Submission 113

House of Representatives Standing Committee of Communications and the Arts

Inquiry into the Australian and television industry

Submission by Submission 113

The terms of reference for the Inquiry are the factors contributing to the growth and sustainability of the Australian film and television industry

1. History of Animal Logic

Established in in 1991 by Zareh Nalbandian and Chris Godfrey (now a renowned independent Visual Effect Supervisor), the Australian owned Animal Logic is one of the world’s most highly respected digital production studios, producing award-winning design, and for the Australian and international film and television industries from its studios in Sydney, and . Over 500 staff are employed in the Sydney studio.

For 25 years, Animal Logic has remained committed to innovation, technical and creative excellence, and most importantly, creating a collaborative, storytelling culture with a unique voice.

Animal Logic’s film credits include The LEGO® Movie, The LEGO® Movie, Avengers: Age of Ultron, The Great Gatsby, , , , Moulin Rouge and . A full list of credits is attached as Annexure “A”.

Projects currently in production include , The LEGO® Movie Sequel, Alien: Covenant, Guardians of the Galaxy Vol. 2 and Peter Rabbit.

Animal Logic comprises two key businesses:

• Animal Logic Studios, the most successful, independently owned, digital in the world; and

• Animal Logic Entertainment, a company which develops and produces Australian and international .

Over the last five years, Animal Logic has attracted over $350 million in international investment into Australia through projects attracted by the skills base at Animal Logic and the Australian Screen Production Incentives, such as the Post Digital and Visual Effects Offset (PDV Offset), the Producer Offset and the “top up” grants for the Location Offset.

Animal Logic Entertainment is developing a strong slate of innovative, commercially minded, story driven projects stamped with the visual and technical innovation that has become the hallmark of the studio’s work. The development slate, while eclectic and diverse, has a core focus on tent pole, 4-quadrant family feature animation and hybrid projects, as well as filmmaker driven and visually arresting live action/VFX films.

Animal Logic Entertainment, with Zareh Nalbandian as a producer, is currently in production on a hybrid feature based on the beloved Beatrix Potter character, Peter Rabbit. Financed by and directed by Will Gluck, Peter Rabbit is being shot in Australia and the UK, featuring an all- cast, including James Corden, Rose Byrne and Margot Robbie. Over 350 staff from Animal Logic Studios in Sydney will work on the digital production.

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Other projects in development with Hollywood Studios include: Fortunately, the Milk (Twentieth Century Fox); Monkeys, Finn and Princesses (Columbia Pictures); Astro Boy (New Line, a division of Warner Bros); and Naruto ().

2. Industry Engagement

As an Australian industry leader, Animal Logic is a member of Ausfilm and Australians in Film. Zareh Nalbandian is the Deputy Chair of Ausfilm, a director of the Sydney Film Festival and a member of the University of Technology, Sydney, Vice Chancellor’s Industry Advisory Board.

Animal Logic is a sponsor of Tropfest, (the annual short film festival), and the Sydney Film Festival. It also regularly provides speakers for festivals and events, such as the Vivid Festival and Oz Comicon in Australia, and international conferences such as FMX in Germany, Siggraph and the CTN Animation Expo in the USA, Spark CG Summit in Canada, the Tech Summit and The Ottawa International Animation Festival in Canada, the Animex International Conference in the UK, and the VIEW conference in Italy.

3. Education, Research and Development

Over 10% of Animal Logic’s revenues are invested back into ongoing research and development and training. With a dedicated research and development team of over 35 software developers, the company recognises that the development and ongoing enhancement of innovative technology pipelines, processes and procedures are essential to the sustainability of its Studio business.

As part of its research and development, Animal Logic collaborates with other animation studios, and is currently working with Studios on the development of open sourcing tools for the animation industry.

In 2016, with the objective of building Australia’s future digital skills capability, Animal Logic partnered with the University of Technology, Sydney (UTS) to form the UTS Animal Logic Academy. This partnership saw the creation of the Master of Animation and Visualisation degree with classes commencing in 2017.

UTS and Animal Logic are also collaborating on digital research and development projects.

Animal Logic provides guest lecturers for the Australian Film Television and Radio School, and runs an annual national high school work experience program with students selected based on the sample work submitted.Given the highly skilled workforce required for an animation and digital effects studio, Australian staff need to be supplemented with international crew on 457 temporary skilled labor visas. Animal Logic has employed staff from 31 countries, including the USA, United Kingdom, Canada, France, Austria, Poland, Spain, Germany, Italy, Switzerland, Sweden, Netherlands, Belgium, Portugal, Russia, Malaysia, China, Taiwan, Thailand, South Korea, Philippines, Japan, Indonesia, Singapore, India, Iran, South Africa, Mexico, Columbia, Argentina, Brazil, Chile and Venezuela.

