, a "tax invoice" dated 28 February 2023 from the Applicant to Hive in relation to "reinvestment"6 and detailed responses to specific queries in relation to the Services Agreement and the Investment Agreement.7

  1. The Applicant also provided to the Respondent an advice prepared by Dr Nick Gangemi in relation to the Reviewable QAPE. The report is dated 17 November 20238 and stated the following matters:

    •On 5 January 2018, Hive and Applicant entered in the Services Agreement;

•On 5 January 2018, Hive and the Applicant entered into the Investment Agreement which provided the Applicant will use the Gross Receipts from the film to pay the Fees;


5 T49.

6 T118.

7 T119

8 T161.

•Payments of $1,059,300 had been made to Hive. Of this $300,000 had been made from the gross receipts while the remainder were from existing funds of the Applicant;

•The Fees are a presently existing obligation to pay which would become due and payable once Hive calls for payment. At the time of the report Hive had not done so.

  1. Dr Gangemi provided a supplementary report on 6 August 20249, which addressed some of the concerns raised by the Respondent from the first report. In his second report, and in response to those concerns, Dr Gangemi clarified that the Fees had actually been paid in full by the "Customary Exchange of Invoices". He also clarified that reference to the Fees "not being paid in full" was intended to reflect that the Fees had not been paid in full in cash.

PRODUCER OFFSET PROVISIONS

  1. The relevant provisions of the law can be found in Division 376 of the ITAA 97. The objective behind the legislative scheme is to support and develop the Australian screen media industry through concessional tax treatment for Australian expenditure.

  1. There is no dispute that the Applicant has met a number of the legislative requirements within the Division, including s376-55 and 376-60 of the ITAA 97. The Respondent has also issued a certificate pursuant to s376-65 of the ITAA 97.

  1. The key provision for the purposes of the separate questions is the application of s376- 75(1) which directs the Respondent to determine in writing the total amount of the qualifying QAPE on the film for the purposes of the producer offset.

  1. Section 376-75(2) says the Respondent must have regard to the provisions of Subdivision 376-C when making its determination of QAPE.

  1. Within Subdivision 376-C, section 376.125 sets out the production expenditure general test. More specifically subsection (1) provides:

9 The report was provided to the Tribunal on 27 August 2024.

(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.

  1. Section 376-135 extends the meaning of production expenditure to include expenditure that is treated as QAPE under section 376-150 and section 376-165.

  1. Section 376-135 works to specifically exclude certain expenditure that might otherwise qualify as production expenditure for the purposes of s 376-125 and 376-130. This relevantly includes the following:

    •[6] 'Deferments', which are references to "amounts that are payable only out of the receipts, earnings or profits from the film"; or

    •[7] 'Profit participation', which refers to "amounts that: (a) depend on the receipts, earnings or profits from the film; or (b) are otherwise dependent on the commercial performance of the film".

    •[9] 'Advances', which are amounts paid by way of an advance on a payment to which item 6,7 or 8 applies to the extent to which it may become repayable by the person to whom it is paid.

THE PARTIES CONTENTIONS

  1. The Applicant's position in relation to the first separate question is that the payment clause in the Services Agreement constituted a definitive commitment to pay the Reviewable QAPE to Hive within a reasonable time, and that commitment was not dependent upon whether the time for payment was certain, or the Applicant had the funds to pay Hive.

  1. In relation to the second separate question, the Applicant submitted that payment of the Reviewable QAPE under the Services Agreement was unconditional. There was no requirement or intention for it be paid out of profits and therefore none of the exclusions apply.

  1. Notwithstanding that the Applicant stated in his written submissions the Investment Agreement or any other external enquiry (including whether the Reviewable QAPE was discharged, including by way of set off) is irrelevant for the purposes of the separate question,10 at the hearing the Applicant submitted the Fee had been paid and on that basis was incurred.

  1. The Respondent's position was whether the Fees had been incurred is an issue that turns on all the surrounding circumstances which extends beyond the terms of the Services Agreement to the totality of the arrangements between the Applicant and Hive, including the status of the liability and whether it has been discharged.

  1. The Respondent submitted that an analysis of those circumstances demonstrates the Reviewable QAPE was not incurred or alternatively it was the intention of the parties that payment of the Reviewable QAPE was contingent on Hive receiving a return in the form of profit participation.

