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FILM LICENSED INVESTMENT COMPANY BILL 1998

1998


THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA


HOUSE OF REPRESENTATIVES








FILM LICENSED INVESTMENT COMPANY BILL 1998


EXPLANATORY MEMORANDUM














(Circulated by authority of the Hon. Peter McGauran MP, Minister for the Arts and the Centenary of Federation)

ISBN: 0642 37750 2

FILM LICENSED INVESTMENT COMPANY BILL 1998

OUTLINE

The Film Licensed Investment Company Bill 1998, together with the Taxation Laws Amendment (Film Licensed Investment Company) Bill 1998 (TLA (FLIC) Bill), provides for the establishment of a pilot scheme for the delivery of tax concessions to investors in the film industry by means of concessional investment in Film Licensed Investment Companies (FLIC). These companies will be required to invest the funds raised in the production of qualifying Australian films (other than a specified percentage allowed for the FLIC to meet its administrative expenses). The scheme will support the continuing development of a uniquely Australian film industry by encouraging investment in the production of high quality, commercially viable films which portray Australian perspectives and Australia's cultural diversity. The scheme is a new and different means of delivering Commonwealth assistance to the film industry. It will be evaluated to determine its success in achieving the stated objectives.

The purchase of shares in a FLIC will attract an up-front tax deduction of 100%. This deduction will only be available to the initial purchasers of shares from the company and not if shares are subsequently on-sold. The scheme will enable up to $40 million of concessional capital to be raised over the financial years 1998-1999 and 1999-2000. Each FLIC will be licensed to raise a pre-determined amount of money that will attract the concessional status (concessional investment). The Minister will determine how many FLICs will be licensed and how much concessional investment each will be licensed to raise.

Divisions 2, 3 and 4 of Part 2 of the Bill provide for the allocation of FLIC licences by means of a competitive process. Applications will be sought in one round and, if the standard of applications received does not justify the allocation of the whole of the concessional investment amount, a second application round will be conducted. To be eligible for consideration for a licence a company will be required to meet certain conditions, which are intended to ensure Australian involvement in the companies; for example, the directors of the company must be Australian citizens and the management and control of the company will be required to be ordinarily exercised in Australia. Selection criteria, which will provide a mechanism for the comparative assessment of applications, will be set out in a disallowable instrument made by the Minister.

Division 6 of Part 2 of the Bill sets out the conditions of the scheme to which each FLIC will be subject. A FLIC will be licensed to raise the determined amount of concessional capital by 30 June 2000 and will be required to invest that capital by 30 June 2002 in qualifying Australian films, each of which must receive a final certificate issued under s124ZAC of the Income Tax Assessment Act 1936 (ITAA) by 30 April 2003. "Qualifying Australian film" has the same meaning as in section 124ZAA of the ITAA. To encourage the development of a broader based Australian film industry, a FLIC cannot invest in films developed or produced by licensees under the Broadcasting Services Act 1992 or by the national broadcasters. Limitations will be imposed on the power of the FLIC to borrow money during the licence period, to raise other capital, on the level of share ownership by an individual or single entity and on foreign ownership. Detailed ownership rules, including the setting of a maximum individual, single entity or foreign shareholding at 33%, are set out in the Schedule to the Bill. A FLIC licence will not be transferable.

Division 7 of Part 2 of the Bill sets out the powers of the Minister to deal with breaches by a FLIC of the conditions and the procedures that are to be followed. Under clause 32 the Minister may decide not to take any action, may give the FLIC a notice that the breach must be remedied, revoke the licence (if the breach occurs during the licence period) or may decide to remove the concessional status of the shares. Where a decision to remove the concessional status is made, the TLA (FLIC) Bill will provide that shareholders will then lose their entitlement to a tax deduction for the shares. Division 7 also makes provision for the FLIC to be given an opportunity to make submissions before a decision is taken, for the FLIC to be given a statement of reasons for the Minister's decision and for the Commissioner of Taxation to be notified of the Minister's decision.

Division 8 of Part 2 provides for each FLIC to report regularly for the purposes of monitoring and evaluation of the scheme. The reports provided by the company will be important in monitoring compliance with conditions of the scheme and evaluating the success of the pilot scheme. Provision is also made for certain information to be passed to the Commissioner of Taxation.

The Bill contains penalty provisions for not providing information or for providing false and misleading information to the Minister and also in relation to deliberate actions of shareholders designed to avoid the limitations on ownership of shares.

FINANCIAL IMPACT STATEMENT

The Film Licensed Investment Company (FLIC) scheme will be able to raise up to $40 million worth of concessional capital for investment into qualifying Australian film and television product over the two year period (1998-1999 and 1999-2000). The cost to the Commonwealth in revenue forgone will depend on the extent of the take-up under the concession, the tax rates of the investors and the extent to which it substitutes for access to the access to the concessions provided for in Divisions 10BA and 10B of Part III of the Income Tax Assessment Act 1936 (ITAA). If the FLIC raises the maximum of $40 million in concessional capital over the two years and this represents additional investment in the film industry, the cost to revenue would be a maximum of around $20 million over those two years.

REGULATION IMPACT STATEMENT FOR TAXATION MEASURES - FILM LICENSED INVESTMENT COMPANIES

OBJECTIVES

The objectives of the Film Licensed Investment Company (FLIC) scheme are as follow:

• Encourage the production of Australian films which portray Australian perspectives and Australia’s cultural diversity

• Encourage the development and production of Australian films which are of a high standard and are likely to be commercially successful

• Support and promote the ongoing development of the Australian film industry through encouraging the use of Australia’s creative resources and industry expertise

• Ensure that the level of Government assistance to the Australian film industry through this program is quantifiable, transparent and accountable


The Government’s announcement of the 15th November 1997 provides the authority for the implementation of this proposal.

BACKGROUND

Since 1981 the Commonwealth has provided tax concessions for capital investment in Australian film and television production through Division 10BA (10BA) of the Income Tax Assessment Act 1936 administered jointly by the Australian Taxation Office (ATO) and the then Department of Communications and the Arts (the Department). 10BA allows for a 100 per cent deduction on investment in Australian film and television and is able to be claimed in the year of investment. Concessions are available only for qualifying Australian films which meet criteria set within the legislation and are certified by the Department. The ATO has responsibility for compliance of tax deductions under the 10BA provisions.

The Government has decided that the current 10BA provisions for film investment be retained and a two year Film Licensed Investment Company (FLIC) pilot scheme be introduced with administration of eligibility remaining jointly with the ATO and the Department (now the Department of Communications, Information Technology and the Arts). The decision forms part of the Government’s response to the Review of Commonwealth Assistance to the Film Industry (the ‘Gonski review’) delivered to the Government in February 1997. The Gonski review found that as a result of industry dynamics and US domination of the market, Australia would not have a sustainable film industry without government support. However, Gonski noted that while government support is necessary to address market imperfections and achieve cultural objectives, the industry needs to attract increased private investment if it is to grow, mature and reach its potential.

Gonski concluded that, due to market imperfections, private investment in film production required government subsidy to offset risk and often poor returns. In particular, Gonski recommended that the introduction of a FLICs scheme would be a more effective and efficient way of using tax concessions to attract investment in film production, than the current 10BA arrangement.

