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Studios see red over ‘Rouge’ ruling

Oz gov't reviewing tax law used to bankroll offshore pics

SYDNEY — Local producers fear attempts by the Australian Tax Office to shut down a key film financing avenue is flying a red flag in the face of studios and major independent producers considering lensing Down Under.

The government is reviewing the tax law historically used to bankroll offshore pics, and has promised to deliver a clarification of the law in weeks.

That will be too late for investors of “Moulin Rouge,” whose application for a tax break was rejected last week.

Fox Studios Australia CEO Kim Williams, referring to the principle of “division 10B” financing — and not specifically to the “Moulin Rouge” case — says: “What’s important is that we’re not asking for anything that doesn’t already exist in the (tax) laws. The ATO has chosen to take an aggressive stance against major films. We have sought action from the government to deliver certainty and a competitive context with other nations that offer incentives.”

Arts Minister Peter McGauran refuses comment on the “Moulin Rouge” decision — and on the earlier negative ruling for investors of Warner/Roadshow’s “Red Planet” — but tells Variety he understands producers’ concerns. “Even if the failed applicants under (the division 10B tax provision) deserved to be rejected, it is sending the wrong signals, and the government will address the issue.”

The minister’s office confirms meetings with studio reps have been held in recent weeks.

The ATO decision leaves Fox on the hook for the entire $53 million production budget; investors who had agreed to bankroll the pic did so on condition the film would be granted a 10B ruling.

The deals are structured so that the studio effectively gets a 10% discount on production costs — a handy savings which Fox now will lose on “Moulin Rouge.”

A spokesman for the investors says they are considering a lawsuit to appeal the ruling. “We believe the ATO has deliberately or otherwise misinterpreted the law,” he says, but concedes litigation is not an attractive option because investors, whose money is still being held, will likely just invest in something else rather than wait for the result of a trial.

“The lack of clarity from the government and the ATO is a disincentive for studios and major independents wanting to come here,” says “Moulin Rouge” producer Martin Brown.

Murray Forrest, chairman of AUSFilm, the industry group that promotes Australia as a production destination, worries that the ruling will drive a stake through the heart of Australia as a location for Hollywood filmmakers: “This is the last thing we need. This will turn away production to countries like Canada and Ireland which have incentives and which are making it easier for offshore producers.”

Division 10B has been used to bankroll U.S.-backed films such as “The Matrix” and “Dark City.” Several other films still awaiting ATO rulings include 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 for the second and third editions of “The Matrix.”

Execs at WB and Fox in L.A. refuse comment, and Bruckheimer and “Matrix” producer Joel Silver did not return calls.

Don Groves in Sydney contributed to this report.

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