LEGAL PRINCIPLES

  1. The term "incurred" is not defined in the ITAA 1997, although it is used in other provisions of the taxation legislation. Over the years, and predominantly in the context of income tax cases, the courts have developed some principles which provide some assistance in determining whether an expense has been "incurred". The parties in their submissions, refer to substantially the same body of case law and accept they are relevant to the interpretation of the term for the purposes of s376-125.11

  1. In New Zealand Flax Investments Ltd v Federal Commissioner of Taxation 61 (1938) CLR 179, Dixon J stated12:

    "Incurred" does not mean only defrayed, discharged, or borne, but rather it includes encountered, run into, or fallen upon. It is unsafe to attempt exhaustive definitions of a conception intended to have such a various or multifarious application. But it does not include a loss or expenditure which is no more than impending, threatened, or expected.


10 This was a change in position from the original submissions filed on behalf of the Applicant.

11 See also Klein v Official Secretary to the Governor General [2013] HCA 52.

12 New Zealand Flax Investments Ltd v Federal Commissioner of Taxation 61 (1938) CLR 179 [207].

  1. Similarly, Barwick CJ in Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation (1981) 144 CLR 61613 made the following observation:

    [T]here can be no warrant for treating a liability which has not 'come home' in the year of income, in the sense of a pecuniary obligation which has become due, as having been incurred in that year. Sir John Latham's language in Emu Bay Railway Co Ltd v Federal Commissioner of Taxation14 clearly enough indicates that to satisfy the word 'incurred' ins 51(1) the liability must be 'presently incurred and due though not yet discharged'. The 'liability' of which Sir John speaks is of necessity a pecuniary liability and the word 'presently' refers to the year of income in respect of which a deduction is claimed. It may not disqualify the liability as a deduction that, though due, it may be paid in a later year. That part of Sir Owen Dixon's statement in New Zealand Flax Investments which presently needs emphasis is that the word 'incurred' ... 'does not include a loss or expenditure which is no more than pending, threatened or expected': and I would for myself add 'no matter how certain it is in the year of income that that loss or expenditure will occur in the future'."

  1. The Applicant argues that an expense can be incurred even if it has not been discharged. In Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492, the High Court of Australia confirmed this proposition and stated that a loss or outgoing will have been "incurred" even though it remains unpaid if the taxpayer is "definitively committed" or has "completely subjected himself' to the liability. 15

  1. In Co/es Myer Finance Ltd v Federal Commissioner of Taxation (1993) 176 CLR 640. Deane J, agreeing with the majority Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ observed a loss or outgoing may still be incurred notwithstanding that it is not payable until a future time and theoretically defeasible. The key is whether the taxpayer is, as a practical matter, definitively committed or completely subjected to the discharge of the liability in the future.16

  1. The Courts have also held that an outgoing will not have been incurred if the liability to pay is subject to a contingency.17


13 Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation (1981) 144 CLR 616 [623-

624].

14 Emu Bay Railway Co Ltd v Federal Commissioner of Taxation (1944) 71 CLR 596 [606].

15 Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492 [506]. The comments were made in the context of s51(1) of the Income Tax Assessment Act 1936, although the provision was similarly worded to section 8-1 of the Income Tax Assessment Act 1997

16 Coles Myer Finance Ltd v Federal Commissioner of Taxation (1993) 176 CLR 640, [670]. See also

Commissioner of Taxation v City/ink Melbourne Limited [2006] HCA 35.

17 See Emu Bay Railway Co Ltd v Federal Commissioner of Taxation (1944) 71 CLR 596.

  1. The relevant principles that may be extracted from the authorities as to whether an expense has been incurred can be summarised as follows:

    •An expense can be incurred even though it remains unpaid or not payable until some time into the future;

    •An expense can be incurred even though it is defeasible;

•The critical enquiry is whether there is a presently existing liability to which the taxpayer has definitively committed, or been completely subjected to; and

•An expense is not incurred if it is contingent, pending, threatened or expected.

