Allocated Bullion Exchange Limited and Australian Trade and Investment Commission
[2016] AATA 939
•25 November 2016
Allocated Bullion Exchange Limited and Australian Trade and Investment Commission [2016] AATA 939 (25 November 2016)
Division
GENERAL DIVISION
File Number
2015/6866
Re
Allocated Bullion Exchange Limited
APPLICANT
And
Australian Trade and Investment Commission
RESPONDENT
DECISION
Tribunal Senior Member D R Davies
Date 25 November 2016 Place Brisbane The decision of Austrade dated 3 December 2015 is affirmed because Allocated Bullion Exchange Limited did not have eligible services pursuant to Section 25 of the EMDG Act in order to receive an export market development grant pursuant to the EMDG Act for the grant year 2013/2014.
........................[Sgd]................................................
Senior Member D R Davies
CATCHWORDS
EXPORT MARKET DEVELOPMENT GRANTS – Grants assisting international promotion of products and services – Eligible products and services – Non tourism services – Services provided to foreign residents – Significant net benefit – Value of Australian inputs.
LEGISLATION
Export Market Development Grants Act 1997
Export Market Development Grants Bill 1997
CASES
Port Jackson Fine Art Pty Ltd and Australian Trade Commission [2003] AATA 140
Drake and Minister for Immigration and Ethnic Affairs No. 2 [1979] AATA 179
Polar Pacific Pty Ltd and Australian Trade Commission [2011] AATA 19
Jingles Australia Pty Ltd and Australian Trade Commission [1991] AATA 120
Asia Pacific Aircraft Storage Pty Ltd and Australian Trade Commission [2014] AATA 835
Oppidan and Australian Trade Commission [2002] AATA 582
Aci Pet Operations Pty Ltd v Comptroller-General of Customs and Edward Murray Tregillgas [1990] 26 FCR 531
SECONDARY MATERIALS
Export Market Development Grants Administrative Guidelines of Austrade
Export Market Development Grants Regulations 2008
Export Market Development Grants (Significant Net Benefit) Guidelines 2006
REASONS FOR DECISION
Senior Member D R Davies
25 November 2016
INTRODUCTION
Definitions
In this decision:
AAT Act - means the Administrative Appeals Tribunal Act 1975.
ABX - means the Applicant, Allocated Bullion Exchange Limited formerly Australian Bullion Exchange Limited.
Administrative Guidelines – means the Export Market Development Grant Administrative Guidelines of Austrade as made under s 101 of the EMDG Act.
Austrade – means the Respondent, Australian Trade & Investment Commission (formerly Australian Trade Commission).
EMDG Act – means the Export Market Development Grants Act 1997.
EMDG Regulations – means the Export Market Development Grants Regulations 2008.
EMDG Bill – means the Export Market Development Grants Bill 1997.
Significant Net Benefit Guidelines – means the Export Market Development Grants (Significant Net Benefit) Guidelines 2006 as Amended as made under s 101(baa) of the EMDG Act.This is a review of the decision made by Austrade dated 3 December 2015[1] affirming its original decision and notice of determination by email to ABX dated 11 June 2015 (Original Determination) that ABX was not entitled to a grant under the EMDG Act.
[1] Exhibit 1, T Docs, T3.
ABX is an Australian incorporated and domiciled company that has developed an electronic exchange platform for its Members to trade allocated physical precious metals including gold, silver and platinum (Bullion). It was formerly called Australian Bullion Exchange Limited but changed its name to Allocated Bullion Exchange Limited on 30 June 2016 as recorded in the Certificate of Change of Name.[2]
[2] Exhibit 8.
As part of this exchange trading platform, ABX also provides storage and delivery facilities for the physical precious metals in several Australian and international warehouses.
ABX lodged an application with Austrade for the 2013/2014 grant year in respect of expenses incurred in relation to marketing visits and the promotion of its exchange trading platform to investors including individuals, financial institutions and brokers (EMDG Application).[3]
[3] Exhibit 1, T Docs, T5.
There is no issue that ABX is an eligible Applicant in accordance with the EMDG Act because it is an Australian incorporated company which was genuinely carrying on business in Australia at the relevant time.
Austrade’s original determination dated 11 June 2015 refused the EMDG Application[4] because it was ineligible citing the following reasons:
(i)The services related to the promotion in buying and selling of substantially non-Australian goods;
(ii)The storage of the goods in Australia being promoted is ineligible in terms of regulations schedule 2-1(d);
(iii)The financial statements provided support and demonstrate that the Applicant is principally buying and selling Bullion;
(iv)Approximately 80-90% of the goods which include gold, silver and platinum are of non-Australian origin.
[4] Exhibit 7 and Exhibit 1, T Docs, T57, page 289.
On 10 July 2015 ABX requested Austrade to undertake an internal review of the Original Determination.[5]
[5] Exhibit 1, T Docs, T30, page 184-189.
On 3 December 2015 Austrade confirmed its Original Determination[6] and referred to email correspondence of 12 October 2015,[7] 6 November 2015[8] and 26 November 2015[9] as providing details of its reasons.
[6] Exhibit 1, T Docs, T3.
[7] Exhibit 1, T Docs, T54, page282.
[8] Exhibit 1, T Docs, T54, page276.
[9] Exhibit 1, T Docs, T54, page273.
Austrade in its Section 37 Statement[10] set out those reasons as:
“10.1 That the Applicant was engaged in business of selling and storing physical Bullion;
10.2That the sale and storage of physical Bullion was not eligible services for the purposes of the EMDG Act;
10.3That the physical Bullion sold by the Applicant was not eligible goods for the purposes of the EMDG Act;
10.4That other services provided by the Applicant such as providing inventory control, and international storage options arranging shipping services and providing auditing access services, were not eligible services for the purpose of the EMDG Act;
10.5That the expenses incurred by the Applicant have not been incurred for an approved promotional purpose and they are not claimable as an eligible promotional activity and are in turn not considered to be eligible expenses”.
