Australian Trade Commission v World Geoscience Corp Ltd
[1997] FCA 818
•20 August 1997
FEDERAL COURT OF AUSTRALIA
Export Market Development Grants Act - grants - requirements of “eligible expenditure” - meaning of “carrying on business” in s 11Z(5) - whether requires ability to supply - identification of relevant act for s 38 - whether motive relevant - requirement of effect flowing from act - s 38(1) concerned with movement (of expenditure)
Export Market Development Grants Act 1974 Part 1A, s 38, 14(1)(a), 11A(1)(a), 11A(1), 11C(1)(a), (2), 11Z(5), 38(1), 38(2)(a)
Goodman Fielder Wattie Ltd v Commissioner of Taxation (1991) 29 FCR 376
Softwood Pulp and Paper Limited v Federal Commissioner of Taxation (Cth) (1976) 76 ATC 4,439
Inglis v Federal Commissioner of Taxation (Cth) (1979) 40 FLR 191
Australian Trade Commission v Correia & Zaknich Holdings Pty Ltd & Anor (1992) 38 FCR 153
Australian Trade Commission v World Geoscience Corporation Ltd and World Geoscience Petroleum Services Pty Ltd
No WAG 21 of 1997
Kiefel J
Brisbane
20 August 1997
IN THE FEDERAL COURT OF AUSTRALIA ) ) WESTERN AUSTRALIA DISTRICT REGISTRY ) WAG21 of 1997 ) GENERAL DIVISION )
ON APPEAL FROM A DECISION OF THE ADMINISTRATIVE APPEALS TRIBUNAL
BETWEEN: AUSTRALIAN TRADE COMMISSION
ApplicantAND: WORLD GEOSCIENCE CORPORATION LTD
First RespondentWORLD GEOSCIENCE PETROLEUM SERVICES PTY LTD
Second Respondent
JUDGE(S): KIEFEL J PLACE: PERTH DATED: 20 AUGUST 1997
MINUTES OF ORDER
THE COURT ORDERS THAT:
The Appeal is dismissed with costs.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA ) ) WESTERN AUSTRALIA DISTRICT REGISTRY ) WAG21 of 1997 ) GENERAL DIVISION )
ON APPEAL FROM A DECISION OF THE ADMINISTRATIVE APPEALS TRIBUNAL
BETWEEN: AUSTRALIAN TRADE COMMISSION
ApplicantAND: WORLD GEOSCIENCE CORPORATION LTD
First RespondentWORLD GEOSCIENCE PETROLEUM SERVICES PTY LTD
Second Respondent
JUDGE(S): KIEFEL J PLACE: PERTH DATED: 20 AUGUST 1997
REASONS FOR JUDGMENT
Each of World Geoscience Corporation Limited (“WGC”) and World Geoscience Petroleum Services Pty Ltd (“WGP”) were applicants for an export market development grant pursuant to the Export Market Development Grants Act 1974 (“the EMDG Act”) in relation to expenditure said to have been incurred by them in the year ending 30 June 1993. The Australian Trade Commission (“ATC”) concluded that WGC’s entitlement should be limited to $205,609 of a claim for $250,000 and WGP’s to $44,391 of a claim of $53,975. The basis for those conclusions, as was noted in the following determination of the Administrative Appeals Tribunal, was that the two companies (WGP being a wholly owned subsidiary of WGC) had distributed or transferred expenditure from WGC to WGP or had rearranged their business activities to maximise the grants able to be claimed by WGC. The Tribunal, on 15 January 1997, set that decision aside and substituted one whereby each of WGC and WGP were eligible for a grant in the relevant claim period in the amounts claimed.
