N98/166 and Anor and Industry Research and Development Board - [2000] AATA 341

DECISION AND REASONS FOR DECISION [2000] AATA 341

ADMINISTRATIVE APPEALS TRIBUNAL )

) No N98/166 & N97/1552

GENERAL ADMINISTRATIVE DIVISION       )
           Re      FIRST APPLICANT (N98/166)
  Applicant
           Re      SECOND APPLICANT (N97/1552)
  Applicant

And INDUSTRY RESEARCH AND DEVELOPMENT BOARD
Respondent
DECISION

Tribunal Mr B.J. McMahon (Deputy President)

Date 28 April 2000
PlaceSydney

Decision 1. The decision in matter number N98/166 is set aside and the matter is remitted to the respondent with the direction that the applicant is entitled to the registration for which it applied. 2. The decision in matter number N97/1552 is affirmed.

(Sgd) BJ McMahon ..............................................
Deputy President
CATCHWORDS
INDUSTRY RESEARCH AND DEVELOPMENT – Tea Tree Oil investment scheme – product development briefs – whether research and development – whether new knowledge was acquired – whether there was any new or improved application – application of section 73B Income Tax Assessment Act1997 definition of research and development activities – whether core or supporting activities – whether there were any supporting activities in the financial year 1995 to 1996 – whether the supporting activities were directly related to the carrying on of the core activities – whether the benefit of the activities allows a claim – product development briefs were supporting activities limited to contracting applicant
WORDS AND PHRASES – core activities – supporting activities – after event activities – "for the benefit of" – "on behalf of"

Industry Research and Development Act 1986 ss 39A, 39J, 39K, 39T
Administrative Appeals Tribunal Act 1975 s 35
Taxation Administration Act (no. 37 of 1997) s 14ZZE
Income Tax Assessment Act (the ITAA) s 73B(1)(a), 73B(2)(a)
Acts Interpretation Act 1901 s23

Re Applicant and Industry Research and Development Board (1999) 55 ALD 784
Re Charles Ife Pty Ltd and Industry Research and Development Board (1995) 39 ALD 635
Cuthbertson and Richards Sawmills Pty Limited v Thomas 30 ADCR 504

REASONS FOR DECISION

28 April 2000 Mr B.J. McMahon (Deputy President)

These are two applications to review decisions made under section 39J of the Industry Research and Development Act 1986. The applications are brought pursuant to section 39T, which provides in subsection (4) that the relevant hearing must take place in private. This constitutes an exception to the general rule stated in section 35 of the Administrative Appeals Tribunal Act 1975 that the hearing of a proceeding before this Tribunal should be in public. The reason for the exception, no doubt, is to protect the privacy of applicants, most of whom seek registration of one sort or another in order to qualify for income tax concessions. The privacy of applicants in the review of income tax objection decisions was also similarly protected in the past. With the introduction of section 14ZZE of the Taxation Administration Act by Act number 37 of 1997, the position has changed. Taxation hearings before this Tribunal are now normally in public, unless the party who made the application requests that it be in private. The continuation of the restriction in subsection 39T(4) may now appear to be anomalous. I would recommend that when the Act is next reviewed, consideration be given to its replacement with a subsection having similar effect to section 14ZZE of the Taxation Administration Act.
Each of the two applicants was a participant in an investment scheme described in the relevant prospectuses as "a business and collaborative research proposal for products featuring Australian Tea Tree Oil". The first applicant was a participant in what I will call company plan 1 and the second applicant was a participant in company plan 2. There were a large number of other participants in both plans. From information given in evidence concerning the activities carried out in pursuit of both plans, it would not be possible to identify either of the applicants. I therefore propose to describe the plans and the evidence in some detail. While the anonymity of the applicants will be maintained, the evidence and conclusions may be of assistance to all other participants who are not applicants before the Tribunal. Indeed I was told that the two applicants were chosen so that the issues concerning their application for registration could be explored in relation to all other companies in a similar situation in relation to these two investment plans.
Sections 39J and 39K are in the following terms:
"39J. (1) Where:
(a)an eligible company applies to the Board for registration in respect of a year of income;
(b)the company provides to the Board such information in relation to its research and development activities, or proposed research and development activities, as the Board reasonably requires; and
(c)there are no grounds under section 39K on which the Board is entitled to refuse to register the company in respect of that year of income;
the Board shall register the company in relation to that year of income.
(2)An application by, or a registration of, a company under subsection (1) may relate to a year of income that ended before the commencement of this Part.
(3)Notwithstanding subsection (1), the Board may refuse to register a company in relation to a year of income unless the application is made after the end of that year of income.
(4)The registration of a company in respect of a year of income is not invalid merely because a ground existed on which the Board was entitled to refuse to register the company in respect of that year of income.
(5) the registration of a company in respect of a year of income is irrevocable.
(6)If the Board refuses to register a company in respect of a year of income, the Board shall give notice in writing to the company stating the reasons for the refusal.
…
39K.(1) It is a ground on which the Board is entitled to refuse to register an eligible company in respect of a year of income that the activities were, or are to be, carried on by or on behalf of the company in that year of income are not, or do not include, research and development activities.
(2)Subject to subsection (3), the regulations may specify other grounds on which the Board is entitled to refuse to register a company in respect of any year of income or in respect of a particular year of income or years of income.
(3)The regulations may not specify a ground unless it relates to a matter the determination of which under this Part is a function of the Board."

