Shoppr Network Pty Ltd and Australian Trade and Investment Commission
[2019] AATA 421
•19 March 2019
Shoppr Network Pty Ltd and Australian Trade and Investment Commission [2019] AATA 421 (19 March 2019)
Administrative Appeals Tribunal
ADMINISTRATIVE APPEALS TRIBUNAL )
) No: 2017/4520
GENERAL DIVISION )Re: Shoppr Network Pty Ltd
Applicant
And: Australian Trade and Investment Commission (Austrade)
RespondentDIRECTION
TRIBUNAL: Mr P W Taylor SC, Senior Member
DATE OF CORRIGENDUM: 19 March 2019
PLACE: Sydney
The Tribunal directs the Registrar, pursuant to subsection 43AA(1) of the Administrative Appeals Tribunal Act 1975 (Cth), to alter the text of the decision dated 19 March 2019 in this application as follows:
1. The reference to the word “re-consider” in the decision is replaced with “reconsideration”,
2. so that the decision reads:
“The Austrade CEO’s 5 July 2017 reconsideration decision under review is affirmed”.
.............................[sgd]................................
Mr P W Taylor SC, Senior Member
Division:General Division
File Number(s): 2017/4520
Re:Shoppr Network Pty Ltd
APPLICANT
Australian Trade and Investment CommissionAnd
RESPONDENT
DECISION
Tribunal:Mr P W Taylor SC, Senior Member
Date:19 March 2019
Place:Sydney
The Austrade CEO’s 5 July 2017 re-consider decision under review is affirmed.
........................[sgd]...........................
Mr P W Taylor SC, Senior Member
CATCHWORDS
BOUNTIES AND OTHER SUBSIDIES – export market development grants – trade and commerce – expenditure on overseas marketing – eligible applicant – eligible expense – eligible product – grants entry requirement – significant net benefit to Australia – Australian input – decision under review affirmed
LEGISLATION
Export Market Development Grants Act 1997 (Cth) ss 3, 4, 5, 6, 7, 9, 10, 18, 20, 21, 23, 24, 25, 25A, 57C, 26, 27, 28, 29, 30, 33, 34, 37, 39, 58, 70, 80, 96, 97, 98, 99, 101, 107, 114
Export Market Development Grants (Grants Entry Requirements) Determination 2002 (Cth)
Trade Legislation Amendment Act (No. 1) 2016 (Cth)
Corporations Act 2001 (Cth)
Administrative Appeals Tribunal Act (Cth) ss 42D, 43
Export Market Development Grants (Australian Net Benefit Requirements) Amendment Determination 2010 (No. 1) (Cth)
Export Market Development Grants (Significant Net Benefit) Guidelines 2006 (Cth)
Export Market Development Grants (Significant Net Benefit) Amendment Guidelines 2010 (No. 1) (Cth)
Export Market Development Grants Legislation Amendment Act 2006 (Cth)
Export Market Development Grants Regulations 2008 (Cth) Schs 1, 2
CASES
Re Parker Pen (Australia) Pty Ltd v Export Market Development Grants Board [1983] FCA 77; (1983) 67 FLR 234
International Harvester Co v Carrigan’s Hazeldene Pastoral Co (1958) 100 CLR 644
Scott v Davis (2000) 204 CLR 333
Oppidan Pty Ltd v Australian Trade Commission [2002] AATA 582
Australian Bullion Exchange Ltd v Australian Trade and Investment Commission [2016] AATA 939
Troozi Pty Ltd v Australian Trade and Investment Commission [2018] AATA 4360
SECONDARY MATERIALS
Austrade’s EMDG Administrative Guidelines
REASONS FOR DECISION
Mr P W Taylor SC, Senior Member
On 30 November 2015 Shoppr Network Pty Ltd applied to the CEO of the Respondent (“Austrade”) under s 70 of the Export Market Development Grants Act 1997 (Cth) (“the EMDG Act”). The application was for a grant relating to expenses (totalling $195,105) Shoppr Network had incurred in the years ended June 2014 and 2015. In its application Shoppr Network identified its “proprietary DistribIO platform” as the “product” that established its grant eligibility. With a brevity resulting in ambiguity about whether its business involved the sale, or the use, of the “platform”, Shoppr Network said the platform “works with exporting goods”.
In September 2016 Austrade’s CEO rejected the application, on the ground that Shoppr Network did not meet the “grants entry requirements”[1] and was not an eligible applicant. In a July 2017 internal review decision Austrade’s CEO again rejected the application, on the grounds that it neither related to an “eligible product” nor involved “eligible promotional activity”. Austrade[2] primarily considered that Shoppr Network’s “platform” was essentially a service for the delivery of goods from China to the USA, and did not have “Australian input” sufficient to satisfy the EMDG Act s 25(4) criterion that “Australia would derive a significant net benefit” from the supply of the service. Austrade adhered to that view in a further 10 July 2018 reconsideration decision made after Shoppr Network’s August 2017 review application[3] had been remitted to Austrade under section 42D(1) of the Administrative Appeals Tribunal Act 1975 (Cth).[4]
[1]The Export Market Development Grants (Grants Entry Requirements) Determination 2002 (Cth) is a legislative instrument authorised by EMDG Act s 21(1). It applied to all applications for grants relating to the 2002 to 2016 grant years. Austrade considered Shoppr Network did not have “sufficient financial resources to carry on its intended activities” and thus did not meet one of the principal grants entry requirements.
[2] For the sake of simplicity, I will typically refer to the statutory decision maker merely as “Austrade”.
[3]The Tribunal’s review jurisdiction arose under EMDG Act s 99, as a consequence of ss 97(1)(c), 98(1) and 98(4).
[4]The Tribunal remitted the review application because Shoppr Network indicated its intention to provide additional supportive information that had not previously been provided to, and considered by, Austrade.
THE EMDG ACT PROVISIONS
The EMDG Act’s object is to benefit Australia by encouraging the foreign marketing of “eligible products” (i.e. Australian goods, intellectual property, events, services and know-how).[5] The Act creates a scheme under which eligible Australian exporters are entitled to grants that recoup part of the expenses incurred in promoting those products:- see EMDG Act s 4. The underlying principles of the EMDG Act scheme, in relation to applicant and product eligibility, confine its operation to (i) “small or medium” Australian businesses that are “developing export markets for eligible products” and have “a prospect of success” in their export enterprise and, (ii) products that are “substantially of Australian origin”:- see EMDG Act ss 3, 5 & 23(2).
[5]The term “know-how” is defined to mean private knowledge, information or expertise that (i) relates to commercial or industrial operations, (ii) has a commercial value and, (iii) is imparted for the purpose of enabling the recipient to carry out a particular activity:- see EMDG Act s 27.
Eligible applicants:- The primary applicant eligibility conditions can be summarised, for present purposes, as restricting grants to individuals and entities that, amongst other things, (i) genuinely carried on business in Australia during the “grant year”, (ii) had a “grant year” income of no more than $50m, (iii) had not received grants for more than seven previous “grant years” and, (iv) (subject to certain exceptions) met the grants entry requirements determined by Austrade’s CEO:- see EMDG Act ss 6, 7(1), 18, 20 & 21.
The “grants entry requirements” relevant to the November 2015 application are that Shoppr Network (i) proposed lawful and practicable export activities, (ii) had “sufficient financial resources” to carry on its intended export activities and, (iii) had taken reasonable steps (such as research, planning and product development) to prepare for its export activities:- see the Export Market Development Grants (Grants Entry Requirements) Determination 2002 (Cth).
Eligible products:- Where a grant applicant’s export activity involves the supply of a “non-tourism service”[6] to a recipient who is neither an Australian resident individual nor an Australian regulated entity, the service will ordinarily be an “eligible product” for EMDG Act purposes:- EMDG Act s 25(1), 107 & 114. The “non-tourism service” will not be an “eligible product” if Austrade’s CEO has made a written determination that the Australian input into the service “is not sufficient to ensure that Australia will derive a significant net benefit from the supply of the service”:- EMDG Act s 25(1) & 25(4). This qualification reflects the underlying principle that product eligibility depends on substantial Australian origin.
[6]The character of a “tourism service” is relevantly prescribed in Schedule 1 of the Export Market Development Grants Regulations 2008 (Cth), and broadly includes travel, accommodation, and general tourist services. The character of a “non-tourism services” depends on whether the service is neither a “tourism service” nor an excluded service prescribed in Schedule 2 of the Regulations.
Where a grant applicant’s export activity involves the supply of rights relating to intellectual properly (other than a trademarks) those rights will be an “eligible product” if the property “resulted to a substantial extent from research or work done in Australia”:- EMDG Act s 26(b). That threshold condition again reflects the underlying principle.
Eligible expenses:- EMDG Act grant expense eligibility is governed by an “underlying principle” that only expenses that relate to “specific promotional activities”, and have been “genuinely incurred for the purpose of marketing” an applicant’s product in foreign countries, should qualify for a grant:- EMDG Act s 28(2). Consistent with that principle, the expenses are eligible if they (i) are “claimable … in respect of an “eligible promotional activity”, (ii) have been paid in the grant year[7] and, (iii) total at least $15,000:- EMDG Act ss 29(a), (c) & (d), 58. From that general criterion, expenses “of a capital nature”, and some 19 other specific categories of expenses are excluded:- EMDG Act ss 39 to 57C[8]. Even where claimed expenses apparently satisfy the eligibility criteria, Austrade can adjust the amount claimed where they have not been “properly substantiated” or are not genuine and commercial expenses:- EMDG Act ss 30 & 96(3). However, before exercising the adjustment discretion Austrade must formally notify the applicant, and seek an explanation, about the applicant of the grounds and reasons for the potential exercise of the discretion:- EMDG Act s 96(2).
[7]If an applicant has not previously received an EMDG grant its “eligible expenses” can include those incurred in both the grant year and the immediately preceding year:- EMDG Act s 29(c).
[8] EMDG Act s 57C was added by the Trade Legislation Amendment Act (No. 1) No 31 of 2016 (Cth).
There are nine categories of “eligible promotional activity”. They are set out in the Table in EMDG Act s 33. The following extract re-presents the content of the three “eligible promotional activity” items (and their corresponding “claimable expenses”) in the EMDG Act s 33 Table, that are relevant to Shoppr Network’s November 2015 application. (I have added this emphasis to highlight the limitation of eligibility to the extent each activity has an “approved promotional purpose”.)
Item Activity Expenses 1A
maintaining one or more overseas representatives on a long term basis in foreign countries to the extent to which the representatives are maintained for approved promotional purposes
all reasonable expenses incurred by the applicant in:
(a) maintaining the representatives;
(b) meeting the expenses incurred by the representatives in
soliciting business for the applicant;
up to a limit of:
…
(d) if the applicant is not a grantee in respect of any previous grant year - $200,000 for the grant year and the immediately preceding year1B
engaging as a consultant (either in or outside Australia) one or more persons who, in the opinion of the CEO of Austrade are not closely related to the applicant, to the extent to which the consultants undertake market research, or marketing activities, related to approved promotional purposes
all reasonable expenses incurred by the applicant up to a limit of:
…
(b) if the applicant is not a grantee in respect of any previous grant year-$50,000 for the grant year and the immediately preceding year2 any visit (marketing visit) made by the applicant or its agent to any place in or outside Australia to the extent to which the visit is made for an approved promotional purpose all expenses:
(a) incurred by the applicant in payments to persons that, in the opinion of the CEO of Austrade, were not closely related to the applicant; and
(b) that are allowable expenses under section 34.