[10] Exhibit 1, T Docs, T4 at para 10
In relation to the further particulars of this, Austrade also noted[11]at para 11:
[11] Exhibit , T Docs, T4.
”11.1That the initial assessment of ineligibility……was based on the Applicant’s financial statements that demonstrate that the Applicant engages in the sale of goods out of commercial necessity in being a liquidity provider of physical bullion and its CCP (Central Counterparty Clearing House) activities for the purposes of applying item 1(c) of Schedule 2 to the EMDG Regulations.
11.2That the initial assessment of ineligibility…was based on physical bullion sourced from outside Australia being the relevant “assets held in Australia” for the purposes of applying Item 1(d) of Schedule 2 of the EMDG Regulations.
11.3That any alleged “significant net benefit”…..does not arise as a relevant consideration in relation to the sale and storage services provided by the Applicant which are explicitly ineligible …..under the EMDG Regulations.
11.4That any alleged “significant net benefit” provided by the Applicant’s business does not arise in relation to any of the other services, such as providing inventory control and international storage options, arranging shipping services and providing auditing access services….as the Applicant’s financial records demonstrate that the only Australian input is the mark up or gross margin invoiced….on a monthly basis and that there is therefore insufficient Australian resident input into the delivery of these other services.
11.5That the key concern of the Respondent is to ensure that “incentives are only provided to export businesses that can return a significant net benefit to Australia because” in keeping with the underlying purpose of the scheme created by the EMDG Act as expressed in the EMDG bill.
11.6That in addition to providing “ineligible services”, the Applicant also provides “ineligible goods” as taking title to physical bullion of 80-90% non- Australian origin goods does not provide any “significant net benefit” for the purposes of applying Section 24(b) of the EMDG Act given preparation of the goods occurs primarily and substantially outside of Australia, no real value is added to the goods within Australia, and the sale of the goods does not generate economic benefits to Australia.
11.7That the 1% execution fee charged by the Applicant for taking title to the physical bullion is part of the cost of the goods sold by the Applicant and therefore the sale of physical bullion is excluded from being an eligible “tourism service” and an eligible promotional activity for an approved promotional purpose under Section 37(1)(da) of the EMDG Act.
11.8That marketing visits and the promotion of its physical bullion exchange platform to institutional and retail buyers are not eligible expenses under the EMDG Act and the EMDG Regulations as the Applicant charges no fee to its users of its platform and the service fees claimed by the Applicant relate to ineligible sale and storage services.”
THE LEGISLATIVE PROVISIONS
The object of the EMDG Act is stated in Section 3 as being:
“To bring benefits to Australia by encouraging the creation, development and expansion of foreign markets for Australian goods, services, intellectual property and know how. It does so by providing for an assistance scheme under which small and medium Australian exporters committed to and capable of seeking out and developing export businesses are repaid part of their expenses incurred in promoting those products”.
Section 4 of the EMDG Act provides that a person “that is a eligible under Part 3 for a grant in respect of a grant year, and has incurred eligible expenses in that grant year in relation to eligible products and has applied for a grant in accordance with Part 7, is entitled to a grant in respect of that grant year, in the amount worked out under Part 6”.
Section 37 of the EMDG Act provides for partial reimbursement for eligible expenses incurred for the promotion of certain eligible goods and eligible services.
Pursuant to Section 107 of the EMDG Act “eligible products” is defined to relevantly mean “eligible goods” and “eligible services”.
Section 107 defines “eligible goods” as having the meaning in Section 24.
Section 107 defines “eligible services” as meaning “eligible non-tourism services” or “eligible tourism services”.
A “non-tourism service” is defined by Section 107 as meaning:
“A service other than:
(a) A tourism service; or
(b) A service specified in the regulations”.
Both parties accept that the services provided by ABX are not “tourism services” within Section 107 of the EMDG Act. In relation to “non-tourism services” regulation 6.2 of the EMDG Regulations provides:
“For paragraph (b) of the definition of non-tourism service in Section 107 of the Act, a service mentioned in Schedule 2 is specified”.
Schedule 2 Item 1 of the EMDG Regulations relevantly provides:
“1. Each of the following is a service other than a non-tourism service
…………….
(c) a service relating to the identification, procurement, lease, sale or purchase of assets in Australia (whether tangible or intangible) including cash, real estate, stocks, options or shares
(d)a service relating to the protection, operation or maintenance of assets held in Australia”.
Section 25(1) of the EMDG Act provides that:
“Subject to subsection 4 a non-tourism service is an eligible non-tourism service if the service is supplied, whether in or outside Australia, to a person who is not a resident of Australia.
Section 25(4) provides that a non-tourism service that would otherwise be eligible is not an eligible service if the CEO of Austrade determines that the Australian input in the service is not sufficient to ensure that Australia will derive a significant net benefit from the supply of the service.
“Eligible goods” is defined in Section 24 of the EMDG Act to include goods that are made in Australia or if the CEO of Austrade is satisfied in accordance with the guidelines under paragraph 101(1)(baa) that Australia will derive a significant net benefit from the sale of the goods outside Australia.
Section 101 of the EMDG Act provides that the Minister must determine by legislative instrument (relevantly):
“(1)(baa)Guidelines to be complied with by the CEO in determining for the purposes of paragraph 24(b) whether Australia will derive a significant net benefit from the sale of goods outside Australia.
(2)…Guidelines to be applied by the CEO of Austrade for the exercise by the CEO of any of his or her other powers under this Act
(3)The CEO of Austrade must comply with the relevant guidelines (if any) determined under this Section in exercising any of his or her powers or functions under this Act”.
