International Universities of Australia Pty Ltd and Australian Trade Commission [1999] AATA 179 (24 March 1999)

Last Updated: 26 March 1999

DECISION AND REASONS FOR DECISION [1999] AATA 179

ADMINISTRATIVE APPEALS TRIBUNAL)

N° V96/1145

GENERAL ADMINISTRATIVE DIVISION)

INTERNATIONAL UNIVERSITIES

OF AUSTRALIA PTY LTD

Applicant

AUSTRALIAN TRADE COMMISSION

Respondent

DECISION

Tribunal: Deputy President G.L. McDonald

Date: 24 March 1999

Place: Melbourne

Decision The decision under review is set aside, and the matter is remitted to the respondent with a direction that the claims be assessed for substantiation in accordance with the conclusions reached in this decision.

(sgd) G.L. McDonald

Deputy President

BOUNTIES - Export Market Development Grants Act - which entity incurs the expenditure - whether expenditure in respect of "eligible services" - whether expenditure of a capital nature

Acts Interpretation Act 1901 (Cth) s.15AA

Export Market Development Grants Act 1974 (Cth) ss.3(6), 11A(1), 11N, 11Z(5)

Export Market Development Grants (Repeal and Consequential Provisions) Act 1997

(N° 44 of 1997) (Cth)

Export Market Development Grants Regulations (Cth) reg.6

Fliway-AFA International Pty Ltd v Australian Trade Commission (1992) 39 FCR 446

Mills v Meeking and Another (1990) 169 CLR 214

Nomad Films International Pty Ltd v Export Development Grants Board (1986) 11 FCR 67

Re World Geoscience Corporation Ltd and Another and Australian Trade Commission

(1997) 45 ALD 175

REASONS FOR DECISION

24 March 1999 Deputy President G.L. McDonald

The Background

1. This is an application by International Universities of Australia Pty Ltd ("IUA") to review a decision of the respondent, the Australian Trade Commission, affirmed on reconsideration, to disallow claimed expenditure under the Export Market Development Grants Act 1974 (Cth) ("the Act"), totalling $676,173 for the 1993/1994 and 1994/1995 years. The Act was repealed by the Export Market Development Grants (Repeal and Consequential Provisions) Act 1997 (N° 44 of 1997) (Cth). The present application is, however, to be determined under the provisions of the repealed Act as the result of the operation of clause 2 of Schedule 1 of N° 44 of 1997.

2. At the hearing Mr S. Anderson, of counsel, represented the applicant and Ms D. Mortimer, of counsel, represented the respondent. Mr R.J. Cochrane, the executive officer of the applicant and who is also deputy general manager and director of Offshore Projects at Monash International Pty Ltd, provided a detailed statement and gave oral evidence on behalf of the applicant. Ms B. Curran, a chartered accountant and partner of Price Waterhouse Coopers, provided a statement and gave oral evidence on behalf of the respondent. Additionally, the Tribunal had before it the documents filed for the purposes of s.37 of the Administrative Appeals Tribunal Act 1975 (the "T" documents), a set of supplementary T documents (the "ST" documents) and other documents tendered during the course of the hearing. Both parties filed statements of issues, facts and contentions.

The Issues

3. There are three issues between the parties:

(a) did the applicant incur the expenditure under s.11A(1)(a) of the Act?

(b) does the claimed expenditure qualify as export development expenditure under s.11Z(5) of the Act?

(c) was the expenditure disqualified from consideration as the result of being capital expenditure under s.11N of the Act?

The Legislation

4. The relevant provisions of the Act are as follows:

11A. (1) Expenditure is eligible expenditure of a person . . .:

(a) only if it is incurred by the person; and

(b) only to the extent to which it is claimable expenditure (see Division 2); and

(c) only if it is qualifying export development expenditure for the particular person (see Division 4).

. . .

11N. Expenditure of a capital nature is non-claimable expenditure unless it is either:

(a) expenses of the kind referred to in section 11F, 11J or 11K; or

(b) expenditure incurred in relation to disposals of the kind referred to in subsections 11Z (8) and (9), 11ZA (5), 11ZB (4), (5) and (6) and 11ZC (7) and (8).

. . .

11Z. (5) Expenditure is qualifying export development expenditure of a person to whom this section applies if:

(a) in the Commission's opinion, it is incurred primarily and principally for the purpose of:

(i) creating or seeking opportunities for; or

(ii) creating or increasing demand for;

the supply, by that person, of eligible services outside Australia; and

(b) the supply by that person is for reward and in the course of carrying on business in Australia.

