Gradeton Pty Ltd and Australian Trade Commission

[2001] AATA 1000

DECISION AND REASONS FOR DECISION [2001] AATA 1000

ADMINISTRATIVE APPEALS TRIBUNAL)
  NºV00/487
GENERAL  ADMINISTRATIVE  DIVISION)                 
  GRADETON PTY LTD

Applicant

AUSTRALIAN TRADE COMMISSION

Respondent

DECISION

Tribunal:       Deputy President G.L. McDonald

Date:7 December 2001

Place:            Melbourne

Decision:The decision under review is affirmed

(sgd) Graham L. McDonald
  Deputy President
BOUNTIES — export market development grant – whether business carried on in Australia
Export Market Development Grants Act 1997

REASONS FOR DECISION

Deputy President G.L. McDonald

1. On 13 August 1999 Gradeton Pty Ltd (the applicant) applied for an export market development grant under the terms of the Export Market Development Grants Act 1997 ("the Grants Act") for the following items and expenditure said to be incurred in the 1998/1999 grant year:

   Overseas representation                   $96,000
   Communications  $5,018
   Free samples  $17,930

The application was declined on 7 October 1999. Thereafter the applicant sought internal review under the provisions of section 98(4) of the Grants Act. On 6 April 2000 the applicant was advised that the internal review had resulted in the original decision to reject the grant being affirmed. Thereafter the applicant sought review in this Tribunal.

1. In the Australian Trade Commission's (the respondent's) submission there are two substantive reasons for the application being rejected, namely,

   the applicant was not "genuinely carrying on business in Australia" (section 7(1)(a) of the Grants Act as governed by the Ministerial Guidelines dated 1 July 1997 and issued under the provisions of section 101(1)(a) of the Grants Act); and
   the applicant did not meet the grants entry requirements as determined under the provisions of section 21. As provided in section 20(2) of the Grants Act, the purpose of the grants entry requirement is to determine whether the export enterprise in relation to which the person is seeking a grant has a prospect of success.

It was submitted on behalf of the respondent that none of the material lodged by the applicant demonstrates that it has, or is likely to continue to have, financial resources capable of supporting the export activities.   It is convenient to deal with each of these submissions in seriatim. 
"Is the applicant genuinely carrying on business in Australia?"

1. The evidence establishes that the applicant is a proprietary limited company with a paid-up capital of $100.   The company operated from a private residence in suburban Melbourne.   Mr Zhan Shi was appointed a director of the company on 24 January 1997 and ceased on 10 September 1998 and that he was reappointed again on 28 January 2001.   Accordingly he was, in the grant year, a director of the company only between 1 July 1998 to 10 September 1998.   His now-wife Mrs Fang Shi was appointed a director on 24 January 1997.   In a document entitled "General Statement of Gradeton's Business Issue" (T15/145) it is stated that Mrs Shi visited Australia in January 1997, April 1997 and October 1997 and again in February 1998 before she returned to People's Republic of China ("China") where, on 5 April 1998, she married Mr Zhan Shi.   Because of technical difficulties relating to her entry visa into Australia, she was not able to return to Australia until the end of June 2000.   Mr Shi stayed with her in China, making visits to Australia each three months.   It follows that Mrs Shi was not able to participate in the applicant's Australian business in the period following her return to China prior to the commencement of the relevant grant year.

2. Mrs He Pei Lin was a director of the applicant between 3 February 1997 and 15 January 2001.   Mrs Lin was noted in the General Statement as being an investor in the company but, while an Australian citizen, she had returned to Shanghai and lived there since 1996 and "wasn't actively involved in the applicant's business".   Another director, appointed on 10 September 1998, is Mr Qiong Ye Zhu.   His address is listed as being in Shanghai and there is no evidence to suggest he has participated in the applicant's business.   Finally, Mr Hai Tian Lu was appointed a director on 10 September 1998.   The General Statement notes Mr Lu as providing a capital injection of $A200,000 in September 1998 into the applicant.   The General Statement says of Mr Lu that he ". . . intended to migrate to Australia and [was] looking for proper business[es] to sustain his application (whole migration plan)".  

3. The annual returns show that, initially, Mrs Fang Shi was the major shareholder with 10 shares but that, by the annual return for the year 2000, her shareholding had reduced to 1 share and Mr Lu held 9 shares.

4. The Tribunal is satisfied that the addresses and participation by the directors in the company, along with the information provided in the General Statement as to their participation in the company, that aside from Mr Zhan Shi whose directorship ceased within three months of the commencement of the grant year, none of the directors were resident in Australia and/or appeared to be operating, or involved in, businesses in China during the grant year.

5. It is uncontested by the respondent that the applicant company operates as an export merchant selling principally Australian sourced fish but also vegetables and orange juice into the Shanghai market.   An Export Market Plan ("the Plan") dated February 1999, prepared for the applicant company, notes it as being established in "March 1999" for the purpose of exporting Australian products to China.   As well as proposing to export food, the Plan states:

   The company will gradually diverse [sic] its products and services to include selected industrial materials; hi-tech equipment and technology.

The Plan projects that there will be an annual turnover reaching $3 million with a net profit of 15 per cent in the next three years and mentions the need for the company to employ more than five people in a number of different fields.   The Plan also anticipates the appointment of two managers for the operating of daily business in China and Australia, establishing a head office in Melbourne and mentions, as part of the proposed marketing strategy, selection and invitation of (Chinese) clients to visit Australia.