There has been criticism in regard to the effectiveness of the current 10BA concession. The industry has been critical of the level of private investment being raised by the concession as well as the transparency of product receiving the investment, which is not easily identified at the level that costs to the revenue would suggest. The ATO is currently investigating a number of 10BA claims as part of a wider examination of tax shelters. It has found 12 instances where the film was not made, and 13 films where the amount spent on the film was much less than the deductions claimed. This has resulted in a need to review the assessments of a total of 3,000 tax payers. That said, there are sectors of the industry which argue for the retention of the 10BA concession. This forms the basis of the Government’s decision to retain 10BA while the FLIC scheme is piloted.

IDENTIFICATION OF IMPLEMENTATION OPTIONS

The following options were considered in consultation with the industry as possible Government responses to the Review of Commonwealth Assistance to the Film Industry.

Option 1

This option involves the implementation of the Film Licensed Investment Company (FLIC) tax concession as a two year pilot scheme. Under the FLIC scheme investors in the company will be eligible for a 100% upfront tax deduction on the costs of their shares. The concession will be reviewed after two years. The current tax deduction under Division 10BA (10BA) of the Income Tax Assessment Act 1936 (ITAA) will be retained for the duration of the pilot.
Under the FLIC scheme:
1) Up to $40 million worth of concessional capital will be allowed to be raised for investment into Qualifying Australian Films (QAF) over two years;
2) Licences will be granted through a competitive application process to companies which have expertise in the development, production and distribution of film and television productions;
3) The FLIC will be allowed to raise a designated amount of concessional capital over a two year period which it must invest in the development and production of Qualifying Australian Films (QAF) within three years;
4) Subscribers will be entitled to an upfront tax deduction upon full payment of their shares;
5) The FLICs will operate as new Australian owned and controlled companies. The company’s head office must be in Australia and it must be registered as a corporation under Corporations Law. All the directors must be Australian citizens and the company will be unable to pass its losses on to other entities. A FLIC will invest in a slate of qualifying Australian films as currently defined under 10BA; and
6) If a FLIC breaches its licence conditions the Minister may decide that the concessional shareholders will lose their deductions.

Option 2

As part of the development of the proposal an alternative implementation option was considered with the FLICs being delivered through a direct outlays program. This program would replace the current 10BA tax concession. Under this option:
1) Licences would be granted to two or three companies which have expertise in the financing of film and television program productions.
2) The film licensed investment companies would be permitted to raise a designated amount of concessional capital from private investors over a three year period.
3) The Commonwealth would provide funding to each FLIC, up to an agreed maximum, which would be supplemented by funding raised from the private sector.
4) A set amount of direct funding would be nominated for each year during a three-year period for use by the FLIC in conjunction with private investment funds.

Option 3:

Retention of the current 10BA tax concession.

IMPACT ANALYSIS

Impact group specification

There are a number of groups likely to be affected by the options outlined above. These groups and likely affects are summarised in the following table.

*The current 10BA concession imposes costs on producers by requiring the certification of productions as qualifying Australian films, the provision of information to support the application, a final certification process once the film is complete and costs to investors of obtaining these certifications to support their claims for the deduction. Similar costs would be incurred by producers in order to attract FLIC investment.

In summary, Option 1 provides both the advantage of increased transparency of costs to Government, through the FLIC pilot, with minimal variation to the current costs to impact groups of the current 10BA concession. The retention of 10BA ensures that one-off producers and investors, and producers unable to attract FLIC funding, still have access to a tax concession.

Option 2 provides certainty and greater transparency than either of the tax concession options, but may result in increased costs to investors.

Option 3 retains the current status quo, but remaining uncapped and uncertain in terms of costs to the government. The relative efficiency and transparency of the system in relation to costs claimed and product produced is also questionable.

Assessment of costs

Option 1

The total costs to the Government of the FLIC concession will be capped by the limited amount of concessional share capital that may be raised by the FLIC. This is a total of $40 million over the two income years 1998/99 and 1999/2000. This is in addition to the revenue forgone of the current 10BA concession, which is estimated in the 1996-97 Tax Expenditure Statement as being around $22 million annually. Administration of the FLIC scheme will be shared between the Department (selection and monitoring of FLIC licences, assessing Qualifying Australian Films, general reporting requirements) and the ATO (compliance). Administration of the current 10BA scheme is similarly shared.

It is expected that there may be a small marginal increase in the Department’s administration costs particularly in the short term from the introduction of the FLIC scheme, in particular through the process for the promotion of the scheme, selection of FLIC licences and then the ongoing monitoring and evaluation of the scheme. The Department’s administrative costs will be accommodated within current running cost arrangements for the Department. The ATO cannot estimate effects on its administration costs of the proposal at this stage. It is not expected that there would be a significant increase in the level of complexity in the taxation system through the introduction of FLICs.

Option 2

The assessment of costs under Option 1 applies also to Option 2 excluding the costs of 10BA. However, because of the nature of a direct outlays program, there may be additional costs to investors as they will not receive a front end tax deduction and will only receive benefits once the film makes a return. There may also be additional compliance costs to both the investor and the FLIC due to increased levels of accountability required by the Government for grant funds provided to the FLIC.
The option would decrease the complexity of the tax system by removing Division 10BA concession from the Income Tax Assessment Act and introducing a direct outlays program as a replacement.

Option 3

Current costs of 10BA.

Benefits of the Options

The benefits of the proposed FLIC scheme (options 1 or 2) to affected groups can be seen as:
1) Independent producers will be able to access FLIC funding (subject to competition) for their projects which will be part of production slates across which risk can be shared;
2) Independent producers and the FLICs may be able to fund a broader range of product (different genres and budget size) than currently under 10BA;
3) Companies receiving FLIC licenses will be able to raise concessional capital for investment in a slate of film and television products across which risk is shared;
4) The FLICs will attract non-industry investment into companies which may be able to be sustained in the long-term without government support;
5) The Commonwealth will have greater certainty that product supported by the concession will reach audiences, and thereby contribute to the Government’s cultural objectives for the industry;
6) The Commonwealth will be able to cap the level of concession provided to the industry; and
7) The industry will have better information on the product supported by the concession than currently under 10BA.

In addition, option 1 has the following benefits:

1) Investors in FLICs will receive an upfront tax concession on their investment into the company;
2) The Commonwealth will be able to minimise any opportunities for abuse of the tax concession through licensing arrangements and compliance and reporting measures;
3) The introduction of the scheme as a pilot whilst retaining 10BA gives the industry security while the scheme is tested. Investors and producers retain a concession which is more accessible than the FLICs and the ability to invest in on-off projects of their choice; and
4) Significant additional levels of Government financial support for the industry.

Option 3 can be seen as:

Maintaining current costs (see *) and compliance requirements for investment in film and television with no impact on the industry.

CONSULTATION

Ongoing consultation on this issue has been undertaken by the Department. In addition to materials provided by the industry as part of the Gonski review, consultation was undertaken in September 1997 specifically on the issue of tax concessions for film investment. As part of this consultation process a joint officials paper, prepared by the Department in consultation with the Treasury, Department of Finance and Department of the Prime Minister and Cabinet was distributed to key representatives of the film and television industry (including producers, industry associations, distributors and financial advisers) and made available through the Department’s web site. This paper considered options for replacement of the current 10BA concession and detail on the FLICs proposal (delivered through a tax concession or through direct outlays). A series of forums were undertaken with representatives of sectors of the film industry in mid-September. Written advice was also received by the Department in response to the joint officials paper.

There was little industry support for the direct outlays program (Option 2). The industry considered that this option would not attract investment into the FLICs as it would provide ‘back-end’ benefits which would not attract ‘up-front’ investment in a high risk industry. Further, the industry considered that the current investment market was attuned to tax-based investment and that there would be considerable cost and delay in developing an investment market able to promote and attract investment into a direct outlay FLIC.

