Australis Leisure Pty Ltd and Australian Trade and Investment Commission (Austrade)
[2022] AATA 44
•17 January 2022
Australis Leisure Pty Ltd and Australian Trade and Investment Commission (Austrade) [2022] AATA 44 (17 January 2022)
Division:GENERAL DIVISION
File Number: 2019/6421
Re:Australis Leisure Pty Ltd
APPLICANT
Australian Trade and Investment Commission (Austrade)And
RESPONDENT
DECISION
Tribunal:Deputy President J Sosso
Date:17 January 2022
Place:Brisbane
The Tribunal determines the reviewable decision is affirmed.
...............[SGD].........................................................
Deputy President J Sosso
CATCHWORDS
FOREIGN AFFAIRS AND TRADE – export market development grants - whether the activities (other than manufacture) which result in the goods being made ready for sale primarily or substantially carried on in Australia – whether a significant proportion of the value of the goods added within Australia - decision under review affirmed
LEGISLATION
Corporations Act 2001 (Cth)
Export Market Development Grants Act 1997 (Cth)
CASES
Oppidan Pty Ltd and Australian Trade Commission [2002] AATA 582
Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees’ Union (1979) 42 FLR 331
SECONDARY MATERIALS
Export Market Development Grants (Significant Net Benefit) Guidelines 2016 (Cth)
Export Market Development Grants Administrative Guidelines 2018 (Cth)
REASONS FOR DECISION
Deputy President J Sosso
17 January 2022
INTRODUCTION
Australis Leisure Pty Ltd (the Applicant) manufactures outdoor furniture in Indonesia for export to a number of countries, including Germany, Singapore and the United States of America. The outdoor furniture is not manufactured in Australia, rather the Applicant subcontracts for the manufacture with Indonesian companies – Exhibit 3 para 3.
Mr Nicholas Price has held the positions as Director and Secretary of the Applicant since 28 January 2005 – Exhibit 1 T32 p. 250, T38 p. 267.
Commencing 27 January 2018, Ms Maria Sugih Rezeki Handitia (Ms Handitia) – also spelt as “Handitya” – was appointed a Director of the Applicant and held 20% of the shares of the Applicant – Exhibit 1 T38 pp. 267 – 268. Ms Handitia ceased being a Director of the Applicant on 22 February 2019 – Exhibit 1 T32 p. 250.
Ms Handitia was the only Indonesian employee of the Applicant – Transcript (Tr.) 13.7.2021 p. 25.
In 2016/2017, export sales by the Applicant amounted to $102,219 and this increased to $271,700 in 2017/2018 – Exhibit 5 para 1. For the 2017/2018 grant year, overseas sales comprised 30.75% of total sales – Closing Submissions (CS) para 1.
Consultancy fees and wages were paid in the relevant periods to – Exhibit 5 para 2a:
(a)Nicholas Price;
(b)Michelle Lewis; and
(c)Maria Handitia.
Ms Handitia is an Indonesian national who, at the relevant times, lived in Java, Indonesia and performed relevant duties for the Applicant, primarily in Java. According to the legal representative of the Applicant, Ms Handitia was employed as a semi-business partner since 2009 and was paid “for working with factories, product development, warranty issues, shipping issues, production coordination re ordering to factories, visits factories for new development.” – Exhibit 1 T51 p. 415.
The roles played by each of these persons, as well as Mr Dennis Abalos, was described by the legal representative for the Applicant as follows – Exhibit 5 para 2b:
·“Nicholas Price: Customer communication, Product design and development, from visiting International exhibitions to design and development of products at Australis’ factories, Company administration, Maintaining and developing International client and supplier relationships.
·Michelle Lewis: Customer communications, Administration and logistics relating to customer shipments, Market research at International trade fairs, regular visits with international customers.
·Handitia: Communication with factories regarding production and new product development, Trade Fair International research, regular visits with International customers.
·Dennis Abalos: Specifically involved in new product design, development and prototyping and also communicating with the factories to final product completion.
·Nick, Michelle and Handitia were heavily involved in International Customer development, relationship building, international exhibiting and new business international development. It should be noted that since Handitia’s resignation from Australis Leisure, they have employed a new lady, based in Australia to support both Michelle and Nick Price and it is envisaged that Australis will need to also develop another support person based in Australia.”
The nominated business location of the Applicant is the residential address of Mr Price. The Applicant does not have any other office or premises in Australia – Exhibit 1 T51 p. 415.
On 28 February 2019, the Applicant lodged with the Australian Investment and Trade Commission (the Respondent) a grant application for expenses incurred for the 2016/2017 and 2017/2018 grant years as a first-time applicant pursuant to s 29(c)(i) of the Export Market Development Grants Act 1997 (Cth) (the Act) – Exhibit 2 para 3.
Expenses claimed were for the costs of an overseas representative ($103,563), marketing visits ($70,531), trade fairs and promotional events ($64,695) and promotional literature and advertising ($5,187) – Exhibit 1 T4 p. 29.
