Quirky Mama Productions Pty Ltd (Subject to Deed of Company Arrangement) and Screen Australia (Taxation)

[2023] AATA 3089

Quirky Mama Productions Pty Ltd (Subject to Deed of Company Arrangement) and Screen Australia (Taxation) [2023] AATA 3089 (29 September 2023)

Division:TAXATION AND COMMERCIAL DIVISION

File Number:          2021/9123

Re:Quirky Mama Productions Pty Ltd (Subject to Deed of Company Arrangement)

APPLICANT

AndScreen Australia

RESPONDENT

DECISION

Tribunal:Deputy President Bernard J McCabe

Date:29 September 2023

Place:Sydney

Pursuant to ss 43(1) of the Administrative Appeals Tribunal Act 1975 the decision of the Respondent made on 1 October 2021 is varied so that the following additional amounts form part of QAPE:

·$254,168 paid to Green Smoke as the production proceeded;

·$260,000 in producers’ fees paid to Ms Imrie and Ms Sparke; and

·$100,000 in director’s fees that were paid to Mr Sparke.

The decision is otherwise affirmed.

..........................[SGD].............................................

Deputy President Bernard J McCabe

Catchwords

Income Tax Assessment – Tax Offset – Producer Tax Offset –  Production Expenditure – Qualifying Australian Production Expenditure – Australian Feature Film – When Relevant Expense was Incurred – Set Aside and Varied

Legislation

Administrative Appeals Tribunal Act 1975 (Cth)

Income Tax Assessment Act 1997 (Cth)

Cases

Coles Myer Finance Ltd v Federal Commissioner of Taxation (1993) 176 CLR 640
Commissioner of Taxation v Citylink Melbourne Limited [2006] HCA 35
Commissioner of Taxation v Desalination Technology Pty Limited [2015] FCAFC 96
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
Kline 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
Sunlite Australia Pty Ltd v Commissioner of Taxation [2023] FCAFC 43
XQDX and Commissioner of Taxation [2021] AATA 4070

REASONS FOR DECISION

Deputy President McCabe

29 September 2023

1. ‘Apocalypse Now’ is regarded as one of the greatest movies of all time, but the story of its production offers a sobering tale about the challenges involved in making feature films. The shoot took place in jungle conditions in the Philippines. It was beset by bad weather and logistical complications. There were also problems with the actors that significantly impacted on the course – and cost - of the production. (Marlon Brando, who played the enigmatic Colonel Kurtz, refused to learn his lines, and Martin Sheen had a heart attack on location.) Cost overruns and delays nearly bankrupted American Zoetrope, the film-maker. Francis Ford Coppola’s frustration with the nightmarish shoot was captured in a film-length documentary about the production called ‘Hearts of Darkness: a film-maker’s apocalypse’. The documentary included footage of Coppola holding a gun to his own head.

2. The applicant in these proceedings knows something of those frustrations. Quirky Mama Productions Pty Ltd (Subject to a deed of company arrangement) (‘Quirky Mama’) commenced production of a feature film titled ‘Occupation: Rainfall’ in March 2018. The production was interrupted by industrial disputation, the onset of Covid, and financial difficulties. Important changes were made during the production process that blew out the budget. The film enjoyed limited success at the box office when it was released in September 2021. Quirky Mama, the financiers and contractors were hopeful of recovering some of the costs of the film by accessing a tax offset.

3. The rules regarding tax offsets for Australian production expenditure are found in Division 376 of the Income Tax Assessment Act 1997 (Cth) (‘ITAA97’). The tax offset regime is administered by Screen Australia, the respondent. One of the offsets comes in the form of a ‘producer tax offset’ equal to 40% of ‘qualifying Australian production expenditure’ (‘QAPE’) incurred by a production company in making an Australian feature film.

4. Quirky Mama says it incurred QAPE of more than $30 million in making ‘Occupation: Rainfall’. Screen Australia says Quirky Mama only incurred QAPE on the production in the amount of $10,127,187. Screen Australia decided to issue a ‘final certificate’ consistent with its estimate on 1 October 2021 pursuant to s 376-75(1) of ITAA97.

5. While Quirky Mama initially disagreed about the date the film was completed, it decided not to press that issue at the hearing. Quirky Mama now accepts the film was completed during the financial year ending on 31 October 2021.[1] The hearing focused instead on the difference between the amount of QAPE Quirky Mama claimed and the amount ultimately approved by Screen Australia. The difference can be explained by Screen Australia’s assessment of Quirky Mama’s claims in respect of:

   a)producer fees for two individuals associated with Quirky Mama;

   b)fees for the writer/director of the movie; and

   c)visual effects work that was billed by Green Smoke Digital Pty Ltd (‘Green Smoke’).

   [1] Quirky Mama initially accepted the film was completed in January 2021, but it subsequently claimed in its statement of facts, issues and contentions that the film may have been complete by October 2020. If that was so, the offset would have been properly claimed in the year ended 31 October 2020. Quirky Mama’s argument to that effect was abandoned at the hearing and it accepted the film was completed during the year ended 31 October 2021.

6. The dispute over the treatment of the visual effects work accounted for the lion’s share of the difference between Quirky Mama and Screen Australia.

7. There was a good deal of evidence led at the hearing about what individuals – especially Green Smoke and its principal – did on the production. As it happens, the outcome depends on what the various players actually agreed. Those agreements were informed by financing arrangements that were said to be common in the industry, but also by the availability of public subsidies. The various participants depended on those subsidies to make them whole. For reasons I will explain, they do not succeed.

   What is this case about?

8. It would be helpful to explain the relevant law and frame the legal questions I must answer before exploring the evidence. The relevant provisions of the law are found in Division 376 of ITAA97.

9. Section 376.1 of ITAA97 succinctly explains the objective of Division 376 as follows:

   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.

10. The three offsets referred to in s 376.1 are the producer offset, the location offset, and the post, digital and visual effects offset. This case is concerned with the producer offset.

11. Section 376.55 says a film production company is entitled to a producer offset for an income year in respect of a film if:

    (a)  the film was *completed in the income year; and

    (b)  the *film authority has issued a certificate to the company under section 376‑65 (certificate for the producer offset) for the film; and

    (c)  the company claims the offset in its *income tax return for the income year; and

    (d)  the company:

    (i)  is an Australian resident; or

    (ii)  is a foreign resident but does have a *permanent establishment in Australia and does have an *ABN;

    when the company lodges the income tax return and when the tax offset is due to be credited to the company.

12. Most of these requirements are clearly satisfied in this case. Quirky Mama has a substituted accounting period that ends on 31 October each year. The film was completed in that income year because the evidence suggests it was “first in a state where it could reasonably be regarded as ready to be distributed, broadcast or exhibited to the general public” by at least January 2021: see definition of completed in s 376.55(2)(a).

13. Section 376.60(a) says the amount of the producer offset potentially available to the applicant in this case is 40% because the film it produced “is a feature film that was produced for commercial exhibition to the public in cinemas…”.

14. The reference in s 376.55(1)(b) to the film authority is a reference to Screen Australia. Section 376.65 says the film authority (ie, Screen Australia) must issue a certificate for a film in relation to the producer offset if the authority is satisfied as to certain matters. There is no need to dwell on these matters here as there is no doubt Quirky Mama satisfied those requirements. A certificate has been issued. The more interesting question for present purposes arises out of s 376.75(1) which instructs Screen Australia to “determine in writing the total of the company's qualifying Australian production expenditure [ie QAPE] on the film for the purposes of the producer offset” when the production company applies for a certificate under s 376.65. Section 376.75(2) says the film authority must have regard to the provisions of Subdivision 376-C when making its determination of QAPE.

15. That brings us to the so-called ‘general test’ in relation to production expenditure. The test is set out in s 376.125. Section 376.125(1) provides:

    (1)  A company's production expenditureon 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.

16. Screen Australia says:

    ·a large portion of the expenditures on post-production work by Green Smoke; and

    ·a portion of the amounts claimed in respect of producer fees and writer/director fees under agreements between those individuals with Quirky Mama;  

    were not incurred within the meaning of the legislation. The word incurred is not defined, but it is used in other provisions of the taxation legislation – most obviously, in the general deductions provision at s 8.1 of ITAA97 and in the former s 51 of the Income tax Assessment Act 1936. The parties agreed the authorities which interpret and apply the word incurred in those other contexts are relevant to the interpretation of the same word in s 376.125(1). That makes sense given the High Court explained in Kline v Official Secretary to the Governor-General [2013] HCA 52 that “cognate expressions in a statute should be given the same meaning unless the context requires a different result”: at [32] per French CJ, Crennan, Kiefel and Bell JJ. The meaning of the expression when used in other contexts (for example, in cases arising out of the law of insolvency) is unlikely to assist.