All of the EMDG Act s 33 Table items limit the quality of a promotional activity as “eligible” to the extent they have been carried out for “approved promotional purposes”. A promotional activity described in the Table is for an “approved promotional purpose” only to the extent that, it has been carried out for the purpose of “creating, seeking or increasing demand or opportunity in a foreign country for” (amongst other things that are not relevant to Shoppr Network’s circumstances) “eligible services” the applicant (or a related “entity” – ie., an Australian resident individual or regulated corporation) intends to sell to non-Australian residents:- EMDG Act s 37(1)(d), (1A), (4) & (5). This limitation, which requires regard to both the relevant purpose and the extent to which it has motivated the activity, replaces the need, expressed in previous similar legislation, to determine whether the promotional purpose was the “principal” or “primary” reason for the activity and its associated expense:- see Re Parker Pen (Australia) Pty Ltd v Export Development Grants Board [1983] FCA 77, (1983) 67 FLR 234.
Marketing visit expenses referred to in Item 2 of the EMDG Act s 33 Table are “claimable” only to the extent they are “allowable expenses”. They satisfy that criterion to the extent they involve:-
(a) (in general) reasonable air travel expenses (limited to 65% of any first class air fares):- EMDG Act ss 33(3), 34(2) & (6)
(b) (subject to some qualifications) all other transport expenses for reasonably undertaken travel:- EMDG Act s 34(3) & (6)[9]
(c) in the case of marketing visits to a place outside Australia, general expenses (at a deemed daily rate of $300)[10] for each working day (up to 21 days) that was “primarily” devoted to furthering the “approved promotional purpose” for which the visit was made”:- EMDG Act s 34(4) & (6).
[9]EMDG Act s 34(3) was repealed by the Trade Legislation Amendment Act No 31 of 2016 (Cth) Schedule 1 Item 5.
[10]The rate increased to $350 for post July 2016 grant years: see the Trade Legislation Amendment Act No 31 of 2016 (Cth) Schedule 1 Item 6.
SHOPPR NETWORK’S EXPENSES CLAIM
Shoppr Network’s 30 November 2015 claim involved Items 1A, 1B and 2 in the EMDG Act s 33 Table:- see paragraph 9 above. The basis for the asserted eligibility of each of the expense categories claims was as follows:-
(a)Item 1A – overseas representative:- The total amount of a monthly consulting retainer paid, pursuant to a 1 July 2014 “Sales Agent Agreement”, to Three Global (an unrelated USA based entity) between February and June 2015. (Shoppr Network’s dealings with Three Global are outlined later in these reasons:- see paragraphs 40 to 43 below.)
(b)Item 1B – marketing consultant expenses:- The total amount of expenses paid to (i) Three Global for unspecified consulting services rendered from January to May 2015 and, (ii) Strategon Capital Pty Ltd, for five categories of analysis and advisory work it performed between January and June 2015.
(c)Item 2 – overseas marketing visits:- A proportion of the cost of airfares for four trips to China (in March, June and October 2014, and January 2015), and the total of general expenses deemed to have been incurred for the duration of each of the visits:- see paragraphs 9 and 11(c) above.
AUSTRADE’S SEPTEMBER 2016 DECISION
Austrade’s September 2016 view, that Shoppr Network did not have sufficient financial resources to meet the “grants entry requirements” (see paragraphs 2 & 5 above), was based on Shoppr Network’s significant net asset deficiency and lack of income in both the 2014 and 2015 grant years:- see paragraphs 28 and 29 below. At least implicitly, that view took into account the nature and focus of Shoppr Network’s intended business – as a “logistics services supplier”. That characterisation of Shoppr Network’s business derived substantially from the 1 July 2014 Sales Agency Agreement - one of the documents Shoppr Network submitted in support of its November 2015 application. That Agreement contained Shoppr Network’s self description as a supplier of logistics services targeted at the “eCommerce market” and “focussed on B2C orders from China to USA customers”.[11]
[11]The term “B2C” abbreviates the expression “business to consumer” and is intended to describe the activities involves in “online” or “eCommerce” transactions, where consumers purchase goods from, and convey delivery instructions to, suppliers by means of communications on the world wide web.
Austrade’s apparently alternative view was that even if Shoppr Network was an eligible applicant, only some of the expenses it had claimed were “eligible promotional activity” expenses. In adopting that position Austrade considered that
(a)based on the functions identified in a 1 July 2014 market report (see paragraph 40 below) Three Global’s monthly retainer, as Shoppr Network’s USA representative, encompassed activities relating to marketing, identification of transport providers and contracting with those suppliers. An approximately equal division between those three principal activities resulted in only one third of the total expense claim being attributable to promotional activities. That assessment was preferable to Shoppr Network’s various impressionistic assessments - that either 75% or 85% of the expenses related to promotion.[12]
(b)part of the amount Shoppr Network had claimed for market consulting expenses related to an amount paid to Three Global pursuant to an invoice for unspecified “consulting services”. As such the amount was indistinguishable from, and more properly characterised as, an “overseas representative” expense. So characterised, the expense was only eligible in relation to one third of the amount claimed.
(c)most of the amount Shoppr Network had claimed as market consulting expenses paid to Strategon Capital involved payment for work done in relation to the EMDG Act grant application, and other non-promotional activities. For that reason, only 15% of the amount claimed could be regarded as an eligible expense.
(d)the whole of the expenses Shoppr Network had claimed for marketing expenses relating to the four visits to China, appeared to relate to the acquisition of storage and carriage service suppliers in China, rather than to promotional activities. As such they could not be classified as an eligible expense.
[12]The 85% assessment was apparently advanced during Austrade’s “audit” discussion meetings in August 2016. The 75% assessment was proffered in Shoppr Network’s solicitor’s 13 October 2016 letter.
The various components of Shoppr Network’s claim, and the effect of Austrade’s September 2016 assessment of them, are summarised in the following Table.
Item Description 2014 2015 Total Claim Decision Claim Decision Claim Grant n"PE" n"PE" n"GER" 1A O'seas rep'ntve 0 130,726 -87,586 -43,140 130,726 0 1B M'kting consultant 0 47,330 -36,229 -11,101 47,330 0 2 M'kting visits 4,052 -4,052 12,997 -12,997 0 17,049 0 Totals - Claim, D'csn & Grant 4,052 -4,052 191,053 -136,812 -54,241 195,105 0 Notes:- n"PE" - expenses were not promotional expenses for the purposes of EMDG Act s 29(a) & (d) n"GER" - Shoppr Network did not meet the "grants entry requirements" - EMDG Act s 21
AUSTRADE’S 5 JULY 2017 RECONSIDERATION
In requesting a review of the September 2016 decision Shoppr Network informed Austrade about the 21 July 2015 sale of its business to BoxC Logistics Inc, at an inferred valuation of USD$3.08m:- see paragraph 47 below. Shoppr Network relied on that event to demonstrate the value of its business, and hence the likelihood of its financial capacity, for the purpose of satisfying the grants entry requirements.
Austrade responded to the belated revelation of the July 2015 sale with some concern. The concern was about whether Shoppr Network had ever really intended, or indeed had the capacity, to undertake actual sales of its “eligible product”. The concern was fuelled by the proximity of the July 2015 sale to the end of the 2015 grant year, and by (i) the absence of any reported sales income in either of the grant application years, (ii) the absence of any evidence of concluded product sales negotiations and, (iii) references to the business having been “in Beta mode” during the two grant application years.
Notwithstanding its concern about the potential significance of the 21 July 2015 sale to its previous adverse conclusion about the “grants entry requirements”, Austrade’s reconsideration decision primarily addressed the EMDG Act product eligibility issues. Most specifically, Austrade remarked on what it perceived to be a significant difference between the emphasis in the application on the “DistribIO platform” as the “eligible product” and the underlying reality that the focus of Shoppr Network’s business had not been on the sale or licensing of the DistribIO software, but on the actual transport and delivery of goods – principally from China to the USA. In contracting to supply and perform services in those two countries, Shoppr Network would be relying on non-Australian warehouse, packaging, transport and postal service businesses. Consequently, and notwithstanding what Shoppr Network asserted was the materiality of the DistribIO software in co-ordinating those various services, and simplifying the delivery obligations of an eCommerce merchant / product supplier, Austrade considered that the primary emphasis of Shoppr Network’s “product” was its transport and delivery of goods. That consideration influenced Austrade to conclude that Shoppr Network had not established its “product” had sufficient Australian input to ensure compliance with the “significant net benefit” requirement in EMDG Act s 25(4). Consequently, Shoppr Network’s service was not an “eligible product” and none of its expenses could be regarded as an “eligible” expense for the purposes of EMDG Act ss 29 & 33.
Austrade’s July 2017 decision also revisited its earlier (and necessarily, alternative) assessment of the eligibility of the expenses Shoppr Network had claimed. This revisitation was influenced by the absence of recorded income or sales in either of the grant years, by the apparent primary character of the expenses claimed (see especially paragraph 14(d) above), and by Shoppr Network’s reconsideration request submission - that its business was promoted by (or as a consequence of) the “partners” it contracted to perform the physical carriage and transport tasks. Austrade considered the totality of this information established that the claimed expenses all related to work involved in Shoppr Network establishing its service performance ability, rather than in marketing its services to eCommerce “merchants”. As such, the expenses involved in these activities were “one step removed” from being expenses that had been incurred for an “approved promotional purpose” as required by EMDG Act s 37(d)). Austrade regarded that conclusion as re-inforced by the consideration that Shoppr Network appeared not to have had any proven capacity to supply its contemplated service at any time during either of the 2014 or 2015 grant years.
In its reasons for the July 2017 reconsideration decision Austrade regarded the expense eligibility criteria in EMDG Act ss 33 & 37 as having been drafted to comply with the World Trade Organisation rules relating to trade promotion assistance. Austrade regarded those rules as limiting EMDG Act type expense compensation schemes to expenses directly related to product promotion, as distinct from development and establishment costs and business incentives. In expressing that view, Austrade recognised the “underlying principle … that only expenses relating to specific promotional activities genuinely incurred … for … marketing” could qualify as “eligible expenses”:- see EMDG Act s 28(2).
That background tends to explain Austrade’s use of the “one step removed” expression in its decision reasons. The expression derives from the content of the Administrative Guidelines Austrade has published as an explanatory guide to its interpretation and administration of the EMDG Act scheme. The expression appears in paragraph 5.10.3 of Guidelines, in the context of attempting to describe the nature of the distinction between, on the one hand, the essential character of an “eligible promotional activity” and, on the other, the extent to which the cost of the activity constitutes an “eligible expense” of promoting or soliciting business, and is thus for “an approved promotional purpose” for the purposes of the EMDG Act:- see EMDG Act ss 33 & 37 and paragraphs 9 & 10 above. The discussion in paragraph 5.10.3 of the Guidelines gives the following four illustrative examples of ineligible expenses:-
(a) product accreditation expenses
(b) expenses incurred for the purposes of facilitating product testing, accreditation or regulatory compliance
(c) establishing relationships or business structures with prospective suppliers
(d) expenses incurred to secure opportunities for advertising (for example a “sign on” fee with an agency or publisher).