  1. Deputy President McCabe (as he then was) in the matter of Quirky Mama Productions Pty Ltd (Subject to a Deed of Company Arrangement) and Screen Australia [2023] AATA 3089 applied the principles in the context of the Production Offset legislation.18

THE ISSUES

  1. In answering the separate questions as formulated by the parties, it is necessary for me to determine on the evidence whether the Disputed QAPE has been paid or otherwise discharged by the Applicant. Should I determine the QAPE has been discharged, then the Applicant will have incurred the Disputed QAPE to that extent.

  1. To the extent I determine the Disputed QAPE has not been paid or discharged, then I need to be satisfied as to the terms of the agreement between the parties and whether in accordance with those terms the Applicant has definitively committed or been completely subjected to the Disputed QAPE. This includes determining whether the liability to pay is unconditional or subject to any contingency.

  1. If the Disputed QAPE has been incurred, then the terms of the agreement between the parties will also inform whether the Disputed QAPE was a deferment, profit participation or advance within the meaning of the legislation and therefore excluded expenditure.


18 In that case the Tribunal determined expenditure had not been incurred as the relevant agreement did not simply indicate the primary source of the funds to be paid out but also made the existence of those funds a condition precedent to the obligation to pay. In other words, Quirky Mama was not under a presently existing liability to pay those amounts until the condition precedent was satisfied.

THE EVIDENCE

  1. I have some disquiet about the reliability of the evidence given by Mr Drummond and what conclusions can be confidently drawn in relation to whether the Disputed QAPE has been paid and true nature of the agreement between the parties having regard to the totality of the evidence before the Tribunal.

  1. In addition to the evolving narrative in his evidence in relation to the circumstances sounding the signing of the Service Agreement and Investment Agreement (collectively the Agreements) I have decided to approach the evidence of Mr Drummond with caution and to place little weight on uncorroborated self-serving statements.

  1. From at least the date of lodgement of the application for the Production Offset until October 2024, the Applicant represented (including through its agents) there was only one Services Agreement and Investment Agreement, and these Agreements were signed by the Applicant and Hive on 5 January 2018.

  1. In his first affidavit, Mr Drummond deposes that the Agreements were entered into on 5 January 2018. The affidavit also deposes to some of the specifics of the Agreements including the value of the investment and the quantified amounts for the special effects. There are also some other key events which he deposes to in his first affidavit as having taken place on or around the same date.19

  1. As part of the application for the Production Offset, a copy of the Services Agreement and Investment Agreement, which reflected a date of 5 January 2018, were provided to the Respondent. Mr Drummond also, as part of the application, provided a signed letter of representation which referred to the date of the agreements.20 He also signed a statutory declaration on 12 April 2023 "... conscientiously believing the statements contained in this declaration to be true in every particular."21


19 At paragraph 19 he refers to preparing the visual effects summary and at paragraph 21 preparing the finance plan on or around 5 January 2018.

20 T26.

21 T32.

  1. Dr Gangemi's report, the purpose of which was to provide advice on whether the Fees were incurred as part of the Services Agreement, assumes there is only one of each Agreement and they were signed on 5 January 2018. The report was prepared on the instructions of the Applicant.

  1. In the requests by the Respondent for further information in relation to the Agreements, the date is not challenged and there is no mention of any subsequent agreements. In one exchange, the Respondent directly asked the Applicant how the Fee and breakdown in Exhibit A was arrived at in the Services Agreement given it was executed more than six months before research and development commenced. The Applicant did not clarify at this point that either Exhibit A was attached, or the Services Agreement had been amended and re-signed at a later time.22

  1. The decision of the Respondent and the standard documents filed by both parties in the normal course of the review, including the Statements of Facts Issues and Contentions, Submissions and affidavits also regularly refer to only one Services and Investment Agreement signed on 5 January 2018.

  1. Plainly the versions of the Investment Agreement and the Service Agreement before the Tribunal were not signed on 5 January 2018. Concept development for the Film was still months away and a rough draft of the script was not completed until more than a year later. In the case of the Investment Agreement, the document reflects the budgeted costs of the Film as $7,454,519.00 which is precisely the difference between the cost of the Film and the external funding. It is implausible that the actual expenditure of the Film was known on 5 January 2018 and before any concept development had taken place.

  1. In the case of the Services Agreement, the Fee for the special effects is specified as

    $6,672,720.00 and detailed in Exhibit A. In his affidavit, Mr Drummond states this was calculated from the detailed visual effects summary. The visual effects summary could not have been completed (and the exact quantum of the special effects calculated) on 5 January 2018.


