A storm is brewing over the $40 million in taxpayer funds to be paid out to Baz Luhrmann’s Hollywood blockbuster The Great Gatsby, with angry film industry insiders saying the decision ignores the main game of proper investment in local productions.

The secretive windfall, offered under Screen Australia’s 40% producer offset for films demonstrating an acceptable level of “Australian content”, is said to have been a major carrot for the decorated filmmaker after he initially planned to film the $120 million Warner Bros opus on location in New York.

Instead, Gatsby, which humorously mocks the excesses of Long Island society during the roaring ’20s and stars American heart-throbs Leonardo diCaprio as Jay Gatsby and Tobey Maguire as Nick Carraway, will be filmed at Sydney’s Fox Studios beginning in August. It is expected to employ about 150 people in post-production and visual effects and a rotating cast of tuxedo-clad extras.

On Sunday, outgoing NSW premier Kristina Kenneally announced the state government would also subsidise the extravaganza under her $25 million silver screen war chest announced during last year’s budget. The federal payment is expected to be processed after production ceases.

But Bert Deling, the writer-director of classic Australian crime drama Pure Shit, told Crikey that the looming decision to award Luhrman the $40 million in taxpayer moolah was “tenuous”.

“It seems amazing to me that a film a story set in 1920s America, with American stars and through an American studio and an expatriate Australian director is given money because it is shot in Sydney.”

Under Screen Australia guidelines, the subject matter of the film, the place it’s made, the nationalities and residency of the filmmakers, the details of the production expenditure and “other matters” are all taken into consideration.

However, Gatsby would seem to satisfy only two of those requirements.

According to Deling: “The argument for it is that it gives about 2000 extras work, and of course they’re similar schemes all around the place, in America, Canada and Lithuania probably … but the fact it should be such a huge offset is unreasonable and unnecessary.”

He said the costs for mid-range Australian features such as Bran Nue Dae are massive and that the government, by privileging Luhrmann’s extravaganza, was effectively killing off smaller features at the inception stage.

“State film commissions and funding organisations are stripped of funds … the government shouldn’t be supporting major American feature films that could be shot anywhere. That whole system has collapsed, the situation now is that you get a $120 million film made for 12-year-old boys or pretty much nothing else.”

The Great Gatsby has previously skirted controversy over Luhrmann’s decision to film in 3D, with critics suggesting that the technique would strip the film of its sepia-toned grandeur. Previous effort Australia also cost about $120 million, but flopped tragically at the box office.

Geoff Brown, the executive director of Screen Producers Association of Australia, said the controversy was emblematic of broader legal fights over the Screen Australia “Australianness” definition.

“It’s great that Baz is continuing to make films on a big scale and … we don’t want to prejudice the project but clearly the Australianness test has to be met.”

Brown said the interpretation of the definition had changed after the administration of the offset had moved from the Film Finance Corporation to Screen Australia.

“When the scheme was introduced in 2007 we didn’t have to put a kangaroo and a koala in the film to get the tax break … we need certainty and we’re not getting it.”

Brown said one his members, Beyond Productions, had recently taken the federal government to the Administrative Appeals Tribunal over a rejection for the documentary Taboo — set to be screened globally on the National Geographic Channel but employing a majority of Australian staff — but that the case was unsuccessful.

Arts Minister Simon Crean had been asked for clarification following the slapdown, and elements of the definition that would appear to grant blockbusters a free ride are currently under review.

A spokesperson for the minister said the government offered a producer offset of 40%, and a lower level of offsets for offshore productions brought to Australia of 15%.

“It is up to the Great Gatsby producers to apply for certification under the strict guidelines and conditions set for the offsets.”

Last week, Crean announced a review of the independent screen production sector that said government support has trebled from $136.7 million to $412.1 million in the three years since the introduction of the incentive in 2007-08.

“Although it’s still early days, the increase in activity, particularly the production of Australian large budget films, such as Baz Luhrmann’s Australia and George Miller’s Happy Feet 2, and the box office performance of films such as Tomorrow, When the War Began shows the government support for the sector is having a significant impact,” the minister said.

Strangely, Screen Australia would not confirm whether Luhrmann was in negotiations to receive the offset, despite its widespread reporting in the media, citing tax secrecy laws: “While Screen Australia administers the offset, we cannot comment on any projects that may or may not receive the offset as the agency is bound by tax secrecy laws.”

A spokesperson for Luhrmann told Crikey that “Baz is on a family break with Catherine Martin and their children and has no comment to make at this time.”