Although paragraph 39J(1)(b) talks of "proposed" research and development activities, it seems clear from subsection 39K(1) that the activities to be relied upon must be carried out in the particular year of income and not in the future. The contrary proposition was not argued by either party.
Section 39A(2) provides that "research and development activities" appearing in the above sections has the same meaning attributed to it by section 73B of the Income Tax Assessment Act 1936. At the relevant time, this was as follows:
"(a)systematic, investigative or experimental activities that involve innovation or technical risk and are carried on for the purpose of:
(i)acquiring new knowledge (whether or not that knowledge will have a specific practical application); or
(ii)creating new or improved materials, products, devices, processes or services; or
(b)other activities that are carried on for a purpose directly related to the carrying on of activities of the kind referred to in paragraph (a);"

Subsection (13) of the same section provides that where an eligible company (that is a company registered under section 39J) incurs contracted expenditure during a year of income, the amount of that expenditure multiplied by 1.5 (a figure that has since been altered) is an allowable deduction to the company for the year of income. Apart from contracted expenditure, an eligible company is also entitled to a deduction on an accelerated basis under subsection (14).
The definition of research and development activities is modified by excluding certain activities as set out in subsection 73B(2):
"(2)For the purposes of the definition of "research and development activities" in subsection (1), activities that are carried on by way of:
(a)market research, market testing or market development, or sales promotion (including consumer surveys);
(b)       quality control;
(c)prospecting, exploring or drilling for minerals, petroleum or natural gas for the purpose of discovering deposits, determining more precisely the location of deposits or determining the size or quality of deposits;
(d)the making of cosmetic modifications or stylistic changes to products, processes or production methods;
(e)       management studies or efficiency surveys;
(f)        research in social sciences, arts or humanities; or
(h)       the making of donations;
shall be taken not to be systematic, investigative or experimental activities."

The activities described in paragraph (a) of the definition are often referred to as "core activities". Those described in paragraph (b) are referred to as "supporting activities". The meaning of the definition and of these terms was considered in Re Applicant and Industry Research and Development Board 55 ALD 784 where the previous relevant authorities were also collected and discussed. The relevant passages are as follows:
"(23) To qualify as "core activities" the "activities" (and they are defined with reference to the plurality of the applicant's endeavours) must be systematic, investigative or experimental, and must involve innovation or technical risk. If the activities are systematic and investigative, there is no requirement that they be experimental. Similarly, if the activities involve innovation, there is no requirement that they involve technical risk. In either event, the activities must be carried on for the purpose of acquiring new knowledge or creating new or improved materials, products, devices, processes or services.
(24) The terms or phrases "systematic", "investigative", "experimental", "innovation", "technical risk", "new knowledge", "new or improved materials, products devices, processes or services", and "purposes directly related to the carrying on of activities" are not defined for the purposes of the Act. The ordinary meaning of key words and the definitions assigned to them in the Macquarie Dictionary are as follows:

"Systematic" means arranged or conducted according to a system, plan or organised method;
"Investigative" means characterised by or inclined to investigation;
"Experimental" means based on, or derived from, or making use of experiment
"Experiment" means an action or procedure undertaken to make a discovery, test a hypothesis or demonstrate a known fact.
(25) The terms have also been considered in various decisions of this tribunal and in a judgment of a full court of the Federal Court. Those decisions are as follows:
Re Charles Ife Pty Ltd and Industry Research and Development Board (1995) 39 ALD 635; 32 ATR 1226; 95 ATC 2149
Re Philip Morris Ltd and Industry Research and Development Board 98 ATC 2001;
Industry Research and Development Board v Unisys Information Services Australia Pty Ltd (1997) 37 ATR 62; 97 ATC 4848;
Re Mobil Oil Australia Ltd and Industry Research and Development Board (1995) 30 ATR 1364; 95 ATC 2042
Re Confidential and Industry Research and Development Board (AAT, Decision 11668, No. N95/1263, 6 March 1997, unreported) which was the subject of the appeal referred to above in Unisys.
(26) From these definitions and decisions, several general statements of principle may be discerned as follows:
(a)the words are to be given their ordinary meanings and dictionary definitions are relevant (Unisys);
(b)provided the condition of innovation or technical risk is not de minimis, the conditions are satisfied by the presence of innovation or technical risk of whatever degree and not necessarily of any particular degree (Unisys);
(c)there is no requirement that the innovation or technical risk must be substantial (Unisys);
(d)the Macquarie Dictionary definition of innovation is "something new or different introduced" and "the act of innovating, introducing new things or methods". Accordingly, an activity may be innovative because it is the first example of the large scale use of certain processes;
(e)the meaning of "risk" is "uncertainty as to outcome" and the word "technical" qualifies "risk" adjectivally and means "belonging or pertaining to an art, science or the like". An activity may, therefore, be innovative because the implementation had to pioneer new territory and may involve technical risk because, while there was little risk in the technology itself, there was induced risk in the attempt to apply it (Mobil Oil Australia);
(f)technical risks may be involved because there is uncertainty as to practical outcome and whether the end product could be processed and sold commercially. It can also arise where there is a significant number of variables and it is difficult to ascertain the effect of the interaction of those variables (Unisys);
(g)so far as supporting activities are involved, these include activities which were in some way inputs to or of assistance to accepted core activities (Charles Ife). That decision is also authority for the proposition that a project may be eligible even though it is a mixture of activities some of which do and some of which do not meet the legislative requirements. That approach appropriately recognises that the legislation expressly focuses on the concept of research and development activities;
(h)In considering a claim for the development of a particular technology it is necessary to have regard to the whole project which involved activities prior to and subsequent to the relevant year (Philip Morris). Accordingly, it follows that segmenting the overall project or activities in question is contrary to the general proposition that eligibility applies to activities as a whole or, in commercial terms, to a project.
(i)The statement that it is the process not the product that must meet the criteria is not correct. There is nothing in the legislation requiring that the definition must be read down to refer only to processes rather than products (Unisys at first instance not dissented from by the full court)."