The Evidence

5. The Tribunal is satisfied from the uncontested evidence that both the University of New South Wales ("UNSW") and Monash University ("Monash") have significant enrolments of international students (16 per cent in the case of UNSW and greater than 10 per cent in the case of Monash (exh D)). According to Mr Cochrane both universities have in particular ". . . developed expertise in attracting Indonesian students to Australia to study at tertiary level" (exh A, para 6). Additionally, those students engage in pre-tertiary studies by completing one final year of secondary study in Australia offered by UNSW and Monash. Those latter courses are known as "Foundation" programmes.

6. In a memorandum of understanding ("the first MOU"), signed sometime prior to, or early in, July 1993, the two universities agreed to jointly undertake some offshore activities (exh A, IUA1). It was Mr Cochrane's evidence that the purpose of signing the first MOU was to develop a new area of business, being the export of technical assistance and expertise to enable a private university to be established in Indonesia. While this was to be separate from the "Foundation" programmes and the provision of approved university courses being taught outside Australia, the first MOU provided that the universities would ensure that their respective "Foundation" programmes were conducted offshore in selected countries. The first MOU describes its purpose as the co-operation to ". . . further enhance the international reputation of the universities and to secure the enrolment of the highest quality international students seeking an Australian education. It is also anticipated that the educational services provided off-shore by both shall develop significantly and in measurable ways". The first MOU set out that the stated aims were to be carried out through an organisation to be established and known as "International Universities of Australia (IUA)".

7. It was Mr Cochrane's uncontested evidence that Indonesian foreign investment laws precluded the Australian universities from operating in Indonesia unless in conjunction with an Indonesian company or institution. To satisfy this requirement, the universities signed a memorandum of understanding ("the second MOU") dated 18 January 1994 with an Indonesian entity called "The Yayasan Persaudaraan Bangbayang '66" ("YPB66") (exh A, IUA3). The preamble to the second MOU describes YPB66 as being established by "45 prominent and visionary Indonesian citizens who have united and pledged themselves in a concerted effort to contribute to the development and enhancement of the Indonesian society and nation building". The second MOU had as its objective the establishment of new educational institutions in Indonesia. This was to be carried out through a joint venture company. The second MOU also contemplated that the costs incurred in establishing that joint venture company were to be capitalised and borne by the joint venture company.

8. The applicant is registered as being incorporated on 3 February 1994 (exh A, IUA 2). The shareholders were to be UNSW and Monash, each holding one issued share. It was Mr Cochrane's evidence that ". . . it was not until later that IUA operated without the direct support of its promoters" (exh A, para 14). It was also Mr Cochrane's evidence that upon incorporation IUA had a paid up capital of $2.00. No other funds were made available to it during the grant years 1993/1994 or 1994/1995.

9. Sometime in May 1994 UNSW and Monash and YPB66 negotiated a master agreement ("the 1994 master agreement) (exh A, IUA4). While the copy of the agreement given to the Tribunal is undated, Mr Cochrane said that it was signed in May 1994. This agreement provided for the establishment of a joint venture company between the two universities on the one hand and YPB66 on the other (called the "PMA company") to co-operate exclusively in the implementation of the objective of establishing a new educational institution in Indonesia. The PMA company was to be 80 per cent owned by Indonesian interests and 20 per cent by the two Australian universities. This ownership reflected the capital contribution being made by those interests. The agreement set out the roles to be played by YPB66 on the one hand and the universities on the other. The agreement also made provision for the interests of the two Australian universities in the joint venture to be represented by ". . . a company owned and operated by the universities" (exh A, IUA4, articles 1, 7.1). In the agreement the company is referred to as ". . . the foreign company". Somewhat curiously, but consistent with Mr Cochrane's evidence that there was a lapse of time between IUA's incorporation and its activation, no mention is made in the 1994 master agreement of IUA, even though IUA had been incorporated for some months by that time. Article 19.1 contemplated that the educational courses were to be managed and operated by advisors or experts of the two universities based on an interim technical assistance agreement. The interim technical assistance agreement referred to is appended to exhibit A, IUA 4 and is dated 8 June 1994. Again, somewhat curiously, given the lack of mention of the applicant in the 1994 master agreement, the interim technical assistance agreement is expressed to be between YPB66 and the applicant. Ultimately, the time frames provided for in the 1994 master agreement were not met and that agreement lapsed.