On 3 June 2019, the Respondent rejected the application under s 24(b), as it was considered that Australia would not derive a significant net benefit from the sale of goods outside Australia – Exhibit 1 T41 p. 388. In an email of 5 July 2019, an officer of the Respondent provided detailed reasons for the refusal – Exhibit 1 T45 pp. 394 – 397.
By letter dated 2 July 2019, the Applicant lodged an application for internal review of the rejection decision – Exhibit 1 T43 p. 391.
The Respondent accepted the Applicant’s letter as written notice of an appeal and requested any additional information in support of the appeal be provided within 14 days – Exhibit 1 T45 pp. 398 – 399.
On 2 September 2019, the Applicant emailed its further information to the Respondent which included a letter dated 31 August 2019 and various attachments – Exhibit 1 T54 pp. 434 – 480.
On 5 September 2019, an officer of the Respondent wrote to the Applicant advising that the original decision was upheld (the reviewable decision). The following reasons were provided – Exhibit 1 T56 p. 484:
“The applicant has been denied under Section 24(b) as it is considered that Australia will not derive a significant net benefit from the sale of the goods outside Australia.
The applicant has failed three of the four criteria in a significant manner. The criteria is detailed as follows:
(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.
The EMDG expenditure claimed was not formally assessed.”
On 1 October 2019, the Applicant lodged an Application for Review of Decision with the Administrative Appeals Tribunal – Exhibit 1 T1 pp. 1 – 9.
THE LAW
The Act is designed to facilitate the grant of financial assistance to provide incentives for the development of export markets.
The object of the legislative scheme is set out in s 3:
“The object of this Act is to bring benefits to Australia by encouraging the creation, development and expansion of foreign markets for Australian goods, services and 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 business are repaid part of their expenses incurred in promoting those products.”
Subsection 5(2) makes it clear that only small or medium Australian businesses that are developing export markets for eligible products and have a prospect of success in their export enterprise are eligible for a grant.
The amount of money available for grants is capped and, as such, grants are distributed in accordance with the intent of the Act. To prevent the finite grant funds from being inappropriately distributed, applicants must satisfy prescribed eligibility requirements for expenses – Exhibit 2 para 26.
The Respondent concedes that, pursuant to s 6(1)(b), the Applicant, as a body incorporated under the Corporations Act 2001 (Cth), is eligible to apply for a grant – Exhibit 2 para 27.
Part 4 of the Act deals with eligible products. The “products” dealt with in Part 4 include eligible goods, services, events, intellectual property, and know-how. Subsection 23(2) explains that the underlying principle is that a product should be eligible only if it is substantially of Australian origin. This matter is only concerned with eligible goods.
Paragraph 24(b) provides that goods are eligible goods if the Chief Executive Officer (CEO) of Austrade is satisfied, in accordance with guidelines determined under s 101(1)(baa), that Australia will derive a significant net benefit from the sale of the goods outside of Australia.
Section 101 provides for the Minister to determine, by legislative instrument, guidelines. In particular, s 101(1)(baa) provides for the Minister to determine guidelines, to be complied with by the CEO of Austrade, for the purposes of s 24(b), to determine whether Australia will derive a significant net benefit from the sale of goods outside of Australia.
On 22 June 2016, the then Minister for Trade and Investment determined the Export Market Development Grants (Significant Net Benefit) Guidelines 2016 (Cth) (the Guidelines) which commenced on 1 July 2016.
The Guidelines apply in relation to goods which are not made in Australia – cl. 3(2).
The Guidelines provide that, when determining whether Australia will derive a significant net benefit, the CEO of Austrade must consider whether – cl. 4(2):
“(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;
(b)the activities (other than manufacture) which result in the goods being made ready for sale are primarily or substantially carried on in Australia;
(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.”
Assistance can also be gleaned from the Export Market Development Grants Administrative Guidelines 2018 (Cth) (the Administrative Guidelines) – para 4.1.4:
“Paragraph 24(b) of the EMDG Act and the Export Market Development Grants (Significant Net Benefit) Guidelines 2006 effectively recognise that many Australian manufacturers increasingly have their final manufacturing and assembly stages carried out overseas while carrying out their design, research and development and other ‘knowledge’ activities in Australia…
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 to be eligible under paragraph 24(b) of the EMDG Act.”
THE HEARING
A Hearing was convened in Brisbane on 13 July 2021. The Applicant was represented by Mr H de Korte and the Respondent by Ms J Forsyth.
The only person who gave evidence was Mr Price for the Applicant.
Subsequently, the Tribunal reconvened on 23 August 2021 and received further evidence from the Applicant.
CONSIDERATION
Introduction
The issue to be determined by the Tribunal is whether Australia will derive a significant net benefit from the sale of the Applicant’s goods outside Australia. However, this question must be answered with respect to the 2016/2017 and 2017/2018 grant years.
In order to determine this question, the Tribunal is required to assess each of the four criteria mandated by cl. 4 of the Guidelines.
Criterion (a) – Are the business assets which are used in making the goods ready for sale (other than assets used in manufacture) primarily or substantially based in Australia?