I have referred in paragraph (g) above to an observation made in Charles Ife at 653 where the Tribunal expressed the view that activities which "were in some way inputs to or of assistance to accepted R&D activities" might be regarded as supporting activities. This observation was not necessary for the decision in Charles Ife. It is not clear from the text of the reasons whether this was an aspect of the definition which was fully debated before the Tribunal. It appears to disregard the clear requirements of the definition namely that the supporting activities are carried on for a purpose directly related to the carrying on of core activities. It is not enough, in my view, that supporting activities merely assist the implementation of core activities. The supporting activities must be not only related but directly related and must not only be directly related to the core activities, but must also be directly related to the carrying on of the core activities.
The purpose of company plan number 1 as described in its prospectus dated 8 May 1996 and lodged with the Australian Securities Commission on 9 May 1996 was to permit a limited number of companies to engage in the business of development for potential manufacture and sale of specified tea tree oil based products. The intention, as disclosed in the prospectus, was that subject to inherent risks, a participating company's business would return profits from the sale of products manufactured as a result of product packages developed by a participating company in collaboration and individuals. Product packages are the isolation of a saleable product as a result of formulation, packaging and regulatory acceptance. The proposed product packages under company plan 1 were intended to relate to acne treatment, hospital and antiseptic products and oral hygiene.
The first applicant became a participant in company plan number 1 on or about 22 May 1996. Neither it nor the second applicant gave evidence before me as to its purpose. This is to be discerned, therefore, from the contractual arrangements into which both applicants entered. The definition of research and development activities requires a purpose on the part of those carrying out the activities of (relevantly) creating new or improved products or a purpose directly related to the carrying out of the paragraph (a) activities. The contracts into which both applicants entered were essentially the same except for the dates. Applicant 2 became a participant in company plan 2 on 28 June 1996. Both applicants seek registration in respect of the year ended 30 June 1996 on the ground that the claimed activities carried out on their behalf were supporting activities as defined, and were carried out in the relevant year.
Each prospectus requires a participating company to execute a management agreement with the management company charged with the provision of management services for both plans. Under the agreement, each applicant appointed the manager as its agent in carrying on the business defined as follows:
"1.1.2"Business" means the following activities undertaken by the Company Participant:
(i)the production and sale of products and Research Results including Product Packages based on tea tree oil including (but not limited to) formulae, packaging and labelling;
(ii) product development including the research and development of products;
(iii)the purchasing of necessary technology for the purposes outlined in 1.1.2(i) and (ii) above;
(iv)the sale of purchased or developed technology to enhance such business and its future prospects or, on the basis that a suitable return is obtained, by the sale at an earlier than envisaged time;
(v) the holding of all appropriate technology developed whether from developed or acquired or from purchased technology;
(vi)derivation of income and profits from the above activities including where appropriate future royalty income; and
(vii)derivation of income from creation of Research Results including Product Packages and Research and Development."