10. A further master agreement was negotiated in 1995 (exh A, IUA5) ("the 1995 master agreement"). The 1995 master agreement was entered into between YPB66 and the applicant, and is dated 26 September 1995. The 1995 master agreement was substantially in the same terms as the 1994 master agreement. The 1995 master agreement was executed after the expiration of the claim period.

11. As the result of the above described activities, a private university was formed in Indonesia, called UniSadhuGuna. It was anticipated that UniSadhuGuna would make payment for services provided to it by IUA on the basis of a royalty per student. IUA was to be involved in curricula design, campus design, installation of information technology systems, entry systems, financial management, student management, organisational management and marketing. It was Mr Cochrane's evidence that most, but not all, of those services would be sourced from either UNSW or Monash. It was Mr Cochrane's evidence that the money was expended during the claim period in the furtherance of the universities objectives ". . . on the understanding that this spending was on account of IUA" (exh A, para 15). The expenditures were, subsequently, but within the grant period, described as being loans by the universities to IUA (see, for example, the letter from Mr Cochrane as IUA company secretary to Professor Chris Fell, IUA chairman, of 23 December 1994 (exh B1, tab2)).

12. The areas of expenditure for which claim is made are as follows -

* fares

* overseas visits allowances

* literature and advertising

* communications

* overseas representation

* agents/consultants, overseas

* other

The total claim is $676,173.34, of which $531,781.07 relates to overseas representation. The overseas representation expenditure was regarded by Mr Cochrane in his statement as being ". . . extremely important in establishing acceptance in the market place of the concept of a private university with substantial links to IUA and the Universities. Without the overseas representation, the university would not have been established and the market for technical services which is now coming to fruition would not have occurred" (exh A, para 16).

13. To assist in that overseas representation, a consultant (Mr B.M. Andersen) was engaged. A copy of the consultancy agreement with Mr Andersen is set out at T6, pages 47-52. The agreement is expressed to be between Monash University and Mr Andersen to provide his consultancy services, commencing 1 February 1994, for a three year period, to 31 January 1997. Article 2 of the agreement is as follows:

The consultant is assigned by Monash as the senior resident representative for Monash in Indonesia and is expected to assist Monash as its country resident representative in achieving its overall aims and objectives for the Indonesian market.

Article 2 then states that the consultant will undertake the duties and responsibilities arising as a direct consequence of the second MOU between Monash, UNSW and YPB66. The Article continues to provide that Mr Andersen is to act as liaison between Monash and YPB66, ". . . coordinating all elements of the intended future joint venture company". Mr Cochrane said that Mr Andersen's role was to convince Indonesian High Schools, Chambers of Commerce, etc, of the value of Indonesian students enrolling in UniSadhuGuna. In his evidence Mr Cochrane described Mr Andersen as a "promotional person".

14. While the applicant admits that all of the amounts claimed were paid by the universities, or their wholly-owned subsidiaries, it submits that those payments were made on its behalf (i.e. on behalf of IUA). Section 11A(1)(a) of the Act provides that expenditure is eligible "only if it is incurred by the person" (emphasis added). Section 3(6) of the Act provides that, subject to some exceptions not relevant in this case, ". . . expenditure shall be taken to have been incurred only at the time when the amount of that expenditure is acquitted". In this context acquittal is used in the sense of "to pay off" (the Oxford English Dictionary) or "to settle a debt, obligation, claim etc" (the Macquarie Dictionary). It follows that the expenditure has been incurred only when payment of the accounts is made. Not any of the claimed payments were made by IUA in the 1992/1993 or 1994/1995 grant years. Reimbursement was subsequently made outside the claim period by IUA.

15. While the respondent concedes that the concept of agency may be applicable to s.11A(1)(a), it submits that there must be some evidence establishing a principal/agent relationship. The respondent points to the provisions of s.3(2) of the Act, which provides ". . . where an act is done by an agent on behalf of his principal, it shall be deemed to be done by the principal and not by the agent". The respondent points to decisions such as Fliway-AFA International Pty Ltd v Australian Trade Commission (1992) 39 FCR 446 where Wilcox J accepted that, if an agency arrangement could be found to exist, then the beneficial provisions of the Act could be invoked. The key, the respondent submits, is the need to establish that there is, according to law, an agency arrangement. In this case the respondent submits that Monash and UNSW could not be characterised as being the agents of IUA. In the respondent's submission the evidence shows that IUA could better be described as the agent of Monash and UNSW rather than the reverse. Further, the respondent submits that there is no discretion in the Act which would allow the Tribunal to treat the expenditure incurred by Monash/UNSW as that of the applicant.