17. In opening submissions on behalf of Quirky Mama, Mr Hack KC pointed out an item of expenditure might be incurred even though payment has not yet been made. That is true. As Crennan J explained in Commissioner of Taxation v Citylink Melbourne Limited [2006] HCA 35; (2006) 228 ALR 301; (2006) 80 ALJR 1282 at [122]: “It has long been recognised that an outgoing may be ‘incurred, but not ‘discharged’…, in the relevant year of income.” Her Honour went on to cite the classic discussion of outgoings being ‘incurred’ in Federal Commissioner of Taxation v James Flood Pty Ltd [1953] HCA 65; (1953) 88 CLR 492. In that case, Dixon CJ, Webb, Fullagar, Kitto and Taylor JJ referred to the deductibility of losses or outgoings under the general deductions’ provision (contained at the time in s 51(1) of the Income Tax Assessment Act 1936 (Cth)) and explained (at [17]):

    The word "outgoing" might suggest that there must be an actual disbursement. But partly because such an interpretation would produce very strange and anomalous results, and partly because of the use of the word "incurred", the provision has been interpreted to cover outgoings to which the taxpayer is definitively committed in the year of income although there has been no actual disbursement. [Emphasis added]

18. The Court went on (at [18]) to confirm it was impossible to claim a deduction in respect of expenses or charges “unless, in the course of gaining or producing the assessable income or carrying on the business, the taxpayer has completely subjected himself to them.” [Emphasis added]. To similar effect, Dixon J (as he then was) explained in New Zealand Flax Investments Ltd v Federal Commissioner of Taxation [1938] HCA 60; (1938) 61 CLR 179 at p 195 that a loss or expenditure could not be said to be incurred (and was therefore not deductible) if it is “no more than impending, threatened or expected”.

19. Consistent with that reasoning, the courts have repeatedly held an outgoing will not be incurred in the relevant sense if the liability to pay is subject to a contingency. The point was made in Emu Bay Railway Co Ltd v Federal Commissioner of Taxation [1944] HCA 28; (1944) 71 CLR 596. In that case, the terms of a debenture trust deed which governed the issue of debenture stocks said interest was to be paid out of net income or net annual income of the company. It was accepted the company did not have any net income in the year of income in question. Latham CJ explained (at 606):

    As there has never been any such net income, the interest which the company claims is allowable as a deduction did not become payable, has not become a debt, and may never become a debt. As the cumulative period has now been reached, it might become a debt (if the company should have net income hereafter), and in that case it could certainly, if it were paid, and possibly even if it were not paid, be a proper deduction from the income of the company for income tax purposes. …As things stand at present, the interest has not become payable, and all that can be said is that there exists at the present time the possibility of a liability accruing in the future, such possibility depending, not only upon the derivation of net income, but also upon the amount of such income derived. In my opinion, such a possibility cannot be regarded as an outgoing incurred within the meaning of s. 51 of the Income Tax Assessment Act. Not only has no outgoing been made, but no liability to make an outgoing has come into existence. [Emphasis added]

20. Starke and McTiernan JJ agreed (at 611 and 613 respectively) with that analysis. McTiernan J emphasised (at 613) it was important to carefully construe the terms of any agreement which governed the payment of amounts from a fund to determine if the agreement merely indicated the primary fund out of which payment was to be made, or if it was stipulated the liability to pay was effectively limited to circumstances where the nominated fund had sufficient resources to make the payment in question.

21. As we shall see, there is a dispute between the parties as to whether there was a “presently existing liability”[2] to pay Green Smoke so that Quirky Mama was “definitively committed” and “completely subjected” in the sense discussed in James Flood. There is also a separate controversy over whether there was a presently existing liability to pay particular amounts under the various agreements with the producers and the director at the relevant time.

    [2] Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation [1981] HCA 6; (1981) 144 CLR 616 at [4] per Gibbs J

22. Screen Australia also argued the contractual arrangements between:

    ·Quirky Mama and Green Smoke in respect of post-production services; and

    ·Quirky Mama and the producers and the director in respect of the contested producer/writer/director amounts

    were such that the expenditures could not be regarded as production expenditure because of the exclusionary provisions found in (relevantly) s 376.135 items [6] and [7]. Those exceptional provisions refer to expenditure that might otherwise qualify as production expenditure for the purposes of s 376.125(1) except to the extent the payments involve:

    [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”.

23. Depending on the conclusions I reach about the production expenditure being incurred, it will be necessary to consider whether the exclusionary provisions in s 376.135 items [6] and [7] apply on the facts of the case.

24. Screen Australia argued in the alternative that at least some of the expenditures incurred in respect of Green Smoke were not for or “reasonably attributable to… goods and services provided in Australia” which would be excluded from QAPE pursuant to s 376.145(1)(a). That argument arises out of the fact some of the contractors engaged by Green Smoke were located offshore. Screen Australia also argued some of the expenses billed by Green Smoke were properly reduced under s 376.175. That section addresses a situation where parties to arrangements or transactions that involve expenditure on the film are not dealing with each other at arm’s length. In such a case:

    … the expenditure is taken to be only so much (if any) of the expenditure as would have been incurred if they had been dealing with each other at arm's length in relation to the arrangement, or in relation to the act or transaction.

    The history of Quirky Mama and the making of ‘Occupation: Rainfall’

25. The narrative which follows is largely uncontroversial as between the parties. It is derived from statements and oral evidence provided by witnesses called by Quirky Mama, and from documents included in the Tribunal book. After recounting the history, I will deal with the contentious aspects of the case in the sections that follow.

26. Quirky Mama was incorporated in January 2018 for the purpose of producing the feature film ‘Occupation: Rainfall’. The film was a sequel to ‘Occupation’, which was released in 2018. ‘Occupation’ told the story of the early stages of an alien invasion of the earth. ‘Occupation: Rainfall’ continues that story. The movie review website rottentomatoes.com summarised the sequel as follows:

    Bursting with spectacular special effects and exhilarating action sequences, Occupation: Rainfall unfolds two years into an intergalactic invasion of Earth, as survivors fight back in a desperate ground war. While casualties mount by the day, the resistance--along with some unexpected allies--uncovers a plot that could bring the war to a decisive end. Now, with the alien invaders hell-bent on making our planet their new home, the race is on to save mankind.

27. The reference in the summary to the film’s “spectacular special effects” is important, for reasons that will become clear.

28. Luke Sparke was credited as the director and writer of both ‘Occupation’ and ‘Occupation: Rainfall’. Carly Imrie and Carmel Imrie were credited as producers of both movies. Carly Imrie is the daughter of Carmel Imrie. Carly has since changed her name to Carly Sparke after she married Luke Sparke in March 2021. (I will refer to her as ‘Ms Sparke’ in the balance of these reasons.)

29. Ms Sparke and Ms (Carmel) Imrie are both directors of Quirky Mama and Occupation Two Pty Ltd. Occupation Two was a financing vehicle that guaranteed some of the loans obtained to fund ‘Occupation: Rainfall’.

30. Ms Sparke and Ms Imrie each entered into agreements with Quirky Mama that were titled ‘Executive producer/producer and reinvestment agreement – “Occupation: Rainfall” in March 2018 (documents T27 and T 28 respectively). The agreements provided for payment of fees due to Ms Sparke and Ms Imrie as producers, and for them to receive a share in the proceeds of the film. The fee payments were structured so that some amounts were paid on a regular basis throughout production with a lump sum due at a later date. (The dispute in this case focuses on the lump sum amount.) Ms Sparke and Ms Imrie each agreed to updated arrangements (which characterised them each as ‘investors’ in the film) on 6 August 2020 (documents T26 and T29 respectively). Those revised agreements restructured (and to some extent recast) the obligation to pay the fees to Ms Sparke and Ms Imrie. As we shall see, the terms of these agreements are important to the outcome of these proceedings. I will have more to say about those terms below.

1. Ms Sparke’s statement (exhibit 7) explains (at [12]) Luke Sparke wrote the script for ‘Occupation: Rainfall’ and licensed it to Quirky Mama so it could be produced as a feature film. The production agreement to that effect is referred to in correspondence from Mills Oakley solicitors dated 22 March 2018. That correspondence records the ‘chain of title’ of the film (document T94 at pp 1400). The agreement was reproduced in the hearing book at document T25 (pp 597). On 2 March 2018, Mr Sparke signed an agreement titled ‘Director and writer reinvestment agreement – “Occupation: Rainfall” Luke Sparke…” which (a) recorded the terms of his engagement as director and writer and (b) set out the terms of his compensation and remuneration. That document is reproduced in the hearing book as document T32 at pp 649ff. A revised, more formal agreement was executed on 6 August 2020 in which Mr Sparke agreed to forgo payment of the fees owed to him under the earlier agreement and reinvest that amount in the film with the fee to be recouped in defined circumstances following completion of the film. That agreement is reproduced as document T33 at pp 654ff.