In order to pursue this business, a second agreement was entered into between the applicant of the first part, the management company of the second part, a tea tree oil research institute of the third part and a trustee company of the fourth part.
In consideration of sums of money set out in this agreement, the institute undertook certain obligations as follows:
"4        Term of Research
4.1In consideration of the research fees the Institute shall for a period of twelve (12) months from the Payment Date conduct the Research and Development and shall engage or cause to be engaged such personnel and facilities as are in its discretion necessary for the completion of the Research and Development.
5        Institute's Covenants
5.1The Institute shall provide the Manager as Agent for the Company Participant and Manager of the Collaborative Research with such follow up support and data as may be reasonably required by the Manager as Agent for the Company Participant and Manager of Collaborative Research to enable the Manager as Agent for the Company Participant and Manager of the Collaborative Research to obtain necessary licenses and registrations for the Research Results including Product Packages and finished Products.
5.2The Institute shall upon advice from the Manager as Agent for the Company Participant and Manager of the Collaborative Research to the effect that the research funds are available forthwith create a research budget and protocols and shall submit the same to the Manager and the Manager shall thereupon confirm or amend such budget and protocols and shall confirm such determination to the Institute.
5.3The Institute shall be responsible in the conduct of its Research and Development and having regard to its objective to create relevant Research Results including Product Packages to undertake the following responsibilities:
1.        To research the mode of action of tea tree oil;
2.        To research optimisation of the properties of tea tree oil;
3.To create formulations for the use of tea tree oil in relation to products for acne treatment and hospital and antiseptic and oral hygiene uses;
4.To develop appropriate processes, trial batches, production scale batches and conduct process validation trials on formulae using tea tree oil;
5.To develop product specifications and analytical methods and validation processes for products using tea tree oil;
6.To develop relevant packaging complying with all national and international statutory marketing requirements;
7.        To conduct stability trials on products using tea tree oil;
8.To conduct all necessary safety studies and obtain relevant insurances in respect of product liability on formulae using tea tree oil;
9.        To conduct relevant preservative studies on tea tree oil based formulae;
10.      To conduct efficacy studies on tea tree oil based formulae;
11.      To conduct laboratory and clinical trials on tea tree oil based formulae;
and in all of the foregoing matters shall perform and report in a timely manner and conduct its research having regard to the highest standards of diligence and international quality control expected of a scientific research institution operating in the pharmaceutical industry."

The evidence was that tea tree oil has a unique place in pharmacology, being one of the few natural products with demonstrable therapeutic qualities equal or superior to synthetic antiseptics and disinfectants. With the rise of the environmental movement, there has been an increased demand for natural products with such therapeutic properties. Whilst some tea tree oil based products have been available on a small scale for a number of years, there has not been extensive research and development in the area and certainly registration of products allowing therapeutic claims to be made has not been achieved. The evidence was that commercial companies had encountered considerable technical problems with the formulation of tea tree oil. Examples were given by witnesses of failed endeavours in their previous places of employment.
A number of significant difficulties have hindered tea tree oil based product development and wide-scale exploitation. These difficulties include variability of colour, odour and chemical composition. Many of these difficulties stem from the fact that basic research has been lacking into the mechanisms and structure of tea tree oil. It has remained part of "folk lore medicine". Dr Twomey, called on behalf of the applicants said:
"The facts are:

we do not know how it works as an antimicrobial;
we do not know the parameters for formulations such as effects of solubilisation on release rates;
we do not know the stability and long term safety of formulated products;
clinical trials to date are not internationally accepted;
the market place has a negative view of the oil due to past experience with odour, irritancy, colour and variability of composition;
considerable R & D needs to be done to provide credible data and information to overcome the negative perceptions."