Further consultations were undertaken in December 1997 with representatives of both the film industry and the investment sector on the details of the FLIC pilot scheme (Option 1). An outline of the proposed pilot scheme was distributed to key representatives for discussion. The issues covered in these meetings included the proposed tax treatment of investors under the scheme, the corporate structure of the FLIC, ownership and control issues and the core activities to be undertaken by the FLIC. Consultation with both film industry and investment sector representatives has been ongoing on the details of the operation of the scheme and has included the distribution of an outline of the legislation and Ministerial guidelines for comment.

Option 1 involves both the retention of the current 10BA system and the introduction of a new scheme involving additional government funding for the industry. Option 3 (the retention of the current 10BA system) is therefore less positive for the industry involving no new initiatives. In regard to Option 1 there was considerable support for FLICs particularly from industry associations, although there were differing views on some of the details of the scheme. There was also concern that the zero cost base treatment of CGT may act as a deterrent to potential investors. The retention of 10BA (option 1 ) in addition to the introduction of the FLIC pilot was supported by sectors of the industry on the grounds that:
1) it is open to all comers with no government ‘picking of winners/favourites’;
2) the industry will not be able to grow if all assistance is directed through capped funding;
3) there are increasing numbers of legitimate, commercial films being made in part, through 10BA raisings (The Wiggles, Solarmax, Strictly Ballroom);
4) FLICs will, by their nature, be less accessible to film makers outside Sydney/Melbourne; and
5) it provides security to the industry while the FLIC tax concession is trialed.

CONCLUSION AND RECOMMENDED OPTION

Following consideration of the above three options, the Government decided that the FLIC scheme be introduced as a two year pilot whilst retaining the current 10BA tax concession (option 1) for film investment. The FLIC scheme will provide significant additional financial support to the industry and another funding “door” option. It also addresses industry concerns regarding the introduction of a new tax concession in the absence of 10BA (option 2) and thereby provides security to the industry and wider access to funding. In addition, the up front nature of the concession and the ability of the FLICs to spread risk across a slate of productions is seen as valuable in attracting non-industry investors into a high risk industry. The FLIC scheme will also deliver Government support to the industry in a form that is transparent and accountable. Ongoing consultation with the industry over the details of the scheme made clear the industries preference for Option 1 over the direct outlay form of support of Option 2.

The administrative costs of the scheme to the Government will be slightly more than existing arrangements and costs to Government in revenue forgone will also increase. Costs for accessing 10BA will remain the same. Producers attempting to attract funding from a FLIC will need to provide similar information to the FLIC as currently required by 10BA and any additional costs of doing business with a FLIC. Application, compliance and reporting costs may be marginally higher than current 10BA arrangements for companies eligible to obtain a FLIC licence. Costs to investors in a FLIC will be marginally less than current 10BA costs as the investor does not need to invest project by project but can make one investment in the FLIC.

The scheme will be jointly monitored by the Treasury, ATO and the Department. The monitoring process will be ongoing and a review will undertaken by the Department after two years.

NOTES ON CLAUSES

Part 1 - Preliminary

Clause 1 - Short title

Clause 1 provides for the citation of the Film Licensed Investment Company Act 1998 (the Act).

Clause 2 - Commencement

Clause 2 of the Bill provides for the Act to commence on Royal Assent.

Clause 3 - Overview of the pilot scheme

Clause 3 explains that the scheme in the Bill is a pilot scheme, under which a company may apply for a licence to raise investment that attracts a tax concession, and provides an overview of the operation of the scheme to assist readers. The Taxation Laws Amendment (Film Licensed Investment Companies) Bill 1998 includes detailed provisions about the operation of the tax concession.

Clause 4 - Objects of the pilot scheme

Clause 4 sets out the objects of the scheme. It is intended that the decision-making criteria determined under clause 10(1) will, amongst other things, include one or more criteria relating to a comparative assessment of the extent to which each applicant would, if granted a licence, further one or more of these objects. It is also intended that the evaluation of the scheme will consider the extent to which the scheme has met these objects.

The objective in paragraph 4(a) is intended to assist in achieving the Commonwealth's cultural objectives by directing assistance through a tax concession to the development and production of qualifying Australian films.

In furtherance of the objective in paragraph 4(b), it is intended that each FLIC will be commercially driven and will be expected to invest in a slate of qualifying Australian films which the company considers will maximise returns to its investors.

The objective in paragraph 4(c) is intended to facilitate industry development and growth through an innovative mechanism that is expected to attract increased private investment into the development and production of qualifying Australian films. Australian producers will be able to seek investment from a FLIC.

The objective in paragraph 4(d) is intended to ensure that the scheme meets accountability standards for government assistance. The amount of concessional capital that may be raised under the scheme is capped. This will enable clearer estimations of revenue forgone to the Commonwealth.

Clause 5 - Extra-territorial operation

Clause 5 provides that the proposed subparagraph 25(a)(v), section 27, Part 3 and the Schedule would apply within and outside Australia. Those provisions relate to limitations imposed on investment in films developed or produced by the associates of licensees or providers of broadcasting services in accordance with a class licence determined under the Broadcasting Services Act 1992 and the limitations imposed on ownership of shares in a FLIC by foreign persons and their associates. This clause is necessary to enable the application of the provisions to persons who are not in Australia.

Clause 6 - Definitions

This clause contains definitions of key terms used in the Bill.

The term “concessional capital” is defined to mean money paid to a FLIC by a person for the issue, during the FLIC’s licence period, of shares to that person.

The definition of “qualifying Australian film” has the same meaning as it has in Division 10BA of Part III of the Income Tax Assessment Act 1936.

Clause 7 - Application of the Criminal Code

Clause 7 provides that Chapter 2 of the Criminal Code is to apply to all offences against the Act. Chapter 2 of the Criminal Code sets out general principles of criminal responsibility, including elements of offences, circumstances in which there is no criminal responsibility, extensions of criminal responsibility, corporate criminal responsibility and proof of criminal responsibility.

Part 2 - The pilot scheme

Part 2 of the Bill sets out details of the scheme under which a company will be able to apply for a non-transferable licence to raise capital for investment in qualifying Australian films (concessional capital licence). Each concessional capital licence would be valid from the date on which it is issued until 30 June 2000, during which time a licensed company (FLIC) would be authorised to raise a determined amount of capital by issuing shares in the company. Initial purchasers of those shares in the company would be entitled to an up-front tax deduction of 100%. The Part provides for allocation of concessional capital licences by means of a competitive process. The Minister would be required to determine rules concerning the application process and decision-making criteria (including the weight to be given to each criterion) and procedures for allocating a licence. Division 4 of Part 2 provides that after receiving the applications, the Minister will, consistent with the decision-making criteria and procedures determined under clause 10 and having regard to the recommendations of a Selection Advisory Panel, determine how many licences will be granted and the amount of capital each FLIC will be authorised to raise overall (that is, on or before 30 June 2000) and, within that limit, the amount that may be raised before 30 June 1999. Clause 14(2) provides for the total amount of concessional capital available for allocation by the Minister to be capped at $40 million but it is not intended that the Minister be compelled to allocate the total amount.

It is intended that applications will be sought in one round and, if the standard of applications received does not justify the allocation of the total amount of concessional capital, the Part provides for the conduct of a second application round. To be eligible for the grant of a licence a company would be required to meet certain conditions, including that it is a company registered under the Corporations Law that has not commenced business nor exercised any borrowing power, that its directors are Australian citizens, that management and control of the company will be required to be ordinarily exercised in Australia and that all shares in the company are fully paid shares of the same class. The Part provides that FLICs will be required to continue to meet those conditions throughout the period of the scheme, except the condition that it has not commenced business nor exercised any borrowing power.