The Applicant concedes that it does not meet this criterion – Exhibit 3 para 24.
The Tribunal accepts that this concession is properly made.
Criterion (b) - Are the activities (other than manufacture) which result in the goods being made ready for sale primarily or substantially carried on in Australia?
Introduction
The Administrative Guidelines state that the activities contemplated by this criterion might include:
·design;
·research and development;
·sourcing components;
·design and manufacture of machinery to make goods, moulds, tools etc;
·marketing;
·administration, legal and accounting;
·distribution and logistics;
·recycling; and
·management of any of the above activities and of the overseas manufacture and assembly.
The Administrative Guidelines also gives the following as an example of an Activities Criterion:
“The applicant promotes high value fashion scarves that are designed by its own employees and by contract designers. Its head office is in Australia and its staff provide all administration, marketing, quality control and management services. It has a manufacturing branch in China that manufactures to Australian head office instructions using raw materials acquired by head office. The head office conducts marketing activities.
The applicant would meet this ‘activities’ assessment requirement.”
Design and development
A key aspect of the activities resulting in the Applicant’s outdoor furniture being made ready for sale is the initial design and development of the furniture, such that it can be manufactured, and then marketed, sold and distributed.
Central to the design and development of the Applicant’s outdoor furniture in the two grant years in question is the role played by Mr Price. During the relevant grant years, Mr Price was Manager and Director of the Applicant, and it was submitted by the Applicant that he was “responsible and involved on a daily basis for the totality of the business” - CS para 3. It was also submitted by the Applicant with respect to Mr Price’s involvement - CS para 4:
“This is not a passive involvement…these activities are required and essential to make the goods ready for sale, (goods for sale in the Australian market as well as export goods) and are primarily and substantially carried on in Australia.”
The Applicant relies, inter alia, on two affidavits of Mr Price. The first affidavit was sworn on 13 April 2020 and relevant extracts are set out below – Exhibit 4.1:
“2.I have worked in the furniture industry my entire life starting in 1972, when I worked in my family retain [sic] furniture business.
3.I first started in the outdoor furniture industry early in 1991, when I started work for Suncoast Kwila in Caloundra. This was a company supplying 100% to the Australian outdoor furniture market. I built the sales of the business up very quicky to a point where there was a severe production imbalance with almost 80% of the business being produced in only 7 months of the year. I suggested to the owner that the way to balance this production was to sell into northern hemisphere markets in either Europe or the USA. To this end, we commenced exhibiting in Cologne Germany in 1994.
4.This was my start into the international Outdoor furniture business. Within 5 years, Suncoast was being watched by some very large European brands and was taken over by a Singaporean company shortly afterwards and my position became redundant as they had their own international marketing team.
5.I was quickly approached by Gumnut Furniture at Brendale and I started them on the international supply journey. They had not supplied anything outside of Australia previously. Their business developed very rapidly and many of the international customers followed me from Suncoast. I worked with Gumnut for around 5 years.
6.I then joined Ausgum based at Gympie and was responsible for developing their international business…
7.I then commenced my own business with the name of Samarinda International, and shortly afterwards changed that company’s name to Australis Leisure.
8.During all of these years, I was lucky enough to have been exposed to many international furniture fairs and furniture presentations. It was not difficult for me to collect design thoughts and pick up ideas regarding product development for new Australis Leisure products. I was in the enviable position of having international clients who trusted me and contact with many factories who could produce almost any Outdoor products that I could think of. I developed very close relationships with three such Indonesian factories and I am proud to say that I still have their confidence. I brief them with new designs when I am there and needing new products and they build prototypes for me for my next visit.
9.I decided to seek outside design assistance from Dennis Abalos. I wanted new innovative and fresh products and that has come to pass with the ‘Breeze Collection’.
10.Throughout the period for this review application, namely 1 July 2016 to 30 June 2018 I remained fully involved in the design process. Every piece in the Applicant’s catalogues is my brainchild.”
The second affidavit was sworn on 12 February 2021 and annexed to it are various documents, some of which are discussed below – Exhibit 8.1.
On the first day of the Hearing, the following exchange occurred between Ms Forsyth and Mr Price – Tr. 13.7.2021 pp. 9 – 10:
“….I am going to put it to you, that your arrangements with Australis were that you would visit oversees [sic] exhibitions to look for new directions and trends, you would exhibit at those various overseas locations and you would present your thoughts to those supply factories and those two supply factories being in Indonesia. And then whilst visiting the supply factories, as you made a statement in your affidavit, you would ask for prototypes to be built and then on your next visit, you would go and have a look at those prototypes, would that be a correct---?---That’s fair, that’s correct.
Yes okay. And then at that point when you were at those factory floors in Indonesia, you would then give the approval for the products to be mass produced then?---Probably a lot of changes before we got to that point and perhaps numerous visits as well to the factory, you know, because straight out of the box, the factory never ever gets it right first time.
Right, okay?---At that’s all on my direction.
Right. But then you would have to go to visit the factory, as you said?---Yes.