The evidence was that the plans were intended to finance research in specific areas. The focus of company plan 1 was to be on acne, hospital and antiseptic and oral hygiene products. Company plan 2 was aimed at the development of product packages in the fields of skin care, bath and shower products, deodorants and haircare, excluding dandruff prevention and treatment. It was intended to develop products which could be sold in the United States of America and Europe and which would, accordingly, satisfy all the regulatory requirements of the authorities in those jurisdictions. These included the carrying out of "double blind" experiments necessary for the development of data for approvals of the regulatory authorities. Formulation knowledge of the use of tea tree oil in company plan 2 products (known as cosmeceuticals) was limited because of the lack of prior research and development.
In Australia, the Therapeutic Goods Administration maintains a register of "listed goods" and a register of "registered goods". The latter requires a much higher degree of satisfaction of the administration. Listing goods would enable the vendor, for example, of an acne treatment containing tea tree oil to claim that it "may assist in the control of acne". If that same treatment were registered on the Register, the claim that could be made by the vendor of that product, subject to what is proved in relation to its efficacy and safety, might be "clinically proven to cure acne in one week". To gain the benefit of registration in the full sense, extensive data from controlled research and development must be supplied to the administration by appropriately qualified experts.
The core activities were essentially carried out after 30 June 1996. The applicants rely principally upon supporting activities prior to that date. I accept the evidence that at the relevant time, there was a good deal of scope for further research and development and that the state of knowledge concerning tea tree oil and its products was inadequate and was insufficient to substantiate therapeutic claims in Australia or elsewhere. The core "systematic investigative or experimental activities that involve innovation or technical risk" were carried on for the purpose of bridging that gap.
The actual nature of the activities are detailed in progress reports provided for under both plans. These were regular reports to the Research Advisory Board of the Institute detailing research that had been carried out at first by contractors but interpreted and dealt with by staff of the Institute. Evidence was given of all the products currently being developed by the Institute under both plans and of those which have proved to be unsuccessful in the development process. These include a successful tea tree oil based acne product, successful tests on the disinfectant capacity of tea tree oil, reports on the work of various contractors, and basic scientific research, most importantly, into the "mode of action" of tea tree oil. This is research undertaken in order to establish the composition of tea tree oil and its basic properties. Such fundamental research is of value in the development of any product incorporating tea tree oil.
Since 30 June 1996, considerable detailed research work has been carried out by the Institute. Tendered in evidence were six volumes of detailed experimental results relating to company plan 1 products and four volumes of similar material relating to company plan 2 products. In the former category, details are given of the two major modes of action research studies which were carried out. Particulars are given of the many formulations, which have been developed in the three company plan 1 categories. The evidence discloses detailed manufacturing methods, analytical data, analytical method validation, stability data, raw material specifications and preferred method of commercial distribution. Results of laboratory efficacy testing are set out. The report also details various successes in the intellectual property fields. Clinical trials are described and current research projects are set out. An order was made under section 35 of the Administrative Appeals Tribunal Act restricting publication of the details of this material because of its confidential nature. Having examined it, however, I am satisfied that it discloses systematic activities, investigative activities and experimental activities. Whether or not technical risk was involved, the evidence clearly supports a conclusion that the activities involved innovation. The activities related to the acquisition of knowledge some of which, on the evidence, was quite new. The activities were certainly directed towards creating improved or new products. These activities of the Institute from 30 June 1996 to date, constitute research and development activities. The question to be determined is whether either applicant is able to point to any supporting activities occurring in the year ended 30 June 1996 which can be said to be directly related to the carrying on of the subsequent core activities
The supporting activities upon which the first applicant primarily relies was constituted by the commissioning of and the preparation of product development briefs for the three company plan 1 areas. Doctor Twomey, a marketing and technical consultant, gave evidence of the report prepared by his company Excel Consulting Group (Qld) Pty Limited dated 16 April 1996 for inclusion in the prospectus for company plan 1. That report identified the market opportunities for various products (including those that subsequently became the focus for that particular plan), the barriers to capturing opportunities through the strict requirements of the regulatory authorities and discussed individually the possible fields for further research. On the basis of this report, a product development brief was commissioned from Xanadu Consulting Pty Limited. The commission was given by Mr Priest who was at the same time managing director of Maincamp Marketing (a company involved in the growing of melaleucas) and managing director of the Institute. The product development brief was expressed to have been prepared for Maincamp Marketing Pty Limited and is dated 27 May 1996.
The brief records that the author had been commissioned by that company to assist in the development of a series of product development briefs to allow initiation of research and development of tea tree oil based products by the Institute.
The brief discusses the cause of acne and it's most commonly used treatments. It discusses the way in which those treatments have effect and the incidence of side effects such as skin sensitivity. It discusses the other products which incorporate tea tree oil and notes that none of them makes specific claims for the treatment of acne. It reviews the potential of the market for a tea tree oil based acne treatment, both in Australia and elsewhere and then makes recommendations for the development of a product range. The range is discussed in relation to the type of distribution channels to be chosen.
The author then turns to a list of product forms for development. Products, for example, can take the form of face cleanser, detergent bar, cream, cream cover up, lotion, gel, wipes or dabs. It recommends varying percentages of tea tree oil concentrate in each of these forms and suggests the percentage of other active ingredients that might, on further research, be found necessary or desirable. It suggests the therapeutic claims that would be required in order to obtain a successful product. To achieve these claims, certain criteria must be observed. Certain substances are to be avoided and certain excipients are to be included. Those that are not globally acceptable are to be avoided. The report sets out the retail and cost prices to be aimed for in the various forms of products and suggests a range to be developed and appropriate market research.
Different sections of the report are then developed dealing with specific requirements of different types of outlets and different approaches which would be required in the development of the product, depending upon which distribution outlet was to be preferred.
Finally, the product development brief in relation to acne suggests a detailed program of research and development activity which could be undertaken under seven headings. These headings serve as guidance to researchers. Apart from suggesting tests such as studies relating to long-term toxicity and to anti-microbial activity, the brief recommends particular types of chemical analyses, recommends particular types of clinical trials and animal testing and recommends future protocols where the effect of various ingredients are to be compared and contrasted. Although the author has one eye on the market, the other eye is firmly fixed on scientific research which will enable that market to be exploited. The author has qualifications in both fields and was chosen and paid because of this.
On 13 June 1996, a similar product development brief was prepared in relation to oral hygiene products. These included toothpaste, mouthwash, breath spray, lip gel, cold sore cream, mouth ulcer paint, tea tree oil impregnated floss and plate soaks and mouthrinse for thrush in denture users. Similar reviews are made of both the marketing and the scientific objects to be achieved. They include an outline of clinical studies which would need to be undertaken.
On 13 June 1996, a third product development brief was also prepared in relation to antiseptic products. There was a particular application of antiseptic products in the hospital market. The consumer market was concerned with skin antiseptics containing certain desirable topical properties and oral antiseptics such as lozenges and mouthwashes. The antiseptic qualities of tea tree oil were discussed. The opportunities for the use of oil in antiseptic and disinfectant products were pointed out, projects were suggested, aims and targets were set, and guidance to development was included.
The evidence was that these product development briefs were of the same kind that other witnesses had encountered when working for other medical or research companies. Professor Brown (a Professor of Pharmaceutics at Sydney University) concluded that they have a definite utility for the purpose of research and development activity. Mr Middleton (who was responsible for the briefs) gave evidence that the production of such documents was commonly used as a first step in setting up a research and development program and was similar to the format used by his previous employers, two well-known international drug companies. Mr Priest gave evidence that background research often determines at what point the research and development commences and the product briefs determine the objective and direction that the research and development takes.
Again, Professor Brown said:
"In my opinion and experience the Product Development Briefs which I have described in this statement represent precisely the type of preparatory work which is a valuable and necessary step in any research and development work. Although aspects of the subject Product Development Briefs may be subject to criticism such as made by Drs Altman and Crooks in certain respects it does not follow that they were a step which did not have to be undertaken in the course of the research and development which they contemplate. They were in my opinion of value and utility to and provided the basis for that research and development."