Consequently, the engagement of the digital Australian with the education sector is integral to securing a future source of skilled Australian labour and lessening the reliance on imported labour.

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4. The Future of the Film Industry

The Australian visual and digital effects and animation industry is internationally recognised for its talent and depth across a number of companies working on a diverse slate of projects. Whilst not providing an exhaustive list, the industry includes: Rising Sun Pictures in Adelaide (the X-Men series including Logan, the Harry Potter series, Game of Thrones and Thor: Ragnarok); Iloura in Melbourne and Sydney (Ted, Ted 2, Spongebob Square Pants, Game of Thrones, Ghostbusters, Fury Road, Jumanji and Spiderman); Luma in Melbourne (Doctor Strange, Deadpool, : Civil War, Avengers, Age of Ultron); Cutting Edge in Brisbane and Sydney (Hacksaw Ridge, Underworld: Blood War); and Fin in Sydney (Gods of Egypt, Australia).

Australia relies on a constant flow of film productions - digital, live action and hybrid, Australian set stories and internationally set stories, large and low budget, arthouse to popcorn films - to continue to position itself as a key contributor to the international film landscape, and to maintain a healthy and sustainable industry which can continue to invest in facilities, technology and equipment, and develop and retain our skilled Australian labour.

The factors contributing to the growth of the Australian film industry include:

• Supportive Federal and State Governments through: (a) incentives such as the Federal Government’s Australian Screen Production Incentives; (b) industry support and investment programs administered by Screen Australia; (c) education such as the Australian Film Radio and Television School; (d) research and development tax incentives; and (e) marketing Australia’s capabilities internationally through Government agencies and Ausfilm. • The disproportionate skill level of Australian creatives relative to Australia’s population size, including award winning talent in front of and behind the camera. For example, there are 4 Australian Oscar winners and one Oscar nominee working on the crew of Peter Rabbit. All those awards and nominations were for films produced in Australia. • The investment by Australian film businesses in training, research and development, technology, equipment, and facilities. • The attraction of large budget international live action, digital and animated productions enabling Australian businesses to invest in their businesses and Australian crew and performers to enhance their skills through experiencing film production at an international level. • The collaborative engagement of industry with the education sector, such as Animal Logic with UTS, and Rising Sun Pictures with the University of South Australia. • Australian screen cultural programs and standards administered by Screen Australia and the Australian Communications and Media Authority. • The support of Hollywood studios in investing in productions in Australia since the Australian Screen Production Incentives were introduced and the comfort level those studios have with the production capabilities of Australia.

Despite the above, there are factors impeding the growth and sustainability of the Australian film and television industry, which continues to be challenged by:

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• The uncertainty surrounding the Federal Government policy of awarding one-off grants to some international productions and rejecting others. This creates “winners” and “losers”, and the lack of clarity about the process, the timing, and the likelihood of a positive outcome detracts from Australia’s attractiveness as a production destination. • An international production being unable to claim the Location Offset and the PDV Offset for different components of work on the same production. • Television programs made for streaming platforms, such as , being ineligible for the Location Offset and the PDV Offset. • The Australian/US exchange rate and other currency fluctuations. • The lack of continuity of work makes it difficult to attract and retain highly skilled members of the digital and physical production industry in Australia rather than working elsewhere.

• For large budget productions, only Sydney and the Gold Coast have studio facilities of sufficient size to attract productions of scale.

5. Animal Logic Recommendations

To achieve the objective of a sustainable, expanding Australian film industry, Animal Logic, as a producer of Australian and international films, and as a supplier of digital and visual effects and animation to international film projects on projects accessing the Australian Screen Industry Incentives, recommends that the Australian Federal Government maintain its existing programs of support but with the following amendments.

5.1 Decouple the Location Offset and the PDV Offset

Currently the Location Offset and PDV Offset are mutually exclusive so that even though the PDV Offset rate is 30%, a production which claims the 16.5% Location Offset is unable to claim the 30% PDV Offset for the digital, visual effects and post production work for that production awarded to an Australian company.

With PDV work on Location Offset projects tied to the Location Offsets rate of 16.5%, this renders Australian visual and digital effects service companies like Animal Logic unable to compete for such work on productions shot in Australia against companies in other countries with more attractive incentives.

Currently, the incentives in competitive jurisdictions for PDV services include:

UK 25%

Montreal, Canada 42%

Vancouver, Canada 30%

New Zealand 25%

Animal Logic strongly supports the “decoupling” of the Location Offset and the PDV Offset for the following reasons:

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• As a supplier of PDV services to international productions, to enable Animal Logic Studios to bid competitively for VFX work on international productions shot in Australia.