Part 4 of the Administrative Guidelines sets out the guidelines to be applied by the CEO of Austrade in relation to eligible products and which relate to Sections 24 and 25 of the EMDG Act.[12]
[12] Re Port Jackson Fine Art Pty Ltd and Australian Trade Commission [2003] AATA 140 at [46]; Re Drake and Minister for Immigration and Ethnic Affairs No. 2 [1979] AATA 179; Polar Pacific Pty Ltd and Australian Trade Commission [2011] AATA 19 at 20.
Item 4.2.6 of the Administrative Guidelines states that:
“Non-tourism services must:
·Be supplied (whether in or outside Australia) to a person who is not a resident of Australia;
·Contain sufficient Australian input to ensure that Australia will derive a significant net benefit from the supply of the service;
·Subject to these requirements, all services apart from those listed in the tourism services schedule are eligible unless they are listed in Schedule 2 of the EMDG Regulations (services that are non-tourism services);
·Schedule 2 of the Regulations lists those non-tourism services that are ineligible for EMDG support. The rationale for the service suppliers being ineligible is that they generally compete with other Australian service providers for export business rather than foreign suppliers”.
In relation to Item 1(c) of Schedule 2 of the EMDG Regulations, the Administrative Guidelines provide (Part 4 – Eligible Products at page 12):
“This exclusion means that services provided to foreign residents relating to a range of transactions involved with assets held in Australia will not be eligible for EMDG support. Assets for the purpose of this exclusion will include but not be limited to real estate, cash, stocks, shares, related financial products and collectable items.
The word “held” limits the exclusion to assets held in Australia on an ongoing basis rather than assets brought to Australia for one-off or short term reasons e.g. this exclusion will not apply to collectables brought to Australia to be auctioned.
This exclusion applies to service providers who promote sales related to transacting in assets held or to be held in Australia. It does not prevent grants being paid to exporters of physical assets that incur expenses of promoting goods assessed as eligible under Section 24 of the EMDG Act and who meet the Acts principal status requirements”.
In relation to Item 1(d) of Schedule 2 of the EMDG Regulations, the Administrative Guidelines provide (Part 4 – Eligible Products at pages 12-13):
“This exclusion applies to services supplied to foreign resident clients for providing any services in relation to any assets held in Australia…..
The word “held” limits the exclusion to assets held in Australia on an ongoing basis rather than to assets brought to Australia for one-off or short term reasons e.g. this exclusion will not apply to:
·Foreign-owned assets brought to Australia just for repair;
·Management and insurance arrangements for works of art that are sent to Australia for exhibition”.
For the purposes of Section 24 of the EMDG Act, the Significant Net Benefit Guidelines (at 4(2)) which are binding on the Tribunal set out four factors in which the CEO of Austrade must consider in determining whether Australia will derive a significant net benefit from the sale of the goods outside Australia:
“Austrade must consider whether:
(a) The business assets which are used in making the goods ready for sale (other than assets used in manufacture) are primarily or substantially based in Australia; and
(b) The activities (other than manufacture) which result in the goods being made ready for sale are primarily or substantially carried on in Australia; and
(c) A significant proportion of the value of the goods is added within Australia; and
(d) Any sale of the goods generates or is reasonably likely in the foreseeable future to generate, economic benefits for Australia, including in the area of employment, that are substantial relative to the amount of the grant claimed by the Applicant”.
The Administrative Guidelines in Item 4.1.4 at page 4 provide guidance and examples of when the requirements of each factor will be satisfied and indicate that:
“To be eligible, goods not “made in Australia” are not required to meet all of the four assessment criteria to be eligible under paragraph 24(b) of the EMDG Act. Where an Applicant fails at least one of the assessment criteria but meets the other criteria in a convincing manner, Austrade may assess the goods as eligible under paragraph 24(b) of the EMDG Act”.
For the purposes of Section 25(4) of the EMDG Act, Item 4.2.2 of the Administrative Guidelines provides for Australian inputs that must be sufficient to ensure that Australia will derive a significant net benefit from the supply of the services and states:
“In assessing the eligibility of services, Austrade will take into account:
·The value of the product;
·The value of the Australia inputs compared with overseas inputs;
·The nature of the inputs, such as professional staff compared to labourers;
·The underlying intellectual property or know how involved;
·Employment generated in Australia;
·Net foreign exchange earnings;
·Any other notable factors.”
ISSUES FOR THE TRIBUNAL
Austrade contends:
(a) That ABX’s principal business activity involves the purchase and sale of goods in the form of physical bullion.[13]
(b) Accordingly ABX is not able to meet the requirement that Australia will derive a significant net benefit from the sale of the goods outside Australia as the purchase sale and the storage of the goods is primarily undertaken overseas.[14]
(c) That if ABX’s primary business activities is a service, that it comes within the exclusionary provisions of Items 1(c) and (d) of Schedule 2 of the EMDG Regulations.[15]
(d) That if ABX’s primary services are non-tourism services, they will be ineligible pursuant to Section 25(4) of the EMDG Act as the Australian input in the service is not sufficient to ensure that Australia will derive a significant net benefit from the service.[16]
[13] Exhibit 3, para 23.
[14] Exhibit 3, para 27 and 28.
[15] Exhibit 3, paras 29, 36-38.
[16] Exhibit 3, para 38.
ABX contends:
(a) That its primary business activity is the provision of the service of the operator of an electronic Exchange and market place for allocated physical precious metals;[17]
(b) That it is incorrect of Austrade to characterise ABX’s product as the purchase and sale of goods and that it is not seeking EMDG support as an entity engaged in the promotion of eligible goods;[18]
(c) That its services are not ineligible services within the exclusions of Items 1(c) and (d) of Schedule 2 of the EMDG Regulations;[19]
(d) That the Australian inputs in its services are sufficient to ensure that Australia will derive a significant net benefit.[20]
[17] Exhibit 4, para 3.