2. Ms Sparke said Quirky Mama originally planned to produce the film in several discrete stages. She said there were several months of pre-production activities anticipated as the cast and crew were assembled, locations were scouted, and other preparations were made. Thereafter, it was expected the actual filming would occur in three blocks. Block one was scheduled to occur between mid-September and mid-October 2018. Block two was scheduled for the entirety of November 2018. Block three and post-production processes were expected to occur thereafter.

3. Quirky Mama applied to Screen Australia for a provisional certificate in March 2018 at the outset of the production process. A provisional certificate was an important step in the financing of the film. In its application, Quirky Mama estimated the QAPE would be $11,839,720 and the total film expenditure would be $12,156,720. Screen Australia issued a provisional certificate on that basis on 3 May 2018. The provisional certificate is reproduced in the documents provided pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act) at T3, pp 42. The certificate reads (relevantly):

   I certify under Rule 13 of the Producer Offset Rules 2007 that the conditions set out in subsections 376-65(2) to (6) of the Income Tax Assessment Act 1997 (the Act) will be met, or are likely to be met, if the film is completed in accordance with the information supplied in the application.

4. As we shall see, the film cost much more to produce than was anticipated in May 2018. That is not altogether surprising. Feature films like ‘Occupation: Rainfall’ are complex endeavours, and they are expensive to produce even when everything goes according to plan. The production of this film featured a cast of around 100 actors and extras. Approximately 250 crew were also engaged. There were significant costs associated with sets and costumes, as well as ancillary services like lawyers and catering. Plant and equipment had to be hired or acquired. It was also necessary to fund post-production services like editing and visual effects, or ‘VFX’: exhibit 8 at [15]-[16].

5. Given the film deals with invaders from outer space, it was always likely that VFX would be an important component of the production – although Ms Sparke said in her affidavit that Quirky Mama originally planned to shoot the movie as much as possible on a physical set using on-set props and costumes: exhibit 7 at [30]. As it happened, the producers came to rely much more heavily on VFX to complete the film. This had consequences for the film’s budget.

6. Ms Sparke confirmed in her statement (at [21]) that block one of the shoot proceeded according to plan. Just before shooting was to commence on block two, Quirky Mama became embroiled in an industrial dispute with members of the crew and their union over wages. Production came to an extended halt while the union publicly criticised Quirky Mama and the producers. As Ms Sparke explained at [25]:

   The [union’s] publications [of the criticisms] caused Quirky Mama Productions to lose funding it had secured from…a company which provides funding for films, either upfront or through pre-sales or gap financing…, which would have been sufficient to cover the expenses of Block Two and Block Three of filming of the Film, from about 10 November 2018. Due to [the financier’s] withdrawal of funding:

   (a)Quirky Mama Productions was not in a position to commence Block Two of filming;

   (b)Cast and crew left the production;

   (c)there was a significant hiatus in filming, causing the sets constructed for the purposes of Block Two to be dismantled;

   (d)Quirky Mama Productions had to find alternate funding to finish the Film;

   (e)Block Two was filmed in November 2019, as opposed to November 2018.

7. Ms Sparke said Quirky Mama had trouble finding new financiers and service providers while production was on hold in the period after 18 November 2018. In her statement, Ms Sparke acknowledged Quirky Mama needed to complete the film so they could generate a return for third party investors in the project. With that end in mind, Ms Sparke recalled an approach being made to Mr Alex Becconsall asking whether he would be interested in launching his own company and completing the VFX work on ‘Occupation: Rainfall’. Mr Becconsall was working on the film as an executive assistant. In his statement, Mr Becconsall explained (at [16]) he was aware the producers were unhappy with the VFX service from other providers. He said (at [17]) he saw an opportunity to start his own VFX business while helping the production team which would also put him in a position to “drive the creative vision for the Film”.

8. Mr Becconsall was, on the face of things, an unlikely choice to lead the VFX component of the production. In his statement, he said he had worked in the industry in a variety of roles, including in the costume, wardrobe and art departments on a number of films: at [2]. In cross-examination, he confirmed he had worked with Mr Sparke, the director, as early as 2006 when both were credited as costume assistants on the film ‘The Battle of Long Tan’. He agreed he had worked full-time in the industry from 2014. In particular, he worked on other projects involving Mr Sparke and members of Mr Sparke’s family since 2015, including a credited role on ‘Occupation’. Mr Becconsall confirmed he had been a producer with a company called Sparke Films – a production company operated by Mr Sparke - between 2015 and 2017: transcript at p 138. While Mr Becconsall had a lengthy history of working with Mr Sparke and the principals of Quirky Mama, he did not have a track record working in VFX before he was approached to consider overseeing the VFX on ‘Occupation: Rainfall’ in 2018.

9. In any event, it was agreed Mr Becconsall would take on the VFX work on ‘Occupation: Rainfall’ through his newly incorporated company, Green Smoke. The post-production services agreement (the PPSA) with Green Smoke was dated 17 April 2019. The agreement is reproduced in the hearing book as document T101.

10. Mr Becconsall said it was unclear in April 2019 what VFX work would be required to complete the film. He explained in his statement that it was originally anticipated the film would be shot ‘in camera’ across three blocks of filming. On that approach, the larger part of the work would be complete by the time shooting concluded. The VFX would be supplied post-production, with the exact VFX requirements (and fee structure) to be determined once the scope of the work became clear: at [22]. To assist in determining pricing, Ms Sparke said Quirky Mama obtained some indicative quotes from other VFX suppliers. Ms Sparke explained (at [33]):

    I discussed what I expected at the time, that the prices would be in accordance with industry standards (which we were able to gauge from the quotes obtained). Alex was open to working with us in terms of our budget.

11. The anticipated scope of the work changed substantially after the agreement was signed. Quirky Mama decided on a new strategy for shooting the film given the financial difficulties it was experiencing after production was interrupted by the industrial action at the conclusion of block one. Mr Becconsall explained (at [23]):

    Block three was cut and block two of filming was shortened. In addition, the way in which block two was filmed changed entirely. Quirky Mama productions couldn’t afford sets, locations or costumes for block two of filming, so together with Luke, Carmel and Carly, it was decided that we would film as much as we could in block two and whatever couldn’t be filmed would be done via green screen after filming. This increased not only the number of shots in the Film but significantly altered the complexity of the existing shots and meant the film would be heavily reliant on VFX.

12. Ms Sparke told the same story about a changed approach to production in her statement at [39]-[41]. She explained (at [41]):

    The change in direction would reduce upfront costs. Instead of constructing a large number of sets (which had been used in Block One), the Film would utilise visual effects to create scenes (using a green screen). By way of example, using physical sets in Block One came at a cost of approximately $6 million for a 3 week shoot, where the change in the approach saw the costs of only $1 million incurred in filming Block Two in November 2019…

13. In August 2019, Green Smoke provided Quirky Mama with a written estimate of the cost of providing the VFX services. Mr Becconsall said in his statement (at [24]) that he estimated it would cost $1.9 million to provide 1045 VFX shots. He insisted the estimate was not a quote and it was based on assumptions about the way the film would be shot: at [25].

14. Mr Becconsall remained closely involved with the production of the film. He became the assistant director just before block two of the shooting commenced in November 2019. That role was in addition to his credited role as co-producer for VFX works: at [25].

15. In December 2019, Mr Becconsall was told Quirky Mama could not afford to pay for the entirety of the cost of the VFX up-front. He said he realised Green Smoke would need to “reinvest” in order to be paid: at [27]. He said he understood it was a common practice in the industry for VFX providers “to make arrangements of reinvestment and/or payment once a film is released, or payments from sales”: at [21].

16. Once shooting on block two was complete at the end of 2019, Mr Becconsall said he developed a clearer idea of the VFX requirements. He said (at [31]) he realised the estimate Green Smoke provided in August 2019 was likely to be inadequate. He recalled telling the producers they would need to spend more on VFX if they wanted VFX with appropriate quality. He revised his estimate to around $10 million for Green Smoke and its subcontractors to complete the required work. Mr Becconsall recalled conversations with Mr Sparke, Ms Sparke and Ms Imrie in January 2020 in which they indicated a willingness to increase the VFX budget in order to ensure the quality of the film. Mr Becconsall recalled they confirmed Quirky Mama could not pay up-front for that more ambitious job of work.

17. Quirky Mama and Green Smoke entered into what the parties described as a ‘payment agreement’ in the form of a counter-signed letter dated 13 January 2020. A copy of the agreement was annexed to Mr Becconsall’s statement. It read (relevantly):

    In reference to your original Agreement made April 2019 between Quirky Mama Production [sic] Pty Ltd and Green Smoke Digital Pty Ltd, it is understood and further agreed that now shooting has wrapped for Occupation;Rainfall that there will be in the vicinity of 1400-1500 whole VFX shots and total individual shot bids listed. The final costs for all work are in the $15m+ range minimum.

    Both parties therefore agree that when it comes time for the final audit for the tax rebate (QAPE) submission, Green Smoke Digital will provide an official reinvestment for all costs accrued to date, and take first position over any rebates, sales and subsequent monies made by the production until the debt is repaid.

