Prestige Carpets (Vic) Pty Limited and Secretary, Department of Innovation, Industry, Science and Research

[2008] AATA 492

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2008] AATA 492

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No N2006/733

GENERAL ADMINISTRATIVE DIVISION		)
Re		PRESTIGE CARPETS (VIC) PTY LIMITED

Applicant

And SECRETARY, DEPARTMENT OF INNOVATION, INDUSTRY, SCIENCE AND RESEARCH

Respondent

DECISION

Tribunal Senior Member, Mrs Josephine Kelly

Date16 June 2008

PlaceSydney

Decision

The reviewable decision is affirmed in relation to the Applicant’s claim for a Type 2 Grant under the Textile, Clothing and Footwear Strategic Investment Scheme 1999 (the Scheme).

The decision is otherwise set aside and the matter remitted to the Respondent for reconsideration of the Applicant’s remaining claims for

  Type 1 and Type 3 Grants under the Scheme.

....................[sgd]..........................

Mrs Josephine Kelly
  Senior Member

CATCHWORDS

TEXTILE, CLOTHING AND FOOTWEAR INDUSTRY -  Strategic Investment (TCF) Scheme – Type 2 Grant – TCF Research Development and Expenditure - Claim for - Eligibility for – Applicant Entity – Eligible TCF product - Eligible Expenditure – Eligible TCF Activity –  Whether claim in respect of eligible TCF activity – Held activity carried out by other entities - Design activity whole of entity’s activity - Primary business not carrying on eligible activity - Claim not made in accordance with Scheme – Reviewable decision affirmed in part but otherwise set aside and remitted for reconsideration

Income Tax Assessment Act 1997, ss 995-1, 960-100

Textile, Clothing and Footwear Strategic Investment Program Act 1999, ss 4, 8, 10, 11

Textile, Clothing and Footwear Strategic Investment Scheme 1999, ss 3, 5, 9, 10, 13, 16, 23, 31, 38, 40, 52, 61, 76, 88, Schedule 1

REASONS FOR DECISION

16 June 2008 Senior Member, Mrs Josephine Kelly     

SUMMARY

1.      Prestige Carpets (Vic) Pty Ltd (the Company) is the Trustee for Prestige Carpets Unit Trust.  The Company seeks the review of a reconsideration decision made by a delegate of the Secretary to the Department of Innovation, Industry, Science and Research ("the Secretary") on 13 June 2006 confirming that the Company was not entitled to be paid a grant pursuant to the Textile, Clothing and Footwear Strategic Investment Scheme 1999 (the Scheme) for the 2004/05 program year.  The Scheme was established under s 8 of the Textile, Clothing and Footwear Strategic Investment Program Act 1999 (Cth) (the Act).   The abbreviation "TCF" is used throughout this decision for the phrase "textile, clothing and footwear".

2.      The Scheme provides for the making of grants and loans in connection with the design and manufacture in Australia, of eligible TCF products. As the Company's name suggests, the relevant product in this case is carpet.  The grants are to be made in arrears.  There are five types of grants prescribed by s 11 of the Act.  At the outset, these proceedings concerned the first, second and third types of grant, that is in respect of manufacturing rugs, TCF research and development expenditure, and in respect of TCF value-adding.  However, I was asked to deal only with the Type 2 grant –  in respect of TCF research and development expenditure.

3.      For the reasons that follow, I find that the Company was not eligible to claim a Type 2 grant under s 52 of the Scheme in respect of design.  Accordingly, the Company was not eligible for a Type 2 grant pursuant to s 61(9) of the Scheme.

4.      As the remaining issues relating to the manufacture of rugs (a Type 1 grant) and the claim for value-adding (a Type 3 grant) were outstanding, the matter will be remitted to the Secretary for reconsideration.

THE ISSUE

5.      I am reviewing the Secretary's reconsideration, under s 88 of the Scheme, of a decision made pursuant to s 61(9) of the Scheme, that the Company is not eligible for a grant under the Scheme.  The parties agreed that that is a threshold question.  If the Company is eligible, I must remit the matter to the Secretary to be assessed in detail.

6.      The precise issue I have to determine was quite narrow and related only to a claim for a Type 2 grant in respect of design activity. On behalf of the Company, Mr Robinson, of counsel, requested that I not consider the claim for a grant in respect of TCF value-adding, that is a Type 3 grant. He said that it was not a significant issue, and if the Company is successful in relation to the research and development claim, the TCF value-adding claim could be dealt with by the Department when the matter is remitted.   He also requested that I not consider the matter of the manufacture of rugs, and that that matter also be remitted to the decision-maker.