Provision is also made for FLICs to be subject to additional conditions during the period of the scheme. These include conditions relating to the raising of capital, borrowing and investments in films. Provision is also made for a limitation of 33% to be placed on foreign and individual ownership of a FLIC. In addition, clause 22 provides for the Minister to be empowered to impose additional conditions both before licences are granted and, after consultation with the FLICs, afterwards.

Division 7 of Part 2 sets out matters relating to breach of conditions of the scheme. The Minister is required to follow certain procedures if he thinks that there are grounds for deciding that a FLIC is in breach of a condition. If the Minister is satisfied that a FLIC has breached a condition, he is empowered to decide not to take any action or to give the FLIC notice that the breach must be remedied by a specified date, to revoke the licence (if the breach occurred during the licence period) or to decide to remove the concessional status of shares issued during the licence period. It is intended that revocation of the licence will not of itself remove the concessional status of shares issued by the FLIC before the revocation. If the Minister decides to remove the concessional status of shares, he will be required to notify the Commissioner of Taxation of his decision.

Division 8 of Part 2 sets out reporting requirements for the purposes of monitoring compliance with the Act and evaluating the scheme. A FLIC will be required to provide information to the Minister at six monthly intervals, commencing on 31 December 1998. The nature of the information that each FLIC is required to provide will be determined by the Minister. Provision is made for a person to be guilty of an offence in respect of the provision of information, and including an omission to provide information, that is false or misleading in a material particular. The Secretary to the Department of Communications, Information Technology and the Arts will be required to provide certain information to the Commissioner of Taxation.

Division 9 of Part 2 renders void a purported transfer of a licence and provides for the determination by the Minister of the percentage of concessional capital that may be spent on administrative costs.

Division 1 - Overview

Clause 8 - Overview of Part

Clause 8 provides an overview of Part 2 to assist readers.

Division 2 - Minister to make certain determinations concerning the application process and decision-making criteria

Clause 9 - Application rules

Clause 9 provides for the Minister to determine Application rules. The Application rules will prescribe matters relevant to the application process and will include the method of application, provision of a closing date, the information that an applicant company would be required to submit to the Minister and other procedures relating to the application process. It is intended that the information to be submitted would include details about the company and its directors and staff, its business plan and investment policy and strategy, as well as information necessary to enable a thorough assessment of the merits of the application against the decision-making criteria, including in comparison with other applicants.

In addition, it is intended that the Application rules would make provision for the establishment and operation of a Selection Advisory Panel (SAP). It is intended that the SAP would include people who have expertise in commercial investment and/or different aspects of the film industry and that it will consider and assess applications and make recommendations to the Minister. Clause 18 will require the Minister to have regard to the recommendations of the SAP.

Clause 43 makes a determination made under clause 9 a disallowable instrument.

Clause 10 - Minister must determine decision-making criteria and procedures

Clause 10(1) requires the Minister to determine criteria to be applied and procedures to be complied with in deciding whether to grant a concessional capital licence, how many licences to grant and the amount of concessional capital to be allocated to each FLIC to raise.

It is intended that the decision-making criteria determined under this clause will enable a thorough assessment of each application in its own right and as compared with other applications. It is intended that the decision-making criteria will, amongst other things, include one or more criteria relating to a comparative assessment of the extent to which each applicant would, if granted a licence, further one or more of the objects of the scheme set out in clause 4. It is also intended that the decision-making criteria will include one or more criteria relating to the expertise of the key personnel in, for example, the film industry or investing in commercially successful projects.

Clause 10(2) requires the Minister to determine the weight to be given to each decision-making criterion. It is intended that different criteria may be given different weight and also that equal weight may be given to two or more criteria. the purpose of this provision is to assist applicants to understand the relative importance of different criteria in the decision-making process.

Clause 43 makes a determination made under clause 10 a disallowable instrument.

Division 3 - The application process

Clause 11 - Rounds of applications

Clause 11(1) provides for the Minister to call for applications for a concessional capital licence.

Clause 11(2) provides that, if the Minister decides not to allocate the total concessional capital in the first round of applications, a second application round may be held. That round would be a fresh process but applicants who are unsuccessful in the first round will not be precluded from applying if a second round is held. After the first round, the Minister will, under clause 19, be required to provide each unsuccessful applicant with the reasons for his decision not to grant a licence to that applicant. This means that such applicants will have the opportunity to lodge a second application and to address any perceived shortcomings in their first application. Applications in the second round will not be limited to those who applied in the first round.

Clause 12 - Applications

Clause 12 provides that a company may apply for a concessional capital licence and that applications must be in the specified form and including required information. Applications must be given to the Minister. Clause 14(1) confirms that only a company registered under the Corporations Law may be granted a concessional capital licence.

Clause 35 specifies that a person is guilty of an offence if the person makes a statement in an application or in response to a request for further information in clause 13 that the person knows is false or misleading in a material particular. The offence also relates to omissions from statements. These offence provisions are intended to ensure that the Minister has complete and accurate information upon which to make a comparative assessment of applications.

Clause 13 - Further information

Clause 13(1) empowers the Minister to seek further information from an applicant about its application and to specify the period within which the information is to be provided. The purpose of this provision is to ensure that all necessary information is available to the Minister. For administrative efficiency, clause 44 enables the Minister to delegate this power to the Secretary to and certain officers of the Department of Communications, Information Technology and the Arts.

Clause 13(2) confers on the Minister a discretionary power to refuse to consider an application if requested information is not provided within the specified period. The purpose of this provision is to ensure that the decision-making process is not unduly delayed by the failure of applicants to provide information in a timely fashion.

Division 4 - Grant of licence

Clause 14 - Minister to determine number of licences to be granted and amount of concessional capital FLICs are licensed to raise

Clause 14(1) provides for the Minister to determine how many licences to grant and the amount of concessional capital to be allocated to each licensee. Each FLIC will be authorised to raise only the amount of concessional capital specified in the determination. It is intended that it be open to the Minister to decide to allocate different amounts of concessional capital to different licensees. The purpose of this provision is to empower the Minister to make decisions, in accordance with the decision-making criteria made under clause 10, about the division of the available concessional capital.

Clause 14(2) imposes a limit of $40 million on the amount of concessional capital available for allocation by the Minister.

Clause 14(3) recognises that there will be a number of applicants for a finite pool of concessional capital and that the Minister may decide not to give all applicants a licence to raise concessional capital nor authorise the raising of the full amount for which an applicant has applied. It is also intended that it be open to the Minister to authorise an applicant to raise a higher amount of concessional capital than that applied for.

Clause 14(4) imposes a limit of $20 million on the amount of concessional capital available for allocation by the Minister in the 1998-1999 financial year. The purpose of this clause is to ensure that the revenue forgone to the Commonwealth in the 1998-1999 financial year does not exceed $10 million.

Clause 14(5) requires the Minister to specify the amount of concessional capital able to be raised by each FLIC in the 1998-1999 financial year (the first year amount). However this limitation will not prevent the FLIC raising the total amount allocated to it under paragraph 14(1)(b) over the two year period. If a FLIC does not raise the first year amount in the 1998-1999 financial year for any reason, it will be open to the FLIC to raise the balance of the total amount in the 1999-2000 financial year.