18. The agreement went on to provide Green Smoke would require “minimal payments off the reinvested whole invoices to cover any overheads that must be covered in order to keep moving forward and stay on schedule”. I understand that clause of the agreement referred to the fact Green Smoke regularly invoiced small weekly amounts to Quirky Mama that it paid because, as Mr Becconsall explained (at [29]), “I wasn’t in a position to work for free”. Ms Sparke’s evidence in her statement was consistent. She said Green Smoke only rendered invoices in the short term which related to the costs associated with VFX supervision. She suggested the payments made in response to those invoices were similar to a wage: at [47]-[48].

19. Mr Becconsall said it was obvious Green Smoke would require the assistance of a wide range of subcontractors to carry out the VFX work. Yet the full scope of the work required did not become clear until editing was completed in March or April 2020: at [37]-[38], [40ff]; statement of Ms Sparke at [42]. Notwithstanding that evidence, Ms Sparke recalled in her statement (at [50]) that Green Smoke provided what she described as a “revised quote” for the VFX work to complete the film on 20 February 2020. Green Smoke said $2,015,400 was required to do the VFX work to complete the film. The ‘quote’ document was reproduced as document T63 (pp 865). Ms Sparke said it was unclear why the ‘quote’ was provided because (as Mr Becconsall asserted in his statement) the scope of work was not clear until March or April 2020.

20. Mr Becconsall said the downturn associated with Covid meant many subcontractors were willing to work on a deferred payment basis. He explained (at [52]):

    In light of the Payment Agreement between Green Smoke Digital and Quirky Mama Productions, Green Smoke Digital notified the Green Smoke Digital subcontractors that they would not be paid until the Film was completed and monies were receipted by Green Smoke Digital from the Producer Offset from Screen Australia and/or sales revenue generated by the Film.

21. Mr Becconsall said the amounts invoiced by the subcontractors were incorporated into the invoices that were ultimately rendered by Green Smoke and issued to Quirky Mama: at [54]. He was cross-examined in some detail over whether Green Smoke included a premium in the invoiced amounts.

22. Most of the post-production process was carried out remotely. Mr Becconsall explained in his statement that the raw footage was uploaded onto servers and managed using specialised software. The software allowed Green Smoke and its contractors to access the raw footage on a scene-by-scene basis to perform work from wherever they were located: at [44ff]. Some of the subcontractors, including Creative Cupids Pty Ltd, were based in Australia. Some of the subcontractors were based overseas. (A list of the subcontractors was set out in his statement at [40].) Mr Becconsall said he was responsible on behalf of Green Smoke for reviewing the work performed by the subcontractors and causing revisions as necessary to ensure each shot or scene met the requirements of the director and producers: at [47]. That evidence is consistent with Ms Sparke’s evidence in her statement (at [43]) that Mr Becconsall would be credited as the VFX supervisor of the film and that he would remain co-producer. Mr Becconsall was cross-examined about the extent of his hands-on involvement in this process of coordinating and reviewing the work of subcontractors.

23. Quirky Mama continued to experience financial difficulties. In August 2020, administrators were appointed to the company. I was provided with a statement prepared by Ms Brooke Darlington, an employee of the firm to which the administrators belonged. In her statement, Ms Darlington said her investigations immediately following the appointment of administrators confirmed (at [8]):

    ·the film was not completed;

    ·the most likely way to secure any return for the creditors in the short term was to release the film at a film festival in October 2020 because release of the film would enable Quirky Mama to access the producer offset;

    ·Green Smoke was the film’s main VFX supplier and the timely completion of the film depended on Green Smoke’s willingness to undertake the work – failing which a new VFX supplier would have to be identified who would undertake the work notwithstanding the administrators did not have the funds to pay upfront.

24. Ms Darlington recalled in her statement that Green Smoke had written to the administrators on 21 August 2020 to explain the works necessary to complete the film. The document is exhibited to her statement. A schedule in that document listed 1469 shots and cited ‘competitor bids’ provided by rival production companies: at [12]. The rival bids, which are annexed to Ms Darlington’s statement, had been obtained earlier in the production process. Lengthy correspondence ensued. It turned out Green Smoke claimed to have undertaken work on the film valued at around $13 million, but a further $7 million worth of work was required before the film could be released later that year. The administrators and Green Smoke were unable to reach a formal agreement in the short term, although Green Smoke continued to undertake some work. By the end of October 2020, Green Smoke claimed to have performed VFX work on the film to the value of $20,234,388.19 (exclusive of GST). Of that amount, $15,238,729.98 was attributed to subcontractors. The largest single subcontractor, Creative Cupids Pty Ltd, invoiced a total of $11,627,029.05 (exclusive of GST).

25. The film was exhibited at a film festival in October 2020 although further work was done after that date. Quirky Mama entered into a Deed of Company Arrangement on 13 November 2020. The application for the producer offset certificate was lodged on 25 March 2021.

    THE WRITER/DIRECTOR/PRODUCER AGREEMENTS AND QAPE

    The producer agreements of Ms Imrie and Ms Sparke

26. I have already explained the producer agreements dated 5 March 2018 were revisited in agreements prepared by lawyers dated 6 August 2020. Clause [3(c)] in each of the 2018 producer agreements provided for Ms Imrie and Ms Sparke (as the case may be) to be paid a total of $350,000 for their work as producers although there was also a cryptic reference to a “6% share in the production company formed to make the Film, and also the same percentage of any back end or net producer profit realized in perpetuity in all territories.” The $350,000 payment was structured as follows:

    ·$100,000 to be paid in weekly instalments during development, pre-production and block one shoot;

    ·$30,000 to be paid in weekly instalments during the block two shoot; and

    ·$220,000 that was “to be reinvested and guaranteed to be paid back to the Producer out of the QAPE on receipt from ATO in a priority position. If not enough excess in rebate the Producer shall be paid out of any other sales from any and all platforms until paid in full.”

27. The contract noted in each case that any amount which might be payable in respect of “back end or net producer profit” was separate and in addition to the $350,000 amount and was not affected by the $220,000 amount being ‘reinvested’.

28. The document also included an ‘entire agreement’ clause which said it represented the entire understanding of the parties. 

29. Quirky Mama’s written opening submissions say the words “until paid in full” in the clause quoted above make clear the parties always intended the full amount of the fee would be paid, even if there was an indication as to the primary fund which would be used to meet the obligation. That submission underlines the importance of the enquiry suggested by McTiernan J in Emu Bay Railway: did the parties intend to suggest a primary fund without limiting recovery to that fund, or was the existence of resources in that fund a condition precedent to the obligation to pay?

1. Quirky Mama argued the agreements gave rise to a presently existing liability to payment of the fee amounts even as they agreed to ‘reinvest’ the lump sum payments which were presently due and payable to them. Indeed, the use of the word reinvest in the August 2020 agreements was said to assume Ms Imrie and Ms Sparke were already entitled to be paid fees (including the lump sums) under the March 2018 agreements.

2. This argument asks the word ‘reinvest’ to do too much work when one has regard to the terms of the agreement. The plain wording of the clause quoted above from the March 2018 agreements anticipates the debt being satisfied at first instance out of QAPE but acknowledges recovery would still be permitted thereafter if QAPE was insufficient – however that right of recovery was still limited to the proceeds “of any other sales…”. It follows the liability to pay under that agreement did not arise until the rebate was paid and there were sales. QAPE had not been paid prior to August 2020. I am not aware if there were any sales by that point, so it is unclear if there was ever a presently existing liability to pay the balance of the fee under the March 2018 agreement. I reach that conclusion even though the definition of ‘Fees’ in the 2020 agreement referred to “the fees payable by the Producer to the Investor” under the earlier agreement. Quirky Mama argues that definition in the 2020 agreement amounts to a subsequent acknowledgment by the parties of an existing liability to pay those amounts under the 2018 agreement. The construction is inconsistent with the plain language of clause [3(c)].

3. It does not appear the parties’ used lawyers when they signed the agreements in March 2018. They may have just adapted a template agreement. That might explain the imprecision of the language. A law firm was certainly involved in the drafting of the August 2020 agreements. The agreements that Ms Sparke and Ms Imrie signed on 6 August 2020 are essentially the same as each other. Interestingly, and somewhat awkwardly, the agreements define Quirky Mama as the ‘Producer’ while each of the individual producers are referred to as an ‘Investor’. Those documents set out the terms on which the balance of the producer fee in the amount of $220,000 would be ‘reinvested’ – that word again - in the film. The agreements provided (at clause [2]) for each of Ms Imrie and Ms Sparke to issue a tax invoice for their (small ‘p’) producer fees under the March 2018 agreement (the ‘Fee Invoice’) which would be recorded in the film’s general ledger as ‘Investor’s remuneration’. The crux of the 2020 agreements is identified in clause [2.2] which says each ‘investor’ (ie, Ms Sparke and Ms Imrie):

   …agree[d] to make the Reinvestment Amount available to the Producer [ie, Quirky Mama] by forgoing payment on the Fee Invoice and agreeing to receive payment of the Profit Share pursuant to this agreement.