[18] Exhibit 6.
[19] Exhibit 6.
[20] Exhibit 4, para 68.
Accordingly, the issues to be considered by the Tribunal are:
(a) What is the principal business activity of ABX? Is it the provision of a service or the purchase and sale of goods?
(b) If it is the provision of a service, is it an eligible service and in particular is it an eligible non-tourism service subject to Section 25(4) of the EMDG Act?
(c) If it would otherwise be an eligible non-tourism service does it satisfy the requirement of Section 25(4) of the EMDG Act that the Australian input in the service is sufficient to ensure that Australia will derive a significant net benefit from the supply of the service?
(d) If the principal activity of ABX is the purchase and sale of goods, are they eligible goods within Section 24 of the EMDG Act.
EVIDENCE BEFORE THE TRIBUNAL
The Tribunal had before it documents lodged (the T-Documents) pursuant to Section 37 of the AAT Act as Exhibit 1 and supplementary T-Documents as Exhibit 2, Austrade’s and ABX’s statements of facts issues and contentions being Exhibits 3 and 4 respectively. Exhibits 5-8 were tendered by consent of the parties.
In addition, Mr Ryan the General Counsel of ABX and Mr Brideaux, the Head of Compliance of ABX gave oral evidence. Mr Brideaux also demonstrated to the Tribunal on a laptop computer the operation of ABX’s electronic trading system.
WHAT IS THE PRINCIPAL BUSINESS ACTIVITY OF ABX?
ABX contends that its principal business activity is the provision of the service of an operator of an electronic exchange and market place for the trading of allocated physical precious metals, principally gold, silver and platinum.
ABX’s Statement of Facts Issues and Contentions[21] states that this business activity involves a number of elements:
[21] Exhibit 4, para 7-32
38.1 Trade Execution Services[22]
[22] Exhibit 4, paras 9-12.
Whereby in the computerised Exchange, orders to buy and sell the precious metals are routed electronically in the centralised order of the software known as MetalDesk which matches buy and sell orders for its Members based on matching algorithms. Members have flexibility and control over how they trade in any of the Exchanges eighty two individual contracts. The Member chooses in what geographic location, in what product and at what price it chooses to buy or sell physical precious metal contracts. The orders are placed by the Members;
38.2 Trade Clearing Service[23]
[23] Exhibit 4, paras 13-17.
ABX as the clearing entity first establishes that the buyer and seller transacted by verifying that all terms submitted by the buyer and seller match. It is then substituted as principal to the transaction, becoming the buyer to the seller and the seller to the buyer. In so doing, it becomes a central counter-party (CCP) and bears the risk of default by the parties to the transaction. As CCP ABX becomes contractually accountable for completing all transactions on the Exchange. The original market contract between the trading participant representing the buyer and the trading participant representing the seller is discharged and replaced with two new contracts; one between the clearing house and the clearing participant representing the buyer and the other between the clearing house and the clearing participant representing the seller. ABX’s role as CCP is stated to be fundamental to the operation of the Exchange because:
·It allows for the introduction of standardised trading framework and product specification;
·It eliminates counter-party settlement/default risk by having the CCP as buyer to every seller and seller to every buyer;
·It allows anonymity with respect to investors trading.
In ABX’s Customer Account Agreement[24] each member consents to ABX acting as the CCP.
[24] Exhibit 1, T Docs T15, page 80.
38.3 Trade Settlement Services[25]
[25] Exhibit 4, paras 17-20.
ABX is responsible for the settlement system and electronic precious metals registry for all precious metals through the Exchange. Settlement occurs automatically at the time the trade takes place using ABX’s software system. As part of this process:
·Payment is transferred from the liquidity taker via the CCP to the liquidity provider; and
·The legal ownership of the underlying precious metal bar or coin passes from the selling Member via the CCP, to the purchaser.
ABX’s clearing house registry system maintains a unique holder identification number (HIN) system to register the cash balances and ownership of precious metal holdings of each Member.
For the provision of the execution, clearing and settlement services, ABX charges Members “Execution Fees”. The execution fee is an ad valorem fee, calculated by reference to the value of the precious metal being matched, cleared and settled through the Exchange. The Execution Fee rate varies depending upon a variety of factors including, but not limited, to the type of Member and total value of the precious metal traded during a calendar month.
38.4 Platform Services[26]
[26] Exhibit 4, paras 21-24.
ABX provides platform services to its Members which include:
·Initial on-boarding, screening and due diligence services;
·Non-exclusive licence to use the Exchange and MetalDesk trading platform;
·Support services.
In relation to this, Mr Brideaux gave evidence that in the second half of 2015 ABX began charging its Members Platform Fees depending on membership levels. Platform Fees were not charged in the 2013/2014 year because ABX was in startup mode and waived these fees to incentivise use of its Exchange.
38.5 Physical Precious Metals Storage Logistics and Assurance Services[27]
[27] Exhibit 4, paras 25-32.
ABX provides ongoing storage, withdrawal and logistic services to its Members for all precious metal traded through the Exchange. As an allocated precious metal Exchange, the underlying precious metal bar or coin being traded must be delivered to ABX’s network of international warehouse storage vault.
ABX uses third party secure vaulting and logistics providers for the provision of the storage vaults and logistics. ABX uses:
·Brinks Australia Pty Ltd;
·Linfox Armaguard Pty Ltd;
·Loomis International (AE) FZE;
·Malca-Amit Singapore Pte Ltd.