The Tribunal’s Findings of Fact
For some time prior to the period in question, WGC had carried on the business of airborne geophysical surveying, its main activity being airborne magnetic mapping and data collection for mineral exploration companies, although from time to time it also undertook those works for oil exploration companies. It decided to establish a subsidiary company which would concentrate its efforts on the provision of airborne oil exploration services. This was brought about, in part, by its directors’ perception of an expanding world market for such services. Further, at about this time, it had come to the attention of the directors that British Petroleum was seeking to sell its airborne laser fluorosensor system technology (the “ALF” System) which was designed to detect petroleum seepage. As the Tribunal later found, WGC’s airborne magnetic services provided different technical information to that which could be provided by the ALF system.
Negotiations of some 18 months culminated in an agreement executed by BP on 18 December 1992 and by WGC on 4 January 1993, by which BP transferred all of its rights in the ALF technology and data for a royalty. By a further agreement WGC was required to pay $1.5M by four instalments between 15 January 1993 and the then anticipated completion date, 31 March 1993. WGC was, by that agreement, to be entitled to terminate if completion was not achieved by the beginning of July 1993. The Tribunal, at various points, accepted that the parties’ expectation was that the ALF technology would be functioning satisfactorily and available by mid-1993. It appears that aspects of the technology were not finalised at the time of entry into the agreements.
On 6 January 1993 BP and WGC agreed to assign, for a nominal consideration, all of WGC’s entitlement under the agreements to WGP. It appears to have been accepted by the Tribunal that WGC wanted the separate company to be in a position to provide comprehensive airborne oil and gas survey services and to provide a platform for a joint venture partner, this being deemed necessary to reduce the risk associated with the venture. That partner had not been found by the time of the hearing.
By an agreement (the “Representation Agreement”) to take effect from 1 December 1992 (but dated 11 January 1993), WGP engaged a consultant, Mr Williams, to market and promote the ALF system in the United Kingdom and other parts of the world. Mr Williams had a knowledge of the technology and of the oil exploration industry. He was a former employee of BP. His task was principally to promote the ALF technology which, as I have said, it was believed by WGC and WGP, would be available by at least July 1993. He was also entitled to make available, depending upon the nature of the request, WGC’s services and to subcontract for other services. As the Tribunal earlier noted, WGC services were, in relevant respects, different from those to be offered by WGP.
Mr Williams was required to report to WGC. Correspondence by him was undertaken on WGC letterhead. The witnesses explained to the Tribunal (and again, they appear to have been accepted in this regard) that WGP’s name was not then promoted as WGC had an established reputation and WGP, in any event, had no stationery. It was noted however that brochures, in fine print, did refer to WGP’s ownership of the ALF technology. The companies and their directors, the Tribunal found, also conducted inter-company dealings in a somewhat informal manner with little by way of formal documentation. WGP had no bank account and, as a result, cheques were drawn on WGC’s account. Correspondence, as earlier noted, was undertaken on WGC’s letterhead. With respect to expenditure which might be attributed to WGP, the company’s accountants recorded this as owed by WGP to WGC.
Despite Mr Williams’ activities in promoting the ALF technology in the six months to the end of the claim period, no such services were able to be provided until late September 1994, after the settlement of an action brought by WGC and WGP against BP for performance of the agreement. WGP derived no income from services in the year in question. It had only the one asset, the technology, and its only obligation, apart from those recorded as owing to WGC, was to Mr Williams pursuant to the consultancy engagement.
Questions on the Appeal
The appeal centres upon two enquiries. The first is whether WGP’s expenditure in the sum claimed was “eligible expenditure” for the purposes of Part 1A of the EMDG Act. This question involves, in particular, consideration as to whether WGP was “carrying on business” in the claim period. The second enquiry is whether, regardless of motive, there was a rearrangement of business activities or a relevant transfer within the meaning of s 38 of the Act which produced the result that WGC was able to claim a higher figure, as the ATC had found.
Whether “eligible expenditure”
This argument relates to the expenditure of WGP, there being no dispute that WGC incurred eligible expenditure. The argument which is addressed to WGC’s application concerns s 38.