Another aspect of Austrade’s July 2017 decision reasoning addressed Shoppr Network’s submission that use of the DistribIO platform would (at least after the July 2015 sale to Boxc) “hopefully result in taxable dividend streams and/or capital gains tax in the future”. Austrade noted that the relevant “approved promotional purpose” criteria required that expenses had to relate to the promotion of products that the grant applicant “intends to sell”:- see EMDG Act s 37(1)(d). Austrade considered that this carried two significant implications. The first was that in assessing “significant net benefit” for the purpose of determining a grant applicant’s “product” eligibility, regard was to be had to the benefits directly generated by the supply. The grant applicant’s prospective discharge of tax liabilities derived from the product supply was neither a necessary, nor a necessarily sufficient, determinant of net benefit. The second was that, in assessing the eligibility of expenses, they had to relate to supply or sale by the grant applicant, rather than to sales by another entity in which the applicant had an interest. Austrade considered there was insufficient evidence to conclude that Shoppr Network itself ever intended to sell its services.
AUSTRADE’S JULY 2018 AFFIRMATION
Austrade’s July 2018 affirmation reasons did not address the grants entry requirements. However the reasons did adhere to Austrade’s previous view that Shoppr Network’s proposed delivery service for eCommerce merchants in China and the USA lacked sufficient “Australian input” to satisfy the “product” eligibility criterion in EMDG Act s 25(4). Austrade also adhered to its previous view that the claimed expenses had been primarily incurred in connection with developing the resources required for Shoppr Network’s service delivery chain. As such, consistent with the illustrative examples given in the Administrative Guidelines, the expenses had not been incurred for “an approved promotional purpose” and could not be regarded as “eligible expenses” for the purposes of EMDG Act ss 33 & 37(1). Austrade supplemented the latter view by noting (i) the absence of sales in either of the 2014 and 2015 grant years, (ii) the uncertain actual availability of the postulated service in either year, and (iii) the uncertain likelihood (given its asserted intention to operate through a “parent-subsidiary or “principal-agent model”) that Shoppr Network had intended to itself provide the delivery service.
SHOPPR NETWORK’S CONTENTIONS
Shoppr Network’s review contentions were to the following effect:-
(a)The company was always likely to be financially supported by its sole director and the corporate trustee of his family trust. It thus satisfied the grants entry requirements.
(b)The software component of Shoppr Network’s DistribIO platform had been developed by the sole director’s Australian resident son. That consideration, plus the sole director’s own Australian resident status (perhaps the similar status of the family trust beneficiaries) and Shoppr Network’s own Australian resident status[13], sufficed to indicate sufficient Australian input and benefit to satisfy the product eligibility criterion in EMDG Act s 25(4).[14]
(c)The fact that the claimed expenses related to the potential acquisition of service delivery contractors in China and the USA did not remove them from the category of expenses incurred for “an approved promotional purpose”. This was because successful negotiation of the supplier agreements depended on being able to promote the economies and efficiencies of the service, and the consequential potential benefits to the suppliers, and successful promotion of the delivery service to merchants depended on being able to demonstrate the capacity to carry out the actual physical delivery task.
(d)There was no statutory requirement for an EMDG applicant to demonstrate either actual, potential or intended sales within the application grant year(s). Nor was there a statutory criterion that required an applicant to have its “product” actually available during the grant year.
[13]As an entity incorporated under the Corporations Act 2001 (Cth), Shoppr Network had relevant Australian resident status:- see EMDG Act ss 107 & 114.
[14]Shoppr Network also asserted that there was a relevant Australian input in the circumstance that it had apparently negotiated some of its agreements with USA suppliers (notably the USPS) from Australia.
SHOPPR NETWORK’S CORPORATE PROFILE
In dealing with the review contentions it is necessary to have regard to Shoppr Network’s corporate profile, its financial position, its intended business and the nature of its DistribIO “platform”.
Mr Michael Pakula is the driving force behind, and the sole director of, Shoppr Network. After several years of involvement with the operation of a substantial clothing business involving international suppliers and customers, he set out to develop an improved system for managing the shipping and delivery of goods. To that end, he incorporated Shoppr Network in October 2013, as a wholly owned subsidiary of Clue Holdings Pty Ltd. That company is the trustee of the MPAK Family Trust, and another corporate entity of which Mr Pakula is the managing director. The MPAK Family Trust beneficiaries are Mr Pakula and members of his family.
In late 2013 Mr Pakula engaged his son to develop the software code for Shoppr Network’s DistribIO platform. So far as appears, Mr Pakula, his son, and perhaps one other person (see paragraph 74 below) were Shoppr Network’s only personnel.
SHOPPR NETWORK’S FINANCIAL POSITION
Shoppr Network derived no income in either of the 2014 and 2015 financial years. The following Table sets out its trading statement at the end of each of those years.
Trading & profit and loss statement 2014 2015 Income 0 0 Expenses Accounting fees 506 Bank charges 9 Contractors and subcontractors 254,904 534,972 Filing fees 243 Marketing 22,730 Sundry 202 Telephone, mobile & fax 17 Travel 2,746 5,687 Total expenses 257,650 564,366 Loss - ordinary activities before tax -257,650 -564,366 Accumulated loss at year start 0 -257,650 Total available for appropriation -257,650 -822,016
Shoppr Network’s balance sheet for the 2014 and 2015 financial years reflected that absence of income, and revealed a significant net asset deficiency. The following Table details the balance sheet items and values.
Shoppr Network Pty Ltd 2014 2015 Current assets Receivables (Shoppr Network LLC) 2,746 Cash at bank (cheque account) 6,150 55 Total current assets 6,150 2,801 Current liabilities Loan - TJM Group 166,587 388,709 Loans - Massimo Pakula 99,000 231,000 Loans - M Pakula 224,343 Sub-total 265,587 844,052 Tax liabilities - (GST provision) -24,144 -44,337 Total current liabilities 241,443 799,715 Total liabilities 241,443 799,715 Net assets -235,293 -796,914 Equity Accumulated losses -257,650 -819,270 Shareholders capital 22,356 22,356 Total equity -235,294 -796,914 SHOPPR NETWORK’S INTENDED BUSINESS
Mr Pakula described Shoppr Network’s essential business purpose as that of simplifying “cross border shipping” to provide a convenient and efficient delivery process. The key element involved linking the computer systems of the enterprises involved in the process (ie., eCommerce merchants, storage and packing service providers, carriers and delivery service providers). That link was achieved by Shoppr Network’s DistribIO software. The software was “cloud-based” and its functionality was made available to Shoppr Network’s customers through “application programming interface” (API”) software Shoppr Network provided (without specific charge) to its customers. The API software effectively linked the Shoppr Network customer’s business software to those of the businesses actually providing the physical shipping and delivery services.
Mr Pakula’s evidence about the nature of Shoppr Network’s customers was not entirely easy to follow. His evidence appeared to include at least four kinds of businesses within the category of intended customers. They were (i) eCommerce vendors of goods, (ii) “third party logistics” entities (essentially warehouses that provided “fulfillment” services for (perhaps many) eCommerce vendors, (iii) parcel consolidators (businesses that attempted to aggregate the consignments of several vendors for the purpose of taking advantage bulk carriage discount rates) and (iv) businesses that operated both as “consolidators” and providers of fulfillment services.
At the level of a Shoppr Network customer who was an eCommerce merchant, the merchant’s customer would use the merchant’s eCommerce site to purchase goods, select a carriage and delivery option, and provide a delivery address. Within the API and DistribIO software the interface links integrated with the merchant’s website to ensure that the consumer’s carriage choice and delivery details were automatically passed on to Shoppr Network’s transportation and delivery service suppliers. The merchant could print out requisite labelling and shipping documentation, and arrange for the goods to be delivered to Shoppr Network’s “hub” (in essence Shoppr Network’s contracted carriage service provider). In this situation the delivery cost presented on the eCommerce merchant’s web site to the purchaser could well differ from the amount charged by Shoppr Network to the merchant. The cost the merchant presented to the consumer was a matter determined solely by the merchant. The cost might be fixed, variable with the purchase value, or even waived. On the other hand, the cost of the delivery to the merchant was a matter that depended on either Shoppr Network’s “card rates” or any specific agreement between the company and the merchant.
At another level, other Shoppr Network customers (perhaps most typically the “fulfillment” warehouses provided physical storage and packaging services for eCommerce merchants) could directly access Shoppr Network’s own website. By entering appropriate information about their required shipments and deliveries, they could obtain similarly automated information, and contract for shipping and delivery services. Again, their costs would depend on either “card rates” or a specific rate agreement with Shoppr Network.
Shoppr Network’s economic objective was to generate income from contracts for carriage and delivery services, and profit from the margin between what it charged its customers, and the cost of the discounted bulk rates it hoped to be able to negotiate with the carriage and delivery service suppliers it engaged. Shoppr Network’s success in realising that economic objective necessarily depended on both its ability to attract customers (most specifically “fulfillment” and “consolidator” businesses) and its ability to negotiate more advantageous terms (than its individual customers could) with its carriage and delivery subcontractors. According to Mr Pakula, part of the difficulty Shoppr Network faced in establishing its business was that, as a neophyte enterprise, Shoppr Network had to “compete for merchant accounts against hegemonic US brands with whom US merchants and merchants across the globe have deep brand familiarity and existing business relationships”. Another difficulty is that Shoppr Network’s customer focus was on entities whose individual delivery volumes were unlikely to be significant enough to qualify for the kinds of bulk discounts the large operators granted.
Consistent with its basic purpose, strategy and limited resources, Shoppr Network’s descriptions of its business between early 2014 and May 2017 variously included its characterisation as “a logistics services supplier” and an “intermediary” whose services were limited to the initial collection of goods and their delivery to other carriers. It also asserted that it provided (perhaps more accurately, that it intended to provide) complementary services including (i) warehouse storage, with packing and despatch facilities (though typically only for Western merchants seeking such facilities in China), and (ii) facilities for merchants’ foreign customers to return goods to a location within their own country or local jurisdiction. Indeed Mr Pakula asserted that one of the advantages of the Shoppr Network service was that goods were delivered to the purchaser with an appearance of having been delivered from a local address, and with a local address for returns.
It is obvious from Shoppr Network’s various descriptions of its services that it intended to contract to provide carriage and delivery services. In so doing it intended to promote its service as qualitatively different from other services. It never intended to operate merely by licensing its DistribIO software to other users. The principal contractor for its shipping services would be either itself, subsidiary companies or third party “agents”[15]. The choice would depend on the legal and practical realities in the jurisdiction of the merchant and carriage businesses it sought to attract.
[15]In this context the term “agent” is used in its “business” rather than its strict legal sense:- see International Harvester Co v Carrigan’s Hazeldene Pastoral Co (1958) 100 CLR 644 at 652 per Dixon CJ; Scott v Davis (2000) 204 CLR 333 at [227] per Gummow J.