4. Clause [2.3] says the Producer [Quirky Mama] agreed it would only use the ‘Reinvestment Amount’ “for the purposes of producing and marketing the Film”. In substance, Ms Imrie and Ms Sparke agreed to trade the debts each of them were owed (but which were not necessarily enforceable at that point) in return for equity in the financial outcome of the production. In those circumstances, I cannot agree with Quirky Mama’s submission that the “liability continues in existence, as the March 2018 agreements make clear…, until paid in full”. I am not satisfied those earlier agreements ever resulted in Quirky Mama being subjected to the obligation to pay the balance of the fees because the triggering event had not occurred. To put it another way: Quirky Mama’s argument that it was merely agreeing in March 2018 to reinvest an amount that was already due and payable misses a step. The obligation to pay the lump sum amount had not crystallised by August 2020. It was never expected to crystallise before the production was complete and the film was released. While the August 2020 agreements required the individuals to render invoices recording the amount of fees owed under the terms of the March 2018 agreements so those amounts could be recorded in the books and ‘reinvested’, those terms in the subsequent agreements do not transform a pending liability under the earlier agreements into a presently existing liability to pay. The later agreements were intended to further defer the contingent obligation to pay the lump sum fees. (I acknowledge the 2020 agreements contain an ‘entire agreement’ clause which says (at [8.9]) the agreement “supersedes all previous agreements or understandings between the parties in connection with its subject matter”. However, the 2020 agreements also define the ‘Fees’ with reference to the earlier agreements.)

5. Clause [3] of the 2020 agreements contains the operative terms for recouping the Reinvestment Amount as ‘Profit Share Payments’. Clause [3.1] says:

   3.1 Profit Share payments

   (a) The parties acknowledge and agree that the Investor will be entitled to recoup the Reinvestment Amount from QAPE and Sales (and any balance after that, from Net Profits) in accordance with this clause 3.

   (b) If the Investor did not fully recoup the Reinvestment Amount from QAPE and Sales, the Producer must pay to the Investor on or before 45 Business Days after each Payment Date a sum equal to the Investor’s Portion of Net Profit as at that Payment Date.

   (c) Notwithstanding any provision in this agreement, all obligations under this clause 3.1 will cease when either the Reinvestment Amount is fully recouped or there have been four consecutive Payment Dates after the Film is released where the Net Profit of the Film for the financial year ending 30 June before that Payment Date is less than or equal to nil.

   (d) The Investor acknowledges that:

   (i) the Producer’s obligation to repay the Reinvestment Amount is limited to payment under this clause 3.1; and

   (ii) it has no recourse to any other investor of the Film and/or the Producer in relation to this agreement, the Reinvestment Amount or in any other way in connection with the Film.

6. The text of clause [3.1] makes clear the obligation to pay out the Reinvestment Amount to both Investors (ie, to Ms Sparke and Ms Imrie) depends on there being sufficient funds available in the form of QAPE and Sales and (in default) any net profits. The expression ‘QAPE and Sales’ is defined in clause [1.1] to mean:

   …the Producer Offset Proceeds [another defined term - it refers to the cash received by way of Producer Offset from the Australian Taxation Office] together with the sums received by the Producer [ie, Quirky Mama] (nett of any deductions or reductions taken before the sums are received by the Producer) in respect of sales of the Film to distributors (but not including box office proceeds).

7. The expression ‘Net Profits’ is defined in clause [1.1] to mean:

   …the proceeds from the exploitation of the Film in all media throughout the world (net of third party distribution and marketing commissions and expenses and net of GST) available for distribution to the investors and the producers of the Film (including any co-producer and assignee).

8. There can be no doubt the ‘Investor’ in each case is entitled to be paid the $220,000 she had ‘reinvested’ pursuant to the agreements out of QAPE and sales (as defined) and – in default - out of any net profits (as defined) provided the funds available from those sources are sufficient to meet the obligation.

9. Ms Burnett SC, who appeared for Screen Australia, said clause [3.1] effectively made the accumulation of sufficient funds by way of QAPE and sales (as defined) or (in default) the existence of net profits (as defined) a condition precedent to payment of the amount to the producers. She relied on the reasoning in Emu Bay Railway to argue the structured payment arrangement meant the expenditure on fees under the agreements was not incurred in the relevant sense unless and until the funds were available. The agreement did not simply indicate the primary source of the funds to be paid out; it made the existence of those funds a condition precedent to the obligation to pay. That understanding of the limits of the obligation is reinforced by the ‘non-recourse’ term in clause [3.1(d)(ii)].

10. In those circumstances, the amount would not be incurred until the condition precedent was satisfied because – until that occurred – Quirky Mama was not under a presently existing liability to pay those amounts.

11. I agree. A careful reading of the agreement suggests the contingency therein does not just impact on the timing of an otherwise certain obligation to pay, nor does it merely express a preference as to primary source of the funds to be used. It goes to the circumstances in which that obligation will be triggered: see Citylink Melbourne Limited at [134] per Crennan J; see also Commissioner of Taxation v Desalination Technology Pty Limited [2015] FCAFC 96 at [25], [43], [45] per Edmonds, Logan and Pagone JJ. The obligation to pay in this case is not subject to a purely theoretical contingency which was almost certain to be fulfilled. The outcome of the application for QAPE and the potential commercial success of the film was obviously uncertain: cf Coles Myer Finance Ltd v Federal Commissioner of Taxation [1993] HCA 29; (1993) 176 CLR 640 at 671-672 per Deane J. In those circumstances, the liability to pay has not “come home” at the relevant time, as Barwick CJ said in Nilsen Development Laboratories Pty Ltd v Commissioner of Taxation [1981] HCA 6; (1981) 144 CLR 616 at [125].

12. I acknowledge that interpretation contains within it a catch worthy of Catch-22. How would Quirky Mama be able to claim it incurred QAPE in respect of the amounts payable to producers if those amounts were not incurred until after QAPE was determined? Indeed, why would Quirky Mama and the producers have agreed to such a clause if that was its intended effect?

13. Quirky Mama effectively finds itself in the same position as the applicant taxpayer in XQDX and Commissioner of Taxation [2021] AATA 4070. In that case, DP Boyle observed (at [84]):

    If the obligation to pay is contingent on receipt of a tax refund (which is only properly claimable for expenditure incurred at the time of the claim), then at the time that the claim for the deduction was made the expense had not been incurred as the Applicant was not, at that point, “definitively committed to the obligation to pay.” That contingency for liability to pay, in effect, puts the cart before the horse.

14. DP Boyle was obviously correct in his analysis in that case. (I note his reasoning was not disturbed on appeal in Sunlite Australia Pty Ltd v Commissioner of Taxation [2023] FCAFC 43.) But would adopting that interpretation of the agreement in this case deny it commercial efficacy?

15. To the extent that question is relevant, the answer appears to lie in the object of the agreement which was articulated in clause [2.2]. The film production was in dire trouble. Ms Imrie and Ms Sparke were agreeing to stake the amount of their fee on the success of the film and the outcome of the application for QAPE. They were taking a risk in circumstances where other suppliers of goods and services were also being asked to reinvest the amounts they were owed. Those other suppliers were identified as ‘Class A Reinvestors’ who would take precedence over Ms Imrie and Ms Sparke in the ultimate distribution of net profits pursuant to clause [3.3]. Ms Imrie and Ms Sparke presumably agreed to these terms to ensure the film was completed. If that occurred, they had some prospect of being paid. The payments in each case would presumably be made out of net profits if the film was a success, if not out of QAPE – but only in that event. Compared to the alternative of not completing the film, the August 2020 agreement offered Ms Imrie and Ms Sparke at least a chance of being paid something. It cannot be said the agreements lacked commercial efficacy if the terms were interpreted in this way.

16. There is a further reason for concluding the lump-sum producer fee contemplated in the evolved arrangements cannot form part of the QAPE. I have already referred to s 376.135 which excludes some expenditures from being treated as production expenditure. In particular, item 6 refers to deferments (being “amounts that are payable only out of the receipts, earnings or profits from the film”) and item 7 deals with profit participation (being “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”).

17. I have also found the August 2020 agreements make clear the producer fee (which was described as a “Profit Share Payment”) was ultimately paid out of QAPE and Sales (as defined) or – if necessary – out of Net Profit (as defined). That arrangement appears to fit squarely within both items 6 and 7 in s 376.135. I acknowledge there may be an argument that item 6 does not apply because the amounts are not only payable out of receipts, earnings or profits given they might also be paid out of QAPE. A similar argument might be made in relation to item 7 because the payment does not depend exclusively on receipts, earnings or profits or on the commercial success of the film because the payments may be made out of QAPE instead. I am inclined to the view that both items 6 and 7 still apply given there arguably cannot be a claim for expenditure to be included in QAPE if that expenditure is to be funded out of QAPE. If I am right in that conclusion, the only practical source of the payment would be from Sales or Net Profit (as defined). That conclusion is reinforced by the term of the agreement that made clear the producer payments would be subordinated to most of the other claimants. It seems clear that, at a minimum, the payments were dependent on receipts, earnings or profits from the film, and upon its commercial performance. That reality brings the payments clearly within item 7, if not item 6 of s 376.135. In those circumstances, the amounts cannot be regarded as production expenditure even if they had been incurred in the relevant sense.