For projects that have received a “top up” grant to shoot in Australia, the grant is capped and primarily utilised for principal photography, often leaving VFX vendors bidding at the uncompetitive rate of 16.5%. This happened to Animal Logic in connection with the following productions: San Andreas, The Shallows, and Pirates of the Caribbean: Dead Men Tell No Tales.

• As a producer of animated or hybrid digital/live action films, to enable productions produced by Animal Logic Entertainment that may not have sufficient Significant Australian Content to qualify for the Producer Offset and therefore may only claim the Location Offset or the PDV Offset, to consider undertaking principal photography in Australia, without compromising the ability to access the 30% PDV Offset for the qualifying related PDV services.

Currently, if a film claims the PDV Offset for the PDV component of the production activity, then the principal photography component of the film is ineligible for the Location Offset (and the PDV Offset). This places Animal Logic Entertainment in the position of taking its own productions outside of Australia for principal photography because other countries provide more competitive incentives so that Animal Logic may claim the PDV Offset for PDV work in Australia.

This recommendation would not be required if the Location Offset and PDV Offset were set at the same rate of 30%.

5.2 Increase the Location Offset from 16.5% to 30%

The success of the “top up” grants equivalent to 13.5% of Qualifying Australian Production Expenditure (QAPE) in addition to the Location Offset has attracted projects to Australia such Aquaman; Thor: Ragnarok; Alien: Covenant; Pirates of the Caribbean: Dead Men Tell No Tales; Unbroken; San Andreas; The Moon and the Sun; Hunters and The Wolverine.

Those projects brought close to $1billion in direct investment into Australian businesses and employees, and have clearly demonstrated both the benefits of large scale international film production activity in Australia and that, at a rate of 30% of QAPE, Australia can compete for footloose international productions.

Large budget international productions directly benefit the Australian film and television industry and the Australian economy by:

• Maintaining the position and profile of Australia at the forefront of complex film making; • Affording on the job training opportunities in a range of skills from camera and lighting technicians to digital artists, creature and special effects technicians, costume designers and makers, set dressers, construction crew, and hair and makeup artists; • Affording opportunities to PDV service companies to market their services more easily to those productions than if they were produced outside Australia;

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• Operating on a scale that enables specialist film businesses to invest in equipment and facilities, which are then available for Australian film and television productions; • Providing additional taxation revenue to the Federal Government through income tax payable by the non-Australian resident cast and crew; • Spotlighting opportunities for Australian tourism through profiling locations and the publicity attracted by “celebrity” talent in the productions shooting in Australia; • Investing immediately in the Australian economy across a relatively short time frame of six to twelve months, and yet the Location Offset is not paid until 2 to 3 years after the commencement of the production; • Spreading the investment across most Australian states and attract interstate employees seeking jobs and training. • Enabling Hollywood studios to plan and commit for a slate of production activity in Australia, particularly with tentpole franchises with the certainty of a guaranteed competitive incentive.

There are natural caps on the amount of production Australia can attract each year as the crew and facilities are limited. The recent productions of “Thor: Ragnarok” and “Alien: Covenant” demonstrated that it is difficult for Australia to support more than 2 productions at the same time.

Whilst the “top ups” have been successful in attracting productions to date, the industry needs the support of a permanent, competitive Location Offset incentive at 30%, which provides certainty to international productions and does not discriminate between productions.

5.3 Enable streamed television series to qualify for the Location Offset and PDV Offset

The viewing options for consumers have varied and increased since the legislation for the Location Offset and PDV Offset was introduced in 2007 and continue to change with technology advances and changes in viewer demand.

Since 2007, streaming services such Netflix, and Stan have emerged, and films and television series made for streaming services are eligible for the Producer Offset and films are eligible for the Location Offset and PDV Offset. However, “television” series produced for those services are currently considered ineligible for the Location Offset and PDV Offset.

This anachronism is an unintended drafting consequence for a format not contemplated at the time the legislation was drafted and the distinction does not exist in other countries.

The issue arises because the eligibility criteria for the Location Offset in Section 376-20 of the Income Tax Assessment Act 1997 as amended (Tax Act), and for the PDV Offset in Section 376-45 of the Tax Act, refer to television series or 2 or more episodes that are produced wholly or principally for exhibition to the public on television under a single title (emphasis added). However, Section 376 – 55 of the Tax Act, in setting out the eligibility criteria for the Producer Offset, does not reference “television”.

Despite projects on streaming services provided by Netflix and Amazon referring to the programs as television series, and those projects being eligible for award shows for television programs such as the Emmys, the Department of the Arts has communicated to the industry that it must adopt a more

7 Submission 113 restrictive view of television, requiring a broadcast to be a traditional television broadcast, such as free to air or subscription television.

As a consequence, Australian VFX service companies like Animal Logic cannot bid competitively for work on international television productions for streaming services such as Netflix and Amazon, and no incentives are available to attract international television series to Australia.