16. On behalf of the applicant, it is submitted that the Act is beneficial in nature and a construction which would promote the purpose of the Act should be adopted (s.15AA of the Acts Interpretation Act 1901 (Cth) (see also Nomad Films International Pty Ltd v Export Development Grants Board (1986) 11 FCR 67 at 78 per Smithers J:

Obviously the underlying purpose of the Export Market Development Grants Act 1974 is to encourage persons to expend effort and money in the exploitation overseas of rights in industrial property such as inventions, trade marks and copyright and to do so for the purpose of encouraging Australians to improve their skills and capacity to produce works of significance and of building up the foreign credits to be reflected in Australia's balance of trade. Both of these purposes are of importance to the nation.

The applicant relies on what the Tribunal said in Re World Geoscience Corporation Ltd and Another and Australian Trade Commission (1997) 45 ALD 175 at 187, where it was decided by the Tribunal that sub-section 3(6) is limited to specifying the time when expenditure will be taken to have been incurred and ". . . does not limit the notion of who incurred expenditure, nor does it limit the notion of the concept of expenditure being incurred". In that case the Tribunal found that World Geoscience Corporation Ltd acquitted expenditure incurred by a wholly-owned subsidiary World Geoscience Petroleum Services Pty Ltd.

17. The Tribunal accepts what was said in World Geoscience's case about the interpretation of s.3(6). That sub-section is clearly designed to ensure no claim can be made except for reimbursement of amounts already paid. It is, however, the words of limitation in s.11A(1)(a), "only . . . by the person" which in the instant case is the matter of concern. The use of the definite article results in "the person" being a reference to the grant claimant.

18. The purpose of s.11A(1)(a) is to restrict claims to the person incurring the expenditure, i.e. to stop expenditure incurred by one party being claimed by another. This, no doubt, is to preclude expenditure incurred by one person being claimed or claimable as being eligible expenditure in order to receive a grant by another person. The use of the adverb "only" coupled with the use of the definite article before the word "person" in sub-clause (a) of s.11A(1) combine to make it apparent that the legislature intends to restrict eligibility to the person incurring the expenditure. In the opinion of the Tribunal s.3(2) is an enabling provision and it is not to be read restrictively. The Act has as its preamble, ". . . the purpose of providing Incentives for the Development Export Markets" [i.e. for Australian goods know how, etc]. It is beneficial legislation. As such it must be given an interpretation which promotes its stated purpose (see Dawson J in Mills v Meeking and Another (1990) 169 CLR 214 at 235 - while his Honour was the dissenting judge in this case, there is nothing which suggests the purposive approach of statutory interpretation should otherwise than be applied). If, ultimately, the grant claimant is, in fact, the person incurring the expenditure, then the expenditure should be regarded as being incurred by that person.

19. In the instant case the Tribunal is satisfied that the evidence establishes that, from the time of the signing of the first MOU, the universities intended to, and did, incorporate a company (the applicant) for the purpose of representing their joint interests in the cooperative venture to establish a private university in Indonesia. Until its incorporation, the applicant could not incur any expenditure because it is not "a person" (s.3(1) of the Act defines a person as including a company). Accordingly, any claim for expenditure in the period prior to 3 February 1994 it is not able to succeed. In the period prior to incorporation, and indeed for some period after incorporation, the universities (or their subsidiaries) were utilised as the funding and administrative vehicles to progress the universities' intentions. Accordingly, the consultancy agreement with Mr M. Andersen is expressed to be with Monash. That agreement was signed on 30 January 1994 prior to the incorporation of the applicant. The Tribunal is satisfied that the consultancy agreement was reached in contemplation at that time of the applicant's incorporation; that it was always intended that the applicant would be responsible for the payment of Mr Andersen's fees and expenses; and that ultimately this was recorded as being the case in the accounts. Accordingly, the Tribunal accepts this and other expenditure arising in a similar way to be, in fact, incurred by the applicant rather than by Monash or UNSW.