Section 14(1)(a) provides that a claimant is eligible for a grant if the claimant has incurred “eligible expenditure in the claim period”. Section 11A(1)(a) requires that it be “incurred” by the person. Whether WGP could be said to have “incurred” the expenditure, by the process outlined above and which involved WGC paying the sums in question in the first instance, was the subject of an express finding of fact in favour of WGP, and was not an issue on this appeal. The other requirements of s 11A(1) are that the expenditure be both “claimable expenditure” and “qualifying export development expenditure” for the claimant. Section 11A(1) provides:
“11A.(1) Expenditure is eligible expenditure of a person (other than an approved trading house, approved joint venture or approved consortium):
(a) only if it is incurred by the person; and
(b)only to the extent to which it is claimable expenditure (see Division 2); and
(c)only if it is qualifying export development expenditure for the particular persons (See Division 4).”
Expenditure satisfies the first requirement, that of “claimable expenditure”, relevantly if it was incurred by way of expenses of, contributions towards expenses of or payments made to an agent for the purpose of carrying out market research, of obtaining market information, advertising or otherwise securing publicity or business (s 11C(1)(a)). It was accepted by the ATC that the monies paid under the agreement to Mr Williams may fall into one or more of these categories. Section 11C(2) then provides that expenditure can only be “claimable expenditure” to the extent to which it relates to one or more of the goods, services or rights listed. The relevant reference here is to “eligible services”. A review of “eligible services” in Schedule 4 to the Regulations (by the definition section, s 3) would appear to be satisfied in the present case. They include technical or advisory services.
As I have earlier referred, the question which arises in the ATC’s case on this appeal is whether the payments made on behalf of WGP, to the consultant, and arising under the Representation Agreement, were “in the course of business”. This is specifically referred to in s 11Z(5) which sets out what may fulfil the description of “qualifying export development expenditure”. It will be recalled that it is the other pre-requisite for “eligible expenditure” under s 11A(1). Section 11Z(5) provides:
(5) Expenditure is qualifying export development expenditure of a person to whom this section applies if:
(a)in the Commission’s opinion, it is incurred primarily and principally for the purpose of:
(i) creating or seeking opportunities for; or
(ii) creating or increasing demand for;
the supply, by that person, of eligible services outside Australia; and
(b) the supply by that person is for reward and in the course of carrying on business in Australia.”
This question was addressed in the reasons of the Tribunal, to which I shall refer. The Tribunal did not itself determine whether or not WGP’s expenditure satisfied the provisions of s 11C of “claimable expenditure”, expressing that as having been common ground, in these terms:
“37. The Tribunal understands that should it find as fact that the expenditure as claimed by WGP (after the respondent’s audit adjustment, which is not disputed) was incurred by it in the claim period, then it is common ground that it is “claimable expenditure” in terms of s 11C of the ENDG Act. The Tribunal accepts that this is a reasonable concession on the part of the respondent and one that is borne out by the evidence, particularly as it relates to the representation agreement with Mr Williams and kindred expenditure incurred in the claim period. The amount of expenditure incurred by WGP was $151,310 according to Ex A3 and the financial accounts for the year in question … and the amount of agreed claimable expenditure is $122,951.”
The ATC disputes that it was a matter of concession. It seeks to argue that the requirement in s 11Z(5), that the expenditure be in connection with supply and in the course of carrying on business in Australia, should also be seen as imported into s 11C. On the view I take of that argument it is not strictly necessary for me to resolve the dispute as to whether the concessions were made. However, I make the following observations. It does not seem to me that the statements of facts and of agreed issues squarely raised the submission now sought to be advanced. What they did raise was the contention that WGP was not carrying on business at the time the expenditure was incurred. But this issue was advanced in connection with the question whether the expenditure was qualifying export development expenditure for the purposes of s 11Z(5) and s 11A(1)(c). The point now sought to be raised is that the requirement, of business being carried on, ought also be implied in s 11C(2). I do not accept that there is the need or warrant for such an implication. Section 11C is concerned with the type of expenses. How and in what connection it is incurred falls to be determined under s 11Z(5).
