Business Brain: It's well worth investing in this plot line
OVER the last number of years in Ireland it seems like taxes are constantly being increased while at the same time, the number of allowances to reduce our taxes are being reduced.
Investment in pensions was traditionally the favoured method of reducing taxes and was touted by the authorities as the most beneficial as it helped you save for the future.
Now that pensions have been decimated by falling asset values, and the tax relief available on them has been greatly reduced with more reductions possible in the future, then perhaps it is no harm to look at another method of reducing your tax liability.
The film industry in Ireland is a relatively thriving one, with large productions such as 'The Tudors' having been made in Wicklow's Ardmore Studios in recent years. Apart from the quality of the facilities, one of the main drivers of the indigenous film industry has been the tax incentives available.
To set the scene, the incentive scheme was broadened in 1993 to bring in individual investors and allow them to benefit from the available tax relief.
The scheme provides tax relief towards the cost of production of certain qualifying films. Up to 80pc of the cost of production for all budgets up to €50m may be raised under the film scheme.
To show how successful this has been, the scheme was originally due to end for investments made up to 31 December 2012, and this has recently been extended up to the tax year December 31, 2015.
Under this scheme, tax relief is available to individual taxpayers on 100pc of their investment in the film production company, and up to a maximum of €50,000 can be invested by each individual under the scheme in any year of assessment.
(There are certain conditions that have to be met in order to qualify for the scheme and the associated reliefs).
Relief is granted by deducting the cost of the investment from the individual's total taxable income for the year of assessment in which the qualifying film investment is made, effectively giving relief at marginal rates.
A certificate called a form FILM 3 must accompany the individual's claim for relief in respect of a film investment. This certificate is issued by the film company, following authorisation by the Revenue Commissioners.
The €50,000 is used to acquire ordinary shares in the qualifying film production company. Once the film has been made, the company is usually liquidated and a distribution made to the shareholders.
In practice, the entire investment amount required is generally financed by way of a combination of borrowings from a financial institution and the investor's own cash.
The following example will best illustrate this: Henry wishes to make the maximum investment of €50,000 in a qualifying film investment.
He has €16,500 cash, but also needs bank borrowings of €33,500 to finance the investment.
As he is paying income tax at the marginal rate, he will receive a deduction from his total income of €50,000, leading to an income tax refund for the year of investment of €20,500 (€50,000 @ 41pc).
When the film is completed, a distribution is made by the company for his shares. For this example, the distribution is €35,000, on the disposal of his shares, and the company retains €15,000 of the original investment.
This €35,000 is sufficient to repay bank borrowings plus interest in full.
Thus, his net gain can be calculated as follows:
Original cash investment (not refunded) = €16,500
Income tax refund (€50,000 @ 41pc) = €20,500
Gain = €4,500
(Note that this is purely for illustrative purposes. There are many different schemes and combinations of financing available).
An investor who cannot obtain tax relief on all of his/her investment in a tax year, either because his/her investment exceeds the maximum of €50,000 investment or his/her income in that year is insufficient to absorb all of it, can carry forward the unrelieved amount to following years up to and including 2012, subject to the normal cap of €50,000 on the amount of investment that can be relieved in any one year.
For example, Brian only had total income of €47,000 in 2010 but made a qualifying investment in Tudor Productions of €50,000 in 2010.
If he had enough income, then Brian would have received a deduction of €50,000 from his total income. The unused €3,000 deduction can be carried forward to 2011 and the relief obtained then.
A husband and wife are each entitled to relief in respect of their own relevant investment(s) in a qualifying film investment, regardless of whether they are jointly, separately or singly assessed for tax purposes.
The limits on the amount of the deductions granted are applied separately to the investment(s) made by each spouse.
In these days of higher taxes and less methods of reducing this burden, investing in a qualifying film is a very good way of reducing one's income tax liability, while at the same time helping to create jobs.
Simon Ball is the founder of SB Tax Consultants and an associate of the Irish Taxation Institute. He can be found at www.sbtaxconsultants.com