11 September, 2017 - 06:04 From the beginning of the production stage to the actual editing of the final film and exhibition, the industry contributes to the economy, revenue, job creation and economic activity.
The results from the economic impact modelling report for 2017, prepared by Urban-Econ Development Economists for the National Film and Video Foundation (NFVF) (NFVF Report), reveal that the film industry has had a positive economic impact on the South African economy. During the 2016/17 financial year, the film industry in South Africa had a direct impact of R4,4 billion on economic production. The NFVF Report also revealed that the operations of the film industry in South Africa raised the level of production by approximately R12,2 billion in total.
The South African income tax system contains an incentive to stimulate the production of films within the country. The current incentive comes in the form of s12O of the Income Tax Act, No 58 of 1962 (Act). Section 12O came into effect on 1 January 2012 and applies to all receipts and accruals of approved films if principal photography commenced on or after this date but before 1 January 2022. Section 12O provides for an exemption from normal tax, specifically income derived from the exploitation rights of a film. The South African Revenue Service (SARS) has also recently issued a guide, reflecting SARS's interpretation of this provision (SARS Guide).
Exemption requirements
In order to qualify for an exemption, taxpayers must satisfy the following criteria:
NFVF must approve the film as a local production or co-production. A film that is co-produced must be co-produced in terms of an international co-production agreement between South Africa and another country, which agreement must be subject to the Constitution.
Income is received by or accrued to two types of investors:
2.1 Those who acquired exploitation rights prior to production of the film; or
2.2 Those who acquired exploitation rights after the production commenced but before completion date provided that funds they receive will not be used to compensate pre-production investors.
Income must be received or accrued within a period of 10 years after the completion date of that film.
Basis for exemption
The point of departure for the exemption is that there must be a film. A film is defined in the Act:
a feature film;
a documentary or documentary series; or
an animation,
conforming to the requirements stipulated by the Department of Trade and Industry in the Programme Guidelines for the South African Film and Television Production and Co-Production Incentive. These requirements contain, among other things, the duration of the film, the format and processing, and distribution methods used.
One requirement worth mentioning is that in order to qualify, the duration of a film must be 90 minutes or more (45 minutes or more for IMAX). This means that producers of short films, television series and even reality shows will not enjoy this exemption, which could have the unfortunate consequence of excluding producers of quality locally produced television content, who might not have the capital to make a full-length film.
As noted in the requirements for an exemption, income must be derived from the exploitation rights of the film. Exploitation rights are defined in the Act as rights to any receipts and accruals in respect of the use of, the right of use of, or the granting of permission to use any film to the extent that those receipts and accruals are wholly dependent on profits and losses in respect of the film.
It is important to note the words, wholly dependent on profits and losses . The receipts and accruals must be dependent on the success of a film.
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The exemption does not apply to a Broadcaster as defined in s1 of the Broadcasting Act, No 4 of 1999 (Broadcasting Act) or a connected person in relation to a Broadcaster.
The Broadcasting Act defines a Broadcaster as any legal or natural person who composes, packages, or distributes television or radio programme services for reception by the public or sections of the public or subscribers to such a service irrespective of technology used.
Reporting requirements
Section 12O also makes provision for special purpose corporate vehicles , which are defined as companies responsible for the production of a film as required by the Department of Trade and Industry in terms of the Programme Guidelines for the South African Film and Television Production and Co-Production Incentive. Such special purpose corporate vehicles (SPCV) must provide a report to the NFVF containing such information, within such time and in such manner as is prescribed by the Minister, when income arising from exploitation rights of a film is distributed to a person within a period of 10 years commencing from the completion date of the film. The same duty applies to a collection account manager (CAM) that manages exploitation rights under a collection account management agreement and has been approved by the Minister of Trade and Industry for the purpose of s12O by notice in the Government Gazette.
According to the SARS Guide, the purpose of this on-going reporting is to measure the success of the incentive and to guard against tax avoidance.
Specific provision regarding deductions
Section 12O(5) states that notwithstanding s23(f) of the Act, a taxpayer may deduct from income an amount in respect of expenditure incurred to acquire exploitation rights in a film. The amount of the deduction is equal to the amount of any expenditure incurred to acquire exploitation rights less any amount received or accrued during any year of assessment in respect of that film. Section 23(f) of the Act states that it is impermissible to deduct amounts incurred to