STAGES IN THE DEVELOPMENT OF THE SHOPPR NETWORK BUSINESS
The material events in Shoppr Network’s pursuit of its business objective are outlined in the following paragraphs.
January to March 2014:- In January 2014 Shoppr Network incorporated a wholly owned Missouri entity named Shoppr Network LLC. This company was to be the operating entity for the business in the USA. This was because Mr Pakula thought potential US customers would prefer to deal with a locally incorporated entity. By March 2014 the first version of the DistribIO software became available. Shoppr Network began to promote itself as a certified wholesaler of the United States Postal Service “Global Direct Entry” service for the shipment and delivery of goods from China to the USA. (This was a consequence of an October 2013 agreement between Shoppr Network and the USPS.) As a result of the availability of the DistribIO software, the wholesale agreements, and a small number of delivery service contracts Shoppr Network had arranged with other suppliers (principally in the USA), Mr Pakula claims the shipping business was then ready to be promoted in an “initial roll out” to a small number of merchants.
March to June 2014:- During this period Shoppr Network sought to engage suppliers (and indirectly, customers) in China to use the Shoppr Network service. (This period covers the first and second of the four trips whose expenses Shoppr Network sought partly to recoup as overseas marketing visits.) Mr Pakula’s contemporaneous email communications record his characterisation of Shoppr Network’s business as having been “designed in partnership with USPS”, specifically targeted at goods to be delivered direct to USA customers (rather than goods to be delivered to US warehouses) and currently confined to “reseller” storage and freight companies (rather than seeking to attract on line eCommerce merchants). Other email communications evidence Shoppr Network’s activities in attempting to secure warehouse facilities, transport services and customers in China. In relation to those activities, Mr Pakula sought to emphasise that the two kinds of activities were not mutually exclusive. This was because the “resellers” / transport providers were (i) capable of providing Shoppr Network with the collection and transport facilities it required, and (ii) “incentivised” by Shoppr Network to refer their existing merchant customers to Shoppr Network.[16]
[16] Shoppr Network used the expression “incentivised” to convey the idea that “resellers” would realise the advantages of the Shoppr Network service (including competitive cost and timeliness) and that realisation would likely lead them to regard it as a “compelling” product they were likely to recommend to their own customers.
June 2014 – Strategon Capital’s Cross Border E-commerce Market Report:- Shoppr Network’s attempts to solicit Chinese customers in the first part of the 2014 calendar year did not bear fruit. In June 2014 Strategon Capital Pty Ltd, a Sydney based management consultancy business, provided Shoppr Network with a “market entry report” containing both observations about the company, and specific recommendations about developing the business. The report observed that Shoppr Network lacked the skills and experience necessary to develop its business. The report’s principal recommendations were that Shoppr Network should (i) focus on delivery from China to USA customers, (ii) develop a formal sales agency network to cover the USA market, (iii) obtain access to a third party warehouse to manage return of goods to China based merchants, (iv) build a small customer base to test both its DistribIO platform and its physical systems before seeking to enlarge its sales agency network and, (v) retain Three Global to implement the recommended market development strategy. The Report concluded that if Shoppr Network was going to be ready to generate sales within the next 12 months, it needed to redefine its approach and establish a “go to” sales and marketing strategy.
1 July 2014 – Sales Agency Agreement with Three Global:- Shoppr Network accepted at least the last of the market report recommendations and entered into a sales agency agreement with Three Global. The agreement described Shoppr Network as a “logistics services supplier” whose services were “targeted to the eCommerce market” and involved (i) domestic USA parcel shipments, (ii) storage, packing and shipment, and (iii) “end to end” distribution focussed on product delivery from China to the USA. Under the agreement Three Global’s obligations commenced (a) “on signing” in relation to unspecified “other marketing services” and, (b) on 1 January 2015, in relation to its stated responsibilities. The latter were to (a) promote Shoppr Network’s products and services in the USA market, (b) provide Shoppr Network with a monthly business report (summarising sales, feedback and product performance), “back market intelligence” (regarding competing suppliers and products) and quarterly sales forecasts. Mr Pakula’s evidence was that Three Global’s role was to “work with USPS leads and work with USPS to develop more leads”.
1 July 2014 – “project management” agreement:- Shoppr Network formally appointed Mr Pakula’s son as ‘project manager” with responsibility for “third party contractor identification and management”, with a monthly payment entitlement of $10,000. Mr Pakula said in his written statement that this agreement really just formalised the terms under which his son provided information technology services to the company. He did not, however, indicate the nature, extent or purpose of those services.
December 2014 - Three Global’s report to Shopper Network:- The report described the company as being at an early stage, critically dependent on the quality and performance of the storage and transport suppliers it engaged, and needing to “bring in beta customers” to trial both its IT and physical delivery performance. Three Global recommended that Shoppr Network should focus on its “China to USA” deliveries, its relationship with, and referrals from, the US Postal Service (as its critical sales activity), and the development of its DistribIO platform with a view to progressing to a “full product launch as soon as practically possible”. Three Global further recommended that, in order to “open the sales channel” in China, Shoppr Network should visit China to establish relationships with “parcel consolidators or companies that are looking to become parcel consolidators”. Three Global’s report emphasised that a key requirement of any entity with which Shoppr Network sought to establish a relationship in China was that it either had, or intended to develop, an existing sales force capable of promoting Shoppr Network’s services.
Mr Pakula insisted that Shoppr Network had a viable business platform, and a “small number” of customers, from about March 2014 onwards. However, recognising both the difficulties the business faced, the limited extent of its physical collection and transport facilities in China, and the reality that it generated no income in either the 2014 or 2015 financial years, Mr Pakula characterised Shoppr Network as operating in “beta mode” and offering a “fledgling” service. In using this description, he asserted it indicated only the limited extent of Shoppr Network’s then available physical collection and delivery services. He claimed that Shoppr Network had in fact secured a small number of USA based merchants who had business contacts in China. It is notable however that Mr Pakula also acknowledged that these few customers had been obtained by referrals from USPS and had not been the result of Shoppr Network’s own advertising or marketing. It is also notable that Mr Pakula’s evidence was imprecise about the actual time when those few customers had been secured. Shoppr Network’s financial statements suggest that it could not have been prior to 30 June 2015. The statements also suggest, and I find, that Mr Pakula’s apparent assertions pointing to earlier income generation were more attributable to distorted enthusiasm than demonstrable objective accuracy.
July 2014 to January 2015:- This period overlaps with Three Global’s December 2014 Report and covers the third and fourth of the four trips whose expenses Shoppr Network sought partly to recoup as overseas marketing visits. Again Mr Pakula characterised those trips as serving the combined purpose of both locating and approving suitable service providers in China, and training their sales force to market Shoppr Network to their eCommerce merchant customers. At the end of this period, in January 2015, Mr Pakula moved with his family to the USA, because he “saw that’s where the future of this business was”.
1 to 21 July 2015:- In this three week period Shoppr Network LLC (the Missouri corporate entity) assertedly generated sales of $200,000.
21 July 2015:- Shoppr Network sold its business to a USA corporate entity, BoxC Logistics Incorporated. The precise parties to, and the content of, this agreement were never made clear. At one stage in his evidence Mr Pakula said that “everything moved over”, but he also said that Shoppr Network had retained its ownership of the Missouri entity Shoppr Network LLC. Those two statements partly conflict, and raise a question as to what assets were actually sold. The little information provided about the transaction was that involved (a) a notional USD3.08m valuation (of the transferred assets), (b) allocation of percentage shareholdings in BoxC Logistics to Clue Holdings Pty Ltd (32%), Mr Pakula (5%), Mr Pakula’s son (5%) and Three Global (an undisclosed %). If those asserted share allocations accurately reflected the substance of the material terms of the transaction, the 21 July 2015 sale must have contained specific, detailed and somewhat unusual provisions. That is partly because it is not clear what consideration Shoppr Network itself received in the transaction. It is also partly because it is also not clear what consideration each of the new BoxC shareholders provided for their respective share allocations. Without clarity about the detailed terms of the sales agreement it is not possible to reach any properly informed view about the nature of any asset or right that Shoppr Network actually transferred to BoxC. Nor is it possible to reach any informed view about the true market value of what was then Shoppr Network’s nascent, problematic (see paragraph 34 above) and non-income generating business.
THE GRANTS ENTRY REQUIREMENTS
Shoppr Network’s financial statements for the 2014 and 2015 financial years reveal both the company’s lack of income and significant asset deficiency. As such, and especially when regard is had to the problematic nature of the company’s “fledgling” business as an “intermediary” confronting “hegemonic” existing enterprises, they hardly conduce to confident satisfaction that Shoppr Network met the principal grants entry requirement of having sufficient financial resources to carry on its intended activities:- see paragraph 5 above.
In August 2016, prior to Austrade’s initial decision, Shoppr Network had attempted to address Austrade’s likely concern about the adequacy of its financial resources – by providing a 1 July 2015 letter of comfort from Clue Holdings Pty Ltd. The letter, signed by Mr Pakula and addressed to Shoppr Network’s accountant recorded (i) a “present intention” to maintain the shareholding in Shoppr Network, (ii) an asserted policy of providing Shoppr Network “with such support and assistance as may be required to ensure that it maintains capital and liquidity levels to enable it at all times to meet its obligations in conformity with standards of prudence generally accepted for its field of business”.
This declaration, with its assertion that Clue Holdings would provide support to “ensure it maintains” prudent “capital and liquidity levels”, was formulaic and literally inaccurate. The facts, plainly revealed by Shoppr Network’s balance sheet is that, far from maintaining a prudent level of capital, the company had at all times significant deficiencies of both current and net assets. Far from having a prudent level of liquidity, Shoppr Network had no current liquid assets of any significance.
The Shoppr Network balance sheet also reveals that it had in fact received no significant support from Clue Holdings. The total of its shareholder’s capital was only about $22,000 and Clue Holdings had not even provided any loan funds to Shoppr Network. It is unsurprising therefore that, in its initial decision, Austrade concluded that there was no sufficient basis to conclude that Clue Holdings had the means to support Shoppr Network and that the company did not satisfy the grants entry requirements.
In early September 2016 Austrade had urged Shoppr Network to provide it with Clue Holdings financial statements, and had offered the encouragement that if Clue Holdings was profitable and had positive net equity, its ability to fund Shoppr Network’s activities could be assumed. Notwithstanding that encouragement Mr Pakula refused Austrade’s request. Instead, he provided a single page document said to evidence the contents of the 2014 and 2015 balance sheets for the MPAK Family Trust.
The material contents of that document are presented in the following Table.