1. It appears that Mr Shi's brother-in-law, Dr Richard Chen, conducted the company's Australian operation under the description of "Exporting Manager".   Dr Chen commenced work with the company in November 1998.   He does not seem to have remained with the company until the end of the grant year before resigning and returning to China.   Mr Shi was not appointed general manager of the company until after the end of the grant year on 2 August 1999.   In the period between Dr Chen leaving and Mr Shi commencing, a student was employed in a temporary capacity to answer the company's telephone.  It seems the student left Australia to return to China and that a recorded message referred the telephone caller to a mobile phone which in turn remained unanswered.

2. The Trading Statement for the grant year shows sales revenue of $1,019,504  and a gross trading profit of $71,657.   However, after deduction of expenses, there was a loss of $60,403.   In his oral evidence to the Tribunal, Mr Shi advised that there were problems in the remission of moneys from China to Australia.   Since the sales were made in China and there were, as Mr Shi confirmed in his evidence, difficulties in remitting money from China to Australia, the Tribunal has some difficulty in reconciling how the figures were arrived at. 

3. The Tribunal is also satisfied that the applicant actively carried on business for approximately one year only and that after Mr Shi returned to China with his wife, there has been little activity.   In his oral evidence to the Tribunal, Mr Shi said that, depending on money being made available from the financier Mr Lu, he hoped to revive the business which held better prospects once China joined the World Trade Organisation.   It was also Mr Shi's evidence that while the applicant had been associated with a Hong Kong company which undertook to illegally import the applicant's exports into China, that he and the company were not willing to see this practice continue.   It was for this reason, and in order to keep interest by Chinese purchasers, that the applicant had examined other areas of imports into China, such as orange juice.

4. It is clear from the lack of payment of wages within Australia, the apparent lack of organisation necessary for the carrying on of a business, the lack of continuity particularly of contact within Australia, the absence of a commercial return in the grant year, the fact that the business strategy did not seem to have been developed and enunciated until 1999, ie after the grant year, the apparent absence of direction of the company by the Directors, and in the case of the investor Mr Lu, his interests appear to have been more connected with securing entry into Australia than they do with the operation of the business in Australia.   The Tribunal is satisfied that the business could not be regarded as a genuine business carried out in Australia.

5. In his evidence, Mr Shi swore that he was "truly carrying on business to make it work and make a profit".   The financial statements indicate both a loss as well as very little expenditure on wages and salary in the grant year.   While the respondent accepted there was a commercial return from the sale of orange juice, it did not accept that, with the purchase of lobsters for $9.50 or $10.00 and the sale price of $11.00, it was possible to obtain a commercial return given the low margin and bearing in mind the cost of air freight and mortality rates.   The figures proposed by the respondent are not challenged and the Tribunal accepts Austrade's assessment as being accurate.

6. The Ministerial Direction in relation to the assessment of whether a genuine business is carried out, which Direction is binding on this Tribunal, provides as follows:

   1.        In forming an opinion whether a person is genuinely carrying on business in Australia, Austrade shall give weight to the following considerations:

   (i)what activities the person claims constitute the activities of the business;

   (ii)where each of those activities is conducted, and whether those activities are conducted substantially in Australia;

   (iii)whether any income is earned by the applicant and if so where that earning of income takes place, and whether that earning of income takes place substantially in Australia;

   (iv)the length of time the activities of the business have been carried on;

   (v)any intention that those activities should be profitable;

   (vi)the degree of repetition of the activities said to constitute the activities of the business;

   (vii)the continuity of those activities;

   (viii)whether there is a possible commercial return from those activities;

   (ix)the nature and size of the assets of the business and whether those assets are located substantially in Australia;

   (x)the terms of any business or marketing strategy which relates to those activities;

   (xi)the extent of which those activities are the independent activities of the applicant or whether they are instead activities of a person associated with the applicant.

   2.        In taking into account each of the matters listed in 1 above Austrade shall consider the substance and not merely the form of each matter.

7. Bearing in mind the facts found by the Tribunal, the Tribunal is satisfied that the applicant is not genuinely carrying on a business in Australia having regard to the issues which ought be addressed as set out in the Ministerial Direction.   Rather it would seem that the business was, during the grant year, being carried out from an office in Shanghai.

8. Accordingly, the applicant's application cannot succeed.   In view of that finding, it is not necessary for the Tribunal to determine whether or not the applicant has also met the grants entry requirements.   Without going into detail, the Tribunal is satisfied, on what it heard from Mr Shi and from the documents filed on behalf of the applicant, that the terms of the Ministerial Direction are also unable to be met. 

9. For the reasons stated, the application cannot succeed and the decision under review is affirmed.

I certify that the sixteen (16) preceding paragraphs are a true copy of the reasons for the decision herein of 

Mr G.L. McDonald, Deputy President

(sgd)             Rhona Hammond
  Personal Assistant

Date/s of Hearing  9 and 10 July 2001
Date of Decision  7 December 2001
Counsel for the Applicant        N/A
Solicitor for the Applicant         Mr Zhan Shi
Counsel for the Respondent    Mr Philip Ginnane
Solicitor for the Respondent    Mr Chris Tucker