Clause 14(6) provides that the Minister is not required to grant any licences nor allocate all the concessional capital available to be allocated. Clause 15(2) empowers the Minister to hold a second application round if he decides not to allocate the total concessional capital in the first round of applications. The effect of clause 14(6), however, is intended to be that the Minister is not required to allocate all available concessional capital in either the first round or the second round, if held. The purpose of this provision is to ensure that the Minister is not required to allocate licences or a particular amount of concessional capital in circumstances where the applications received do not meet the decision-making criteria determined under clause 10 or do not meet those criteria at an acceptable standard.

Clause 14(7) requires the Minister’s determination under clause 14(1) to be in writing.

Clause 15 - Conditions on grant of licence

Clause 15 provides for conditions that must be met before the Minister is able to grant a concessional capital licence to an applicant. The condition in paragraph 15(b) is intended to ensure that licences are granted to new companies with no business history. The conditions in paragraphs 15(c) and (d) are intended to ensure that the company is predominantly Australian in character by imposing a requirement that it have its headquarters in Australia and Australian directors. The condition in paragraph 15(e) is intended to ensure that every shareholder in a FLIC has an equal opportunity to vote and that control of the company cannot be distorted by manipulation of share classes with differing rights attached.

Clause 16 - Grant of concessional capital licence

Clause 16 confers on the Minister a discretionary power to grant a licence to raise concessional capital to a company and provides for a company granted such a licence to be known as a FLIC.

Clause 17 - Form of licence

Clause 17 provides that a licence must be in writing and must state the amount of concessional capital that the FLIC is entitled to raise overall and before 30 June 1999 (see clause 14) and the conditions of the scheme to which the FLIC is subject. In addition the notice must state that the conditions determined by the Minister under clause 22 may be altered at any time after consultation with the FLICs. The purpose of this clause is to ensure that each FLIC has a clear statement about the scheme that can be made available to potential investors to assist them (and the FLIC) to comprehend the operation of the scheme.

Clause 18 - Minister is to have regard to recommendations of SAP

Clause 18 provides that the Minister must have regard to the recommendations of the Selection Advisory Panel in deciding whether to grant a licence under the scheme and the amount of concessional capital to be allocated to a FLIC to raise during the licence period. The purpose of this clause is to ensure that the decision-making process is informed by people with appropriate expertise.

Clause 9 provides for the making of a disallowable instrument that includes provisions for the establishment and operation of a Selection Advisory Panel (SAP).
Clause 19 - Notice of refusal to grant licence

Clause 19 provides that the Minister must notify an unsuccessful applicant of his decision and provide reasons for the refusal to grant a licence. Section 25D of the Acts Interpretation Act 1901 provides that where an Act requires a person making a decision to give written reasons for the decision, the instrument giving the reasons shall also set out the findings on material questions of fact and refer to the evidence or other material on which those findings were based. Accordingly, the Minister must, in giving the reasons for the decision to refuse to grant a licence, set out those elements.

The provision of reasons for a decision to refuse an application in the first round will assist applicants to consider whether or not to make an application in the second application round if any (see clause 11) and to address any perceived shortcomings in their proposal.

Division 5 - Term of licence

Clause 20 - Term of licence

Clause 20 provides for a concessional capital licence to come into force when it is granted and to remain in force until 30 June 2000, unless it is revoked beforehand under clause 33. The proposed term of a concessional capital licence is consistent with the scheme being a pilot scheme with revenue forgone for the financial years 1998-1999 and 1999-2000.

Division 6 - Conditions of Scheme

Clause 21 - General

Clause 21 summarises the conditions that apply for the period of the scheme, that is until 30 June 2003.

Clause 22 - Conditions in a disallowable instrument

Clause 22(1) provides that the Minister may determine in writing conditions that are to apply to all FLICs under the scheme. The purpose of the clause is to enable the Minister to impose additional conditions on the FLICs if he should consider it necessary or desirable for the proper operation of the scheme. A condition made by determination under this clause will apply to all FLICs. The clause is not intended to empower the Minister to impose a condition on one FLIC that is not imposed on all FLICs.

Clause 22(2) allows the Minister to revoke or vary conditions determined under clause 22(1), including imposing new conditions at any time after the grant of licences after consulting each of the FLICs. The purpose of this provision is to ensure that each FLIC is given the opportunity to make a submission to the Minister in connection with a proposed revocation or varying of the conditions. No obligation is imposed on the Minister to consult with applicants or potential applicants about proposed conditions before a FLIC licence is granted.

Clause 43 makes a determination made under clause 22 a disallowable instrument.

Clause 23 - Fundraising conditions

Clause 23 will impose restrictions on the fundraising of a FLIC. The condition in clause 23(a) is intended to ensure that a FLIC does not raise more concessional capital than the amount authorised by the Minister in accordance with clauses 14(1) and 14(4). The conditions in clauses 23(b) and (c) are intended to ensure that concessional capital raised by a FLIC is available for investment in qualifying Australian films and not diverted to debt servicing. Clause 23(c), however, provides that a FLIC may raise funds in the 1998-1999 financial year solely for the purpose of meeting administrative costs. This provision recognises that a FLIC is likely to incur administrative expenses before it has raised any or sufficient concessional capital to meet those expenses. Clause 23(d) is intended to prevent a FLIC from raising capital other than concessional capital during the period in which it is authorised to raise concessional capital and to allow the FLIC to raise such capital after the end of the licence period. The purpose of clause 23(d) is to separate the periods in which concessional and non-concessional capital may be raised in order to prevent a mixing of those funds and possible confusion amongst potential shareholders. It will also facilitate an assessment of whether the scheme is effective in attracting investment in the film industry and is intended to reduce the opportunities for use of the scheme for tax avoidance.

Clause 24 - Investment conditions

Clause 24 imposes conditions on investments that may be made by a FLIC.

Clause 24(a) imposes a condition that concessional capital raised by a FLIC, less an amount for administrative expenses, must be invested in provisionally certified films. Provisionally certified film is defined in clause 6 as a film that has received a provisional certificate under section 124ZAB of the ITAA. That section includes the requirement that a film be a qualifying Australian film for a provisional certificate to be issued. Clause 24(a) provides for the amount to be invested in provisionally certified films to be reduced by the allowable deduction percentage. That percentage is defined in clause 37(2) as a percentage of the concessional capital raised by a FLIC that may be used to meet its costs of administration. The percentage is to be determined by the Minister for each FLIC under clause 37(1).

Clause 24(b) imposes a condition that the concessional capital raised under the scheme must be invested on or before 30 June 2002. The purpose of the clause is to ensure that investment of concessional capital cannot be deferred indefinitely. In providing for investment to be completed two years after the final date on which concessional capital may be raised, the clause recognises that investment cannot necessarily be completed immediately after the funds are raised.

Clause 24(c) provides that a FLIC cannot invest both concessional and non-concessional capital in the same film. The purposes of this provision are to enable proper monitoring of the investments made by a FLIC and to reduce the opportunities for the scheme to be used for tax avoidance.

Clause 25 - Film conditions

Clause 25 imposes conditions in respect of films in which a FLIC may invest.

Clause 25(1) prevents a FLIC from investing in a film developed or produced by licensees under or providers of broadcasting services in accordance with a class licence determined under the Broadcasting Services Act 1992 or their associates or by the national broadcasters. The purpose of this provision is to ensure that, consistent with the objectives of the scheme and other existing assistance to the film industry, assistance is primarily directed to the independent production sector.