Mr Brideaux gave evidence that in 2013/2014 ABX had vaults in the following locations – Brisbane, Sydney, Singapore, Hong Kong, Shanghai, Dubai, London, Geneva, Zurich, New York and Istanbul. The vault storage and logistic services outside Australia were provided by Loomis and Malca-Amit. He also gave evidence that there is a storage vaults facility in each hub where precious metals are traded and Members have to use the storage vault in the hub where the trade has occurred .
ABX states that whilst the secure warehouse providers provide the infrastructure, ABX is responsible to its Members for the facilitation of all storage services including assurance services in relation to the quality of the precious metal admitted to the Exchange. For the provision of these storage and assurance services, ABX charges Members storage fees. The storage fees are an ad valorem fee charged to each Member calculated according to the value of the Members precious metal holdings physically held in the storage vaults each month.
Mr Ryan gave evidence that ABX’s revenue sources are:
·Execution fees;
·Storage fees;
·Withdrawal fees;
·Delivery fees.
Since 2015 platform fees have also been charged.
Mr Ryan also gave evidence that in the 2013/2014 year there was a one-off purchase of bullion to provide liquidity for the Exchange. He said that this resulted in the profit and loss statement for that year[28]recording income from the sales of bullion. He said that has not been repeated.
[28] Exhibit 1, T Docs T12 page 63.
Austrade says that because ABX as part of the settlement process takes title to the metal albeit briefly before it is transferred to the Buyer, its principal commercial activity involves the initial purchase of goods from one party and its re-sale to another[29]. Mr Leerdam for Austrade submitted to the Tribunal that the predominant business activity is the sale and purchase of precious metal and not the service platform which facilitates the purchase. In this respect, he submitted that the “end product” to be considered is the sale and purchase of precious metals. He referred to Re Jingles Australia Pty Ltd and Australian Trade Commission [30] where the Applicant was an advertising production house producing and selling finished audio and visual tapes designed to advertise products. In that case the Tribunal found that the Applicant produced a master tape which was “tailor made” for the specific advertising requirements of the client. The production involved processing music and voices using specialist equipment. The Tribunal found that “the end product is a tangible item which is sold to the client and taken away by the client for the client’s use at his or her discretion….. I am satisfied that the tapes produced by the Applicant are “goods” and not “services.”[31]
[29] Exhibit 3, paras 23-24.
[30] (1990) AATA 120
[31] Para 11.
Whilst there is a tangible product, namely precious metal involved in ABX’s business activity, I consider that it is not correct to characterise ABX’s predominant business activity as being the production of an end product being the sale and purchase of precious metals.
Whilst ABX does take ownership of the precious metal being traded as part of the counterparty clearing house settlement process, it does so only for a very brief time of milliseconds before title is transferred to the buyer. Whilst ABX’s financial accounts for 2013/2014 year record an income item from the sale of bullion[32]I accept the evidence of Mr Ryan that this was a one-off transaction to provide liquidity for the Exchange. ABX is not acquiring the precious metals for the purpose of resale. It does not own nor hold any precious metal trading stock nor inventory of its own.
[32] Exhibit 1, T Docs T12, page 63.
I consider that the various component activities of ABX’s business to which I have referred above are not stand alone services, but are part of the Exchange service being provided by ABX.
Accordingly, I am satisfied and find that the predominant business activity of ABX is the provision of the service of an operator of an electronic Exchange and market place for allocated physical precious metals (Exchange Services).
IS IT AN ELIGIBLE SERVICE?
It is accepted by the parties that ABX is not providing a tourism service. Accordingly, the next matter to be determined is whether it is an eligible non-tourism service within Section 25 of the EMDG Act.
The first requirement to be determined as to whether it is an eligible non-tourism service, is whether in accordance with Section 107 of the EMDG Act and Schedule 2 of the EMDG Regulation, it is a service other than (relevantly):
·A service relating the identification, procurement, lease, sale or purchase of assets in Australia (whether tangible or intangible) including cash, real estate, stocks, options or shares);[33] or
·A service relating to the protection operation or maintenance of assets held in Australia.[34]
[33] Schedule 2 Item 1(c) EMDG Regulations.
[34] Schedule 2 Item 1(d) EMDG Regulations.
IS IT A SERVICE RELATING TO THE SALE OR PURCHASE OF ASSETS IN AUSTRALIA?
The Administrative Guidelines in relation to Schedule 2 Item 1(c) of the EMDG Regulations provide (at 4.2.6):
“This exclusion means that services provided to foreign residents relating to a range of transactions involved with assets held in Australia will not be eligible for EMDG support….This exclusion applies to service providers who promote sales related to transacting in assets held or to be held in Australia…..”.
Mr Brideaux gave evidence that the storage vaults for the precious metals forming part of ABX’s services in 2013/2014 were located in Brisbane and Sydney and nine locations outside Australia. He further said that the majority of the precious metals were held in storage vaults overseas.
I have already found that ABX’s predominant business activity is not the sale and purchase of precious metals which would be assets. I have found that its service is the provision of Exchange Services.
On the basis of this and the evidence of Mr Brideaux referred to above I find that ABX’s service is not a service relating to the sale or purchase of assets in Australia and is therefore not within Schedule 2 Item 1(c) of the EMDG Regulations.
IS IT A SERVICE RELATING TO THE PROTECTION OPERATION OR MAINTENANCE OF ASSETS HELD IN AUSTRALIA?
In relation to this, Item 4.2.6 of the Administrative Guidelines provides:
“This exclusion applies to services supplied to foreign resident clients for providing any services in relation to any assets held in Australia.
The word “held” limits the exclusion to assets held in Australia on an ongoing basis rather than to assets brought to Australia for one-off or short term reasons….”.