7.      Before proceeding, I note that Mr Lloyd, counsel appearing for the Secretary, did not press submissions set out in paragraphs 27 and 57(a) of the Secretary's Statement of Facts and Contentions.

THE CASE FOR THE COMPANY

8.      The case for the Company was put on two bases, although I sometimes had some difficulty distinguishing them.   The primary submission was that the Company comes within s 5(1)(b) of the Scheme, that is,  it carries on in Australia an activity in respect of the design in Australia for manufacture in Australia of eligible TCF products, some or all of which are intended to be sold in Australia, and it satisfies the criteria for making a claim set out in s 52(4) in relation to such an activity.   The eligible TCF product is carpet.

9.      This argument focuses on the use of the phrase "carrying on" and variations of it, which appear in s 5(1)(b) and s 52(4).   Mr Robinson argued that other "related" companies, Alixla Pty Limited ("Alixla") and Prestige Custom Carpets Pty Ltd ("Prestige Custom"), do the design activity as the Company's agents.  The relationship between the Company and those two companies was emphasised and will be detailed later in these reasons.   Mr Robinson described the consultancy agreements between the Company and each of Alixla and Prestige Custom as labour hire agreement contracts for the employees of those companies to design carpets for the benefit and ownership of the Company.  He emphasised that the Company owns the intellectual property attached to the design activity, and the trademark "Prestige Carpets", and obtains the benefit of the activity undertaken by Alixla and Prestige Custom.   Without the innovative design, the Company would wither and die.

10.     The alternative argument relied on the s 16(3) and s 52(9) of the Scheme.  It was submitted that Alixla and Prestige Custom did the work on behalf of the Company.  The phase "on behalf" appears in both those provisions.

11.     For completeness, the following extract, from the Statement of Facts and Contentions filed on behalf of the Company, sets out its position on the factual issue:

The design activities referred to in the Application were carried on by the Applicant entity through a number of layers of control by it:

(a)      through its directors Mr MacKay and Mr McGinty who were the key individuals undertaking the design activities (both in their capacity as directors and their capacity of the main employees and directors and shareholders of the labour hire companies);

(b)      through the Consultancy Contract with the labour hire companies Alixla Pty Ltd and Prestige Custom Carpets Pty Ltd; 

(c)       through the fact that the only two shareholders in the Applicant also had effective control of the labour hire companies Alixla Pty Ltd and Prestige Custom Carpets Pty Ltd;

(d)      through the fact the design activities were carried out primarily at the Applicant’s premises using the Applicant’s materials and equipment (including the two (2) pass machines owned by the Applicant which are used to create design samples); and

(e)      through the fact that the consultancy payments made to Alixla Pty Ltd and Prestige Custom Carpets Pty Ltd were regular monthly payments, as in substance and effect, a regular wage, which enabled the Applicant to exercise effective and regular control over the activities.

CONSIDERATION

The Business Structure and Operation

12.     On the material before me, I accept that Mr Paul McGinty and Mr Selwyn Mackay are the directors and shareholders of the Company, which is the trustee of the Prestige Carpets Unit Trust.  Alixla and Prestige Custom are the unit holders of the trust.  Mr Mackay is a director and shareholder of Alixla. Maria Mackay was also a director and shareholder.   There were three shareholders who each held one third of the shares.   Previously, Mr Mackay was a carpet selling agent.

13.     Mr McGinty is the director and a shareholder, with his wife, of Prestige Custom.  Previously, he was a freelance carpet designer.

14.     The Company entered into a similar "Business Consultancy Contract" with each of Alixla and Prestige Custom, although the Company's name was incorrect in each contract.  Both contracts were dated 1 July 2004, although there were various versions in evidence.  The important terms were as follows.

15.     Each contract was for the 2004/2005 financial year.   The Company employed the consultant to:

consult with the officers and employees of the company concerning matters relating to the development of new and innovative products, technical advice, methods of manufacture, adaptation of machinery and generally any matter arising out of the research, development and design of new products for the company.

16.     Payment was a fixed rate per month plus GST “with provision for the issue of a final adjustment invoice to cover any further costs incurred".   The consultant was to act as an independent contractor. Information about the Company's affairs were to be confidential.   The intellectual property of the products developed through the contract were to be the property of the Company.    The Company could request that the consultant arrange for the services of others at the Company's cost, but the consultant could not employ others without the prior authorisation of the company.  The activities under the contract could take place at the Company's or the consultant's premises, on the telephone and at such other places as designated by the Company.  

