For 11 days in January 2013, director Joseph Sims-Dennett holed up in an apartment in Rozelle, Sydney and spent $11,000 making his second feature film – roughly the same cost as the duck canapés and gougères served at a Hollywood premiere. Two years later he emerges with Observance: a twitchy, icky, genuinely unsettling psychological thriller about a private investigator who takes on what appears to be a simple, well-paying job.

From a derelict apartment across the street, all Parker (Lindsay Farris) is employed to do is spy on a woman and report daily updates over the phone to his employer (voiced by Brendan Cowell). Things aren’t as they seem, as these things often go, and Parker – traumatised by the recent death of his young son – spirals into confusion, delusion and possibly madness.

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Why is he paid to watch this woman (played by Stephanie King) and who is he working for? When a man on the street mumbles something about her being “a sacrifice” it feels like the film is about to get Wicker Man-style weird. Instead, Sims-Dennett gravitates towards things-that-go-bump-in-the-night style inclinations, largely swapping out plot-based mysteries for spooks part-and-parcel with scary sound effects and gnarly images.

Think body horror and surprise discoveries made during his surveillance, such as an ominous-looking silhouette captured in a photograph and a ghostly voice found on an audio file. Opening images of a beach and coastal rocks are clearly, in some way, important to the riddle of what exactly is happening and why.

The actors speak in American accents, making it clear which market Sims-Dennett was hedging his bets on. Even John Jarratt, a fair dinkum actor if ever there bloody well was one, talks like a yank, arriving to hand over documents to Parker in a car during the dead of night, cloak-and-dagger style.

The director’s gambit appears to have worked. Observance premiered last July at Canada’s Fantasia film festival, where it was greeted enthusiastically. Off the back of a review published in the Hollywood Reporter, Sims-Dennett was contacted by The Weinstein Company and flew to LA to meet representatives.

Observance continues a pattern of Australian films that from the get-go have found more success abroad than at home, including last year’s conversation starter The Suicide Theory (incredibly, the better part of a year later, it is still not available in its home country). The director doesn’t so much extrapolate bang for the buck as an atomic bomb for the buck, or whatever expression reiterates the point that his film sure as hell looks the part.

The atmosphere is largely comprised of small details: lots of close-ups and mid-shots, tied together with an unnerving sense of show and (don’t) tell, as if in most scenes something terrible is bobbing just off frame.

The cinematography of Rodrigo Vidal-Dawson (who was a camera operator on 1998’s Bride of Chucky) is textured with eerie colour-sapped grading. Scenes are tinted in unhealthy-looking shades of green and blue, as if the film is slowly making itself sick. Sound editors rarely get a guernsey in film reviews, so take a bow David Gaylard and David Williams; their work here is terrific (observe how they mesh together the sounds of the sea with the sound of a train).

There are hints of Roman Polanski’s early films, particularly Repulsion, which was largely based inside an apartment, and Cul-De-Sac, which like Observance features surreal visions of a shoreline – also, when Parker sneaks into “Subject 1’s” apartment in a particularly tense moment, Christopher Nolan’s first feature film, Following.

Sims-Dennett eventually loosens the throat-choking tie grip established in the first half and the film takes on a throbbing intensity, not entirely in a good way. The director indulges in obscene, conventional horror images that feel like shorthand for shock rather than earned scares or suspense. Blood oozing out of a person’s mouth is an easy way to disturb viewers, but feels particularly gratuitous in a film that works studiously hard to get its tone and mood right and – for a while – avoids cheap tricks.

Some of the discipline that defines its early moments is lost when the crunch time comes to start coughing up revelations, or at least hinting at what on earth is happening across the street and in the protagonist’s mind. With a story that gravitates towards cryptic resolutions and an aesthetic that also grows increasingly hallucinogenic, you get a protagonist, a plot and a visual makeup that all feel in danger of spiralling out of control.

In this way Observance feels poised on a knife edge, on some occasions tinkering on the precipice of excellence and on others feeling at risk of slipping into a cabin fever B movie. Somehow Sims-Dennett and his peculiar thriller stand their ground. Whatever you make of the film’s oblique thinking-person’s ending, and whether or not it cuts the mustard from a storytelling point-of-view, Observance is undoubtedly an impressive achievement.