It is plain that the product development briefs do not contain information which would meaningfully assist in the actual formulation or compounding of the proposed products, although in the acne brief, various parameters and combinations are suggested. Nevertheless, the evidence is that such documents and the work that went into the production of those documents, had utility for the subsequent research work carried out. Even the respondent's principal witness, Dr Altman, had to agree:
"Is it important in this kind of research and development of products for the work to be systematic? --- Yes.
And is having a product brief or whatever we want to call it at the moment which sort of starts pointing people in a direction part of that systematic work? --- The product brief is the concept. It's not the order of work, it's not what things are important and what things have to be done first and second and so forth. It's generally – the general thrust, the general direction that one is aiming for and it's usually left up to the technical people to actually get down to the nuts and bolts and work out what the order – what the research plan is.
Would you agree that it's the first thing in a systematic approach, the first step? --- You certainly need it before you set the research plan. There's no doubt about that."

The evidence, furthermore, was that the product development briefs for company plan 1 were in fact used. Mr Priest who commissioned the reports from Mr Middleton's company said:
"Did they form any part of your decision making or deliberation first and decision making process as to what should happen next? --- Yes. Very much so.
In what way? --- Well, we took a lot of notice with the recommendations that came out of John Middleton's briefs. He's very experienced in the area and, you know, knows his stuff. So we'd asked him to put these together and having gone to an expert to do that then obviously we were going to take notice of it. I mentioned earlier about the salicylic acid, well on ---"

Succinctly describing the purpose of the product development briefs as the foundation for subsequent research, Mr Priest said:
"Can you just indicate why you say that? --- The product briefs as Mr Middleton put together in our terminology meant the specific objectives of each product, the technical objectives of each product which meant we wanted to develop a product that's got a two year shelf life minimum, that contains – that's a shampoo for problem scalp, for itchy scalp that contains the minimum amount of tea tree oil required to do the job in a green colour with a nice odour and if it's packaged in this particular pack then we think we've got something which we can sell. So that was, if you like, the technical objectives of the R and D program, so it's directly linked to the research because that becomes the target for research. The researcher then has to try to produce that."