Section 11Z(5) provides:
“(5)Expenditure is qualifying export development expenditure of a person to whom this section applies if:
(a)in the Commission’s opinion, it is incurred primarily and principally for the purpose of:
(i) creating or seeking opportunities for; or
(ii) creating or increasing demand for;
the supply, by that person, of eligible services outside Australia; and
(b)the supply by that person is for reward and in the course of carrying on business in Australia.”
The Tribunal concluded, from the evidence relating to Mr Williams efforts, that he was primarily and principally engaged in promoting the future provision of ALF services to potential customers of WGP. The expenditure in question was in connection with those activities. It would follow from that finding that paragraph (a) of subs 11Z(5) was satisfied. The ATC, at one point in its submissions, took issue with this finding. In my view however there was clearly evidence to support it and this appeal does not permit a wider review of the Tribunal’s findings.
The other argument advanced by the ATC might however involve a question as to the construction of paragraph (b) of the subsection. The ATC submitted that WGP could not be said to have been “carrying on business” in the period in question and that until it had taken delivery of the ALF technology, which it did not do until 1994, it was unable to contract with persons and unable to supply the services in question. The point which was sought to be made was that there was only an intention to carry on a business, but that it had not yet commenced.
The Tribunal observed that WGP was undoubtedly carrying on business after 1994 when it was able to provide the ALF services. So far as the expenditure incurred in the claim period was concerned, the Tribunal was of the view that it was proper to be characterise it as connected with usual and ongoing business costs, as compared with those of a capital nature. It concluded that, so far as subs (5) was concerned, for the claim period in question, WGP was carrying on business in its own right with the reasonable expectation that sales would soon eventuate. In this connection it considered that some income tax decisions concerned with the phrase “in the course of carrying on business” and “in carrying on business” supported such a view.
In Goodman Fielder Wattie Ltd v Commissioner of Taxation (1991) 29 FCR 376, Hill J discussed a number of cases which had dealt with the concept of a trade or business being carried on. The following observations are drawn from that collection of cases. Indicia which have been found to be relevant to that enquiry include whether a profit was sought to be made, the continuity of activity and the commercial nature of it and the organisation of the activity. And in some cases the question of intention, or commitment to a project or undertaking, has been held to be a relevant consideration (see Softwood Pulp and Paper Limited v Federal Commissioner of Taxation (Cth) (1976) 76 ATC 4,439; 4,447 and Inglis v Federal Commissioner of Taxation (Cth) (1979) 40 FLR 191, 201). In the present case the Tribunal emphasised the commitment by reference to WGP’s expectation that it would be able to supply in the near future.
The ATC’s argument would limit the commencement of a business to the commencement of actual sales. As Hill J observed in Goodman Fielder (386), there are some English cases to this effect, although they may be explained, in part, by the legislation with which they were concerned. As I shall shortly refer, the context provided by the EMDG Act confirms me in my view that the business of which s 11Z(5) speaks is not to be read narrowly, and by requiring sales and supply at the time the expenditure was incurred, and in respect of which a export marketing grant was sought. To conclude the more general observations, the opinion of the AAT, that WGP ought be seen to have commenced business by reason that it had incurred expenses usually associated with a business venture and had sought out customers, was one clearly available on the facts. The only matter which might have delayed it, if orders had been placed, was the actual delivery of the technology in its final form, and this was expected to occur by mid-1993. And it was of some importance to the Tribunal’s reasoning, I infer, that WGP and its directors had a commitment to the undertaking.
Turning to the subsection itself, the enquiry posed by the ATC’s submission is whether a requirement that a claimant be in a position to sell, at the time the expenses are incurred, can be seen as consistent with its operation and purpose. Such an approach would deny a grant to a claimant which could not yet deliver goods or services although it was intended to do so and although the monies in question had been spent in attempts to carve out a market to permit that future supply.