Clause 5 of the Schedule to the Bill provides a definition of “associates” for the purposes of the ownership provisions in the Bill. This definition also applies to associates under clause 25 due to the extended meaning of “ownership provisions” in Clause 2 of the Schedule to the Bill. “Ownership provisions” means subparagraph 25(a)(v), section 27, Part 3 and this Schedule.

Clause 25(b) imposes the condition that the films in which a FLIC invests must receive a final certificate under section 124ZAC of the ITAA on or before 30 April 2003. The purposes of this condition are to facilitate evaluation of the scheme and to ensure that, in accordance with the objectives of the scheme, investment is made in qualifying Australian films.

Clause 26 - Preconditions and conditions in the Minister's determination under section 22

Clause 26(a) imposes the condition that a FLIC continue to comply with conditions on grant of a licence set out in clause 15 (other than the condition that the company not have commenced business or have exercised any borrowing power, which can have no application beyond the initial application and grant of a licence). The purpose of this condition is to ensure that the conditions imposed in respect of the grant of a licence continue to apply to each FLIC for the duration of the scheme.

Clause 26(b) imposes the condition that a FLIC comply with the conditions determined by the Minister under clause 22.

Clause 27 - Ownership condition

Clause 27 provides that a FLIC must not have an unacceptable level of foreign or individual ownership. The purpose of the clause is to restrict the level of foreign and individual ownership of a FLIC.

An “unacceptable level of foreign-ownership” exists in relation to a FLIC if a group of foreign persons hold, in total, a particular type of stake in the FLIC of 33% or more.

An “unacceptable level of individual ownership” exists in relation to a FLIC if one or more persons hold a particular type of stake in the FLIC of 33% or more.

Clause 27(4) provides that the Schedule sets out definitions of expressions used in this clause.

The expression “foreign person” is defined in clauses 2 and 3 of the Schedule to mean a foreign citizen not ordinarily resident in Australia; a company in which any individual foreign person or company holds more than a 33% ownership stake; a company in which an ownership stake of 33% or more is held by two or more foreign persons or foreign companies; and a trustee of a trust estate in which foreign persons or foreign companies hold, either individually or together, a substantial interest.

Clauses 11 and 12 of the Schedule define the different types of stake in a FLIC to which the ownership limits would apply. Clause 11 provides that a person’s stake in a FLIC is the aggregate of "direct control interests" held by the person and by the person's associates. Clause 12 enables "direct control interests" to be measured as a percentage of paid up share capital, voting power, rights to distribution of capital or profits on winding up and rights to distribution of capital and profits otherwise than on winding up.

Clause 5 of the Schedule provides that persons will be taken to be an "associate" of another person if they are a relative, partner, employee of the person; a company in which the person is an officer, or an officer in the same company; a co-employee, trustee of a trust where the other person benefits from the trust; a company in accordance with whose directions the directors are accustomed to act; a company in which the person has an ownership stake of 33% or more; and a person who holds more than a 33% stake in another company.

Clause 28 - Other conditions

Clause 28 imposes additional conditions on a FLIC.

Clause 28(a) prohibits any purported transfer of a FLIC licence. This clause operates in conjunction with clause 38 which renders any purported transfer of a licence void. The purpose of the clauses is to ensure that the concessional capital licences granted by the Minister remain with the companies that were granted licences following the comparative assessment and decision-making process.

Clause 28(b) requires a FLIC to comply with the reporting requirements set out in a determination made under clause 32. The purpose of this clause is to ensure that required information is provided to the Minister. Provision of adequate information will be essential to the proper monitoring and evaluation of the scheme.

Clause 28(c) requires a FLIC to notify each shareholder of any decision of the Minister under clause 32 in respect of a breach of condition. The purpose of this clause is to ensure that shareholders are kept informed of any decisions that may affect the concessional status of their investment and are afforded the opportunity to take action in connection with that status.

Clause 28(d) requires a FLIC to maintain a separate bank account for its concessional capital. The purposes of this provision are to facilitate monitoring of the investments made by a FLIC and to reduce the opportunities for the scheme to be used for tax avoidance.

Division 7 - Breach of conditions

Clause 29 - Minister to notify FLIC of suspected breach of conditions

Clause 29 requires the Minister to notify a FLIC in writing that he is of the opinion that it may have breached a condition of the scheme, giving his reasons and inviting the FLIC to make a written submission to him within 28 days. The conditions of the scheme are set out in clauses 23 to 28 and a determination made under clause 22. The purpose of the provision is to ensure that a FLIC has the opportunity to make a submission to the Minister in relation to a suspected breach of a condition before the Minister makes a decision under clause 32.

Clause 30 - Minister may seek information

This clause empowers the Minister to seek further information from the FLIC for the purposes of making a decision under clause 32. The purpose of the provision is to ensure that all necessary information is provided to the Minister before a decision is made. For administrative efficiency, clause 44 enables the Minister to delegate this power to the Secretary and certain officers of the Department of Communications, Information Technology and the Arts.

Clause 35 specifies that a person is guilty of an offence if the person makes a statement in response to a request for further information that the person knows is false or misleading in a material particular. The offence also relates to omissions from statements. These offence provisions are intended to ensure that the Minister has complete and accurate information upon which to make a decision.

Clause 31 - Minister must consider FLIC's submission and information

Clause 31 provides that, in making a decision under clause 32, the Minister must have regard to the matters raised in a submission made by the FLIC (if any) and any further information received following a request made under clause 30. The purpose of the provision is to ensure that the Minister is required to consider the available information and make a fully informed decision on the course of action to take under clause 32.
Clause 32 - Powers of the Minister in relation to breaches of conditions

Clause 32 sets out the powers of the Minister to take action once he is satisfied that a FLIC has breached a condition of the scheme. The clause makes a range of options open to the Minister, which vary in the severity of their impact. The purpose of making a range of options available is to enable the Minister to decide, in his discretion, on the appropriate action according to the type and severity of the breach of condition under consideration, and taking into account any mitigating factors.

Clause 32(1) empowers the Minister to decide to take no action in respect of the breach or to take action under the succeeding subsections. The purpose of the provision is to enable the Minister to decide that a breach of a condition will be overlooked. It is anticipated that a decision to take no action would be made, for example, where it is of a minor or inconsequential nature or where it has already been remedied by the FLIC. If the Minister decides to overlook a breach of a condition, it is nevertheless open to him to take that breach into account in deciding whether to take action in respect of a further breach. The purpose of this latter provision is to ensure that the Minister can consider appropriate action in circumstances where the FLIC has breached the conditions on two or more occasions, even if those individual breaches are of a minor or inconsequential nature. A decision under paragraph 32(1)(a) is reviewable by the Administrative Appeals Tribunal (see clause 42).

Clause 32(2) empowers the Minister to require a FLIC, by written notice, to remedy a breach of condition (paragraph 32(2)(a)) or to revoke the licence (if the breach occurred during the licence period) (paragraph 32(2)(b)) or to decide to remove the concessional status of the shares issued during the licence period (paragraph 32(2)(c)). It is intended that it be open to the Minister to decide to take one or more of the available actions under this clause. Clause 33(3) means that revocation of the licence does not of itself remove the concessional status of shares issued before the revocation. Proposed section 375-865 of the Income Tax Assessment Act 1997 (ITAA 1997) will mean that if the Minister decides to remove the concessional status of the shares, the holders of those shares will lose their entitlement to a deduction. A decision under paragraph 32(2)(a), (b) or (c) is reviewable by the Administrative Appeals Tribunal (see clause 42).