22 T119.

  1. In his affidavit of 26 October 2024 and in his oral testimony at the hearing, Mr Drummond's evidence was that the Agreements in the terms before the Tribunal are not the original signed agreements. The versions before the Tribunal were actually signed in 2023 after the Film was completed.

  1. In the case of the Service Agreement, his evidence was the document was amended to alter the price of the services, the end date and the details in Exhibit A. Mr Drummond could not recall the exact date the Services Agreement was signed but claimed it was before the application for the Producers Offset was lodged.

  1. The second Services Agreement, on Mr Drummond's evidence, was signed after Hive had issued to the Applicant the tax invoices in relation to the visual effects for the Film. It was also signed after the Applicant issued an invoice to Hive pursuant to the Investment Agreement.

  1. Notwithstanding that the services had been provided and tax invoices had been issued, none of the purported changes to the second Services Agreement reflected these key events.

  1. Mr Drummond explained the inclusion of the date of 5 January 2018 in the document as that of the original Services Agreement. His evidence was that the original Services Agreement was prepared in early 2018 using a template from a previous film and included an early estimate of Hive's Fees. The date was not altered when the document was otherwise updated and re-signed in 2023.

  1. A copy of the original Services Agreement has not been produced by the Applicant. Mr Drummond's evidence is that the only copy, which was stored electronically, was overridden by the later version which is in evidence.

  1. Counsel for the Applicant directed the Tribunal's attention to a screen shot of the documents metadata which reflects a creation date of November 2017. This only confirms the Service Agreement document was created at that date. It is not evidence of the terms of the agreement or the date any agreement was signed.

  1. A copy of the original Investment Agreement has not been provided for the same reason advanced in relation to the Services Agreement. In his evidence, Mr Drummond's stated the document was only changed to alter the Delivery Items and the definition of Hive Investment, before being re-signed in 2023.

  1. As with the Services Agreement, the second Investment Agreement was signed after Hive had issued to the Applicant the tax invoices in relation to the visual effects for the Film. It was also signed after the Applicant issued an invoice to Hive pursuant to the Investment Agreement.

  1. Up until the second affidavit of Mr Drummond, the Applicant has consistently and repeatedly maintained the Service and Investment Agreements were signed on 5 January 2018. Mr Drummond's affidavit was the first time it was directly stated that the Service and Investment Agreements were amended and re-signed in 2023.

  1. That being said, I do accept that the Service Agreement and the Investment Agreement before the Tribunal were actually completed and signed after the completion of the Film. This conclusion is consistent with the content of those documents.

  1. In any event, the omission by the Applicant and Mr Drummond of this important detail is concerning. The specifics of the Agreements have been the subject of close scrutiny both during the Producer Offset application process and as part of this review. It is remarkable that at no point prior to October 2024, the Applicant or Mr Drummond sought to directly clarify or correct the position on such a critical detail.

  1. The Services Agreement and Investment Agreements provided to the Respondent were amended and signed on Mr Drummonds evidence only shortly before the Producer Offset application was lodged. By excluding this critical detail, the Applicant created the false impression the agreements in those terms were entered before the services were provided.

  1. The position was only clarified by Mr Drummond in his second affidavit after the Respondent filed submissions on the separate question. In those submissions, the Respondent outlined the reasons why those documents could not have been signed in January 2018.

  1. At the hearing Mr Drummond was cross-examined on the responses provided by the Applicant to queries from the Respondent in relation to the Producer Offset application and specifically why the real date of the Agreements was not disclosed at that time.

  1. Mr Drummond stated in his evidence that he thought it was "obvious" and there had been a phone conversation with the Respondent on the issue. In light of the voluminous material before the Tribunal in which the date of the Agreements are repeatedly referred to as 5 January 2018 and the critical importance of the documents more generally, I do not accept this evidence.

  1. Although I accept a Services Agreement and Investment agreement were signed in 2023, what is less certain is whether the agreements were only finalised at that time and backdated by the parties to 5 January 2018 or whether the parties amended an earlier signed version and simply did not alter the date.