Because you’d have to have a look at the prototypes?---Absolutely.
And then you---?---Have a look and have a sit in the product, yes.
So you’d need to test that product there?---Correct.
And then you would give the green light then, it would be your say so, you’d give the green light?---Yes.
And that’s when they would start manufacturing the products?---That’s right.
And then have them shipped out based on where those products were supposed to go, okay?---Correct.
And who were you dealing with over there, when you went to the Indonesian factories?---Generally the owners of the factory would be involved, as well as some of their senior management.”
Dealing firstly with the respective roles of Mr Price and Mr Abalos in design and product development, the following information was provided on 14 July 2020 by the legal representative of the Applicant to the legal representative of the Respondent– Exhibit 5 para 4:
“a)Design and Development: This has predominantly been the responsibility of Nick Price until 2016 when Dennis Abalos was engaged to assist with new and innovative product design and development. When Nick Price first started in the International Outdoor Furniture business over 25 years ago, there were 5 key manufacturers of Outdoor Furniture producing in Australia. When Australis Leisure commenced business in 2005, none of these companies were producing any longer in Australia. Nick continued and still continues to visit overseas exhibitions looking for new directions and trends. Nick also exhibited in the German Exhibition SPOGA no less than 17 years consecutively, and also exhibited in Singapore, Las Vegas, Dubai, Manila, Hong Kong and Abu Dhabi giving him an insight into product design and what designs and styles were being requested by International buyers. Nick then presented his thoughts to his supply factories and they would proceed to build prototypes. Nick would then revisit the factory the following month or when the prototype was built to refine and perfect the product.”
A file note prepared by Mr Peter West, on behalf of the Respondent, outlines a conversation he had with Mr Price on 9 May 2019. Mr Price provided the following information regarding the role of Mr Abalos – Exhibit 1 T37 p. 264:
“He [Mr Price] stated the furniture for the applicant is mostly designed by Dennis Abalos from Abalos Design in Sydney suburb of Alexandria. Dennis designs the various collections, undertakes the drawings, comes up with the concepts, does the CAD and puts input of instructions for the process to the factory in Indonesia. Dennis does not travel to Indonesia but communicates over the telephone in guiding the process. Nick Price oversees the process from his home Sanctuary Cove, QLD. Prior to Ablos [sic] Design the work was undertaken by Nick Price.”
It would appear that the Applicant did not pay any money to Mr Abalos in the 2016/2017 grant year and $3850 in the 2017/2018 grant year – Exhibit 1 T40 p. 273.
None of the Breeze Collection products designed by Mr Abalos were sold in the two relevant grant years – Exhibit 5 para 9:
“Dennis’s [sic] initial engagement commenced in 2016 and the first products from Breeze were only shipped and sold to the USA last year [ie 2019]. This was an incredibly complex design group and required CAD and 3D design development which Dennis is capable of. There are none of Dennis’s [sic] designs listed on page 226 of the T28 files.”
The Respondent contends, and the Tribunal agrees, that the design work undertaken by Mr Abalos is irrelevant to determining the goods promoted and sold internationally in the two relevant grant years – Exhibit 2 paras 40 and 45.
The Respondent contends, and the Tribunal agrees, that the evidence presented suggests that the design and development activities for the Applicant during the two grant years in question involved
(a)visiting overseas exhibitions to discern new directions and trends – Exhibit 2 para 46:
(b)exhibiting at various overseas locations;
(c)presenting design and development concepts/thoughts to Indonesian factories; and
(d)visiting the Indonesian factories to perfect the product.
Prima facie, the bulk of the design and development activities as described took place overseas.
The Respondent made the following submission – Exhibit 2 para 48:
“The Respondent takes the Applicant’s response as implying that following Mr Price’s attendance at overseas exhibitions where he looked for new directions and trends, some conceptualisation of designs was also undertaken once he had returned to Australia. However the point from and degree to which conceptualisation occurred and what particular steps were undertaken in Australia remain opaque.”
The Respondent referred the Tribunal to the judgement of Deane J in Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees’ Union (1979) 42 FLR 331 for guidance on what “substantially” means in the context of Criterion (b). Deane J made the following observations (at 348):
“The word ‘substantial’ is not only susceptible of ambiguity: it is a word calculated to conceal a lack of precision. In the phrase ‘substantial loss or damage’, it can, in an appropriate context, mean real or of substance as distinct from ephemeral or nominal. It can also mean large, weighty or big. It can be used in a relative sense or can indicate an absolute significance, quantity or size. The difficulties and uncertainties which the use of the word is liable to cause are well illustrated by the guidance given by Viscount Simon in Palser v Grinling where, after holding that, in the context there under consideration, the meaning of the word was equivalent to ‘considerable, solid or big’, he said: “Applying the word in this sense, it must be left to the discretion of the judge of fact to decide as best he can according to the circumstances of each case….”