Clause 32(3) provides for the Minister to make a further decision under clause 32(2) if a FLIC fails to remedy a breach of a condition by the date specified in a notice under paragraph 32(2)(a). The actions available to the Minister include issuing a further notice under paragraph 32(2)(a) as well as revocation of the licence or removal of the concessional status of shares.

Clause 32(4) provides that the Minister must notify the Commissioner of Taxation if he decides either not to take any action in respect of a breach or to remove the concessional status of shares in the relevant FLIC. The purpose of the provision is to ensure that the Commissioner of Taxation is provided with information relevant to the proper administration of proposed Subdivision 375-H of the ITAA 1997 (see the accompanying TLA (FLIC) Bill)).

Clause 32(5) provides that the Minister must give to the FLIC concerned written notice of a decision under this clause together with reasons for the decision. Section 25D of the Acts Interpretation Act 1901 provides that where an Act requires a person making a decision to give written reasons for the decision, the instrument giving the reasons shall also set out the findings on material questions of fact and refer to the evidence or other material on which those findings were based. Accordingly, the Minister must, in giving the reasons for the decision, set out those elements.

Clause 32(6) provides that, if the Minister decides to revoke a licence the notice is to include the date on which revocation is to take effect (see clause 33).

Clause 33 - Revocation of licence

Clause 33(1) provides for the revocation of a licence to take effect on a day specified by the Minister. The Minister is required under clause 32(6) to notify the FLIC of the date on which revocation takes effect.

Clause 33(2) provides that the date of effect of revocation must be at least 7 days after the date of the Minister's decision. The purpose of this clause is to ensure that there is adequate time for the FLIC to be notified of the revocation decision before it takes effect.

Clause 33(3) makes it clear that a decision to revoke a FLIC's licence does not of itself remove the concessional status of shares issued by the FLIC before the revocation. The concessional status of such shares would only be removed by a decision under paragraph 32(2)(c).

Division 8 - Information exchanges and reporting requirements

This Division contains other requirements in relation to the operation of the scheme.

Clause 34 - Reporting requirements

Clause 34(1) provides that the Minister may make a determination concerning the reporting requirements that a FLIC must comply with. The reports are a necessary part of the scheme to facilitate monitoring of compliance by the FLIC with the conditions of the scheme. The reports will also provide valuable information to the Minister in relation to the scheme, including whether the scheme is meeting its objectives and resulting in a broader base of investors, more investment in commercially viable qualifying Australian films and the completion of qualifying Australian films within a time span that is shorter than is currently the case.

Clause 34(2) places a restriction on the frequency with which a FLIC can be required to provide reports. The earliest a FLIC may be required to provide a report is by 31 December 1998. The Minister may only require a FLIC to provide a report at six monthly intervals from 31 December 1998 regardless of whether a report was initially requested for 31 December 1998. The restriction is imposed to ensure that a FLIC is not distracted from the task of seeking investors and raising concessional capital by too frequent requests for information. However, the requirement for six monthly reports is in recognition that if there are any problems with the scheme or compliance then it is essential for the FLIC and the Minister to become aware of the problems and resolve them as quickly as possible.

Clause 34(3) empowers the Minister to seek information from a FLIC in relation to the FLIC’s reports. This clause is necessary so that the information in the reports can be fully understood and any misunderstanding or confusion clarified.

Clause 35 - False or misleading statement

Clause 35 makes it an offence for a person to knowingly make a false or misleading statement, or to knowingly omit any matter without which a statement is misleading, in an application for a concessional capital licence, the provision of a report under clause 34 or in response to a request for information under clauses 13, 30 or 34. The maximum penalty on conviction is 12 months imprisonment or a fine of 60 penalty units or both. At the current conversion rate for penalty units (see section 4AB and 4B of the Crimes Act 1911 (Crimes Act)) the fine would amount to $6600.

Clause 36 - Provision of information to the Commissioner for Taxation

Clause 36 provides for the Secretary to the Department to provide certain specified information to the Commissioner of Taxation in writing after the end of each financial year and to provide specified information about shares issued in a FLIC and details of the shareholders to the Commissioner of Taxation after the end of the 1998-1999 and 1999-2000 financial years.

The purpose of this provision is to authorise and require disclosure to the Commissioner of information necessary for the proper administration of taxation matters connected with the scheme.

Division 9 - Other requirements

Clause 37 - Minister may determine allowable percentage for administrative costs

Clause 37 empowers the Minister to determine in writing the proportion of concessional capital that a FLIC is authorised to raise that may be expended in meeting the costs of the administration of a FLIC. Clause 24(a) requires the FLIC to invest the amount of concessional capital raised less the allowable deduction percentage in provisionally certified films. The FLIC is therefore restricted in its spending for administration costs to the allowable deduction percentage.

It is anticipated that the allowable deduction percentage may be different for each FLIC and that the determination will take into account any matters raised by the company in relation to administrative costs in its application for a concessional capital licence. The purpose of clause 37, together with clause 24, is to ensure that expenditure on administration is limited to maximise the amount of concessional capital available for investment in qualifying Australian films.
Clause 38 - Transfer of licence void

Clause 38 renders any purported transfer of a licence void. This clause operates in conjunction with clause 28(a) to prohibit any purported transfer of a FLIC licence. The purpose of the clauses is to ensure that the concessional capital licences granted by the Minister remain with the companies that were granted licences following the comparative assessment and decision-making process.

Part 3-Offences concerning ownership restrictions

Clause 39 - Meaning of terms used in this Part

This clause notes that the Schedule sets out definitions of expressions used in this Part.

Clause 40 - Acquisition of shares

Clause 40 creates an offence if a person or persons acquire shares in a company either knowing, or reckless as to whether, the acquisition would create or exacerbate an “unacceptable level of foreign ownership” in relation to the FLIC, as defined by clause 27. On conviction, a fine not exceeding $44,000 for individuals or $220,000 for corporations would apply, at the current conversion rate for penalty units (see sections 4AB and 4B of the Crimes Act). The fault elements are consistent with Chapter 2 of the Criminal Code.

Clause 41 - Anti-avoidance

Clause 41(1) applies where one or more persons enter into, or begin to carry out, or have carried out a scheme, where it would be concluded that this action was taken for the sole or dominant purpose of avoiding the application of the ownership levels in clause 27. In these circumstances, the Minister would be empowered under clause 41(1) to give the stakeholder a written direction to cease holding that ownership stake within a specified time.

Clause 41(2) establishes an offence, which at the current conversion rate for penalty units (see sections 4AB and 4B of the Crimes Act) would be punishable on conviction by a fine not exceeding $44,000 for individuals or $220,000 for corporations, if a person contravened a direction under clause 41(1). The fault elements of the offence are consistent with Chapter 2 of the Criminal Code.

Clauses 11 and 12 of the Schedule define the different types of stake in a FLIC to which the ownership limits would apply. Clause 11 provides that a person’s stake in a FLIC is the aggregate of “direct control interests” (clause 12 of the Schedule) held in a FLIC by the person and by the person’s “associates” (defined in clause 5 of the Schedule).

Part 4- General administrative matters of the scheme

Clause 42 Review of decisions

Clause 42 provides for the review of certain decisions by the Administrative Appeals Tribunal. Review is available where the Minister decides not to take any action except to consider the breach in deciding on a course of action in the event of any future breach (paragraph 32(1)(a)), where the Minister imposes a timeframe within which the breach has to be remedied (paragraph 32(2)(a)), where the Minister, during the licence period, revokes the licence (paragraph 32(2)(b)) and where the Minister decides that the breach warrants the removal of the concessional status of the shares (paragraph 32(2)(c)).