    The writer/director agreement of Mr Sparke

18. Mr Sparke executed the director and writer reinvestment agreement on 2 March 2018. A copy is reproduced in document T32 at pp 648ff. The agreement sets out the responsibilities attaching to the twin roles of director and writer. It also has a compensation clause which talks about production credits (a matter of some moment in the industry) and provides (at [3(c)]):

    c. ALL Total Compensation in the amount of $825,000AUD shall have a 12% share in the production company formed to make the Film, and also the same percentage of any back end or net producer profit realized in perpetuity in all territories. No one else receives better.

19. The clause goes on to provide two schedules for payment – one for the director fee component of the total remuneration and one for the writer fee. The director fee component provided for the payment of $100,00 divided into weekly payments throughout the production and:

    $300,000 to be reinvested and guaranteed to be paid back to the Producer [ie, Quirky Mama] out of the QAPE on receipt from the ATO in a priority position. If not enough excess in rebate the Director shall be paid out of any other sales from any and all platforms until paid in full. This reinvestment is separate and on top Clause 3C.

20. The schedule for the writer payment provided for Mr Sparke to be paid a lump sum in the amount of $425,000 in the same circumstances as those which governed the lump sum director payment.

21. These payment terms are described using similar language to that found in the March 2018 agreements for producer payments to Ms Imrie and Ms Sparke. As I have already explained, those equivalent provisions make clear the lump sum payments are not due and payable until the contingency was satisfied.

22. Mr Sparke subsequently signed a ‘reinvestment agreement’ (reproduced as document T33 at pp 654) on 6 August 2020. The relevant provisions of that agreement are in substantially the same terms as the separate agreements signed by Ms Sparke and Ms Imrie. (Ms Sparke counter-signed the agreement with Mr Sparke in her capacity as a director of Quirky Mama. She signed as ‘Carly Imrie’ because she and Mr Sparke had not yet married.)

23. The reinvestment agreement signed by Mr Sparke results in the same outcome for the same reasons as those I gave in relation to Ms Sparke and Ms Imrie. While the August 2020 agreement in each case supersedes the earlier agreements, the ‘Profit Share Payments’ (being the Reinvestment Amount, which is defined in Mr Sparke’s 2020 Agreement to be $425,000 in ‘Fees’ – ‘Fees’ being defined with reference to the amount “payable” to Mr Sparke under the earlier agreement) were only payable out of QAPE and Sales (as defined) at first instance and thereafter out of Net Profit (as defined). I am not satisfied the expenditure was incurred in the relevant sense. In any event, I am satisfied the expenditure is excluded under s 376.135 items 6 and 7.

    THE ARRANGEMENTS WITH GREEN SMOKE

24. I have already explained the unusual circumstances under which Green Smoke came to be engaged to provide VFX services to the production. The Post-Production Services Agreement (the PPSA) which governs the arrangement was signed by Mr Becconsall on behalf of Green Smoke and by Ms Imrie on behalf of Quirky Mama on 17 April 2019. A copy of the agreement is reproduced as document T101 (at pp 1660ff).

25. Clause [4] of the PPSA deals with the services to be provided by Green Smoke and clause [8] deals with the payment of fees and the rendering of invoices. Clause [8.1] requires Quirky Mama to pay Green Smoke “in accordance with the Fees set out in the Schedule 2 in the manner and at the times provide for in this agreement”. But Schedule 2 - which is supposed to specify the ‘services, deliverables and fees’ - is blank. The omission is presumably explained by the fact the scope of the post-production facilities had not been finalised when the PPSA was signed: see statement of Ms Sparke at [36]. That evidence is consistent with other evidence about the evolving approach to the shoot and the potential role of VFX. As I have already explained, it was initially assumed the bulk of the film would be shot on location using props and costumes. If that occurred, the demands on post-production facilities and VFX services would be more limited. The uncertainty about the scope of the work that would be required might explain the silence in the agreement as to those matters. The decision to leave the fee structure unspecified is harder to explain, although it may have been difficult to articulate a fee structure without being specific about the services to be provided.

26. The failure to identify the scope of the services and the fee structure in the contract inevitably raises questions over whether the contract documented in T101 was complete and enforceable. In the ordinary course, the scope of the work and a method for settling the price of that work done would be regarded as essential terms in a valid contract. Having said that, there is substance to Mr Hack’s point that it would be possible to effectively divine a price for work done through a quantum meruit claim – although arriving at a price for the work does not make the debt due and payable if it otherwise remains subject to a contingency.

27. As it happens, there was some negotiation over price prior to the PPSA being signed. I have already noted the evidence provided by Ms Sparke in her statement to the effect that Quirky Mama had obtained some indicative quotes from other suppliers that were discussed with Mr Becconsall. Ms Sparke said the quotes enabled them to understand “the industry standard” price for the services. She recalled Mr Becconsall apparently agreed to “working with us in terms of our budget”: at [33]. That discussion would not of itself fill the gap left in the PPSA.

28. In August 2019, after the PPSA was in place, Mr Becconsall provided an estimate (but not a quote, he insisted) that it would cost $1.9 million to complete 1045 VFX shots: statement at [24]-[25]. But it was only after a rough-cut of the film was assembled following the second block of shooting that it became clear how many VFX shots would be required, and how complex that work would be: statement of Ms Sparke at [42]. By that point, Quirky Mama was committed to relying more heavily on VFX to complete the film.

1. Ms Sparke said in her statement that she recalled having conversations with Mr Becconsall around January 2020 about the scope of the work. She said she made clear the allocation of work to Green Smoke was dependent on it agreeing (and to it securing the agreement of its subcontractors) to “do a reinvestment”. Ms Sparke recalled (statement at [43]) the following exchange between them:

   Carly: The reinvestment will work on you doing all the VFX and being paid from the QAPE and or sales.

   Alex: That’s fine – as long as me and my guys definitely get paid.

   Carly: You guys will be the first guys we pay from the QAPE and or sales.

2. I note Mr Becconsall appears to have a consistent recollection of that conversation: statement at [32].

3. In the wake of that conversation, Ms Sparke recalled she (on behalf of Quirky Mama) and Mr Becconsall (on behalf of Green Smoke) countersigned the letter dated 13 January 2020. That letter:

   ·estimated 1400-1500 VFX shots would be required to complete the film;

   ·said “the final costs for all work are in the $15M+ range minimum” and

   ·recorded Green Smoke’s agreement that it would “provide an official reinvestment for all costs accrued to date, and take first position over any rebates, sales and subsequent monies made by the production until the debt is repaid”.

4. Notwithstanding the lack of specificity in the PPSA over the scope of work or its funding, Green Smoke continued to undertake VFX work on the production – mainly through subcontractors in Australia and overseas – throughout 2020 and into 2021. While small amounts were regularly paid to Green Smoke, it appears Mr Becconsall had convinced the subcontractors to continue undertaking work on the film so it could be completed, and they might all thereafter be paid.

5. Ms Darlington recalled negotiations with Green Smoke about costs and progress after the administrators were appointed to Quirky Mama in August 2020. I have already mentioned Ms Darlington asked for Green Smoke to report on the total costs it had incurred by that point, and its estimate of what further expenditure would be required to complete the film: statement at [13]. She said the administrators told the first meeting of Quirky Mama’s creditors on 29 August 2020 that it would be preferable if Green Smoke completed the VFX work so the film could be released and a claim for QAPE might be lodged in respect of the year ended October 2020: statement at [15].

6. Green Smoke and the administrators continued to negotiate over the work required to complete the film, but that took some time. I note Ms Darlington recalled (statement at [28]) the administrators writing to Green Smoke on 17 September 2020 summarising the administrators’ current understanding of the relationship. (A copy of the email was annexed to her statement.) The administrators acknowledged the agreement between Quirky Mama and Green Smoke dated 17 April 2019 and the arrangement regarding payment recorded in the letter dated 13 January 2020. They went on to confirm:

   ·Green Smoke was regarded as an unsecured creditor;

   ·Green Smoke had no rights to or interest in the film;

   ·It was in the best interests to continue the relationship with Green Smoke with a view to completing the film however that was subject to reaching an agreement with Green Smoke regarding the costs of undertaking further VFX work; and

   ·The VFX costs to date had not been incurred by the administrators.

7. The administrators also asked for an itemised summary of Green Smoke’s estimate of the VFX costs. Green Smoke replied on 22 September 2020 with an updated shot list. The email noted there were over 350 people undertaking work on the film at the time.