During argument it became apparent that the ATC placed reliance upon the word “supply” in paragraph (b) of the subsection being expressed in the present tense, as is the phrase “in the course of carrying on business”. The paragraph does not speak of future supply. But that is clearly what paragraph (a) is concerned with. Section 11Z is, it seems to me, concerned primarily to connect expenditure made with an attempt by an applicant for a grant to create an export market. That will necessarily connote some possibility of future, and not present, supply. The phrase “in the course of business” was no doubt inserted to designate the area of operation as one concerning commerce and business. I do not think that these features support an inference that the subsection was to have regard only to expenditure by a present supplier.
In my view the facts as found by the Tribunal qualified WGP’s expenditure as “qualifying export development expenditure” within the meaning of s 11Z(5).
Section 38 and the Discretion
Section 38(1) provides:
“38.(1) Where the Commission is of the opinion that:
(a) an effect of an act done … is to distribute or transfer expenditure or income among some or all of the persons (in this subsection referred to as the “participants”) affected by the doing of the Act; and
(b) as a result, the Commission would, but for this section, be liable to pay to such of the participants as are claimants, in respect of the grant … a total amount by way of grant that exceeds the total amount (if any) by way of grant that would have been payable to the participants if:
(i)the act had not been done; and
(ii)such of the participants (if any) who ceased to exist had not ceased to exist;
the Commission may, for the purposes of this Act and to the extent it thinks necessary to prevent or limit that result, treat the whole or any part of any expenditure or income that has been so distributed or transferred as if it were re-allocated among some or all of the participants in such manner as the commission determines.”
The Tribunal rejected part of the ATC’s submission which had regard to the entry into the company accounts of the expenses paid by WGC during the claim period as a liability owed by WGP to WGC. In the Tribunal’s view there was, by this process, no distribution or transfer of expenditure to WGP and the entries did not re-arrange any business activity. The Tribunal found that the journal entry did no more than record the liability of WGP, which it found had incurred the expenditure. In its view, as the expenditure in question was incurred by WGP, it was incapable of being “moved” to it.
The last mentioned reference, as a passage quoted by the Tribunal discloses, is from the judgment of Hill J in Australian Trade Commission v Correia & Zaknich Holdings Pty Ltd and Anor (1992) 38 FCR 153, 165:
“First, it must be noted that s 38, like its predecessors, is concerned with the effect of the act done, not the motive or purpose of the act, or the motive or purpose of the person doing the act. Secondly, the section will only come into operation if there is an act done which produced the relevant effect. The identification of the relevant “act” will be of utmost importance to the practical application of the section. Thirdly, the relevant effect must be the distribution or transfer of expenditure …among the persons affected by the doing of the action.
The concepts of distribution or transfer of expenditure …are at first sight curious. However, in the present context the meaning is not difficult to grasp. The section is concerned with steps taken which have the effect of moving expenditure from one or more persons, who previously had incurred such expenditure, to some other person or persons, … In referring, …, to ‘some other person or persons’ I do not wish it to be thought that I would exclude from these words a person or persons who originally incurred the expenditure…”
(the underlining was the Tribunals’).
On this appeal the ATC submitted that the Tribunal’s error was in identifying the journal entries as the relevant acts for the purpose of s 38. In its submission the relevant “act” was either the entry into the assignment agreement between WGC, BP and WGP or WGP’s entry into the Representation Agreement with the consultant, or both of them. The Tribunal was of the view that they could not qualify as relevant acts, by reference to following observations of Hill J in ATC v Correia (166):
“It may be said that if that agreement had not been entered into, there would have been no grant at all payable; on that basis the hypothesis [that the act includes the entering into the agreements] would literally always be satisfied … Although this is a possible interpretation of the section, it is not, in my view, the correct interpretation.”