Clause 43

This clause specifies the determinations of the Minister which are disallowable and therefore require tabling in Parliament in accordance with section 46A and section 48 of the Acts Interpretation Act 1901.

The instruments which are disallowable instruments are:
• the Application rules (clause 9);
• the Selection criteria and procedures (clause 10);
• other conditions applicable to FLICs not specified in the Bill (clause 22); and
• the reporting requirements (clause 34).

Clause 44

Clause 44 allows the Minister to delegate some of his powers under the Act to the Secretary to the Department of Communications, Information Technology and the Arts or a person holding or performing the duties of a Senior Executive Office or equivalent in that Department.

The powers that may be delegated are all information gathering powers in relation to the application process (clause 13), possible breaches (clause 30) and the reports required from the FLIC (clause 34(3)).

SCHEDULE - OWNERSHIP DEFINITIONS

The Schedule defines terms relevant to the ownership restrictions in section 51 and Part 3 of the Bill.

Clause 1 - Object

This clause notes that the object of the Schedule is to define terms used in proposed paragraph 25(a)(v), clause 27 and Part 3. Proposed paragraph 25(a)(v) deals with the restrictions imposed on a FLIC in relation to the associates of a licensee or a holder of a class licence under the Broadcasting Services Act 1992. Clause 27 and Part 3 deal, respectively, with ownership restrictions and offences associated with the ownership restrictions.
Clause 2 - Definitions

The clause defines terms used in proposed paragraph 25(a)(v), clause 27, Part 3 and the Schedule, in particular the terms “associate”, “foreign persons” and “ownership provisions”.

“Associate” has the meaning given by clause 6.

“Foreign person” is defined as a foreign citizen not ordinarily resident in Australia; a company in which a natural foreign person or a foreign company holds more than a 33% ownership stake; a company in which natural foreign persons or foreign companies hold more than a 33% ownership stake; and a trustee of a trust estate in which foreign persons or foreign companies hold, either individually or together, a substantial interest. (The term "not ordinarily resident in Australia" is defined in Clause 3 of the Schedule. Clause 11 of the Schedule defines “a particular type of stake” in a company).

“Ownership provisions” is defined as the provisions in proposed paragraph 25(a)(v), clause 27, Part 3 and this Schedule.

Clause 3 - When foreign citizens are ordinarily resident in Australia

The clause specifies, for purposes of the foreign ownership limits in clause 27, when a foreign citizen would be taken to be "ordinarily resident in Australia".

Clause 1 of the Schedule defines a "foreign person" to include a foreign citizen not ordinarily resident in Australia.

The effect of Clause 3 is that a foreign citizen will be taken to be ordinarily resident in Australia if he or she either has been in Australia on 200 or more days during the last 12 months; or has permission to remain in Australia indefinitely, or is not in Australia but has a right to re-enter Australia and to remain indefinitely; or has, or has a right to be granted, a special category visa under section 32 of the Migration Act 1958.

Clause 4 - Entering into an agreement or arrangement

The clause defines, for purposes of the ownership provisions, the expression “entering into an agreement”. This expression is used in:

• Clause 5 of the Schedule, which defines “associates” of a person to include another person who enters, or proposes to enter, into certain arrangements with the first person; and
• Clause 11 of the Schedule which defines a “stake” of a person in a company to include certain interests not only of that person but also of associates of the person.
Clause 5 - Associates

This clause defines, for purposes of the ownership provisions, the term “associates” of a person. The clause provides that associates of a person include, among other specified persons:

• a company whose directors are accustomed or under an obligation to act in accordance with the directions, instructions or wishes of the person;
• a company where the person is accustomed or under an obligation to act in accordance with the directions, instructions or wishes of the company;
• a company in which the person has a particular type of stake of not less than 33%;
• if the person is a company, a person who holds a particular type of stake in the company of not less than 33%; and
• the trustee of a trust.

The clause specifies that associates of a person include associates of the person’s associates.

One of the effects of this definition of "associates" is to provide a mechanism for tracing interests through a series of companies, for the purpose of determining whether there is a breach of the ownership limits in section 27. For example, if company A held a 0.5% ownership stake in a FLIC and also held more than a 33% ownership stake in company B that itself held a 0.5% ownership stake in a FLIC, then company A would be taken to hold a 1% stake in a FLIC, comprising the direct 0.5% stake and the 0.5% stake attributed to company A by virtue of company B being an associate of company A.

Clause 6 - Power to appoint director

This clause specifies circumstances in which, for purposes of the ownership provisions, a person would be taken to have “power to appoint a director”. The latter expression is used in clause 5, under which persons are associates of each other if they enter, or propose to enter, into an arrangement with each other related to their power, by acting together, to appoint or remove a director of a company.

Clause 7 - Meaning of entitled to acquire

This clause provides that, for purposes of the ownership provisions, a person is “entitled to acquire” anything that the person is absolutely or contingently entitled to acquire, for any reason. The expression “entitled to acquire” is used in clause 8.

Clause 8 - Meaning of interest in a share

This clause specifies the circumstances in which a person is taken to hold an "interest in a share". Under clause 12, the interest of a person in a share is relevant to determining the “direct control interest” of the person in a company, which in turn is relevant to determining under clause 11 the stakes a person holds in the company.

Clause 9 - Certain interests in shares to be disregarded

Clause 9(1) enables interests in FLIC shares to be disregarded for the purposes of the ownership provisions if they are held by a lender in the ordinary course of business.

Clause 9(2) enables an interest in a FLIC share to be disregarded for a period of 90 days or such longer period approved by the Minister, if it is held by a lender in the ordinary course of business who holds the share for a continuous period by reason of enforcement of the loan security.

Clause 10 - Voting power

The clause defines, for purposes of the ownership provisions, the expression “voting power” in a company. Under clause 12, voting power in a company is relevant to determining the “direct control interest” of the person in a company, which in turn is relevant to determining under clause 11 the stakes a person holds in the company.

Clause 11 - Stake in a company

Subclause (1) provides that a particular type of stake that a person holds in a company at a particular time is the aggregate of the direct control interests of that type that the person and associates of the person hold at that time. Clause 12 specifies the types of direct control interests.

Subclause (2) prevents double counting in determining a particular type of stake a person holds in a company.

Subclause (3) prevents double counting in determining the total of the stakes of a particular type that are held by foreign persons.

Clause 12 - Direct control interests in a company

This clause defines four types of direct control interests in a company.

The clause provides that a person holds a direct control interest in a company at a particular time equal to the percentage:

• of the total paid-up share capital of the company in which the person holds an interest at that time (subclause (1));
• of the voting power in the company that the person is in a position to control at that time (subclause (2));
• that the person holds, or is entitled to acquire, at that time of the total rights to distributions of capital or profits of the company to its shareholders on winding-up (subclause (3)); or
• that the person holds, or is entitled to acquire, at that time of the total rights to distributions of capital or profits of the company to its shareholders otherwise than on winding-up (subclause (4)).

Subclause (5) provides for the tracing of direct control interests in a company.

Subclauses (6) and (7) have the effect of ensuring that double counting of foreign interests, held through an interposed foreign company, does not occur as a result of the fractional tracing rule in subclause (5).

Clause 13 - Substantial interests in trust estates

The clause defines the circumstances in which a person is taken to hold a “substantial interest”, or two or more persons are taken to hold an “aggregate substantial interest”, in a trust estate. The expressions “substantial interest” and “aggregate substantial interest” are used in the definition of “foreign person” in clause 2 of the Schedule.

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