8. The negotiations between the administrators and Green Smoke dragged on for some time. During that time, Green Smoke and its contractors continued to undertake VFX work on the film even though “there was no formal agreement regarding the VFX Costs and the total amount owing to Green Smoke Digital”, as one of the administrators reported to the committee of inspection on 24 September 2020. Ms Darlington recalled in her statement (at [33]) Mr Becconsall attended the committee meeting where he said words to the effect: “I have a large team and there has been months of negotiations to deals for my team not to get paid until after the Film is complete”. [Emphasis added].

9. The evidence that Green Smoke and its subcontractors were prepared to continue working in the absence of a confirmed agreement from the administrators to pay – and a preparedness in any event to defer payment until after the film was complete – was consistent with an email chain of correspondence between Mr Sparke and Mr Nandakumar Payan, of Creative Cupids Pty Ltd, that is found in document ST16. (Mr Payan also gave evidence at the hearing.) Creative Cupids was the largest subcontractor on the film and it was understandably nervous about not being paid. On 2 November 2020, Mr Payan told Mr Sparke:

   I have asked Alex [Becconsall] to pay the invoices submitted, I need this to put all the vendors work towards the final. Please ask producers to get me paid this week. Invoices given are past the due date.

10. Mr Sparke replied the same day. After talking about the work, he observed:

    As for the money part - there is no budget until our tax rebate and sales comes in. I believe this is in your contract you signed with green smoke and what ever other vendor has also done. We wont get our millions until its complete. We can submit to screen Australia now the screening is done, but that will take weeks and be after the final delivery. I want a closer to finished version for the American film market next week, but now they wont be able to show this temp one i dont think. So they will screen it once we delivery the final.

    But we are only working with small amounts of money now and you, me, greensmoke, producers, toby, all other vendors can't get paid until we deliver. And I know you have expended your own cash, which is amazing, but we all have to see this through so we can get paid asap.

    …

    I think we all need to take a breath and work together to see this through. We have an opportunity to make a huge splash across all markets with this film, but the only way is finishing this off together and keeping communication open all month. If you or your vendors can't finish in time, or you can't continue without funds, you need to tell us now so we can bring in other teams. Either way, we will get this done and I really hope you guys continue to be a big part of it.

11. Mills Oakley, who had come to act for Green Smoke and the directors of Quirky Mama, provided what was described as a ‘letter of comfort’ dated 25 November 2020: document ST17. The letter was addressed to ‘Whom It May Concern’ and was apparently provided to the various service providers whose cooperation was required to complete the film. The letter confirmed the film was to be released domestically and internationally in early 2021. At that point, the letter explained, Quirky Mama would lodge its claim for the producer offset “in respect of the money expended on making the Film. These monies include but are not limited to the money spent on VFX work.” The letter noted producer companies expected to receive in the order of $12.5 million in the hand but added:

    It is anticipated that Green Smoke will, in a worst case scenario, be paid at least $8,000,000 for the VFX work that Green Smoke has completed on the Film as a priority from the QAPE rebate money received from the Australian Taxation Office and the net sales receipted from the Film.

12. The evidence I have discussed suggests Quirky Mama did not have a presently existing liability to pay the invoices rendered by Green Smoke by January 2021. I acknowledge clause [8.1] of the PPSA (which refers to the obligation to pay fees in response to an invoice) does not expressly contemplate delayed payment or reinvestment. That is different to the other agreements we have discussed. But Schedule 2 to the agreement is left blank. It does not include any of the detail about fees and services that should have been included. In any event, the payment agreement contained in the letter dated 13 January 2020 makes it tolerably clear that payment of the fees would be deferred until the film was complete – at which point Green Smoke would “take first position over any rebates, sales and subsequent monies made by the production until the debt is repaid”. That agreement once again uses the word ‘reinvestment’ to describe an arrangement which is substantially the same in its effect as that adopted in the March 2018 agreements between Quirky Mama and Ms Sparke, Ms Imrie and Mr Sparke.

13. The ‘reinvestment’ conceit found its way into the agreement between Quirky Mama and Green Smoke with respect to Green Smoke’s fees. The document dated 24 February 2021 is described as a “Class A Reinvestment Agreement”. It is reproduced at document T36. The recitals to the agreement refer to the earlier agreement dated 17 April 2019 and noted:

    The Investor [ie, Green Smoke] has agreed to reinvest the Reinvestment Amount in respect of the Fees to be used by the Producer [ie, Quirky Mama] for the Purpose [defined in clause [2.3] as ‘producing and marketing the Film’] and on the terms and conditions set out in this agreement.

14. The agreement defines ‘Class A Reinvestment Agreement’ as an agreement with a third party to reinvest “all or part of their payment entitlement for their supply of goods or services in respect of the Film”. The ‘Reinvestment Amount’ is defined as the portion of the fees owing under the earlier agreements which the investor wishes to reinvest. (The definition notes Green Smoke elected to reinvest fees in the amount of $21,872,308 inclusive of GST.) Clause [2.1] of the agreement goes on to provide the Investor would furnish an invoice in respect of the fees to be reinvested which would be recorded in the books of the production. Clause [2.2] then provides:

    The Investor [ie, Green Smoke] agrees to make the Reinvestment Amount available to the Producer [ie, Quirky Mama] by forgoing payment on the Fee Invoice and agreeing to receive payment of the Profit Share pursuant to this agreement.

15. The payment of ‘Profit Share’ is addressed in clause [3]. That clause is almost identical to the Profit Share clauses in the producer and director/writer agreements struck in August 2020 which I have already discussed save for one difference. The difference is found in clause [3.1(b)] which reads:

    If the Investor did not fully recoup the Reinvestment Amount from QAPE and Sales, the Producer must pay to the Investor on or before 45 Business Days after each Payment Date a sum equal to the lessor of:

    (i) The Investor’s Portion of Net Profit as at that Payment Date; and

    (ii) Any balance of the Reinvestment Amount not yet recouped by the Investor.

16. This sub-clause does not change the basic effect of clause [3.1] which anticipates payment of the debt would occur out of a limited fund (ie, QAPE and Sales as defined, then net profits from all sources as defined). The effect of clause [3.1(b)] was to limit the upside for Green Smoke in the event the film made greater profits from all sources. The parties plainly did not intend Green Smoke should become entitled to a windfall if it turned out the Investor’s Portion of Net Profit (as defined) exceeded the Reinvestment Amount. For the same reasons I gave in relation to the other agreements discussed earlier, I am satisfied the expenditure was not incurred in the relevant period because the payment was subject to a contingency.

17. Even if I thought there was doubt over whether the production expenditure claimed by Green Smoke was incurred pursuant to its agreements with Quirky Mama, I am satisfied the disputed expenditure would not be regarded as production expenditure because it was excluded pursuant to items 6 and 7 in s 376.135. I have already explained my reasoning when I discussed the application of these items in the course of the earlier discussion.

    Other issues

18. I will deal briefly with the other principal arguments made by Quirky Mama.

19. The first of these was identified in Screen Australia’s ‘issue three’ – namely that many identified expenses invoiced to Green Smoke by its subcontractors:

    ·were not “incurred in, or in relation to, the making of the film” (s 376.125(1)(a)); or

    ·were not “reasonably attributable to:

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

    (ii)Activities undertaken in;

    the making of the film” (s 376.125(1)(b)).

20. The expenses referred to in invoices set out at pp 2853, 2876, 2877, 2878 and 2913 of the Tribunal hearing book all refer to additional amounts charged by subcontractors in the form of administrative fees and penalty interest on unpaid invoices. Screen Australia says those amounts cannot be ‘incurred’ or be ‘reasonably attributable’ in the relevant sense.

21. I have already referred to the general deductions provision in s 8.1 of ITAA97. That section contemplates deduction of a wide range of expenses that meet the statutory criteria. There are a number of specific expenses or outgoings that might answer those criteria but which are nonetheless excluded as deductions for reasons of public policy under Division 26 of ITAA97. Examples of excluded expenditure include penalties imposed pursuant to a law (s 26.5). It is not clear why late fees levied on an invoice would not be deductible under s 8.1, but that does not necessarily answer the question of whether they were incurred in the sense intended in s 376.125(1).

22. Subsections 376.125(1)(a) and (b) contemplate the establishment of a nexus between the expense and the end. If I am wrong in my earlier reasoning about the costs not being incurred, there is no reason to doubt the nexus has been maintained between those expenditures and the activities referred to in the subsections. The fees and charges appear to have been imposed in the ordinary course of providing the indicated services.