MPAK Family Trust 2014 2015 Trust Funds 2 2 Assets (current only) Cash on hand 2 2 Loans at call TJM Group Pty Ltd 1,135,999 1,135,999 Shares in other companies TJM Group Pty Ltd - 2 shares 2 2 TJM Group Pty Ltd - 4.73m red pref shares 499,998 499,998 Can Can Lingerie Holding AG 8.125m shares 88,701 88,701 Total Assets 1,724,702 1,724,702 Liabilities (current only) Loans - unsecured Michael Pakula 1,591,940 1,591,940 Gabrielle Pakula 91,020 91,020 Stephaines Pakula 39,407 39,407 Hugo Pakula 2,333 2,333 Total liabilities 1,724,700 1,724,700 Net assets 2 2
A number of features of the proffered balance sheet information point to their limited utility in conducing to satisfaction that Clue Holdings had sufficient means to support Shoppr Network. Those features include (i) the likely problematic classification of the listed shareholdings as “current” assets, (ii) the likelihood that the share values reflected historical cost, rather than current realisable value, (iii) the absence of any reference to the trust assets including either shares in, or loans to, Shoppr Network, and (iv) the categorisation of the entire $1.724m debt as a current liability of the trust. Without positive evidence of the contemporary values of the Trust’s various shareholdings it is not possible to be satisfied that even the trivial net asset position revealed in the balance sheets reflected the economic reality of the Trust’s financial position and capacity. Neither is it possible to be satisfied that either Clue Holdings or the Trust even traded, let alone traded profitably, during the 2014 and 2015 financial years. On the contrary, the apparently static values of both its assets and liabilities (in total and in relation to individual items) tend to convey the impression that the two entities were essentially dormant during those years.
The balance sheets reveal that the MPAK Trust’s principal asset was the $1.136m loan to TJM Group Pty Ltd. That company was, in turn a significant creditor of Shoppr Network as at June 2014, and had more than doubled its loan to the company in the 2015 financial year. In fact, it is readily apparent from Shoppr Network’s balance sheets that (i) TJM had been the principal source of Shoppr Network’s funding in 2014, (ii) TJM provided less than 50% of the additional funding Shoppr Network had required in 2015 and, (iii) Shoppr Network’s activities in 2015 had mainly depended on the personal funding provided by Mr Pakula and his son:- see paragraph 29 above.
Mr Pakula asserted in his evidence that TJM Group Pty Ltd had a current loan it could call in to repay Clue Holdings, and that Clue Holdings would thus be in a position where it could have supported Shoppr Network should it have been necessary to do so. I am prepared to accept this assertion as reflecting Mr Pakula’s current belief about the situation during the 2014 and 2015 financial years. But in the absence of clear and specific evidence about the details of TJM Group Pty Ltd’s financial position at the time, I am not prepared to accept Mr Pakula’s assertion as reflecting the reality of the situation. The plain fact, made obvious by the financial statements that were provided, is that Clue Holdings and the MPAK Trust, were never clearly shown to be supporters of Shoppr Network to the extent of providing it with funds.
Of course the equally plain facts are that (i) Shoppr Network did survive throughout the 2014 and 2015 financial years and, (ii) it was supported during the 2015 financial year by Mr Pakula and (perhaps) his son. That support demonstrates their personal individual commitment to Shoppr Network’s business, and something of their own financial capacity. But that evidence does not lead to positive satisfaction that Shoppr Network had the financial resources to carry out its intended activities.
In order to arrive at positive satisfaction of that kind it would be necessary to reach conclusions about at least four matters:- (i) the nature and extent of Shoppr Network’s intended activities, (ii) the range of financial risk and cost likely to be associated with those activities, (iii) the financial means of the entities available to support Shoppr Network and, (iv) whether the likelihood of those entities being willing to support Shoppr Network was sufficiently great to justify them being characterised as financial resources relevantly available to Shoppr Network.
In relation to the first of those matters, Shoppr Network’s solicitor complained (in October 2016) that Austrade could not properly have reached its original conclusion that Shoppr Network did not meet the grants entry requirements because it had not made any meaningful finding about Shoppr Network’s intended activities. This is a complaint without substance. The whole of the information Shoppr Network had presented to Austrade, and in the present proceedings, was to the effect that Shoppr Network intended to operate as an intermediary in the logistics and delivery business relating to eCommerce:- see paragraph 35 above. The intended activity involved establishing both its ability to provide the necessary physical services and a profitable customer base.
That intended activity was not without risk. There were at least two kinds of significant risk. The first was that Shoppr Network had to survive whilst seeking to establish its physical delivery infrastructure. The second significant risk that Shoppr Network faced was that its profitability depended on the “margin” it was able to negotiate, and take advantage of, between its delivery service suppliers and its own customer pricing. In relation to the former risk, as Mr Pakula had himself characterised the position, Shoppr Network’s competitive environment was one dominated by “hegemonic US brands”:- see paragraph 34 above. The challenge it faced was thus very significant, and one that Shoppr Network made no demonstrably significant progress in addressing during the 2014 and 2015 years. Despite Mr Pakula’s assertion that Shoppr Network was ready to operate from about March 2014 onwards, there is no clear evidence that it had established any significant delivery services (other than its wholesale agreement with USPS) at any time prior to July 2015. In the meantime, Shoppr Network had accumulated a substantial net asset deficiency, without generating any income. Moreover its expenses had more than doubled, and increased by about $300,000.
In relation to its margin risk, there was a potential distinction between the discounted bulk rates that Shoppr Network was able to negotiate with its suppliers, and its actual ability to generate sufficient business to take advantage of those bulk rates. Mr Pakula explained in his evidence that Shoppr Network’s supplier rates were typically contingent on its ability to meet volume threshold requirements. He acknowledged that Shoppr Network’s costs would likely increase if it failed to meet those threshold requirements. He explicitly conceded that the company’s business model was sensitive to the need to meet those requirements, and that Shoppr Network could lose “a lot of money very quickly” if it failed to meet relevant volume requirement thresholds.
Given the nature of the challenge that Shoppr Network faced, and the apparently slow progress it had made up to the end of June 2015, the state of affairs evidenced by the 2014 and 2015 balance sheets seems likely to have continued, and been at risk of worsening, for a substantial part of the 2016 financial year. Against that apparent likelihood, it is quite unclear what continuing financial support would have been forthcoming – whether from Clue Holdings, TJM or Mr Pakula personally.
It was urged on Shoppr Network’s behalf that its available financial resources should be regarded as including the value of its business, and its capacity to realise part of that value as a means of funding its ongoing activities. That submission pointed to the July 2015 business sale to BoxC Logistics, and the value that transaction was said to reflect. The difficulty with the submission is presented by both the paucity of the evidence about the details of the BoxC Logistics transaction and the apparently unusual circumstance that no identifiable consideration was said to have been paid to Shoppr Network. Given that paucity of evidence, the poor state of Shoppr Network’s balance sheet and trading account up to June 2015, its uncertain future prospects, and the absence of any evidence that, prior to July 2015 Shoppr Network had contemplated any sale of part of its intended business, I am unpersuaded that its nascent business represented a realisable asset that could have contributed meaningful funding sufficient to permit it to continue its intended intermediary activities.
The reality suggested by scrutiny of the Shoppr Network and MPAK Trust balance sheets is that by some time during the 2015 financial year Shoppr Network’s ability to fund its intended activities depended substantially on the personal support of Mr Pakula. As one of the principal beneficiaries of the Trust, and the driving force behind the Shoppr Network business model, there was reason to anticipate that he had a motive to provide additional funding. But he was under no obligation to provide any funding, and the motive, assuming he acted rationally, was only to the extent of an anticipated economic return, and the absence of any countervailing opportunity cost to his other interests. Furthermore, the position Shoppr Network presented to Austrade, and substantially repeated in the present proceedings, was that the relevant source of financial support for Shoppr Network was Clue Holdings, rather than Mr Pakula personally.
Relying on the historical fact of Mr Pakula’s significant unsecured loan to Shoppr Network, and his asserted motivation to ensure it carried out its intended activities, Shoppr Network contended that the “financial resources” criterion in the grants entry requirements should be regarded as presenting a comparatively “low threshold”. I have taken this to mean that the adequacy of available “financial resources” should not be overcritically analysed so as to require available capital, and the disregard of loan funds. I also take it to encourage regard to the practical likelihood of funding being both available and provided, rather than to the existence of a funding obligation or entitlement. Both of those propositions should be accepted, but there remain to be answered two impressionistic questions. The first is whether or not the potentially available funding should really be regarded as an available resource of the grant applicant. The second is whether or not the amount of the potentially available funding conduces to satisfaction of its adequacy to fund the intended activities. I consider that, in Shoppr Network’s circumstances both of those questions should be answered in the negative. In relation to the first question, the balance sheet information to which I have earlier referred demonstrates that by 30 June 2015 Mr Pakula had lent over $1.8m to the MPAK Trust and Shoppr Network. Of the approximately $1.135m the MPAK Trust had (perhaps) on lent to TJM Group Pty Ltd as at 30 June 2014, only $0.166m (at most) had been further advanced to Shoppr Network. During the 2015 financial year Mr Pakula first appeared as a Shoppr Network loan creditor, but it is unclear whether or not this reflects an actual cash contribution, or merely the accrual of a liability for “personnel expenses” recorded in the company’s trading statement and balance sheet. The totality of these various considerations suggest that Mr Pakula had typically not personally been a significant source of funds for Shoppr Network’s operations. They also raise a doubt as to whether TJM Group retained any future capacity to fund Shoppr Network, and do not conduce to positive satisfaction in that regard. In the totality of the presently known circumstances, despite the motivation that Mr Pakula, and the entities associated with him, may have had to provide financial support to Shoppr Network, I am not satisfied that their asserted motivation, but uncertain means, provides a proper basis for a positive finding that Shoppr Network had available financial resources to fund its activities.
In relation to the second question, the adequacy of the potentially available financial resources, the absence of both any sales prior to 30 June 2015, and evidence of the extent to which Shoppr Network had by then succeeded in establishing a significant physical delivery capacity, as well as the acknowledged “beta” stage of the business, suggests it is reasonably appropriate to proceed on the basis that Shoppr Network would have faced continued funding requirements of about the same order as those it incurred during the 2015 financial year. They included (i) $120,000 pa payable to Mr Pakula’s son for his “project” and “contractor” management services, (ii) USD$120,000 per annum payable to Three Global for its USA representation, (iii) ongoing marketing and travel expenses of at least the order reflected in the 2015 trading statement. To those funding requirements would have to be added a prudent provision of a contingency amount to address the risk Shoppr Network faced in relation to its “margin”, and its ability to satisfy the volume threshold requirements on which its “margin” rate depended:- see paragraph 61 above.
The reality, reflected by the preceding considerations, is that by June 2015 Shoppr Network faced significant challenges in undertaking its intended activities, and considerable uncertainty about the funding it would require. The corresponding, somewhat surprising, reality is that at no stage has Shoppr Network produced any budget, forecast or modelling to reflect its own assessment of its likely business performance – either as to revenue, expenses or profitability.