The simple fix is to either provide a definition of “television” that includes streaming services or any service provided to a screen, or amend the legislation to conform to the relevant sections of the Producer Offset eligibility criteria.

6. Conclusion

Animal Logic welcomes the interest of the Committee in the growth of the Australian Film and Television Industry and advocates for the adoption of its three suggested recommendations by the Committee. Animal Logic would be pleased to provide any additional information the Committee may require and the members of the Committee are also welcome to tour the Animal Logic studio in Sydney.

31 March 2017

8 Submission 113 Annexure "A" - Animal Logic Credits

Opening Weekend Box Office #1 YEAR TITLE STUDIO (Nth America) 2017 THE LEGO NINJAGO MOVIE Warner Bros. ALIEN: COVENANT 20th Century Fox GUARDIANS OF THE GALAXY VOL. 2 THE GREAT WALL Legendary/ Warner Bros. X 2016 THE MASTER Warner Bros. CAPTAIN AMERICA: CIVIL WAR Marvel Studios X ALLEGIANT Lionsgate 2015 MONK COMES DOWN THE MOUNTAIN Columbia Pictures/New Classic Media AVENGERS: AGE OF ULTRON Marvel Studios X INSURGENT Lionsgate X 2014 UNBROKEN Universal Pictures ALEXANDER AND THE TERRIBLE. HORRIBLE. NO GOOD, VERY BAD DAY Pictures THE ROVER Roadshow Films X-MEN: DAYS OF FUTURE PAST 20th Century Fox X Warner Bros. X 2013 WALKING WITH DINOSAURS 3D 20th Century Fox THE HUNGER GAMES: CATCHING FIRE Lionsgate X THE GREAT GATSBY Warner Bros. Pictures Marvel Studios X 2012 THE POLAR BEARS (COCA-COLA SHORT FILM) The Coca-Cola Company PROMETHEUS 20th Century Fox MARVEL'S THE AVENGERS Marvel Studios X 2011 MISSION IMPOSSIBLE: GHOST PROTOCOL X COWBOYS & ALIENS Universal Pictures/Paramount Pictures/DreamWorks Pictures X CAPTAIN AMERICA: THE FIRST AVENGER Marvel Studios X HARRY POTTER AND THE DEATHLY HALLOWS: PART 2 Warner Bros. X THOR Marvel Studios X SUCKER PUNCH Warner Bros. 2010 LEGEND OF THE GUARDIANS: THE OWLS OF GA'HOOLE Pictures/Warner Bros. IRON MAN 2 Marvel Studios X 2009 WHERE THE WILD THINGS ARE Warner Bros. X KNOWING X 2008 BEDTIME STORIES Walt Disney Studios THE SPIRIT Lionsgate AUSTRALIA 20th Century Fox ROGUE Village Roadshow Pictures/ NIM'S ISLAND 20th Century Fox/Universal Pictures/Summit Entertainment THE BLACK BALLOON Icon Entertainment International/NeoClassics Films FOOL'S GOLD Warner Bros. X 2007 28 WEEKS LATER Fox Searchligh Pictures 300 Warner Bros. Pictures X CROCODILE DREAMING THE PAINTED VEIL Warner Independent Pictures 2006 CHARLOTTE'S WEB Paramount Pictures HAPPY FEET Warner Bros. Pictures/Roadshow Films X WORLD TRADE CENTER Paramount Pictures AQUAMARINE 20th Century Fox 2005 HARRY POTTER AND THE GOBLET OF FIRE Warner Bros. X THE GREAT RAID Films STEALTH Columbia Pictures HOUSE OF FLYING DAGGERS Pictures Classics/Edko Films 2004 HERO Miramax Films/Beijing New Picture Film/EDKO Film X 2003 Village Roadshow Pictures/Warner Bros. X ANGST SWIMMING UPSTREAM Metro-Goldwyn-Mayer 2002 THE QUIET AMERICAN Miramax Films RABBIT-PROOF FENCE Becker Entertainment CHARLOTTE GRAY Warner Bros./Universal Pictures 2001 WILLFULL Cinemavault/Showtime Australia THE LORD OF THE RINGS: THE FELLOWSHIP OF THE RING X PLANET OF THE APES 20th Century Fox X MOULIN ROUGE 20th Century Fox 2000 CHOPPER First Look Pictures ME MYSELF I Classics 1999 HOLY SMOKE Miramax Films STRANGE PLANET New Vision Films THE MATRIX Warner Bros./ X 1998 BABE: PIG IN THE CITY Universal Pictures THE THIN RED LINE 20th Century Fox 1997 MOUSE HUNT DreamWorks Pictures FACE OFF Paramount Pictures/ International