20. Somewhat curiously, even after incorporation, the applicant was not actively utilised in areas not involved with payments, e.g. the 1994 master agreement, whilst signed some months after the incorporation of the applicant, does not specifically involve the applicant, but rather refers to the applicant as "the foreign company" as if it was not yet incorporated. The Tribunal accepts Mr Cochrane's evidence that university bureaucracies can sometimes be hard to move quickly and in the absence of the applicant having funds and there being considerable pressure from UNSW and Monash to advance their cause with YPB66, the formalities were not attended to as well as should have been the case. Accordingly, there is, for instance, the extraordinary letter of 24 August 1994 on the applicant's letterhead in which the then chief executive officer, Mr Peter Cunliffe, confirms that he ". . . authorises a transfer of $us244,958.67 from Monash sources [to be expended in the Indonesia venture] . . ." (exh B1, tab3). Despite these irregularities, the Tribunal is satisfied that it was always intended that the expenditure would be incurred by the applicant and that the subsequent accounting records confirmed that intention as being the fact.

21. To succeed, the Tribunal needs to be satisfied on the material before it that the claim is for "eligible services". The applicant does not claim that it was engaged in supplying international educational services to persons resident outside Australia under s.11Z(6) of the Act. It claims under s.11Z(5) that expenditure was incurred in the supply of "eligible services" outside Australia. "Eligible services" is defined in s.3(1) of the Act by reference to the regulations. Regulation 6 of the Export Market Development Grants Regulations (Cth) provides that the services specified in Schedule 4 are eligible services. Relevantly, item 8 states as follows:

8. Educational services provided outside Australia, being:

(a) services in respect of the provision of approved courses;

(b) services in respect of the establishment of educational institutions, study centres or educational facilities;

(c) services in respect of the provision of curricula or of course services;

(d) services in respect of the provision of courses of study prepared by arrangement with individual clients outside Australia, being courses that are administered or intended to be administered individually to those clients; or

(e) services in respect of the provision of courses of study related to the training of persons having responsibility for the training of other persons.

It is clear from the 1994 master agreement, as confirmed in the 1995 master agreement, that it was contemplated that a new educational institution was to be established in Indonesia. It was Mr Cochrane's evidence that, even with the support and involvement of YPB66, there was still a need for money to be expended in increasing the demand for the new educational establishment in Indonesia. In this exercise Mr Andersen was to play a pivotal role. The Tribunal is satisfied from the evidence that expenditure was incurred for the purpose of increasing the demand for the supply of an eligible service and hence the expenditure qualifies.

22. The final issue to be determined is whether the amounts expended are of a capital nature and therefore excluded by operation of s.11N of the Act. There is no dispute that the expenditure was treated as a loan from UNSW and Monash to IUA, that the loan was capitalised, forgiven as a debt and converted into equity. However, the Tribunal agrees with the applicant's submission that it should look to determine the nature of the expenditure at the time it is incurred. At that time the expenditure was not incurred to purchase capital items, but rather it was incurred in the marketing and promotional activities aimed at increasing the demand for the educational services which it sought to provide. That type of expenditure is of a revenue not a capital nature. In her affidavit, Ms Curran distinguished capital expenditure from capitalised expenditure. She exemplified the former as involving expenditure on items of physical substance or which give rise to transferable rights, e.g. licence or trade mark. The latter she described as expenditure which is capitalised and recognised as an asset. The latter is what has happened to the loan given by the universities to IUA. While Ms Curran describes capitalisation of costs as not being uncommon in Australia (exh 1, paras 27, 30), the process involves a reclassification of the items in relation to which the expenditure was originally incurred. In the opinion of the Tribunal it is not the way in which the accounts are reclassified which should be determinative of whether the expenditure should be regarded as being of a capital nature, but rather the decision-maker should look to whether the expenditure was incurred in purchasing items normally regarded as being capital. Accordingly, the assumption (exh 1, para 38) upon which Ms Curran was asked to proceed is not, in the opinion of the Tribunal, a valid assumption. No claim is made in relation to items which would normally be regarded as being of a capital nature (e.g. expenditure in obtaining necessary licences which would allow the university to function in Indonesia).

23. Both counsel agreed that, if the Tribunal determined to set aside the decision under review, it should do so remitting the matter with a direction that the claims be assessed for substantiation in accordance with the conclusions reached in this decision. That is the order the Tribunal makes.

I certify that the twenty-three [23] preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President G.L. McDonald

(sgd) Judith Birch

Associate

Dates of Hearing: 10.08.99, 11.08.99

Date of Decision: 24.03.99

Counsel for the Applicant: Mr S. Anderson

Solicitor for Applicant: Messrs Erlington Boardman Allport

Counsel for the Respondent: Ms D. Mortimer

Solicitor for the Respondent: Australian Government Solicitor