It is in that context that the July 2015 sale to BoxC Logistics tends to re-inforce my lack of satisfaction that Shoppr Network satisfied this aspect of the grants entry requirements. It does so because the sale stands in contrast to Shoppr Networks previously asserted desire to establish itself purely as an intermediary. That desire was expressed without any suggestion of sale of either its DistribIO software or its business – even as to a partial sale. Indeed, in the review proceedings Shoppr Network resisted Austrade’s argument that such a disposal had been intended. Shoppr Network asserted that the sale had been uninvited and in no sense dictated by the company’s need for funds to develop its contemplated business activities. But that assertion involves a wishful re-interpretation of the likely contemporaneous reality underlying the change of circumstances reflected in the BoxC Logistics sale. Mr Pakula may have been hopeful of being able to continue to support Shoppr Network, but the company’s unimpressive balance sheet, the absence of income and the difficult challenges it faced, all combine to incline me to the view that the sale to BoxC Logistics confirms the appropriateness of an absence of satisfaction that Shoppr Network had sufficient financial resources to carry on its intended activities. That absence of satisfaction carries with it the consequence that Shoppr Network did not meet that aspect of the grants entry requirements and was not an eligible EMDG Act grant applicant.
Another aspect of the grants entry requirements is that a grant applicant has taken “reasonable steps to prepare for export” and, perhaps specifically, by having carried out appropriate “export product development”. This aspect of the requirements is open to flexibly varying assessments about what constitutes “reasonable steps” in the particular circumstances. In relation to its acknowledgement of the potential relevance of “product development” it is perhaps intended to convey the idea that the applicant’s business, in relation to the “product” concerned, must have progressed to the stage where its asserted “export” activities have an appreciable practical substance and degree of probability. That concept, when applied to a “non-tourism service” whose performance depends on third party suppliers who (at least in the case of Shoppr Network’s required suppliers in China) had neither been identified, nor engaged nor their performance assessed, tends to overlap with the eligibility criteria for the “product” itself, and is best considered in that context.
ELIGIBLE PRODUCT
Notwithstanding my finding that Shoppr Network did not satisfy the grants entry requirements, it is prudent go on to address Shoppr Network’s application on the alternative basis – that its entitlement primarily depended on its carriage and delivery services being an “eligible product” for EMDG Act purposes.
I summarised earlier the relevant “eligible product” criteria in EMDG Act s 25:- see paragraph 6 above. Literally construed, EMDG Act s 25 could be seen to result in a service of the kind offered by Shoppr Network being categorised as an “eligible product” unless the Austrade CEO had made a formal written determination (under EMDG Act s 25(4)) that “the Australian input in the service is not sufficient to ensure that Australia will derive a significant net benefit from supply of the service”.
It is certainly open to Austrade’s CEO to make such an explicit determination in response to a grant application. Indeed a determination of that kind is expressly characterised as a “reviewable decision” for the purposes of the EMDG Act:- see EMDG Act s 97(1)(b). It is also clear that Austrade’s July 2017 review decision proceeded on the basis of dissatisfaction that the “Australian input” and “significant net benefit” criteria had been satisfied. What is less clear is the proposition that Austrade’s CEO in fact made a formal determination in the terms apparently required by EMDG Act s 25(4). The available records of the decision simply refer in general terms to Shoppr Network’s failure to satisfy the EMDG Act s 25 eligibility requirements.
However, the absence of an express formal determination by Austrade, in the terms apparently required by EMDG Act s 25(4) neither dictates that Shoppr Network’s services must be regarded as an “eligible product” nor precludes the Tribunal from making such a determination in the course of reviewing Austrade’s grant determination decision. The starting point in that construction of the EMDG Act provisions is that the Austrade CEO has a statutory obligation to consider each application and determine whether or not the applicant is entitled to a grant:- see EMDG Act s 80(1)(a) & (b). Consideration of entitlement to a grant necessarily requires the Austrade CEO to consider the applicable product eligibility criteria and, in particular, the criteria of Australian input and significant net benefit. In any event, for the purpose of exercising the review jurisdiction conferred by EMDG Act s 99 the Tribunal may itself exercise any of Austrade’s decision making powers:- see AAT Act s 43(1). Those powers necessarily include the power to make any decision that Austrade could have made “relating to an application for a grant” and that includes the power to make a determination about Australian input of the kind contemplated by EMDG Act s 25(4).
Shoppr Network asserted that the relevant Australian input to its services was the development of the DistribIO software, and its significance in Shoppr Network’s ability to promote and conduct its business. Shoppr Network next contended that “under Shoppr’s business model” the relevant “Australian benefit” was reflected in the fact that all its management research and IT staff would be based in Sydney, and the likelihood that, as an Australian regulated company (whose sole shareholder was also an Australian regulated company) with a sole Australian director and an Australian citizen project manager, all its profits would flow back to Australia. This reference to Shoppr Network’s management and staff conveys the impression of a substantial cohort being involved in the conduct of the business. There was no specific evidence to substantiate that proposition. On the contrary, by the time of the July 2015 sale of the business to BoxC Logistics Mr Pakula and his family had moved to America and he and his son (whose then place of residence was not clear) were the only two Australians identified as having any current role with the business.[17]
[17]A single paragraph in the 1 July 2014 Sales Agency Agreement asserted that Shoppr Network’s “key staff” (additional to Mr Pakula) included a “general manager”. But no other evidence explained the nature and extent of that person’s role, or indeed of any other personnel.
Apart from the content of EMDG Act ss 25, 25A, 26 and 27 the concept of “significant net benefit” is most specifically addressed in EMDG Act ss 9, 10, 24 and 101. The former two sections deal with applicants whose eligibility had been favourably determined in relation to at least two previous grant years. In such cases, the Austrade CEO must decide whether the applicant meets “the Australian net benefit requirements” in relation to the grant application year. Those requirements are permissively determined by the relevant Minister:- see EMDG Act s 10.
For the purposes of applications relating to the 2014 and 2015 grant years the relevant requirements were set out in the Export Market Development Grants (Australian Net Benefit Requirements) Amendment Determination 2010 (No. 1) (Cth). That instrument can be summarised as involving the following cumulative requirements:-
(a) evidence of the derivation (or reasonable expectation “in the foreseeable future”) of a commercial return,
(b) that commercial return being commensurate with the expenses incurred, and sufficient to warrant the expenditure of further public funds,
(c) assessment that the business has reasonable prospects of achieving sustainable international business success in the foreseeable future, and
(d) satisfaction that the applicant’s international business is likely, in the foreseeable future, to generate economic benefits to Australia in relation to at least two of the following:- (i) employment, (ii) capital investment, (iii) new value added operations and (iv) the introduction of new technologies.
The Australian manufacture of goods is a sufficient, but not a necessary, condition of their eligibility for EMDG Act purposes. Goods that have not been made in Australia will be “eligible goods” where the Austrade CEO is satisfied that Australia will derive “a significant net benefit” from their foreign sale:- see EMDG Act s 24(b). In arriving at any such satisfaction the Austrade CEO must act in accordance with mandated Ministerial guidelines:- see EMDG Act s 101(1)(baa). The Guidelines relevant to the 2014 and 2015 grant years were the Export Market Development Grants (Significant Net Benefit) Guidelines 2006 (Cth), as amended by the Export Market Development Grants (Significant Net Benefit) Amendment Guidelines 2010 (No. 1) (Cth). Those guidelines mandated regard to
(a) the Australian location of the (non-manufacturing) assets and activities involved in making the goods saleable, and the significance of those activities
(b) the extent of any activities in Australia that added value to the goods
(c) the extent to which the sale of the goods was reasonably likely, in the foreseeable future, to generate economic benefits (including employment) that were substantial relative to the amount of the grant claimed.
The “significant net benefit” criterion used in EMDG Act s 24(b) is repeated in the EMDG Act provisions dealing with “services” and “events”:- see EMDG Act ss 25 & 25A. But those provisions do not expressly require regard to either the Ministerial “net benefit requirements” or the “net benefit guidelines”. Instead the eligibility of the service or event requires regard to “all the facts available” and an absence of satisfaction that the Australian input is “sufficient to ensure that” Australia will derive a “significant net benefit from the service or the event.
The absence of reference in EMDG Act ss 25 & 25A to either the “net benefit requirements” or the “significant net benefit guidelines” is somewhat surprising. The explanation for its absence is likely to lie in the history of the various provisions. Prior to its repeal in 2006 (by the Export Market Development Grants Legislation Amendment Act 2006 (Cth)) EMDG Act s 10 had dealt prescriptively with the calculation of expert earnings, and they were potentially relevant to the calculation of the grant amount. The “export earnings” for services were the amount the applicant received, less so much of the consideration as was “in Austrade’s opinion, paid, or payable, outside Australia in relation to that service”. In addition, prior to the 2006 amendments the “net benefit” criterion was identically expressed in all three of EMDG Act ss 24, 25 & 25A. In each instance eligibility ultimately depended on the state of Austrade’s satisfaction about whether the Australian input being “sufficient to ensure that Australia will derive a significant net benefit from their export”. But until 2006 the goods eligibility criterion in EMDG Act s 24 also contained a threshold requirement that goods made outside Australia had to meet a “75% Australian content rule”. The 2006 amendments simplified both aspects of the EMDG Act s 24 “eligible goods” criteria by (i) removing the express references to proportions of Australian content, and (ii) substituting a discretionary consideration of “net benefit”, informed by the “net benefit guidelines” thereafter authorised by the simultaneous insertion of EMDG Act s 101(baa).
When regard is had to this legislative history it can readily be seen that, prior to the 2006 amendments, EMDG Act ss 24, 25 & 25A used essentially the same criterion of “Australian input” and required it to be sufficient to “ensure” Australia would derive a “significant net benefit”. After the 2006 amendments, although EMDG Act s 24 no longer contained either express reference to Australian input or to the concept of an ensured outcome, it did require positive satisfaction that a significant net benefit “will” be derived.[18] Furthermore, the considerations mandated by the “significant net benefit” guidelines very plainly required particular consideration of the “Australian input” to the manufacture and sales value of the goods.
[18]I note that in Oppidan Pty Ltd v Australian Trade Commission [2002] AATA 582 at [92] the Tribunal expressed the view that “will” (in what was then EMDG Act s 24(4)) required both certainty of benefit and actual benefit in the grant year. That interpretation was followed in Australian Bullion Exchange Ltd v Australian Trade and Investment Commission [2016] AATA 939 at [64], and there is a similar, but ambiguous, statement in Troozi Pty Ltd v Australian Trade and Investment Commission [2018] AATA 4360 at [22]-[23]. For myself, I doubt the interpretation favoured in Oppidan and Australian Bullion is correct. In a situation where grant applications will inevitably be made after the years in which expenses have been incurred, there is no contextual warrant for construing the word “will” in EMDG Act ss 24 – 25A as limited to the past tense. Such an interpretation is additionally inconsistent with (i) the reference to “prospects of success” in both the underlying principle or the limitation on the content of the “grants entry requirements (see EMDG Act ss 5 & 21) and with (ii) with the disjunctive expression “has sold or intends to sell” (in EMDG Act s 37(1)(d). The decision in Troozi needs to be understood against its particular factual the background where the applicant’s intention to sell was subject to a condition precedent that had not been satisfied in the grant year. Properly understood the reasoning in Troozi involves the proposition that the “intention” to sell must exist in the grant year, but not the proposition that the sales must have been intended to occur, or have occurred, within that year.