In relation to this, Austrade contends that:
“In addressing the Applicant’s secondary business activity, the services provided such as inventory control, and Australian or international storage options, arranging shipping services and providing auditing access services, the ineligibility of the services contended by the Respondent depends on whether it is provided in Australia or overseas.[35]
[35] Exhibit 3 para 36.
Austrade in its Statement of Facts Issues and Contentions relied on the decision of Asia Pacific Aircraft Storage Pty Ltd and Australian Trade Commission[36] (APAS) where APAS had established a business based in Alice Springs offering short and long term storage of aircraft. Its intended customers were aircraft operators in the Asia/Pacific region. It was held at the aircraft at APAS’s facility in respect of which its services provided were held in Australia.
[36] [2014] AATA 835.
The circumstances of the present case are different to those in APAS. Here, as I have previously mentioned, ABX provides as part of its service, storage vault facilities for the storage of the precious metals in Brisbane and Sydney and nine locations outside Australia. In the locations outside Australia, those services are provided using Loomis International and Malca-Amit Singapore Pte Ltd. Further, as previously mentioned, Mr Brideaux gave evidence that the majority of the precious metals were held in storage vaults overseas. I have already found that the service provided by ABX is the provision of Exchange Services. One of the components of those services is the provision of storage and logistic services to its Members for precious metals traded through the Exchange. As previously mentioned, those storage and logistic services are provided predominantly at locations outside Australia. Accordingly, I find that whilst a component of ABX’s Exchange services involves the provision of storage and logistic services, its service considered in its entirety is not a service relating to the protection, operation or maintenance of assets.
Further, those storage and logistic services are provided predominantly at locations outside Australia in respect of precious metals held in those locations outside Australia.
Accordingly I find that ABX’s service is not a service relating to the protection, operation or maintenance of assets held in Australia and is therefore not within Schedule 2 Item 1(c) of the EMDG Regulations.
It therefore follows and I find that ABX’s service is a non-tourism service within the definition of Section 107 of the EMDG Act.
IS ABX’S NON-TOURSIM SERVICE SUPPLIED TO A PERSON WHO IS NOT A RESIDENT OF AUSTRALIA?
Section 25(1) of the EMDG Act requires that the non-tourism service is an eligible non-tourism service if it is supplied (whether in or outside Australia) to a person who is not a resident of Australia.
ABX in its Statement of Facts Issues and Contentions states:[37]
“While the Applicant does provide a means for participants to buy and sell precious metal within Australia, the majority of the Applicant’s target membership basis and the majority of the eighty two individual precious metal products are located internationally due to the market size and precious metal interest of other international precious metal hubs relative to Australia”.
As previously mentioned, Mr Brideaux also gave evidence that the majority of the precious metal was stored in overseas storage vaults.
[37] Exhibit 4 para 95.
Accordingly I am satisfied and find that ABX’s service is predominantly supplied to persons who are not a resident of Australia. I find that ABX’s non-tourism service is therefore an eligible non-tourism service within Section 25(1) of the EMDG Act subject to the requirements of Section 25(4).
IS THE AUSTRALIAN INPUT IN ABX’S SERVICE SUFFICIENT TO ENSURE THAT AUSTRALIA WILL DERIVE A SIGNIFICANT NET BENEFIT FROM THE SUPPLY OF THE SERVICE?
The final requirement to be determined is whether in accordance with Section 25(4) of the EMDG Act the Australian input in ABX’s service is sufficient to ensure that Australia will derive a significant net benefit from the supply of the service thereby making it an eligible non-tourism service to be eligible for an export market development grant under the EMDG Act.
The Administrative Guidelines at Item 4.2.2 set out the assessment criteria which Austrade is to take into account in making that determination as being:
·“The value of the project;
·The value of Australian inputs compared with overseas inputs;
·The nature of the inputs such as professional staff compared to labourers;
·The underlying intellectual property or know how involved;
·Employment generated in Australia;
·Net foreign exchange earnings;
·Any other notable factors.”
Before considering the application of those criteria, regard must be had to the meaning of “Australia will derive a significant net benefit” in Section 25(4) of the EMDG Act. This provision was carefully considered in Oppidan and Australian Trade Commission.[38] There the Tribunal:
“Accepted that the term will “in Australia will derive a significant net benefit” in Section 24(4) of the Act is intended to refer to certainty and the grant year and not a time in the future”.[39]
[38] [2002] AATA 582 at paras 81-92.
[39] Para 92.
Whilst that decision was in respect of Section 24(4) of the EMDG Act, the equivalent wording in Section 25(4) in respect of this issue was identical. Accordingly, I adopt that interpretation of the phrase “Australia will derive a significant net benefit”.
In accordance with that interpretation, the criteria are to be assessed with a requirement of certainty in respect of the grant year, which in this case is 2013/2014.
Turning now to consider the meaning of “significant” in the same phrase, the Macquarie Dictionary defines “significant” as “important, of consequence”. It also defines “insignificant” as “unimportant, trifling or petty…..too small to be important….of no consequence”.
In ACI Pet Operations Pty Ltd v Comptroller-General of Customs & Anor[40]at page 552 Foster J stated:
“Looked at from this point of view “significant” may be regarded as meaning “not unimportant or trivial” or as “sufficiently large to be important”.
[40] (1990) 26 FCR 531.
THE VALUE OF THE PROJECT
The first of the assessment criteria which Austrade is to take into account is the value of the project. ABX addresses this in its Statement of Facts Issues and Contentions[41]and states that the world trade in precious metals is worth in excess of $14 trillion dollars:
“This market is the Applicant’s principal target and even a modest infiltration rate of 0.5%-1% will generate significant execution and storage revenues…..The Applicant is uniquely placed to revolutionise the $14 trillion dollar precious metal industry with its integrated, modernised and globalised solution”.[42]
[41] Exhibit 4 para 71 and 72.
