Oz investors seeing red after ‘Rouge’ tax ruling

Decision could affect present, future films Down Under

SYDNEY — Australia’s appeal as a production center for international films is under severe threat after the Australian Tax Office denied a tax break for the Australian investors who bankrolled “Moulin Rouge.”

The agency’s decision effectively knocks out a financing avenue that has been used to fund U.S.-backed films such as “The Matrix” and “Dark City.” It’s feared the ruling could impact several films that recently lensed Down Under, including the Jerry Bruckheimer-produced “Down and Under,” Warner Bros.’ “Scooby Doo” and the WB/Village Roadshow Pictures co-production “Queen of the Damned.”

WB was aiming to use the same funding mechanism — division 10B of the Tax Act — for the second and third editions of “The Matrix.”

Wednesday night, Oz net ABC-TV program “Lateline” revealed that the ATO had refused a product ruling for “Moulin Rouge,” which means the Australian investors who funded the $53 million pic are not entitled to a tax deduction. The coin was raised from several large institutions, Daily Variety has learned. Typically, the investors chip in 20%-30% of the budget and borrow the rest from banks, enabling them to claim the entire amount as a tax write-off.

A spokesman for the investors said they are considering federal court action to appeal the ruling. “We believe the ATO has deliberately or otherwise misinterpreted the law,” he told Daily Variety, adding that the funds raised have been held in abeyance.

If investors are denied the deduction, they “will just invest in something else,” and studios wanting to produce films Down Under in future will have to shoulder the risk, he said.

‘Very unsettling’

One person familiar with 10B financing warned: “The national risk to the palatability of this country as a place to make international films is huge. This is very, very unsettling. The ATO does not want to see 10B used for big pictures. They say it is being used as an entrepreneurial tax (device); we say it is a commercial transaction, which cauterizes the downside (for investors) and creates an upside.”

The “Moulin Rouge” rejection follows an earlier negative ruling for the WB/VRP co-production “Red Planet,” which prompted calls from sections of the film industry for the Australian government to act to remove the uncertainty over using division 10B.

Subsequently, communications minister Richard Alston announced a review of the tax rules for offshore production. But that review, which is still ongoing, won’t have any bearing on the “Moulin Rouge” investment.

Gov’t can’t overrule

The government cannot overturn ATO rulings, and any remedial action would require legislation or administrative measures — which are unlikely between now and the federal election due at the latest in December.

A recent report by consultants at Malcolm Long and Associates notes the runaway film sector is a significant industry with growth potential, which in the 1999-2000 fiscal year attracted production worth $211 million.

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