Against this background it is obvious that the “significant net benefit” satisfaction contemplated by EMDG Act s 25(4) is not simply, and not even primarily, concerned with the prospect of income, profit and dividends being derived by either a grant applicant or its shareholders. The better view is that the concept of “significant net benefit to Australia” requires regard to the nature and extent of the “Australian input” in the supply of the services. That was the view that this Tribunal took in the “Ceylon tea” case (see Oppidan Pty Ltd v Australian Trade Commission [2002] AATA 582 at [112]) and it is clearly required by the statutory wording.[19]
[19]In the following paragraphs of these reasons I have born in mind the criteria outlined in paragraph 4.2.2 of Austrade’s Administrative Guidelines. Those criteria, which refer, non exhaustively to the value of the applicant’s relevant activity, the level of earnings returned to Australia, and the nature and extent of Australian input, are consistent with the permissive generality of the statutory “significant net benefit” requirement.
In response to Shoppr Network’s contentions about the significance of its Australian ownership and management, I am not satisfied that the prospect of economic benefit linked solely to the prospect of dividends (or salaries) being paid to the principals (officers and their related shareholder entities), and unrelated to any significant ongoing input to the “eligible product” from Australian resident individuals or entities, constitutes a “significant net benefit” to Australia for the purposes of the EMDG Act. Whilst I accept that, prior to 21 July 2015, Shoppr Network intended (subject to practical and legal restrictions:- see paragraph below) to implement its services as a principal contractor, its ability to implement the service to any significant extent was problematic (for the reasons contained in the Three Global reports, and the market presence of the hegemonic entities alluded to by Mr Pakula). Correspondingly the prospect of profit and the return of meaningful (ie., significant) dividends and taxable income was problematic and uncertain.
In relation to the more specific question of Australian input, as I have previously indicated, Shoppr Network’s principal contention is that the development of its DistribIO software was carried out in Australia, and that this, plus the ownership of the company by Mr Pakula (and entities associated with him), and management of the company by himself and his son, provides the relevant and sufficient Australian input. Austrade did not accept that contention, nor do I. The essential nature of Shoppr Network’s business is that of a “broker” or “intermediary” in relation to storage, transport and delivery services that are wholly performed (in relation to physical activities) outside Australia. In addition, those physical activities are performed by entities that are either non-Australian or that have not been shown to have, or to be likely to have, any Australian connection. Against the background of that basic reality, Shoppr Network’s contention that its DistribIO software meaningfully contributes to satisfaction of an Australian input sufficient to “ensure” significant net benefit to Australia is unpersuasive.
Shoppr Network’s evidence about the real nature and significance of the degree of innovation, novelty and commercial significance of the software was rather opaque, difficult to grasp and consequentially, problematic. This was the case despite several invitations he was given to attempt to explain precisely what contribution the technology made to the utility and benefit of the service. Ultimately he asserted that the three principal advantages that Shoppr Network had to offer were (i) a customer’s “access to options they can’t otherwise get”, (ii) “ease of integration” and (iii) a “local look” for delivered parcels. It is not easy to see how any of these advantages is significantly contributed to by the DistribIO software, as distinct from the physical services put in place. The “options” seem to have been the prospect of more favourable rates, and that was a corollary of the risk that Shoppr Network bore as a result of the volume threshold discounts it negotiated with its suppliers. The ease of “integration” concept was somewhat elusive and, at least in the absence of cogent explanation, seemed more to relate to the mechanical process of “aggregating” transport and deliveries by the carriage suppliers than to a mere software solution. A similar scepticism applies to the “local look” advantage. That seems inherently likely to depend on the mechanical process of aggregation (at the point of shipping from China) and disaggregation (following arrival in the USA), than upon an inadequately explained software function.
As a matter of objective analysis of the available evidence, the DistribIO software can be regarded as necessarily serving three main objectives – (i) providing Shoppr Network with a system for recording and reporting sales, purchases, revenue and costs, (ii) providing a system for producing the “labels” required to address goods to be delivered and, (iii) co-ordinating the exchange of despatch and delivery instructions, between originating and delivery businesses. Whilst the software facilitated access to, and the exchange of, those kinds of information, the preponderant inputs to the service Shoppr Network contracted to provide were the physical activities of storage (at least in some instances) collection, despatch from China and delivery in the US. Those activities were all contemplated to be provided by other entities, none of which had, or has been shown as likely to have, any Australian connection, let alone a significant one.
That characterisation of the substance of Shoppr Network’s service does not conduce to any satisfaction that there was, or was likely to be, a significant Australian input to the service. The DistribIO software, with its imprecisely explained characteristics, apparent origin in the work of a single programmer (Mr Pakula’s son), was not a significant input in the provision of the performance of services that were wholly dependent on the activities of other entities. Neither Mr Pakula’s role as the controlling director of Shoppr Network, nor his son’s role as “project manager” constitute – either individually, collectively or in contribution with the physical services, a significant Australian input. Still less do they conduce to satisfaction of an ensured significant net benefit to Australia - even if it were the case that Shoppr Network should be regarded, as at 30 June 2015, as the likely future operator of the business. The reality that, soon after 30 June 2015, Shoppr Network disposed of its service business provides another, but quite independent and additional reason for a lack of the requisite satisfaction. The limited extent of the Australian input to the development of the DistribIO software, and the pre July 2015 management of Shoppr Network’s business by the two Messrs Pakula, do not lead to satisfaction of an ensured “significant net benefit to Australia” from Shoppr Network’s then intended activities. That conclusion is not altered by the fact that at least some of Shoppr Network’s initial contractual agreements with US suppliers (eg., USPS) were apparently negotiated and entered into at a time when Mr Pakula was residing in Australia. The substance of the agreements involved services to be provided outside Australia by non-Australian entities.
In the light of the foregoing considerations I determine that, having regard to all the available facts, the Australian input to Shoppr Network’s intended service was not sufficient to ensure that Australia would derive a significant net benefit from the supply of the service. It follows from that determination that Shoppr Network’s service is not an “eligible product”” for EMDG Act purposes.
THE OVERSEAS REPRESENTATIVE CLAIM
Although I have found that Shoppr Network was not an eligible applicant and its service was not an eligible product, it is nevertheless prudent to consider its claim on a further alternative basis, and address the eligibility of the expenses that were the subject of its application. In so doing, I will first address the expenses it claimed in relation to Three Global, as its USA representative.
I have outlined aspects of Shoppr Network’s relationship with Three Global, and in particular the 1 July 2014 Sales Agency Agreement, in earlier parts of these reasons:- see paragraphs 40 to 43 above. The expense claim related to the USD20,000 monthly retainer payable to Three Global pursuant to the 1 July 2014 sales agency agreement, and involved five payments made in the first five months of the 2015 calendar year.
I have referred earlier to the different approaches Austrade took, in its initial 15 September 2016 decision and its 5 July 2017 reconsideration, to this aspect of the claim. In its September 2016 decision Austrade had adjusted the claim amount and allowed only one third. That assessment was made after considering, and partly rejecting as insufficient, various documents Shoppr Network had provided during the course of earlier discussions:- see paragraph 14 and 19 above. In so doing, Austrade appears to have been intending to exercise the “adjustment” discretion conferred by EMDG Act s 96. However, it is far from clear that, in purporting to make the adjustment, Austrade had complied with the mandatory written notice and reasons obligation imposed by EMDG Act s 96(2). There is some evidence that at a meeting on 4 August 2016 Austrade had requested an itemised breakdown of expenses, but there is no evidence that this request was either written, or otherwise complied with the notice requirements in EMDG Act s 96(2).
Austrade’s 5 July 2017 reconsideration decision (as affirmed in July 2018) rejected the expenses claim on the bases that (i) because of the “beta” stage of the business, the expenses were “one step removed” from “promotional” activity and, (ii) Shoppr Network had apparently not intended to be the actual supplier of the services:- see paragraphs 19 & 23 above.
The second of Austrade’s reasons for rejecting the expense claim seems to be unanswerable. Although a grant applicant’s intention to supply services through a related “entity” will satisfy the relevant EMDG Act s 37(1)(d) criterion, any corporation used for that purpose must be “a body incorporated under the Corporations Act 2001”:- see EMDG Act s 37(5). However, Mr Pakula’s evidence was that the Missouri corporation was to be the trading entity in the USA (see paragraph 38 above) and any operations in China would be conducted through a corporate entity in which Shoppr Network would retain “the maximum ownership permitted under local law”. I infer from this evidence that Shoppr Network did not itself intend to “sell” services in either the USA or China. In the absence of such an intention, the activities undertaken by Three Global, even if they were otherwise “eligible promotional activity”, were not undertaken for an “approved promotional purpose” and thus do not satisfy the requirement in Item 1 of the EMDG Act s 33 Table.
The first of Austrade’s reasons for rejecting the expense claim in relation to the Three Global monthly retainer payments is, on the other hand, rather more questionable – at least in relation to the total disallowance of the claim. At one point in his evidence in the review proceedings Mr Pakula asserted that the purpose of the monthly retainer was to develop relationships with “key US merchants”. If this was meant to convey the impression that all of Three Global’s activities were “eligible promotional activities” it was both inconsistent with Shoppr Network’s previous estimates of the proportion of the cost attributable to marketing activities (see paragraph14(a) above) and involved an inaccurate oversimplification. The sales agency agreement in fact imposed obligations on Three Global in addition to marketing:- see paragraph 41 above. The only contemporaneous documents submitted in relation to these payments were cryptic invoices from Three Global. Those invoices simply described the invoiced amount as relating to “Consulting – monthly retainer”. No other specific information was provided about the nature and extent of Three Global’s activities, apart from Mr Pakula’s brief and general overview assertion that Three Global’s services had resulted in Shoppr Network consolidating its relationship with USPS.
Mr Pakula’s general assertion about that result of Three Global’s activities is insufficient to conduce to positive satisfaction that any part of the monthly retainer payments constituted an “eligible expense”. It is readily apparent from the nature of Three Global’s generally expressed responsibilities under the July 2014 sales agency agreement that its contracted work was not confined to activities involved in “creating, seeking or increasing demand or opportunity” in the USA. On the other hand, there is no reliable evidence of what marketing activities Three Global did carry out, let alone evidence of the extent to which those activities constituted “eligible promotional activity”. Shoppr Network provided only one of the monthly reports apparently required by the 1 July 2014 Sales Agency Agreement - the December 2014 report:- see paragraph 43 above. Nor did it provide any evidence about the nature and extent of either its own, or Three Global’s, interaction with USPS during the period to which the expense claim relates. That absence of evidence is significant in the light of (i) Shoppr Network’s October 2013 wholesale agreement with USPS (see paragraph 38 above), (ii) its claims in April and May 2014 to be already working closely with USPS, (iii) numerous email communications in the period from early 2013 to mid 2014 which record Mr Pakula himself dealing with and following up USPS leads, without any apparent involvement of Three Global.