  1. It is possible that a version of the Agreements was prepared in early 2018 by Mr Drummond using the template of an earlier project. However, there is nothing to corroborate Mr Drummond's recent evidence that an earlier version of the Services Agreement and Investment agreement was signed on or around 5 January 2018.

  1. Ms Williams, who also signed the Service and Investment Agreements and is the sole director of the Applicant has not provided a witness statement and was not called to give evidence at the hearing. In the absence of any explanation for her non- participation in the proceeding, I infer that her evidence in this regard would not assist the Applicant.

  1. In reviewing the electronic PDF version of the Investment Agreement before the Tribunal, I observed that a comment in the metadata indicated that the signature date on that agreement was inserted by "Hive" on 12 April 2023. At face value this appears to be inconsistent with the evidence of Mr Drummond that the dates were not changed in the Agreements, and they were re-signed prior to 12 April 2023 being the date the application was lodged.23


23 See paragraph 19 of Mr Drummonds affidavit dated 25 October 2024. These matters were confirmed in his oral evidence at the hearing.

  1. The Applicant submits the metadata evidence is consistent with the evidence of Mr Drummond in that the Agreements were completely overwritten and resigned in 2023. The problem with this submission, is it fails to reconcile the evidence of Mr Drummond with the metadata which suggests that not only was the date was altered but they were resigned on 12 April 2023.

  1. In circumstances where the Investment Agreement is the Applicant's document and Mr Drummond was specifically cross-examined on the circumstances of execution including the date of the Agreements, I consider it is open to the Tribunal to draw any inferences as may be appropriate from the evidence as a whole.

  1. Having regard to the totality of the evidence (including but not limited to the contents of the Investment Agreement itself which could only be known after the film was completed, the absence of corroborating evidence of an earlier agreement having been signed, the failure to call Ms Williams and the metadata contained in the version of the Investment Agreement), it is possible the Investment Agreement was signed on 12 April 2024 and backdated to 5 January 2018.

  1. In his first report, Dr Gangemi mentions in passing that Exhibit A was exhibited to the Services Agreement after the services had been provided. The earliest this could have occurred is October 2022. If this statement were to be accepted, then any Services Agreement signed before this date did not include Exhibit A at all.

  1. It is common ground between the parties that the Agreements were executed contemporaneously. Although the metadata in relation to the date is only present on the Investment Agreement, it can be inferred from this and the evidence as a whole24 that the Services Agreement could also have been signed on 12 April 2023 and backdated to 5 January 2018.


24 The other evidence in support of this conclusion includes that Exhibit A could not have been in the form before the Tribunal until after the film had been completed, there is no corroborating evidence an earlier version was signed, Mr Drummond's evidence as to the date of any earlier agreement is vague and imprecise and the failure to call Ms Williams to give evidence as to the circumstances surrounding the Services Agreement even though the she is the director of the Applicant.

  1. Even if the Agreements were backdated, this does not rule out the possibility that an earlier version of the Agreements were signed by the parties. Services were provided by Hive to the Applicant in respect of the Film, invoices were issued, and an electronic version of the Services Agreement existed prior to this time.

  1. In any event, Exhibit A in the Services Agreement before the Tribunal, does not include any payment terms or conditions.

  1. Although the Applicant made a forensic decision not to frame its case on whether the expenses were incurred by proving the Reviewable QAPE has been paid, Mr Drummond did give evidence to this effect at the hearing.

  1. The position advanced by the Applicant on this issue has been a moving feast.

  1. There are four invoices dated 1 November 2022 and one invoice dated 15 January 2023 from Hive in relation to services provided to the Applicant under the Services Agreement. Relevantly those invoices do not include any payment terms.

  1. The reinvestment invoice produced by the Applicant is dated 23 January 2023. This invoice also has no payment terms.

  1. In July 2023 the Applicant advised the Respondent that "No cash payment has been made between the entities. The service invoices contra the investment invoices."25

  1. Later in September 2023, the Applicant advised the Respondent there was not a set off arrangement between the Applicant and Hive.26

  1. In November 2023, the Applicant advised the Respondent that "pre-payments have been made to Hive [Studios] for Don't Go Below totalling $1,059,300 to date for Post Services. These payments commenced in 2018 as agreed by both parties to aid cash flow of [Hive Studios] FX services and have been ongoing. The debt has been 'called upon' and


25 T119.

26 T143.

 

acknowledged'. 27 This statement appears to be contrary to that made in July which suggested there had been no cash payments between the parties.