It was sought to show that the three briefs were mere "marketing documents". In my view, they do not constitute market research, market testing or market development or sales promotion within the meaning of paragraph 73B(2)(a) quoted above. They have a scientific content and purpose which take them well beyond a description of the types of activities referred to in this paragraph. In any event that subsection merely excludes from the category of "systematic investigative or experimental activities" market related activities to which I have referred. The subsection does not preclude such activities from being "supporting activities" if they were carried on for a purpose directly related to the carrying on of activities of a kind referred to in section 73B(1)(a). The reports, however, go well beyond the terms used in the statute and, in my view, are not of the kind to which the statute is directed. The overwhelming evidence is that they form a link, possibly the primary link, in the chain of research and development. It is not a balanced assessment of the briefs to dwell only on the marketing aspects of those reports. I have concluded that the production of the relevant briefs should properly be regarded as supporting activities.
No similar briefs were prepared for company plan 2 prior to 30 June 1996. At or about the time of the company plan 1 reports, Mr Priest asked Mr Middleton to prepare product development briefs for the cosmeceuticals intended be targeted by company plan 2. This conversation may have taken place in late 1995. When the company plan 1 briefs were delivered around 13 June 1996, Mr Priest again asked Mr Middleton directly whether he could prepare similar product development briefs in relation to the cosmeceuticals. Mr Middleton said that this was an area beyond his expertise and accordingly, he declined. A suitable person for the preparation of these other briefs relating to cosmeceuticals could not be found for some time. The dates that those documents bear suggest that they were brought into existence late in September 1996. This fact alone means that the second applicant is unable to rely upon the production of these briefs as supporting activities carried out in the year for which it claims registration. In the absence of any other supporting activities assisting the second applicant's case, it must therefore fail.
Both applicants relied on the involvement of Technical Consultancy Services Pty Limited as providing further supporting activity. On 18 June 1996, Mr Priest writing as managing director of the Institute, asked Mr Staton of Technical Consultancy Services Pty Limited whether that company was interested in quoting on the development of 30 acne products and, in the future, a similar number of oral hygiene and antiseptic products. Mr Staton replied on 20 June. He did not feel that his company was qualified to undertake the primary research into mode of action. He felt, however, that his company could offer a broad range of expertise in dosage formulation, microbiology, packaging technology, stability testing and so on. He enclosed a copy of his company's profile and offered to enter into any necessary secrecy agreement. There was no firm quotation because, as the letter said, "obviously we would need to firm up the protocols for the projects once we have your list of proposed products". There was no further correspondence during that fiscal year. I do not consider that the involvement of Mr Staton and his company can be regarded as a supporting activity by either applicant because of its timing.
There was some question whether company 1 could rely upon the Xanadu product development briefs because they had been commissioned by Maincamp Marketing Pty Limited, a company not directly involved in the financial plan. If the product development briefs (regarded as a supporting activity) were not prepared "on behalf of" the company seeking registration or its agent in the relevant year of income, then this would constitute a ground for refusal to register the first applicant under section 39K. The question to be asked then is whether the three product development briefs were prepared "on behalf of" the participants in company plan 1. The products covered are identical with those in a corresponding plan intended for personal investment. The prospectus for the personal syndicate was dated 5 December 1995. The correspondence makes it clear that the three product development briefs were prepared with earlier prospectus in mind. It does not follow, however, that they could not also be regarded as having been prepared on behalf of investors in company plan 1 so as to be regarded as supporting activities carried out in the relevant year by those investors.

The respondent sought to draw a distinction between what may be relevant to more than one financing plan, on the one hand, and what may be done by or on behalf of a participant on the other hand. The respondent submitted that the two concepts were distinct and that relevance of itself did not establish by, or on whose behalf, the activity was done. Thus, it was contended that even though the product development briefs related to the same products in both plans, the fact that the briefs were prepared for the participants in the first plan meant that they could not be regarded as having been prepared on behalf of participants in the second plan. Furthermore, the respondent submitted that the phrase "on behalf of" did not permit subsequent adoption after the event of some other entity's activities. It was submitted that section 39K did not permit the second plan to adopt the after event activities undertaken on behalf of the first plan for the purposes of the section. The respondent also appeared to rely on what might be respectfully called a floodgate argument. It was submitted that to conclude that activities may be subsequently adopted would be to open the way for any entity whatever to come in at the end of the financial year, purchase prior activities and then say it was entitled to registration under section 39J. In my view, this approach to interpretation of the phrase is not helpful. Although section 39K does not use the phrase "for the benefit of" which might be understood to include work done in advance, it is nevertheless instructive to consider those cases where "on behalf of" has been combined with "for the benefit of" to arrive at a correct approach to interpretation. I do not consider, as counsel suggested, that the wording of section 39K requires the phrase "on behalf of" to amount almost to an agency situation.
The phrase "on behalf of" has been considered by the High Court. It was also considered by a Full Court of the Federal Court in Cuthbertson and Richards Sawmills Pty Limited v Thomas 30 ACSR 504 in the context of the expanded phrase. The earlier authorities were collected and discussed at 510 by the Court as follows:
"The phrase "on behalf of" does not have a strict legal meaning. In R v Toohey; Ex parte A-G (NT) (1980) 145 CLR 374 at 386; 28 ALR 27 Stephen, Mason, Murphy and Aickin JJ referred to that phrase in these terms:
… it bears no single and constant significance. Instead it may be used in conjunction with a wide-range of relationships, all however, in some way concerned with the standing of one person as auxiliary to or representative of another person or thing.
…
Context will always determine to which of the many possible relationships the phrase "on behalf of" is in a particular case being applied; "the context and subject matter" (authority cited) will be determinative.
In that case, the majority held that no straining of language was involved (see 387) to describe the Aboriginal Land Fund Commission as holding its leasehold station land "on behalf of" Aboriginals, although there was no relationship of trustee and beneficiary. The court relied upon the observations of Dixon and McTiernan JJ in R v Portus; Ex parte Federated Clerks Union of Australia (1949) 79 CLR 428 at 438 and 440 respectively. There the question was whether employees of Qantas Empire Airways Ltd (Qantas) were employed by Qantas "on behalf of the Government of the Commonwealth". The Commonwealth owned all the shares in Qantas and, under its articles of association, the Minister for Air had the sole right to appoint directors to it. The High Court's decision was unanimous. Despite the interposition of a company, the substance of the matter was that Qantas' employees were employed on behalf of the Commonwealth. Those words were used in the wider sense of, "for the purposes of" or "as an instrument of or for the benefit and in the interests of the Commonwealth". Similarly in FCT v Commonwealth Bank of Australia (1992) 34 FCR 296; 105 ALR 294 at 299; 23 ATR 121 a Full Court of this court held that cheques drawn by members of a building society, under a facility agreement, upon a bank account maintained in the name of that society were drawn "on behalf of" the society even though they were not signed by it. The court said:
In our view, establishing and maintaining the cheque facility was something done "on behalf of" the society, even if these were activities for the benefit of members as well."