(footnotes omitted)
As Deane J explains, substantial (and, by extension, the adverb, substantially) can only be sensibly understood by the context in which it is used. In this matter, Criterion (b) requires activities resulting in goods being made ready for sale primarily or substantially carried on in Australia. Here the focus is on activities that make the relevant goods ready for sale. What is required is that activities that result in the goods being ready for sale are carried on in Australia.
In this matter, the Applicant, through Mr Price, has expended significant amounts of money, time and effort overseas in visiting exhibitions, exhibiting overseas and interacting with Indonesian factories. However, critically, what activities took place in Australia by the Applicant and what role did those activities play in ensuring that the outdoor furniture was made ready for sale?
Although not necessary for the resolution of this matter, it may be said that the role played by Mr Abalos has been central in the development of the Breeze Collection. Mr Price described Mr Abalos as undertaking drawings, developing concepts, doing the CAD and giving instructions to the Indonesian factories – Exhibit 1 T37 p.264. If this is an accurate description of the role played by Mr Abalos, then it would be open to a decision-maker to conclude that his involvement may satisfy the requirements of Criterion (b).
However, a different factual matrix exists for the two relevant grant years before the Tribunal. The following exchange occurred between Mr de Korte and Mr Price – Tr. 13.7.2021 pp. 15 – 16:
“MR de KORTE: Mr Price, so you were asked about the process when you attend these trade fairs, and you then go to the factories, and you give directions to the factories to make prototypes. Can you explain to the tribunal the process that goes into that explanation? And I’m talking specifically about design. Can you explain to the tribunal how do you design?---Okay, I’ve been in the industry for 30 years. I’ve been in the export side of the industry for almost 30 years now. When I speak to my customers, whether they be in Australia or whether they be international, my customers will give me ideas about the kind of products that they might be looking for. When I’m at overseas exhibitions I see trends developing in relation to the kind of products that are being marketed by different manufacturers, or different suppliers. A combination of those two things, plus what I have been involved in in the outdoor furniture industry for 30 years, in the manufacturing process when it was being done here in Australia, provides me with the ideas that I need to have products developed and designed. It’s not an easy process. I’m not a technical person, or a draftsman… And I would present the factories with information – be that pictures or images – or products that I like. And we won’t’ replicate them, but we’d use certain features of those products to develop our own product. And most of the time that’s in conjunction with what our dealers might be asking us for. When I give the factory those particular ideas, or pictures, or comments, they will have their drafters in the factory draft the drawings… Many times the drawings will be a little bit of change here, a little bit of change there. And when we strike the right balance, we’ll then ask the factory to make a prototype.”
It will be seen from the evidence of Mr Price that most of the activity generated towards the perfection of the outdoor furniture products that were manufactured in Indonesia occurred overseas.
The Tribunal agrees with the following submission of the Respondent – Exhibit 2 para 51:
“The available objective evidence supports a conclusion that there is consultation across the business about product development, notably between the contracted manufacturer in Indonesia, the Applicant’s Indonesia sale representative (during the relevant time) and Mr Price. There is a paucity of evidence concerning design tasks that the Applicant asserts took place in Australia in relation to the goods listed for overseas sale during the grant years, or in relation to any other process or activity conducted in Australia that results in the goods being made ready for sale. Mr Price’s own affidavit indicates that significant aspects of his input are and were undertaken in Indonesia, which is echoed in the Applicant’s response at 2(b) of the letter dated 14 July 2020 indicating that design and development of products is done at the Applicant’s factories.”
As Mr Price testified, he is “not a technical person, or a draftsman” and he would “present the factories with information”. Importantly, Mr Price testified that when he gave the Indonesian factories “particular ideas, or pictures, or comments” the Indonesian factories would “have their drafters in the factory draft the drawings.” In short, apart from initial and preliminary information, “whether in words, photographs or drawings”, the bulk of the design and development would be at the initiative of the Indonesian factories. Further, the communications between Mr Price and the Indonesian factories would, it appears, be primarily in Indonesia.
It would be fair to conclude, based on Mr Price’s testimony, that much of his input into design and development was at the concept stage, whereas the bulk of the practical design and development work was carried out by Indonesians in Indonesia. There is also the issue of the role played by Ms Handitia in both the design and development stage, as well as the general operations of the Applicant. This issue is dealt with below.
This, as previously noted, is a feature of the Applicant’s modus operandi during the two grant years in question. A different scenario has developed since the appointment of Mr Abalos. However, his technical input into the design and development of outdoor furniture sold internationally by the Applicant is of more recent origin and is absent from the two grant years under consideration in this matter.
Other activities
The Applicant asserts that the marketing, administration, legal, accounting and general management of the relevant activities all take place in Australia, with Mr Price specifically involved in procurement, sales and marketing – Exhibit 1 T51 p. 415-416.
Mr Price subsequently gave the following testimony about the Australian input into the Applicant’s activities - Tr. 13.7.2021 p. 17:
“But there’s marketing, there’s website development, there’s the exposure of those products at international exhibitions, and all of that work is done here in Queensland by myself and by Michelle Lewis. So, whilst the goods themselves have got a tick, the actual making them ready for sale is a process that continues to be developed in Australia, in my office on the computers.”