[42] Exhibit 4, para 72.
ABX’s profit and loss statement for the 2013/2014 year which is the grant year[43]indicates that its total income was $203,494 with a gross profit of $5,873. Its total expenses were $1,557,217 resulting in an operating loss of $1,551,344. Its profit and loss statement for the 2014/2015 year[44]indicates that its total income was $937,018 and its operating loss was $2,881,794. As I have previously mentioned, this criteria has to be assessed in respect of the grant year and with certainty. Whilst the accounts for these two years indicate substantial expenses or investment in its business, they do not indicate with certainty any significant value of the business. Whilst ABX may well be right as to the future potential of its business and its service, I am not satisfied with any certainty that for the grant year, the value of the project was significant.
[43] Exhibit 1, T Docs, T12, page 63-64.
[44] Exhibit 2, T Docs, T71, page 402.
THE VALUE OF THE AUSTRALIAN INPUTS
The next criteria to be considered is the value of the Australian inputs compared with overseas inputs. ABX addresses this in its Statement of Facts Issues and Contentions[45]it states that:
“It provides economic benefits to multiple classes of Australian resident service providers including but not limited to the following:
76.1 The storage service providers; and
76.2 Software development organisations”.[46]
[45] Exhibit 4, paras 76-85.
[46] Exhibit 4, para 76.
In relation to the provision of storage services providers, ABX in its Statement of Facts Issues and Contentions relies on an email to Austrade in which it states that some of its storage and audit services providers are Australian based companies or contractors being Armaguard and BDO Audit.[47]
[47] Exhibit 1, T Docs, T19, page 105-106.
It also states that:
“In addition to the ancillary benefit to the predominantly Australian entities listed…..it is imperative to note that ABX also marks up its storage and audit services by approximately 50-100% to its market participants”.
ABX also states in that email that:
“The current persons employed by ABX who directly or indirectly assist in providing storage service to our market participants are listed below. The operations persons listed complete the majority of day to day tasks with the remainder of the other staff involved in technical, compliance and support functions associated with the provision of storage services to the market participants”.
It then proceeds to list two operations staff and three other staff.
ABX in its Statement of Facts Issues and Contentions[48]states that its resident storage service providers are Linfox Armaguard and Brink’s Australia. It states that it maintains five Australian vault locations and that these operations generate a minimum annual spend to Armaguard and Brink’s of $80,000. It goes on to state that based on its growth rates the volumes of precious metal forecasted to be held at Armaguard and Brink’s storage accounts will generate millions in ongoing storage fee revenues for the providers for the foreseeable future.[49]
[48] Exhibit 4 para 80.
[49] Exhibit 4 para 81.
As I have previously mentioned, Mr Brideaux gave evidence that the majority of the precious metals are held overseas using the overseas storage providers Loomis and Malca-Amit. He also gave evidence that it has nine storage vault locations outside Australia. Further in an email from Mr Ryan of ABX to Austrade dated 10 July 2015[50]he makes reference to an email of Austrade explaining the reasons for disallowing the claim including that:
“As advised during the audit visit discussion, approximately 80-90% of the goods….are of non-Australian origin”.
Mr Ryan in his email to which I referred, did not demur to this statement.
[50] Exhibit 1 T Docs, T30, page 186.
ABX’s profit and loss statement for the 2013/2014 year[51]does not record any income from storage fees. It records expenses for secure storage fees of $66,241. The wages expense for the staff ABX listed as being involved in the management of storage operations totalled approximately $31,000. Two of the staff listed do not appear in the wages expenses in those accounts. In the profit and loss statement for the 2014/2015 year.[52] There is no dissection of income items and secure storage fees expenses are nil.
[51] Exhibit 1, T Docs, T12, pages 63-64.
[52] Exhibit 2, T Docs, T71, page 402.
It is therefore apparent that for the grant year:
·Most of the storage vault facilities and those services are provided by overseas providers;
·80-90% of the precious metals in storage vaults are sourced outside Australia;
·The services provided by ABX’s Australian based staff are limited to management support of the storage operations and technical and compliance support.
·Five Australian staff were involved in the provision of those services and of those, only two were involved in most of the day to day activities. The wages paid to those staff were approximately $31,000.
Accordingly, I am not satisfied with any certainty that the value of the Australian inputs with respect to storage services compared with overseas inputs for the grant year is significant.
In relation to the inputs of software development organisations, ABX in its Statement of Facts Issues and Contentions[53]states:
·Over the past two years it has engaged several resident professional software organisations and hired contractors to assist in its engineering and developmental projects to accelerate commercialisation.
·Based on current engagements, it is on track to spend more than AUD$500,000 on Australian resident software development organisations per annum. This figure is forecast to grow.
[53] Exhibit 4, para 82-83.
ABX’s profit and loss statement for 2013/2014[54]records its software development expense as $94,841.55. ABX’s balance sheet for the same year[55]records a total software and website asset after depreciation as $1,391,524. ABX’s profit and loss statement for the 2014/2015 year[56]records software development expenses of $537 and website development expenses of $14,648.
[54] Exhibit 1, T Docs, T12, page 64.
[55] Exhibit 1, T Docs, T13, page 65.
[56] Exhibit 2, T Docs, T71, page 502.
Accordingly, I am not satisfied with any certainty that the value of Australian inputs with respect to software development for the grant year is significant.
THE NATURE OF THE INPUTS
The next criteria to be considered is the nature of the inputs such as professional staff compared to labourers. In relation to this, ABX in its Statement of Facts Issues and Contentions[57]states:
·It engages approximately forty people globally with nineteen of those persons currently being fulltime Australian resident employees.