The part in parenthesis was supplied by the Tribunal. The ATC took issue with that statement as a correct description of what Hill J had earlier discussed as the “hypothesis”. At 165 his Honour observed that para (b) of subs 38(1) requires the adoption of an hypothesis, which is that the act referred to in para (a) did not happen and then the resolution of the question, under para(b), whether a grant would have been payable and the quantum of it. His Honour then dealt with the situation where the “act” in question, which was to be disregarded for the purpose of that enquiry, was the entry into the agreement by which the relevant expenditure was incurred. In that case the answer to the question posed by para (b) would always be that there would have been no grant. His Honour did not consider that to be a proper interpretation of the section and concluded that, in such a circumstance, the Commission could consider what other agreements might have been entered into instead. The full passage in Hill J’s judgment from which the Tribunal’s excerpt was taken, was in these terms:
“A difficulty may be thought to arise if the act to which the section refers is, or includes, the entry into the agreement under which the eligible expenditure is incurred. The present is such a case and the applicant Commission particularised the agreement entered into with NC Read Pty Ltd, as the relevant ‘act’ to be examined. It may be said that if that agreement had not been entered into, there would have been no grant at all payable; on that basis the hypothesis would literally always be satisfied in such a case. Although this is a possible interpretation of the section, it is not, in my view, the correct interpretation. If the relevant act be, or include, the entry into the agreement pursuant to which the relevant expenditure was incurred, it does not follow that the adoption of the hypothesis that this agreement was not entered into requires the conclusion that the Tribunal could not form the view that some other agreement would on the balance of probabilities have been entered into instead.”
What his Honour referred to as “always being satisfied”, in the case where the act was the undertaking of the expenditure itself, was the question whether a grant would have been payable, but for the operation of the section. It follows that the Tribunal has misstated the effect of that passage. The Tribunal however may be taken to have concluded that there was not a relevant “distribution or transfer” in the sense of there having been a “movement” of expenditure, and that the mere entry into the Representation Agreement did not have that effect. In my view those conclusions are correct.
In ATC v Correia Hill J, whilst speaking of the “act” as the entry into an agreement, was concerned with a background whereby three agreements with the agent, for services, had previously been entered into with respect to the three boats owned by the respondents. In the year in question however only one boat was the subject of such an agreement and this raised the possibility of the devolution of all such expenditure upon it. The present case is simpler. There was no transfer or distribution of expenditure by the assignment agreement which could have the “effect” of which para (a) speaks. The expenditure was not incurred until the representation agreement was entered into between WGP and the consultant, Mr Williams. Whilst the Assignment Agreement did have the effect of re-arranging a business activity (s 38(2)(a)) the result of it was not to create an entitlement to a grant. It merely placed WGP in a position to incur expenditure on its own account, and with respect to marketing the technology it acquired. There was no relevant distribution or transfer of that expenditure. The only possibility of the “movement” of which the section speaks was the creation of or recording of a liability in WGP to repay WGC for payments made in connection with the agreement, and this was determined by the Tribunal favourably to the claimants.
I should add that the ATC also submitted that the Tribunal, at various points, appears to have taken account of the motives of WGC and WGP and their directors. The Tribunal’s view was, in summary, that the transactions were bona fide and had a basis in the company’s planning. The ATC’s submission, that paras (a) and (b) of s 38(1) and (2) do not require reference to motive or purpose, may be correct although I would think regard to it may be required for the exercise of discretion which follows. In any event, it does not seem to me that the Tribunal’s views, in this regard, impinged upon the identification of the act in question.
Notice of Contention
It is not necessary to have regard to other arguments which might support the Tribunal’s determination. In any event the additional matters sought to be raised by the claimants appear to me to involve review of conclusions as to fact.
Conclusion
The appeal is dismissed with costs.
I certify that this and the preceding eight (8) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Kiefel
Associate:
Dated: 20 August 1997
Counsel for the Applicant: L Price Solicitor for the Applicant: Australian Government Solicitor Counsel for the Respondents: R McCormack Solicitor for the Respondents: Shane Brennan Date of Hearing: 22 July 1997 Date of Judgment: 20 August 1997 Place of Judgment: Brisbane
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