23. Screen Australia disputes one of the invoices from Creative Cupids on a different basis. It is reproduced in the Tribunal book at p 2854. The invoice is dated 31 December 2020. It records a series of charges for VFX work totalling $4.909 million (or $5.4 million inclusive of GST). The invoice records those amounts as being overdue. That invoice appears regular on its face but it took on a different complexion during the oral evidence. Ms Burnett asked Mr Payan how that invoice came to be rendered. Mr Payan was shown evidence of negotiations conducted by Creative Cupid’s lawyers on a deal to release the work Creative Cupids had completed so it could be incorporated into the film. Not surprisingly, Creative Cupids was looking for assurance about payment for the work in question. Creative Cupids and Green Smoke concluded an agreement dated 28 December 2020 to pay the amounts due for work done under the various contracts: reproduced at document ST025. If that agreement provided a way forward in respect of the work that had been contracted, where did the further invoice issued two days later come from?

24. Mr Payan’s evidence raised more questions than it answered. Screen Australia notes he referred to the $5.4 million invoice issued on New Year’s Eve as a “ballooned amount” in an email dated 11 March 2021 (reproduced in document ST038). That email referred to Creative Cupid’s own separate claim for a tax offset for expenditure on post, digital and visual effects, one of the other offsets available under Division 376. Mr Payan agreed in cross-examination that the “ballooned amount” (which he also described as an “escalation” cost: transcript at p 85) of $5.4 million was not referable to the contracts in place with Green Smoke that were dealt with in the payment agreement dated 28 December 2020, but he was unable to identify any other contract pursuant to which the work was performed: transcript at pp 78, 80. He also acknowledged he did not expect that amount would be paid by Green Smoke: transcript at p 87.

25. Screen Australia says I should infer the “escalated” or “ballooned” amount was not intended to create a liability between Creative Cupids and Green Smoke that either party expected to be satisfied. Rather, it was apparently included to support and perhaps enhance the claim by Creative Cupids for a separate tax offset. That purpose appears to be evident in the email correspondence reproduced in documents ST036-ST039. On balance, I am inclined to agree but there is no doubt the fees in that amount were not incurred in any event since Mr Payan agreed he did not expect to be paid that amount by Green Smoke – which suggests neither Mr Payan nor Green Smoke regarded Green Smoke as being committed to the expense.

26. That brings me to Screen Australia’s claim that some of the amounts claimed by Quirky Mama were not for (or are not reasonably attributable to) goods and services provided in Australia. If Screen Australia is right, that expenditure does not satisfy the Australian-content rules set out in s 376.145. Those rules are obviously consistent with the objective of Division 376, which is “to support and develop the Australian screen media industry by providing concessional tax treatment for Australian expenditure”: see s 376.1.

27. There is no dispute that Green Smoke engaged some overseas-based subcontractors to undertake VFX work. Creative Cupids also engaged some overseas-based subcontractors. Ms Darlington was able to identify around $3.444 million in charges referable to foreign subcontractors engaged by Green Smoke and $1.647 million referable to foreign contractors that were engaged by Creative Cupids, the lead subcontractor to Green Smoke. Mr Darlington also refers to an amount paid to Amazon Web Services in respect of cloud computing facilities.

28. Quirky Mama’s argument comes down to this: it says Green Smoke is clearly an Australian company, and it contracted in Australia for the delivery of services. On that approach, it is irrelevant where the work was actually done by Green Smoke’s contractors.

29. That cannot be right. The requirement that “goods and services [be] provided in Australia” must be understood in light of the purpose of the section, which is made clear from the language of the provision and the wider context, including the objects clause found in s 376.1. I accept there might be room for uncertainty about the precise meaning of the expression ‘provided in Australia’: does it include services provided by Australian experts who are located overseas, even temporarily? Does it extend to services provided by multi-national businesses that have both an Australian and overseas presence where work might be shared between local and overseas practitioners? However, I am satisfied the (sub)contractors in question need to form part of the Australian film industry which the producers’ offset is intended to promote. The presence of a local head-contractor that outsources a substantial part of the work to otherwise unconnected overseas businesses cannot satisfy that requirement. It is not enough that Green Smoke or Creative Cupids are Australian-based: only expenditure incurred in relation to (sub)contractors that also form part of the industry will qualify for the purposes of s 376.145.

30. I should add that the expenditure on cloud computing likely falls into a different category because it is in the nature of an infrastructure service that happens to be based overseas, but which permeates the local industry. It is, in that sense, part of the Australian film industry.

31. That bring me to the last of the principal issues identified by Screen Australia, albeit that it only arises if my reasoning (above) is flawed. The issue arises under s 376.175 which provides:

    Expenditure to be worked out on an arm’s length basis

    For the purposes of this Division, if any 2 or more parties to:

    (a)  an arrangement under which a company incurs expenditure in relation to a film; or

    (b)  any act or transaction directly or indirectly connected with expenditure that a company incurs in relation to a film;

    do not deal with each other at *arm’s length in relation to the arrangement, or in relation to the act or transaction, the expenditure is taken to be only so much (if any) of the expenditure as would have been incurred if they had been dealing with each other at arm’s length in relation to the arrangement, or in relation to the act or transaction.

1. I have already made clear that Green Smoke used subcontractors to carry out most of the work it had agreed to do on the production. Those contractors generally carried out the work in accordance with their contractual arrangements with Green Smoke. Ms Darlington’s evidence confirmed the invoices from those subcontractors to Green Smoke were genuinely passed on to Quirky Mama in invoices from Green Smoke. The issue under s 376.175 arises in relation to:

   ·the $4.909 million amount that Creative Cupids invoiced on 30 December 2020 which (as I have already found) is not otherwise referable to a contract; and

   ·the mark-up or premium of around $5 million that Green Smoke added to its invoices to Quirky Mama which incorporated the amounts billed by subcontractors.

2. Screen Australia says those charges are problematic given the relationship between Green Smoke and Quirky Mama.

3. The expression “deal with each other at arm’s length” is not defined in the legislation but it is well-understood. The parties have a business relationship that was negotiated by officers of Quirky Mama and Mr Becconsall, the director and principal of Green Smoke. Mr Becconsall was already engaged to work on the film in his individual capacity; his co-producer agreement with Quirky Mama entitled him to a profit share if the film was a success. At the time he discussed establishing a VFX company, he already had a long-standing relationship with Mr Sparke in particular. The relationship that developed had few of the characteristics one would expect in an arm’s length relationship. If one defined an arm’s length relationship as one in which independent parties were able to bargain with each other without being compromised by other aspects of their relationship with each other, this was clearly not an arm’s length relationship.

4. That being so, the question arises as to whether the disputed amounts would have been incurred if the parties had in fact dealt with each other at arm’s length.

5. There is no doubt the $4.909 million amount claimed by Creative Cupids would not have been passed on to Quirky Mama if Green Smoke and Quirky Mama were dealing at arm’s length. Neither Green Smoke nor Quirky Mama appeared to regard themselves as bound to actually pay that amount; the formal acknowledgment provided by the solicitor acting on behalf of both Quirky Mama and Green Smoke must be understood in that context. Quirky Mama had no reason to agree to that save that it might assist Green Smoke in its relationship with Creative Cupids in a way that did not prejudice the interests of Quirky Mama: document ST039.

6. The amount that was ‘marked-up’ was the subject of expert evidence from Mr Matt Lynch, who was called by Screen Australia. Mr Lynch opined that the better approach was to look at the services actually provided by Green Smoke as a visual effects supervisor or producer on the film.  In his first report, he estimated (at 4194) the services would cost in the order of $370,000-465,000 if market rates were applied. Mr Lynch’s second report was written after more detailed evidence was provided by Mr Becconsall about his work on the production. Mr Lynch suggested it was unlikely that the parties would have reached agreement in the first place for Green Smoke – which was, in substance, comprised of Mr Becconsall who had limited relevant experience - to provide the services that were contemplated.

7. I acknowledge Quirky Mama provided some quotes from other VFX providers but the expert evidence of Mr Lynch carries more weight. His reports were thorough and he has extensive relevant experience.

   Conclusion

8. Screen Australia has conceded that:

   ·an amount of $9,299,070 that was originally claimed as QAPE is not in dispute in these proceedings;

   ·an audit fee in the amount of $7500 that was not included in the original claim should now be included.

9. In addition, I am satisfied the following amounts were incurred in the relevant sense so they form part of QAPE:

   ·$254,168 paid to Green Smoke as the production proceeded;

   ·$260,000 in producers’ fees paid to Ms Imrie and Ms Sparke; and

   ·$100,000 in director’s fees that were paid to Mr Sparke.

10. The reviewable decision should be varied in accordance with these findings.

I certify that the preceding 128 (one hundred and twenty -eight) paragraphs are a true copy of the reasons for the decision herein of Deputy President Bernard J McCabe

.................................[SGD].......................................

Associate

Dated: 29 September 2023

Date(s) of hearing:	28 April 2023; 2, 4, 5 May 2023
Counsel for the Applicant:	P Hack KC and C Conway
Solicitors for the Applicant:	Mills Oakley
Counsel for the Respondent:	C Burnett SC and C Winnet
Solicitors for the Respondent:	Simpson Lawyers