Absence of positive satisfaction that Three Global’s activities can properly be regarded as involving “eligible promotional activity” is further confirmed by some of the contents of Three Global’s December 2014 report. It tends to convey that Shoppr Network did not intend to conduct any significant marketing in the USA in the immediate future. Rather, the strategy that Three Global recommended was merely to rely on referrals from the USPS as a source of potential sales, and to put effort into strengthening the relationship with USPS to ensure that referrals continued to be made. That relationship was already one where Shoppr Network was a wholesale contractor of USPS’s delivery service (see paragraph 38 above) and that relationship raises a question whether the focus of Three Global and Shoppr Network’s activities in January to May 2015 was on the promotion of its own business, as distinct from merely participating in the business of USPS. The answer to that question may not be limited to binary alternatives, and it is conceivable that some aspects of Three Global’s activities in the context of relationship building with USPS might have involved the direct promotion of Shoppr Network’s facilities and services as a means of encouraging further referrals from USPS. But the generality of Three Global’s recommendation, and the absence of specific evidence do not permit positive satisfaction that the monthly retainer expenses claimed by Shoppr Network actually relate, to any identifiable extent, to eligible promotional activity.
On the other hand, the concept of eligible promotional activity, as expressed in the EMDG Act is comparatively generous, and is not limited to the direct advertising of an immediately available product – so much is made clear by (i) the width of the expression in EMDG Act s 37(1) and, (ii) the disjunctive expression “market research or marketing activities” in Item 2 of the Table in EMDG Act s 33. For that reason, as Austrade concluded in its September 2016 decision, Three Global’s obligations under the July 2014 sales agency agreement to (inter alia) (i) promote Shoppr Network’s services in the USA and (ii) provide “competitive market information” might well fall within the requirement of being at least for the purpose of “creating, seeking or increasing … opportunity” for the carriage and delivery services:- see EMDG Act s 37(1). That purpose is not precluded by either the fact (potentially apparent from the financial statements) that Shoppr Network did not generate any income in either of the grant years or the fact (as conceded by Mr Pakula) that the business was operating in “beta” mode.
The evidence about the “beta” stage of the business was somewhat imprecise, and apt to be evaluated from different perspectives. Austrade’s view was that Shoppr Network’s “intermediary” role established its utter dependence on third parties to perform its carriage and delivery obligations, and that its asserted “marketing” activities were apparently primarily concerned with locating and assessing such suppliers. Shoppr Network’s contention was that the “beta” stage of its business related only to the scale at which it operated, or contemplated operating. Its further contention was that there was an inevitable overlap between “marketing” its service and securing carriage and delivery suppliers. In relation to the limited scale of is operations, but emphasising that it did in fact have some performance capability, Shoppr Network pointed to its established relationship with USPS. In relation to the overlap between “suppliers” and its service “customers”, Shoppr Network pointed to the December 2014 Three Global report, with its emphasis on (i) selecting customers that fitted the business’ needs, (ii) limiting the customer base, until the business’ performance capacity had been fully proven and, (iii) seeking out, as potential customers “parcel consolidators or companies that are looking to become parcel consolidators”.
In his evidence Mr Pakula characterised this focus of the business activities as having two distinct objectives. One was that of “platform development”. The other was that of promoting the service, because parcel consolidators would have existing merchant customers. But those two conceptually distinct objectives were in fact related – because, in order to enlist either suppliers or customers Shoppr Network would have to sell the benefits of the Shoppr Business to both the suppliers and to the customers. (I referred earlier to Mr Pakula’s description of suppliers and “fulfillment” businesses as being “incentivised” to promote Shoppr Network’s services:- see paragraph 39 above.)
The intrinsic duality of Shoppr Network’s activity in its selective marketing and limited activity during the 2014 and 2015 grant years makes it very difficult to reach a concluded opinion about the actual proportion of the monthly retainer amounts paid to Three Global that might constitute claimable and eligible expenses. Like Austrade, in its initial decision, I am inclined to the view that (but for the other matters I have considered) some element of the expenses would have been eligible, and the expense claim should have been adjusted – as contemplated by EMDG Act s 96. That view is consistent with the proposition that the proper consideration of “purpose” requires regard to the subjectivity of Mr Pakula’s motives and intention. It is a matter than cannot be ignored:- see Re Parker Pen (Australia) Pty Ltd v Export Development Grants Board [1983] FCA 77, (1983) 67 FLR 234. If the difficulty in quantifying the precise proportion of the expenses that were “eligible” were the only matter in dispute I would have set aside the decision and remitted it to Austrade to reconsider, in accordance with these reasons. That remittal would have been for the purpose of Austrade formally complying with the EMDG Act s 96 procedure.
THE MARKETING CONSULTANT CLAIM
This aspect of Shoppr Network’s expense claim related to one AUD$24,600 June 2015 invoice from Strategon Capital, and a further June 2015 invoice for USD$17,250 from Three Global.
The Strategon Capital Pty Ltd invoice indicated that it reflected the total of the monthly fee payable for a six month retainer, relating to work it performed between January and June 2015. Two of the five work items related to EMDG Act issues, one was described as “general advisory work”, one was for an analysis of the USA market and the final item was for attendance at USA “market development meetings”. The descriptions of the first three items is inconsistent with those activities being likely to involve activities that would constitute an “eligible promotional activity” purposes” and thus give rise to an “eligible expense”. The two descriptions referring to “US market assessment analysis” and “US market development meetings”. As I indicated earlier, Austrade’s original response to this aspect of Shoppr Network’s claim was to allow only 15% of the amount as an eligible expense – a view that no doubt relied on the references to market analysis and market development meetings as likely to constitute “eligible promotional activity”.
My view about this aspect of Shoppr Network’s claim is essentially the same as that expressed in the previous section of these reasons. There is good reason to characterise at least some aspect of Strategon’s activity as relevantly “eligible” and, if that were the only consideration, I would set the Austrade decision aside and remit it for reconsideration, specifically to ensure compliance with EMDG Act s 96 procedure. But it is not the only consideration and, having regard to the business model that contemplated the business would trade in the USA under the mast of the Missouri corporation, the activity of Strategon in relation to the US market, was not for “an approved promotional purpose” and is consequentially was not an “eligible promotional activity”.
The June 2015 invoice from Three Global uninformatively asserted that the charge was for “additional consulting services” during the period from January to June 2015. In his evidence Mr Pakula said that the invoice related to work Three Global did in redesigning the Shoppr Network’s website “for the global and American market”. That assertion was not the subject of any specific evidence detailing either the nature, extent or purpose of the work, or the reason for its apparent duration. Furthermore, it is an assertion that appears to be contradicted by the invoice itself, because it attributes a zero charge for various items relating to website development, integration and optimisation.
I indicted earlier that Austrade treated this aspect of the claim as indistinguishable from the item relating to Three Global’s monthly retainer payments, and purportedly adjusted the claim to allow only one third of the amount claimed. If that were the only relevant consideration, I would have acknowledged the imprecision of the evidence, particularly the apparent (but potentially explicable) conflict between the invoice contents and Mr Pakula’s evidence, and remitted the decision for Austrade to re-consider in compliance with the procedural requirements of EMDG Act s 96. But, as I have indicated earlier (in dealing with the overseas representatives aspect of the claim), there are other reasons to conclude that this activity was not undertaken for an “approved promotional purpose”.
THE MARKETING VISITS EXPENSE CLAIM
The substance of Shoppr Network’s marketing visits expense claim is apparent from the following Table.[20]
[20]The total amount claimed was reduced in the course of the review hearing, apparently partly as a result of some re-consideration, and perhaps partly as a result of currency conversion. But the precise nature and components of the reduction were not fully explained. For the sake of simplicity, I have addressed the claim as it was presented to Austrade.
Overseas marketing visits Claim Item & amount and % of total expense Date Description Amount % Airfares 3-9 March 2014 Airfares 638 50% 2-8 June 2014 Airfares 414 50% 2-14 October 2014 Airfares 740 50% 5-28 January 2015 Airfares 1,022 50% 5-28 January 2015 Airfares 1,635 80% Total Airfares claimed 4,449 Working days 3-9 March 2014 Working days (5) 1,500 100% 2-8 June 2014 Working days (5) 1,500 100% 2-14 October 2014 Working days (11) 3,300 100% 5-28 January 2015 Working days (21) 6,300 100% Total Days claimed (42) 12,600 Total claimed 17,049
It is readily apparent from the Table that the claim typically involved only 50% of the airfare expenses, but included the full amount of the permissible “deemed” expenses (see paragraph 11(c) above) for every day of the trip. This apparently inconsistent treatment of the two components of the claim invites examination.
There is limited material substantiating the details of the activities Shoppr Network undertook in China during the January 2015 visit. An “itinerary” summary Mr Pakula provided to Austrade (apparently in about mid 2016) detailed meetings on only 9 of the 21 days of the visit. The meetings were with eight different entities. Every meeting was described in the itinerary as being concerned with either the review or discussion of the interviewed entities facilities and capabilities as a potential service provider to Shoppr Network. In some instances that was the only stated purpose of the meeting. In others, the additional purpose was stated as being to “explore sales and marketing opportunities”. Essentially the same descriptions are contained in the itinerary summaries for each of the meetings during the trips to China in March (5 meetings), June (5 meetings) and October 2014 (11 meetings).
In his affidavit evidence in the review proceedings Mr Pakula provided additional details that named the people present at each meeting. But with rare exceptions, Mr Pakula’s affidavit evidence added nothing of substance to either flesh out, or to contradict, the more cryptic summaries contained in the previously provided itineraries. One of those exceptions described one of the meetings as contemplating an arrangement under which the Chinese entity would supply services to Shoppr Network and, correspondingly Shoppr Network would supply the Chinese business with “shipping services”.
It is clear from the typical descriptions of these various meetings that each Chinese business involved in the various meetings was a potential carriage or storage provider. It is also clear that the primary purpose of the meetings was to assess their suitability and willingness to participate as a supplier of services to Shoppr Network. Activities of those kinds cannot be regarded as wholly concerned with “an approved promotional purpose”.
On the other hand, the exceptional description to which I referred above tends to highlight the point I made earlier, that there was likely to be a degree of dual and overlapping purpose. Shoppr Network had to interest suppliers in working for it. The incentive was likely to have been lower cost rates or greater volume (or both). That incentive would have had to be explained with information about Shoppr Network’s business concept, strategies and potential benefits. It follows that the distinction between the two activities of securing suppliers and attempting to market the business (using the concept of marketing in the comparatively expensive terms of the EMDG Act s 37(1)(d) description of an “approved promotional purpose”) is unlikely to be one involving “bright line” differences.
For the same reason I gave above in dealing with the overseas representative aspect of the claim, if the characterisation of the various expenses were the only eligibility criterion, I would remit Shoppr Network’s grant application for reconsideration by Austrade in the manner contemplated by EMDG s 96. But as I also indicated in dealing with that aspect of the grant claim that it is not the only matter. The expenses are not eligible, because the evidence established that Shoppr Network did not itself intend to sell its services, and did not intend to sell through a related “entity”.
DECISION
The decision under review is affirmed.
I certify that the preceding 112 (one hundred and twelve) paragraphs are a true copy of the reasons for the decision herein of Mr P W Taylor SC, Senior Member
..................... [sgd].......................
Associate
Dated: 19 March 2019
Date(s) of hearing: 21 November 2018 and 30 January 2019 Counsel for the Applicant: P Travis Solicitors for the Applicant: Aden Lawyers Solicitor for the Respondent DLA Piper Australia
0
8
0