  1. In his report dated November 2023, Dr Gangemi appears to be working on the assumption that the Fees had not been paid in full and that the Applicant will use the gross receipts of the Film to pay the fees. 28 The report was prepared on the instructions of the Applicant.

  1. In his later report, Dr Gangemi walked back comments in relation to the payment of the Fees. He clarified that the Fees were not paid in in full in cash but were actually offset upon the exchange in invoices.

  1. The payment of $250,000 by the Applicant to Hive on 17 January 2025 was expressed to be in respect of the VFX work for the Film. It seems curious that the Applicant would make this payment if the Fees had already been discharged upon the exchange of invoices.

  1. This was put to Mr Drummond in cross-examination. He accepted that although the email referred to the VXF work for the Film, he really intended for the payment to be a recoupment of the investment. In circumstances where the statement is self- serving and contrary to the contemporaneous email of Mr Drummond, I do not accept this explanation.

  1. At the hearing, in support of the contention that the Fees had been discharged (apart from the uncorroborated evidence from Mr Drummond to this effect), I was directed to the various invoices and the second report of Dr Gangemi.

  1. Ms Williams has not filed a witness statement on this issue and was not called to give evidence. In the absence of any explanation for her non-participation in the proceedings, I infer her evidence in this regard would not assist the Applicant.

Were the expenses incurred?

  1. If the Applicant can establish the Reviewable QAPE had been discharged, this would be a complete answer to the question of whether the expenses were incurred.


27 T160

28 T161, paragraph 2.4 and 4.10(e)

  1. The Applicant concedes that no cash payments have been made toward the Reviewable QAPE. They say the Reviewable QAPE was discharged through the exchange of invoices between the parties (Set Off).

  1. The invoices are not evidence the liability has been paid. The Applicant has given conflicting versions to whether the liability has been discharged by way of Set Off in response to questions asked by the Respondent and within the reports provided by Dr Gangemi.

  1. There is no contemporaneous or reliable evidence as to the purported Set Off. The evidence of Mr Drummond rose no higher than a bare assertion of the fact. There were no details as the circumstances of the Set Off agreement and no written record has been produced. Ms Williams who is the Director of the Applicant was not called to give evidence. A payment of

    $250,000 was made by the Applicant to the Respondent a year after the last invoice was exchanged. These are all matters that consistent with a conclusion the Reviewable QAPE has not been paid.

  1. Having regard to the all the circumstances, I find the Applicant has not paid or discharged the Reviewable QAPE.

  1. Given there is insufficient evidence before the Tribunal to conclude the Reviewable QAPE has been paid, the relevant enquiry is whether the Applicant in respect of the Reviewable QAPE has a presently existing liability that it had definitively committed to.

  1. For the reasons referred to earlier, there is some evidence to support the conclusion the parties signed the Agreements in April 2023 and backdated the documents to January 2018. Combined with the conduct of the Applicant which consistently represented the actual date of the Agreements as January 2018 this created the impression there was an agreement in place at the time the post-production services were undertaken.

  1. This conclusion does raise questions as to whether there is a legally effective agreement. If there is no enforceable agreement between the parties, then the Reviewable QAPE could not have been incurred.

  1. I cannot, however, completely rule out the possibility the Agreements were signed at an earlier point in time, amended after the completion of the Film and re-signed in 2023. Giving

the Applicant the benefit of the doubt there is a legally effective agreement, the terms of the Service Agreement do not give rise to a presently existing liability the Applicant had definitively committed to.

  1. The payment clause specifically contemplates that payments will be made in accordance with the Schedule to be set out in Exhibit A, and that payments will be made in accordance with that Schedule unless otherwise agreed.

  1. Exhibit A only contains a brief description of the services and their value. Critically, Exhibit A does not set out any terms or conditions of payment. In circumstances where there is no identifiable timeframe for payment, the due date is effectively deferred indefinitely.

  1. Although the lack of a fixed day for payment of a liability will not prevent it from being incurred, if no range of dates or other provision for payment is provided for at all, then it is difficult to conclude there is a presently existing obligation which has been definitively committed to.