17.     I find on the evidence that, in fact, only the Company had business premises during the relevant financial year, and I accept Mr Mackay's evidence that the design activities were undertaken there.  I also accept his evidence that the income received by Alixla and Prestige Custom comprised the income from the activities undertaken pursuant to the consultancy agreements with the Company, and their entitlements as shareholders in other companies.

18.     I also find that the Company did not pay Mr Mackay and Mr McGinty salaries or directors' fees and did not employ any staff.  Rather, Mr Mackay was employed and paid by Alixla, and Mr McGinty was employed and paid by Prestige Custom, from funds paid by the Company under the consultancy agreements.  Alixla had four other employees and Prestige Custom had one other employee.  I find that the other staff salaries and business expenses incurred by Alixla and Prestige Custom in relation to work undertaken pursuant to the consultancy agreements were reimbursed by the Company.

19.     Mr Robinson carefully phrased his submission that the design activities were undertaken at the Company's factory by Alixla and Prestige Custom under the guidance of Mr Mackay and Mr McGinty, the directors of the Company.   I accept that the design activity carried out created 11 new designs the subject of the claim under the Scheme.

20.     It was not in dispute that the Company has its carpets manufactured under commission by another company on its behalf, and that it owned the product which it then sold.   As summarised by Mr Mackay, the Company's activities since 1997 have been concerned with design, production and the sales of carpets and rugs.

Overview of the Legislation

21.     In summary, the policy objectives of the Act, set out in ss 10 and 11, are to authorise a scheme which provides five types of grants for the TCF industry.

22.     The provisions of the Scheme are detailed.  For present purposes, it is sufficient to note that the Company had to apply to be registered for the program year 2004/2005 before 1 July 2004 (s 38(b) of the Scheme, which is in Part 3).  That application was received by the Department on 25 June 2005.  Registration of itself does not give rise to an entitlement to a grant (s 40(4) of the Scheme).    The Company registered as a manufacturer, designer, warehouser, and distributor of carpets.

23.     The next step is to make a claim for a grant, which is dealt with in Part 5, Division 5.1 of the Scheme.  On or about 31 March 2006, the Company lodged the claim the subject of these proceedings. It included a claim for expenditure for activities for a Type 2 grant, for innovative product design, in the amount of $540,279.  That claim was made in respect of 11 projects. The "TCF Product" identified in relation to each project was "carpets". The 11 projects were described as:

Development of stipple effect cut pile carpet;

Development of extra heavy duty loop pile carpet;

Development of conventional plush pile carpet with subtle stipple effect;

Development of woven carpet on a tufted machine;

Development of “Eco friendly” or “Green” carpets;

Development of new carpets with boucle or fancy yarns;

‘Striation styling’ carpets development;

‘Coarse plush’ carpet development;

‘Super fine plush’ carpets development;

Development of Gaucho; and

Development of carpets using felted slub yarn

24.     The Trustee also claimed for a Type 3 grant for value added in the amount of $831,891.

25.     The Secretary then has to carry out an assessment of the claim according to the provisions of Division 5.2 of the Scheme. Section 61 is in this Division.

DETAILED ANALYSIS OF LEGISLATION

26.     Various definitions are relevant to the consideration of the present claim.

27.     "Entity" is defined in s 4 of the Act as having the same meaning as in the Income Tax Assessment Act 1997 (Cth) (the ITAA).   Section 995-1 of the ITAA provides that "entity" has the meaning given by s 960-100.   I did not understand that there was any dispute that each of the Company, Prestige Custom, and Alixla is relevantly an entity. In any case, I find that is so.

28.     Following are the relevant provisions of the Scheme.

29.     "Eligible expenditure" for a type of grant is defined in s 3 of the Scheme.  For a Type 2 grant, it is "eligible expenditure within the meaning of sections 23 to 26".

30.     "Eligible TCF product" is defined in s 3 of the Scheme relevantly to mean a product resulting directly and predominantly from an eligible TCF activity mentioned in s 5(1)(a), which relates to manufacturing.