·The majority of the Australian resident employees are IT and operations staff who are responsible for the maintenance and development of the software platform and management of back office storage services.
·Its annual gross salary expenses approximately $1,840,000.
·To date (2016) ABX has paid out approximately $5,050,000 in salaries to Australian resident employees engaged for the purpose of developing the engaging platform.
[57] Exhibit 4, para 73-75.
ABX’s profit and loss statement for the 2013/2014[58]records total wages and salaries for a total of fourteen staff of $172,842. Its profit and loss statement for 2014/2015 year[59]records an employee benefits expense of $710,518. In his evidence, Mr Brideaux said that ABX has paid $5.05 million in salaries to Australian resident employees in the period from 2011 to the present date.
[58] Exhibit 1, T Docs, T12, page 64.
[59] Exhibit 2, T Docs, T71, page 402.
In relation to the criteria of the nature of the inputs, it is apparent that ABX’s Australian staff are management and technical staff and not labourers. Whilst ABX’s current Australian resident staff might number nineteen, in 2013/2014 it had a total wages expense of $172,842 for a total staff of fourteen people according to its financial accounts. I am not satisfied with certainty that the nature of the Australian inputs of its staff for the grant year are significant.
THE UNDERLYING INTELLECTUAL PROPERTY
The next criteria to be considered is the underlying intellectual property or know how involved. In relation to this, ABX in its Statement of Facts Issues and Contentions[60]states that it owns 100% of the underlying intellectual property and know how developed by its employees that is used to deliver all Exchange Services. It is apparent from Mr Brideaux’s evidence in demonstrating the software platform that ABX has developed a unique software platform for the provision of its Exchange Services. I consider this intellectual property to be significant. I am satisfied that ABX’s underlying intellectual property or know how relating to its service for the grant year is significant.
[60] Exhibit 4, para 75.
EMPLOYMENT GENERATED IN AUSTRALIA
The next criteria to be considered is employment generated in Australia. The matters relating to this are also covered in paragraphs 83 and 84 above. In summary:
·ABX currently employs forty people, nineteen of whom are Australian residents.
·ABX states that in the period 2011-2016 it has paid approximately $5,050,000 in salaries to Australian resident employees.
·In the 2013/2014 year ABX employed a total of fourteen people.
·For the 2013/2014 year ABX’s total wages expense of $172,842.
It is necessary to consider the value of the input from employment generated in Australia with certainty in respect of the grant year 2013/2014. There is no evidence as to how many of its total staff of fourteen for that year were Australian residents. Only nineteen of forty or 48% of its current staff are Australian residents. Its total wages expense for 2013/2014 was $172,842. Even assuming that the majority of ABX’s 2013/2014 staff were Australian residents, I am not satisfied with certainty that the employment generated in Australia for the grant year was significant.
FOREIGN EXCHANGE EARNINGS
The next criteria to be assessed is ABX’s net foreign exchange earnings. In relation to this, ABX has not provided any evidence nor made any submissions. ABX’s profit and loss statement for 2013/2014[61]records its total income as $203,494. I am not satisfied with any certainty that ABX’s net foreign exchange earnings for the 2013/2014 year are significant.
[61] Exhibit 1, T Docs, T12, page 63.
ANY OTHER NOTABLE FACTORS
The final criteria to be assessed is whether there are any other notable factors. In relation to this ABX in their Statement of Facts Issues and Contentions[62]states:
·Based on its current engagements, ABX is on track to spend more than $500,000 on Australian resident software organisations per annum.
·The development of its Exchanges Service is generating international interest.
·ABX is in advanced negotiations with several sophisticated investors.
[62] Exhibit 4, para 84-85.
Mr Ryan in his submissions to the Tribunal stated that the requirement that the Australian input in the service is sufficient to ensure that Australia will derive a significant net benefit requires a common sense assessment. He submitted that ABX had invested a substantial amount of money to develop this product and it employs significant staff. He submitted the product was now starting to gain traction.
I consider those submissions to be general in nature and the statements about its current expenditure on software development, are not relevant in considering the grant year.
CONCLUSION ON SIGNIFICANT NET BENEFIT
The Administrative Guidelines set out the matters which Austrade is to take into account in assessing whether the Australian inputs are sufficient to ensure that Australia will derive a significant net benefit from the supply of the services.
In making the assessment of significant net benefit, I consider that regard must be had to the totality of the Australian inputs in relation to the service. However, of the seven factors which are to be considered as listed in Item 4.2.2 of the Administrative Guidelines and which are to be taken into account by Austrade, the only one which I was able to be satisfied with certainty as being an input in respect of which Australia will derive a significant net benefit was the underlying intellectual property or know how involved in ABX’s Exchange Service.
Considering all of these factors in their entirety, I am not satisfied with any certainty that for the grant year the Australian inputs in ABX’s service are sufficient to ensure that Australia will derive a significant net benefit from the supply of the service.
I find that the Australian input in the service is not sufficient to ensure that Australia will derive a significant net benefit from the supply of ABX’s service. It therefore follows that ABX’s service does not satisfy the requirements of Section 25(4) of the EMDG Act. As a result ABX’s service is not an eligible non-tourism service in accordance with the EMDG Act. The Application must therefore fail.
DECISION
The decision of Austrade dated 3 December 2015 is affirmed because ABX did not have eligible services pursuant to Section 25 of the EMDG Act in order to receive an export market development grant pursuant to the EMDG Act for the grant year 2013/2014.
I certify that the preceding 97 (ninety -seven) paragraphs are a true copy of the reasons for the decision herein of Senior Member D R Davies ..............................[Sgd]..........................................
Associate
Dated 25 November 2016
Date of hearing 6 October 2016 Applicant In person Solicitors for the Respondent DLA Piper Australia
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