During the Hearing, the following exchange occurred between the Tribunal and Mr Price – Tr. 13.7.2021 p. 17:
“DEPUTY PRESIDENT: So can you tell me exactly what you’re doing in Australia – and who else was it---?---Michelle Lewis
Okay, so I’ll go through it step by step. You have customers who say to you, I’d like a certain sort of product. You go to international fairs and you see the latest international trends. You develop a concept, you give it to the factories in Indonesia, they develop a prototype in due course – over – it could be one visit, or ten visits, whatever. What happens from the point of time where you have a prototype which is capable of being sold, to the actual selling of the product? What’s being done in Queensland? What are you and Ms Lewis doing that’s value-adding to the process?---I guess communicating with customers for a start. Showing them products that have just been developed. Developing our internet or our website for the products. Cataloguing, photography. And then the planning, I guess, of exhibitions that we exhibited in. All of the background work that goes to the marketing of those products.”
The Applicant employed Ms Handitia from 1 January 2009. In a letter dated 1 January 2009 from the Applicant to Ms Handitia, it was stated that, at the last Board Meeting, the Applicant made the strategic decision to establish a Sales Representative position in Sidoarjo, Indonesia, to promote and develop international sales. Ms Handitia was appointed to be “in charge of all international sales, promotional/marketing activities and including non-marketing activities” – Exhibit 1 T19 p. 68.
In the letter of appointment, the assignment Ms Handitia was tasked with was described as follows – Exhibit 1 T19 p. 68:
“To promote and market Australis Leisure ranges/products, targeting existing and potential customers. You will research the market and determine potential opportunities, prepare promotions and sales strategy, develop commercial presentations tailored to specific clients and product targets, build business relationships, follow up on customers’ feedback with the goal to achieve firm purchase orders for the Company.”
When Ms Forsyth referred to this letter, Mr Price made the following observations about the role played by Ms Handitia – Tr. 13.7.2021 p. 21:
“…This letter is dated 2009 when [Ms Handitia] first joined the company. You know, things evolved. She was a lady who wore many hats. And as it – because she was on the ground there in Indonesia, she was able to look at things that I would ask her to look at and follow up with the factories, but she was also involved in many, many sales missions and exhibitions internationally for various customers.”
When asked how her role evolved, Mr Price testified that he eventually appointed her as Managing Director. In fact, Mr Price testified that he was going to hand Australis Leisure over to her on his retirement. Of significance, is the following exchange between Ms Forsyth and Mr Price – Tr. 13.7.2021 p. 22:
“But in that process though, and the process of preparing yourself for retirement, and getting Ms [Handitia] ready, you were then providing her with the majority of the responsibilities would you say?---No, I would say that. She was still working under direction. But she was carrying out a lot of functions that were far beyond the scope of this letter of appointment.”
When cross-examined by Ms Forsyth, Mr Price testified that Ms Handitia’s role and salary expanded over time and that the duties outlined in the 2009 letter of appointment did not correspond with the role she subsequently played – Tr.13.7.2021 p. 24:
“And since 2009 her role only improved significantly, and that was, sort of, corresponding with her wage, as the Deputy President pointed out?---Yes.
So, in fact, she took a much larger role than this?---Than this? I’d say that would be fair to say that, yes.”
Mr Price testified that he was not fluent in either Bahasa Indonesia or Bahasa Javanese and relied on Ms Handitia to negotiate with the Indonesian factories – Tr. 13.7.2021 p.23:
“So this person was the key to you even negotiating with the factories….---? Yes.”
Further, Mr Price testified that Ms Handitia had “very good English” language skills and was able, under direction, to carry out international negotiations. I asked the following question to Mr Price – Tr. 13.7.2021 p. 25:
“So where did her role begin and end?---As I say, she was a lady wearing many hats. I guess though I could ask her to do anything for me and know that it would be done and done well.”
The important role that Ms Handitia played in the Applicant is illustrated by an email Mr Price sent to her in February 2019 – Exhibit 1 T36 p. 263:
“I have always said that Australis Leisure will belong to you when I retire and I always have and do intend to keep that promise to you. This is my proposal to you:
Australis Leisure does NOT belong to you yet but it will, on the following conditions:
·I will immediately have a further 20% of the shares in Australis issued to you, lifting your stake in the company to 40%.
·I will have a legally binding and witnessed document drawn up saying that on 31st December 2022 (a further 3 years time), that I will issue you with a further 40% of shares lifting your stake to 80%. This will give you total control of the company.
·In the agreement, I will also state that the remaining 20% of the shares are to pass to you on 30th June 2024 (5 years time) or in the event of my passing prior to 30th June, 2024.
I see this as a very fair agreement and something that can give you security.”
The Respondent contends, and the Tribunal agrees, that the consultancy fees paid to Ms Handitia of $91,689 in 2016/2017 and $69,845 in 2017/2018 reflect the central management role she then performed in respect of the Applicant’s international markets - Exhibit 2 para 55.