31.     Relevantly, "eligible TCF activity" is defined in s 5(1) of the Scheme: 

For the Scheme, each of the following activities is an eligible TCF activity:

(a)      a manufacturing activity of a kind mentioned in Parts A to E of Schedule 1 carried on in Australia by an entity;

(b)      an activity carried on in Australia by an entity in respect of the design in Australia for manufacture in Australia of eligible TCF products, some or all of which are intended to be sold in Australia;

…

32.     I understood that both parties accepted that the carpet manufactured on commission for the Company is an eligible TCF product, as it falls within Part A, paragraph 5 of Schedule 1  of the Scheme – “Textile Floor Covering Manufacturing”.

33.     Section 9 of the Scheme defines "total eligible revenue":

(1) For the Scheme, total eligible revenue, for an entity (other than an entity mentioned in subsection (3)) and for a period, means the total revenue derived by the entity from sales, except sales to New Zealand, of the entity's eligible TCF products during the period, excluding" [certain taxes and subsidies]

…

(2) In subsection (1), a reference to the entity's eligible TCF products is a reference:

if the entity is carrying on an eligible TCF activity mentioned in paragraph 5(1)(a) – to eligible TCF products manufactured by the entity; or

if the entity is not carrying on an eligible TCF activity mentioned in paragraph 5(1)(a),  but is carrying on an eligible TCF activity mentioned in paragraph 5(1)(b) in accordance with paragraphs 52(4)(a) and (b) – to eligible TCF products manufactured on behalf of the entity by another entity; or

…

34.     Section 10 addresses references to an entity:

In the Scheme, unless the contrary intention appears, a reference to an entity, in relation to the doing of anything by the entity for the purposes of the Scheme, does not include a reference to an agent of the entity, except where:

(a)  the entity is a body corporate; and

(b)  the agent is:

(i)  a director or other officer of the body corporate, or an employee of the body corporate having management responsibility; or

(ii)  if the entity is in receivership or under administration – the entity's receiver or administrator.

35.     Part 2 of the Scheme deals with the Types of grant.  Section 13 defines the five types of grant.  Relevantly, Type 2 grants are in respect of TCF research and development expenditure.

36.     Section 16 is in Division 2.3 of the Scheme and deals with Type 2 grants.  Relevantly it provides:   

(1)  A type 2 grant, for an entity, is a grant relating to eligible expenditure by the entity that is directly attributable to any of the following activities carried on by, or on behalf, of the entity in respect of an eligible TCF activity:

(a)  …

(b)  a product development activity of a kind mentioned in subsections (2) and(3).

…

(2)  For paragraph (1)(b), a product development activity must be:

(a)  innovative product design within the meaning of section 18; …

(3)  For paragraph 1(b), if a product development activity is carried on on behalf of the entity by another entity, the activity must be carried on under a written contract or in accordance with detailed and binding arrangements.

37.     Section 18 of the Scheme provides:

(1)  For the Scheme, an innovative product design activity must be:

(a)  Australian-based; and

(b) an activity directly concerned with:

(i)  the design, testing, trial and sample production of a particular innovative eligible TCF product; or

(ii)  innovation in the design, testing, trial and sample production of particular eligible TCF products

…

38.     The Company's claim was that it had 11 new designs for manufacture in Australia.

39.     Division 2.3.2 of the Scheme describes what eligible expenditure for type 2 grants is.   Relevantly s 23(b) of the Scheme requires that eligible expenditure reflect costs based on normal commercial values and arms length transactions.

40.     Part 3 of the Scheme deals with registration of entities.   As mentioned earlier, it was accepted that the Company had complied with s 31 of the Scheme in relation to the Type 2 grant with which I am concerned.   That section provides:

(1) An entity that intends to make a claim for a… Type 2… grant must apply to the secretary to be registered for the Scheme. 

(2) An entity is not eligible for registration unless the entity carries on, or proposed to carry on, an eligible TCF activity.

41.     As stated in the Company's Statement of Facts and Contentions, s 52 of the Scheme governs the making of claims.  Section 52(1) of the Scheme confers a right on an entity to make a claim for Type 1, 2 and 3 grants.  Sub-sections 52(2) to 52(7) qualify that right,   and each uses the qualifying phrase "only if".   Mr Robinson emphasised that the Company was not relevantly a manufacturer, and therefore s 5(1)(a) did not apply to it.   The relevant provision is therefore 52(4), which provides:

An entity that is not carrying on an eligible TCF activity mentioned in paragraph 5(1)(a) may make a claim for a Type 1, Type 2 or Type 3 grant relating to eligible expenditure by the entity in respect of an eligible TCF activity mentioned in paragraph 5(1)(b) only if: 

(a)  the entity's primary business is the carrying on of an eligible TCF activity mentioned in paragraph 5(1)(b); and

(b)  the activity represents the whole of the design activity for eligible TCF products to which the claim relates; and

(c)  the manufacture of the eligible TCF products is carried on in Australia on behalf of the entity by another entity.

