Sars issues guide on income from films

SOUTH Africa’s income tax system contains an incentive aimed at stimulating the production of films within the country.

The incentive was previously contained under Section 24F of the Income Tax Act. Section 24F provided an upfront deduction, or in some circumstances a deduction which was spread over 10 years, for certain production or postproduction costs incurred by the taxpayer. This incentive has been repealed and replaced by the provisions of Section 12O which provides for the exemption from normal tax of income derived from the exploitation rights of approved films. Section 12O came into effect on January 1, 2012, and applies to all receipts and accruals of approved films if principal photography commenced on or after this date but before January 1, 2022.

The receipts and accruals of income derived from the exploitation rights of a film are exempt from income tax under Section 12O:

• If the National Film and Video Foundation (NFVF) has approved the film as a local production or a co-production.

• If the income is received by or accrues to an investor.

• And only to the extent that the income is received or accrues within a 10-year period after the film’s completion date.

The income referred to under Section 12O is only applicable to income received from the use or right of use of any films and is dependent on the profits and losses from the film.

For an investor to use the 12O exemption, the income from the film must be contingent on the success of the film; any guaranteed minimum payment is fully taxable when received or earned as it is not dependent on the success of the film.

The Sars guide provides that the receipt and accruals from branded products, toys, clothes and other items does not qualify for this exemption, as the receipts and accruals are not wholly dependent on the success of the film.

The Department of Trade and Industry (DTI) and the NFVF have guidelines as to what qualifies as a film and what is considered a local production, which are crucial elements for obtaining the exemption under this section.

The Sars guide provides that investors who obtain the exploitation rights after the completion date of the film (once all the recording has been done) do not qualify for this exemption.

The Sars guide also provides that 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 the exploitation rights, less any amount received or accrued during any year of assessment in respect of that film.

Any DTI incentive received is also exempt from normal tax but subject to the recoupment provision under Section 8(4). Taxpayers who have received government grants must consider the provisions of Section 12P.

Section 12O effectively eliminates income tax on qualifying film receipts and accruals for a 10year period from the date the film is completed.