Mr Price testified that prior to 2009, Ms Handitia was the Personal Assistant to the President and Director of one of the Indonesian supply companies he was dealing with, and that while initially her expertise was in the development and manufacturing aspects of the outdoor furniture business, in time she also played a key role in international sales. Mr Price gave the following testimony – Tr. 13.7.2021 pp. 25-26:
“…So probably – and in hindsight – you know, the wording of the appointment letter probably was what I would like to have happened, but it was probably premature to have actually put that in an appointment letter. But as it turned out, that’s what did evolve. She was involved – and she was good in public relations. She was good in talking to people.”
Mr Price went on to testify that although Ms Handitia was “a key person in the organisation” and was “specifically employed as a factory go-between and for international sales relationships and development” both he and Ms Lewis were also involved in these activities - Tr. 13.7.2021 p. 27.
The Tribunal does not doubt that Mr Price and Ms Lewis played a major role in the non-design and development activities of the Applicant in the two grant years in question. However, the evidence before the Tribunal suggests that Ms Handitia played a key role in the international activities of the Applicant. The fact that Mr Price was prepared to assign, progressively, the vast majority of the shares in the Applicant to Ms Handitia indicates the key role she played and the importance Mr Price placed on her.
The Tribunal recognises that in the 2017/2018 grant year, Australian sales of the Applicant’s outdoor furniture products represented 69.25% of all sales. Further, the Tribunal accepts that Mr Price was involved on a regular basis for the totality of the Applicant’s business. Nonetheless, the question before the Tribunal is not how the Applicant’s Australian market activities were managed, but the international component of the Applicant’s business. As explained above, the role of Ms Handitia in the international activities of the Applicant for the purposes of Criterion (b) were significant and continued to grow from her first engagement in 2009. By 2016/2017 and 2017/2018 grant years, Ms Handitia was playing a key role in the Applicant’s operations and the evidence suggests that Mr Price placed a heavy reliance on her.
Conclusion
For the reasons outlined above, the Tribunal finds that the activities (other than manufacture) which resulted in the outdoor furniture of the Applicant being made ready for sale were not primarily or substantially carried on in Australia during the two grant years in question.
Criterion (c) – Was a significant proportion of the value of the goods added within Australia?
Introduction
The Administrative Guidelines state that an applicant should be able to cost and describe the types of Australian value-added work. This includes the factors outlined in the Administrative Guidelines for Criterion (b).
Two examples are given for this value-added criterion. The first, which is more relevant to the facts of this matter, is set out below:
“The applicant is an Australian-owned t-shirt and casual fashion gear manufacturer set up in 2010. It pays fees to a contract manufacturer in India for the sourcing of materials, manufacture and in some cases design.
The applicant spends little time or money on design in Australia. The designs have mainly been made by the applicant’s two owners who have drawn no salary since the applicant company commenced operations. Other designs have been sourced from the Indian manufacturer and its associates. The applicant plans to recruit some design staff in the near future.
The applicant carries out some administrative, marketing and management work associated with sourcing and selling the goods. Its sales margin is 60 per cent.
The applicant would not meet the ‘value added’ assessment requirement. The Australian value added work is not a significant proportion of the value of the goods. Rather, a significant proportion of the value of the goods is added in India by way of designing goods and the machinery used to manufacture them, sourcing raw materials, administration and shipping.”
Consideration
In addressing this Criterion, the Applicant made the following submission – Exhibit 3 para 30:
“The Applicant contends that the income statement for 2018 grant year records total sales of $863,735 of which overseas sales totalled US$203,771 (approximately AUD$279,000 @ 0.73 ¢ AUD to USD) which equates to approximately 32% export. The Applicant marks product up for the export market. The Applicant therefore contends that a significant portion of the value of the goods is added within Australia and reflected in the Applicants gross profit.”
On 6 August 2019, the Applicant made the following submissions to the Respondent – Exhibit 1 T51 p. 416:
“The industry average for mark-ups for the bottom tier or entry level manufacturers is 10%, mid-tier manufacturers 25% and top-tier manufacturers 40% plus. Australis Leisure is thus squarely in the range for the standard of products manufactured.
As pointed out in the previous section, nearly all of the designs and drawings have been developed in Australia over the past 10 years by Nick Price who has drawn a salary during these years.
Australis staff are involved in the administration, marketing and management work associated with the sourcing and selling of the products.”
In response, the Respondent made the following submissions – Exhibit 2 paras 57 – 60:
“57. In the circumstances of this application, the Respondent’s view is that the actual value-add work done in technical and industrial design was undertaken overseas. Mr Price’s role in the process having regard to the available evidence is best described as facilitative in nature.
58.The Applicant makes a single contention in respect of the value of the goods added within Australia, which in summary is that the mark-up for export of the goods satisfies the criterion.
59. Oppidan discusses, and the Respondent accepts, that Australian input can include mark-up and profit margins….
60.A reference to ‘profit margin’ means the total sales less the cost of goods sold. ‘Mark-up’ is the amount by which the cost of a product is increased in order to derive the selling price. In an example of a product with a cost of $70 being sold for $100, which is the result of a $30 mark-up. Expressed as a percentage the mark-up is 42.9%.”