42.     Both parties accepted that s 52(4)(c) is satisfied, that is, that the manufacture of the carpets which are  an eligible TCF product, is carried on in Australia on behalf of the Company by another entity.

43.     Mr Robinson argued that the Company satisfies s 52(4)(a) because its primary business is the carrying on of the design activity, and it satisfies 52(4)(b) because that activity represents the whole of the design activity for the carpets, the eligible TCF products, to which the claim relates.

44.     As I understood Mr Robinson's submission, the relevant activity in respect of the design upon which he relied is that carried out by Alixla and Prestige Custom, including by Mr Mackay and Mr McGinty, pursuant to the consultancy agreements with the Company resulting in the 11 carpet products the subject of the claim.   For completeness I should add that I understood Mr Robinson to say that the activity was done under the guidance of those gentlemen who were directors of the Company.

45.     I accept that that design activity represents the whole of the design activity referred to in s 52(4)(b) of the Scheme, however, the question is: does the Company satisfy s 52(4)(a)? Is the Company's primary business the carrying on of an eligible TCF activity mentioned in paragraph 5(1)(b) of the Scheme, that is:

an activity carried on in Australia by an entity in respect of the design in Australia for manufacture in Australia of eligible TCF products, some or all of which are intended to be sold in Australia.

46.     In my opinion, the only activity in respect of design that the Company carried on was to enter into the consultancy agreements.    I do not consider that Mr Mackay and Mr McGinty were working on the design in their capacity as directors of the Company.   They were employed and paid by Alixla and Prestige Custom, which were the entities that carried out the design activity.

47.     Further, in my opinion, the primary business the Company carried on is the selling of carpets.  It contracts out the design and manufacture of the carpets it sells.    Even if  Mr McGinty and Mr Mackay took some role in the design process as directors of the Company, that would not make the design activity the Company's primary business as required by s 52(4)(a) of the Scheme.

48.     Mr Robinson did not press his case based on the discretion conferred by s 52(8) of the Scheme, because he acknowledged that that provision does not extend to s 52(4) upon which he relies.

49.     The second argument put by Mr Robinson relies on s 16(3) (set out earlier in this decision), and s 52(9) of the Scheme.

50.     Section 52(9) provides:

A claim for a Type 2 grant relating to eligible expenditure by an entity (the contracting entity) in respect of a research and development activity or product development activity carried on, on behalf of the contracting entity, by another entity must be made by the contracting entity.

51.     Section 16 of the Scheme does not assist the resolution of this case.  It defines what a Type 2 Grant is.  It does not deal with the question of which entity may make a claim for the grant, which is the subject of s 52.

52.     Subsections 52(2) to 52(7) of the Scheme prescribe which entities can make a claim for a Type 1, 2 or 3 grant.  On that question I have found against the Company.    Section 52(9) only applies where an entity is otherwise qualified to make a claim for a Type 2 grant under one of the provisions s 52(3) to 52(7), and limits that right relevantly to the "contracting entity" where work is carried out on its behalf. 

53.     I conclude therefore s 16(3) and s 52(9) do not assist the Company.  

54.     As the Company did not satisfy the requirements of s 52 of the Scheme, its claim cannot succeed (s 61(8) of the Scheme) and the Company is not eligible for a grant (s 61(9) of the Scheme).

DECISION

55.     The reviewable decision is affirmed in relation to the Company’s claim for a Type 2 Grant under the Scheme.

56.     The decision is otherwise set aside and the matter remitted to the Respondent for reconsideration of the Company's remaining claims for Type 1 and Type 3 Grants under the Scheme.

I certify that the 56 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member,
Mrs Josephine Kelly.

Signed: …………[sgd]..…………

Steven Mulipola, Associate

Dates of hearing:  29 & 30 January 2008

Date of decision:  16 June 2008

Counsel for the Applicant:             Mr M Robinson

Solicitors for the Applicant:           Lyndon Sayer-Jones & Associates

Counsel for the Respondent:        Mr S Lloyd

Solicitors for the Respondent:      Australian Government Solicitor