  1. The Applicant submitted that in the absence of an express provision, a reasonable amount of time for payment is to be implied. No evidence or submissions were made as to what constitutes a reasonable amount of time in the circumstances of this case or whether that threshold has been met such that there is a presently existing obligation. A term is also usually only implied to give effect to a parties presumed intention.

  1. The amendments to the Services Agreement in 2023 included amendments to Exhibit A. Notwithstanding they were made after the completion of the Film, those amendments did not extend to the due date for payment or other relevant conditions. It is possible the omission was intended.

  1. The Applicant has only recently argued the Service Agreement should be construed in isolation. The Services Agreement and the Investment Agreement were signed at the same time and in contemplation of the other agreement. Together they provide the full context of the arrangements between the parties and are relevant to the task of construing the terms.29


29 Crossman v Sheahan [2016] NSWCA 200.

  1. There is evidence that payment of the Fees was intended to be conditional. In his first report, Dr Gangemi stated that the Applicant (pursuant to the Investment Agreement) "will use the Gross Receipts from the Film... to pay the Fees".30 In other words, even if there were an obligation to pay, it was not required to be paid in a reasonable amount of time but rather from the Gross Receipts of the Film. On this basis, the Reviewable QAPE was not incurred.

  1. The Production Offset Guidelines set out the Respondent's expectations in respect of the documentation to be provided in support of incurred expenditure claims. The guidelines have always specified that contracts should state the payment terms.31

  1. An agreement that requires expenditure to be paid within an identifiable timeframe is an important integrity measure. The absence of specific payment terms, including an identifiable timeframe, could result in an outcome, where as a matter of substance, payment of the liability is reliant upon the applicant receiving the Producer Offset. It could not have been intended that a claim for expenditure to be included as QAPE only be funded out of QAPE.

  1. Accordingly, I find the Reviewable QAPE has not been incurred.

Is the expenditure specifically excluded under s376-135?

  1. In circumstances where I have determined the Reviewable QAPE Amounts have not been incurred, it is not necessary for me to determine the second question. However, should I be wrong about this and in recognising the submissions which have been made by the parties, I have determined that the Reviewable QAPE Amounts would otherwise be excluded from the Applicant's production expenditure by reason of the fact it is a deferment, profit participation or otherwise an advance of such an amount within the meaning of section 376- 135 of the ITAA 97.

  1. The Applicant points out that payment of the Fees under the Services Agreement is unconditional and on this basis the exclusions do not apply. It is true that there are no

30 T161, p1086.

31 The guidelines were amended in October 2024 to provide additional guidance on incurred expenditure, including that expenses are required to be paid within an identifiable timeframe.

 

express conditions contained within the Services Agreement in respect of payment. This analysis is limited to the Services Agreement in isolation.

  1. The Services Agreement and the Investment Agreement need to be read together to fully appreciate the full context of the arrangement. As I stated in paragraph 117 above, there is evidence to suggests it was the intention of the parties that payment of the Fees was conditional upon the Gross Receipts of the Film.

  1. There is no evidence before the Tribunal to show Hive had the capacity to pay the investment amount under the Investment Agreement. It can be inferred from this and the contents of the first report that Hive intended to fund the investment out of its entitlement to Gross Receipts. In other words, the payment of the Fees and the investment were contingent on one another. The Applicant was dependant on funding from Hive (to be sourced from the Gross Receipts) to pay the Fee for Hives services.

  1. The Fees are therefore not production expenditure and not QAPE by reason of the fact they are deferments or profit participation for the purposes of s376-135.

Conclusion

  1. I have decided that the Reviewable QAPE Amounts have not been incurred by the Applicant and therefore my answer to the first separate question is "no".

  1. In the event the Tribunal answers the first separate question as "no" it follows the decision under review must be affirmed.

I certify that the proceeding one hundred and twenty-two paragraphs (127) are a true copy of the reasons for the decision herein of General Member R Smith.

[sgnd]

Associate

Date(s) of hearing:  11 November 2023 and 18 December 2024

Date final submissions received:      20 December 2024

Counsel for the Applicant:                Mr S Balafoutis SC

Solicitors for the Applicant:               DWA Law Counsel for the Respondent:  Mr C Peadon Advocate for the Respondent:   Screen Australia

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