There was a close relationship between Maincamp Marketing Pty Limited and the management company which had been appointed as agent for each of the investors. There is similarly a close connection between the research and development proposed pursuant to the personal plan and that proposed pursuant to company plan 1. Indeed, the proposed research and the intended business are described in identical terms. The substance of both prospectuses links company plan 1 with the personal plan. There is a reference to the sharing of net earnings from product sales, as one would expect, as the products to be developed by both plans were identical. The management arrangements for both plans were the same. The marketing and technical consultant whose report is referred to above also linked the investment plans. The investigating accountant made reference to the personal plan. Although the first step leading to the preparation of the product development briefs was a request from the management company made in connection with the personal plan, it is clear that whatever resulted was also to be used in connection with company plan 1, even though at that time, the company prospectus had not obtained registration and applicant 1 had not entered into any management agreement with the management company.
The management agreement commenced on 22 May 1996 so that when the product development briefs were completed at various dates in June 1996, first applicant had appointed the management company as its agent. The linkage between the personal plan and company plan 1 again appears in the minutes of the Research Advisory Board and was reaffirmed in evidence given before me. Although there are some timing difficulties so far as the first applicant is concerned, I consider on the above authority (particularly Rv Toohey) that in the context of this beneficial legislation, the words "on behalf of" must be taken to include the preparation of the product development briefs on behalf of the first applicant. In logic, there is not reason why acts may not be done on behalf of an entity yet to come into existence. Fowler cites on behalf of a person "and his heirs" as a correct usage. As I have previously said, the product development briefs are not available to the second applicant, as they do not deal with products targeted by the second investment scheme.
There may be some substance in the respondent's "floodgates" argument if the two beneficiaries of the product development briefs were totally unrelated. There might be something to be said for a submission that an isolated applicant is not entitled to look back to totally unrelated prior activities and to appropriate them as its own. This is not the case in the present circumstances. The intention of all relevant parties was that the two plans (which are separate only for technical taxation reasons) were intended to benefit from these initial supporting activities. I consider that they should not be deprived of that entitlement through too literal an approach which does not appear, in any event, to be consistent with authority.
It was also submitted that as the applicants were merely one of a number of applicant companies in each plan, neither of them could be said to be the sole "owner" of the activities. Section 39J requires the activities to be carried out "by or on behalf of the company". Subsection 39J(1)(b) also refers to the ownership of the activities in the expression "its research and development activities". The respondent submitted that the construction for which it contended arose from the ordinary meaning of the word "its" and the phrase "by or on behalf of" and contended that this was further supported by the provisions of section 39P which provides for joint registration of companies in respect of shared or collaborative activities.
In my view, this is too narrow a view of the terms of section 39J. From a technical point of view, paragraph 23(b) of the Acts Interpretation Act 1901 provides that words in the singular number include the plural and words in the plural number include the singular. The use of the word "its" in section 39J, therefore, does not unequivocally indicate the necessity for sole ownership of requisite activities by an applicant company. Such a reading would, for example, preclude applications by two closely related family companies, even if they were in partnership. I do not see any difference in principle between that situation and a joint venture between a large number of participants of the kind presently under consideration. The respondent's argument, if accepted, could lead to odd results. For example, if core activities such as basic research into the properties of tea tree oil could not be said to have been carried out on behalf of any particular company or, indeed, on behalf of the participants in any particular plan, then on the respondent's submission, no company would be entitled to rely upon those activities in support of its application. This is clearly an unacceptable result and must indicate an erroneous interpretation.
I have concluded that in the relevant year, supporting activities were carried out on behalf of the first applicant and, accordingly, it is entitled to registration. It does not become necessary to examine the nature of the activities claimed on behalf of the second applicant as, on any view of the evidence, they all occurred outside the relevant fiscal year. Accordingly, the decision in relation to the second applicant will be affirmed.

I certify that the 46 preceding paragraphs are a true copy of the reasons for the decision herein of Mr B.J. McMahon (Deputy President)
Signed:       J. Healy           .....................................................................................
  Jacqueline Healy, Associate
Date/s of Hearing  27-31 March & 3-5 April 2000
Date of Decision  28 April 2000
Counsel for the Applicant        G Downes QC and A Bell
Solicitor for the Applicant         Kemp Strang
Counsel for the Respondent    A Robertson SC and A Gelbart
Solicitor for the Respondent    Australian Government Solicitor