(footnotes omitted)
Reference was made to Oppidan Pty Ltd and Australian Trade Commission [2002] AATA 582 where Senior Member Ettinger accepted that Australian inputs can include mark-ups and profit margins and, as noted above, this is conceded by the Respondent. The Tribunal agrees that this concession is properly made.
In the 2016/2017 grant year, the Applicant’s total sales were $605,959.86 – Exhibit 1 T8 p. 43. Sales increased to $883,735 in 2017/2018 – Exhibit 1 T10 p. 47. Conversely, costs of sales (purchases) for the Applicant in 2016/2017 was reported as $460,311.95 (Exhibit 1 T8 p. 43) and $596,904 in 2017/2018 – Exhibit 1 T10 p. 47. The Respondent contends (Exhibit 2 para 63) that based on these figures, the profit margin percentages in the two grant years are as follows: 2016/2017 24%, 2017/2018 32%.
This estimate of profit margin percentages is consistent with the Applicant’s 6 August 2019 submissions set out above. The Tribunal, accordingly, proceeds on this basis.
It is also the case that the Applicant is a wholesaler and does not generate any income from retail sales – Exhibit 2 para 65.
The Respondent made the following submission – Exhibit 2 paras 65 – 67:
“65.…a review of the product pricing information provided in the Applicant’s application identifies that Item 1 (Bahama Jack & Jill Set using MC06 chairs) costs USD$146.00 to buy from the Indonesian contracted manufacturers, and is sold at wholesale level for USD$175.00. The mark-up in this instance is USD$29 which when expressed as a percentage is 16.57%. For Item 43, the mark-up from the purchase price of $45 paid to the Indonesian contracted manufacturer is USD$9, and when expressed as a percentage is 20%.
66.The Respondent submits that the information provided by the Applicant concerning the FOB buy price and overseas wholesale price appears to indicate that it operates at the low-mid tier level in the furniture industry (having regard to the Applicant’s information referred to above). In the circumstances, the Respondent does not consider that this represents a significant portion of the value of the goods.
67.The requirement is that any favourable assessment by the Tribunal must be made on the basis that the result is undoubted. Accordingly, the Respondent submits the Tribunal cannot consider this threshold can be met on the available evidence.”
The Tribunal agrees with this submission. The evidence presented does not permit the Tribunal to conclude that, in the two grant years in question, a significant portion of the value of the Applicant’s outdoor furniture collection was added within Australia.
In reaching this conclusion, the Tribunal accepts, as noted above, that mark-ups can, and should, be taken into account. However, the value of the mark-ups and the salary component of Mr Price and other Australians involved in the business do not, cumulatively, reach the threshold required of this Criterion.
Criterion (d) – Does any sale of the goods generate, 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 Respondent, correctly, concedes that the Applicant satisfies Criterion (d).
Conclusion
The Tribunal concludes that the Applicant does not satisfy Criteria (a), (b) and (c) of the Guidelines in the two grant years in question, and, therefore, the Tribunal is not satisfied that there will be a Significant Net Benefit to Australia pursuant to s 24(b) of the Act.
The Tribunal places on record that Mr Price was a witness of credit. Mr Price appeared before the Tribunal on two occasions and was subjected to cross-examination by Ms Forsyth. The Tribunal observed that Mr Price answered all questions posed directly and without equivocation. The Tribunal was impressed by Mr Price’s honesty and candour.
It is clear from the evidence presented that, over a number of years, Ms Handitia played an increasingly important role in the business activities of the Applicant. During the two grant years under consideration, her role was pivotal. Up until the finalisation of Mr Price’s business dealings with Ms Handitia in 2019, it would appear that it was intended that the Applicant would be controlled by her.
This is no longer the case and the evidence before the Tribunal suggests that the Applicant is now a much more Australian-centred organisation. The engagement of Mr Abalos, and the marketing of clearly Australian designed outdoor furniture, are examples of this. It is not for the Tribunal to speculate on what the result would be of any further grant applications by the Applicant; however, it can be noted that the circumstances pertaining, during the two grants year under consideration, are quite different from those that now pertain. It is to be hoped that Mr Price and the Applicant continue to operate, manufacture and sell outdoor furniture, especially for overseas export.
Finally, the Tribunal places on record its appreciation for the constructive and focused assistance provided by Mr de Korte for the Applicant and Ms Forsyth for the Respondent.
CONCLUSION
97.The reviewable decision is affirmed.
I certify that the preceding 97 (ninety seven) paragraphs are a true copy of the reasons for the decision herein of Deputy President J Sosso
.............[SGD]...........................................................
Associate
Dated: 17 January 2022
Date(s) of hearing:
13 July 2021 & 23 August 2021 Date final submission received 23 August 2021 Solicitors for the Applicant: Mr Hendrik de Korte
TdK Lawyers
Solicitors for the Respondent: Ms Jasmine Forsyth
Mills Oakley Lawyers
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