Hold Your Horses

It’s rare to be offered the chance to invest in a successful Australian television series. And in the case of Channel Nine’s drama series McLeod’s Daughters, it certainly is popular.

For the second year in a row Nine Films & Television (the production wing of the Nine Network) has put together an investment vehicle that consists of an interest in the copyright of the popular drama, which comes with a guaranteed pre-tax return of 106% over eight years. What’s more, the initial investment is 100% tax-deductible.

Investing in movies is generally disastrous. As acclaimed Australian director Rolf de Heer recently acknowledged, about one in six Australian movies breaks even; one in seven makes money. What sets the McLeod’s Daughters offer apart is that it is not a speculative feature film but an established TV program in its sixth series, and being sold to more than 240 countries from Afghanistan to Zimbabwe. For investors driven by tax concerns, the risk of this investment is greatly reduced by its track record.

But before you get too excited about investing in the fortunes of the plucky young jillaroos from Drover’s Run, it pays to look at the details. In terms of fees, the only fee associated with the product is the application fee, equivalent to 0.22% and payable on application. According to the information memorandum on the website, the investment returns are distributed as follows:

Over the eight-year period that the investment runs, a return of 106% is equal to 9% per annum compounded. This stacks up well against the average return of the ASX since 1900 (about 7.7%) although in recent years it has returned investors far more than that. But don't forget the advertised investment returns are pre-tax and will incur capital gains tax.

Further, although the returns to the investor are guaranteed, the manner in which they are distributed ensure that Nine Films & Television is reimbursed all its costs before you see any “overage” '” or returns better than forecast '” on top of the guaranteed amount. This is a common practice in Hollywood where participants are promised a percentage of film profits or “points”, but only after the production, sales and marketing costs borne by the studio are fully reimbursed.

All of this raises an interesting question: what’s in it for Nine Films & Television? Effectively, it is a way for the company to leverage the unique tax deductions applied to local productions. The tax concessions, known as division 10B and 10BA, have been around for a long time but it recent years have been whittled down from 150% to 100%.

In this case the relevant tax break is division 10B, where 50% of the amount invested can be deducted this financial year. In the following year, you may deduct another 50%. The deduction is not available to Nine Films & Television, so by on-selling this benefit the package becomes much more attractive and in turn, it can reinvest the principal back into more productions.

The guaranteed return attached to this investment certainly makes it stand head and shoulders above the alpaca and olive grove schemes that proliferate in the final weeks of June because the investment guarantee is backed by an ASX100 company, although it is unfortunate that only 50% of the investment is deductible this year.

Next year the top tax rate will be lowered by 2% and the threshold for the new top bracket of 45% is raised from $95,000 to $150,000. For many investors, the second installment of the tax deduction will go begging. Separately, returns on the investment are also exposed to high levels of currency risk. The investment is unhedged and a strengthened Australian dollar could seriously stunt any overage generated.

The opportunity to invest in the goings on at Drover’s Run and get a significant tax benefit at the same time will certainly be attractive for some, those in line for a particularly big bonus or tax bill should certainly consider whether it suits their particular situation. Those whose tax concerns are secondary to finding an investment with potential for serious growth and perhaps franked dividends might be inclined to sit this one out, and support McLeod's Daughters from the comfort of the couch.