Cash Converters Ontario Pty Ltd and Australian Trade Commission [1999] AATA 86 (16 February 1999)

Last Updated: 18 February 1999

DECISION AND REASONS FOR DECISION [1999] AATA 86

ADMINISTRATIVE APPEALS TRIBUNAL )

) No W1998/252

GENERAL ADMINISTRATIVE DIVISION )

Re CASH CONVERTERS ONTARIO PTY LTD

Applicant

And AUSTRALIAN TRADE COMMISSION

Respondent

DECISION

Tribunal Deputy President T E Barnett, OBE; Associate Professor R D Fayle, Senior Member; Dr M Wood, Member.

Date 16 February 1999

Place Perth

Decision The Tribunal affirms the decision under review.

.............. (signed) .............

Deputy President

CATCHWORDS

EXPORT MARKET DEVELOPMENT GRANT - franchise - whether sole owner of eligible industrial property rights or eligible know-how - whether co-owner can be agent for joint ownership - grants entry test and guidelines - Export Market Development Grants Act 1974, ss40A(2), 11A, 11C, 11Z(8), (9), 13J, 13K.

Trade Practices Commission v Ansett Transport Industries (Operations) Pty Ltd (1978) 20 ALR 31

REASONS FOR DECISION

16 February 1999 Deputy President T E Barnett, OBE; Associate Professor R D Fayle, Senior Member; Dr M Wood, Member.

1. Cash Converters Ontario Pty Ltd ("the applicant"), a company incorporated under Australian law, made a claim for an export market development grant in relation to the claim year ended 30 June 1996. This was considered and disallowed by a delegate of the Australian Trade Commission ("the Commission"). The applicant's subsequent request for review of that decision, pursuant to s40A(2) of the Export Market Development Grants Act 1974 ("the Act") was dealt with by the Commission on 5 June 1998. It affirmed that no grant be payable to the applicant. It is that decision of the Commission which is before this Tribunal for review pursuant to s29 of the Administrative Appeals Tribunal Act 1975.

2. At the hearing the applicant was represented by Mr Francois Carles, solicitor and the Commission by Mr Jeremy Allanson of counsel.

3. The Tribunal had before it the documents filed pursuant to s37 of the Administrative Appeals Tribunal Act 1975 ("the T documents") together with the following exhibits:

A1 Bundle of supplementary documents;

A2 Copy of extract from the "Cash Converters Story";

A3 Copy of Grants Entry Test Determination with Guidelines and extract of Explanatory Memorandum;

A4 Copy of a franchise agreement dated 25 July 1997 for Queen Street, Brampton, Ontario store dated 25 July 1995;

A5 Copy of extract of first and last 2 pages from franchise agreement for Mississauga store dated 15 November 1995;

A6 Copy of extract of franchise agreement of 1 April 1995 for Victoria Terrace (Canada) store dated 1 April 1995;

A7 Copy of a facsimile sent by Mr M Thurston to "Rhett", dated 15 July 1995 with facsimile date stamp 30 January 1998;

A8 Copy of page 230 of the T documents, being a response to Exhibit A7;

A9 (a) selected bank statements from National Australia Bank for Account number 63 941 4335;

A9 (b) selected bank statements from National Australia Bank for Account number 65 228 2162;

A10 Assignment of sub-franchise agreement "made as of" 1 March 1997;

A11 Cash book for Cash Converters Ontario; and

A12 Copy of 1996 tax return for Cash Converters Ontario Unit Trust.

Background

4. In 1983 Mr Brian Cumins, a Perth, Western Australian businessman, started, in a Perth suburb, a second hand goods and pawnbroking business called Cash Converters. Soon after a further six stores were opened in the area, each of which was independently owned but subject to a franchise agreement with Mr Cumins or his nominee. This was followed by more licensed (franchised) stores opening in other parts of Australia and eventually overseas. Cash Converters Pty Ltd, an Australian registered company, became what is termed the "master franchisor", licensing various companies to sub-licence others to exploit the intellectual property and know-how in various geographical locations. More will be said later of the nature of the relevant contractual relationships or licences. Riverstone Nominees Pty Ltd ("Riverstone"), another Australian registered company (unrelated to the applicant), was licensed to exploit the intellectual property and know-how in Canada. Riverstone in turn licensed a Canadian company, Cash Converters Canada Inc (also unrelated to the applicant), to hold the rights to exploit the intellectual property and know-how in Canada.

5. The applicant claims that it was granted the sub-franchise over the Canadian territory of Ontario and engaged a Canadian incorporated company, Cash Converters Ontario Inc. ("CCO Inc") as its agent to exploit its rights under the Ontario sub-franchise agreement. We say "the applicant claims" because it is that claim which is the central issue, but not the only issue, in these proceedings. This obtains because the Sub-Franchise Agreement - Canada (T5, p.10) names both the applicant (Cash Converters Ontario Pty Ltd) and CCO Inc as the licensee of the sub-franchise over the territory of Ontario. However, the applicant claims that this is a mistake and in fact CCO Inc, at all material times, was not a joint licensee with it but rather, its Canadian agent and nothing more.

6. If, on the evidence before it, the Tribunal concludes that CCO Inc was, during the 1995/1996 claim year, co-owner with the applicant of the sub-franchise for Ontario, then the basis for the applicant's claim for an export market development grant is questionable. This obtains from the framework of the Act. Section 11A defines "eligible expenditure". It specifies three essential criteria. It must be "incurred" by the claimant; (s11A(1)(a)). It must be "claimable expenditure", which, in terms of this matter, means it must be within the scope of s11C, being "incurred by way of expenses of, contributions towards expenses of or payments made to, an agent for the (requisite) purpose". And thirdly, it must be "qualifying export development expenditure", which for the claim in question means it must meet the requirements of s11Z(8) and (9). These critical statutory provisions are set out below:

"11A. (1) Expenditure is eligible expenditure of a person (other than an approved trading house, approved joint venture or approved consortium):

(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).

...

(5) Division 2 sets out the kinds of expenditure that are claimable.

...

(7) Division 4 sets out the purposes for which the expenditure must be incurred to be qualifying export development expenditure: whether expenditure is qualifying export development expenditure depends on the status of the claimant.

11C. (1) Expenditure is claimable expenditure if:

(a) it is incurred by way of expenses of, contributions towards expenses of or payments made to, an agent for the purpose of:

(i) the carrying out of market research or the obtaining of market information; or

(ii) the advertising or other means of securing publicity or soliciting

business; and

...

11Z. (1) This section applies to persons other than an approved body, approved trading house, approved joint venture or approved consortium.

...

(8) 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 disposal, by that person, to persons resident outside Australia for use and enjoyment outside Australia of:

(iii) eligible industrial property rights owned by the person; or

(iv) eligible know-how owned by the person; and

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

(9) If:

(a) a person to whom this section applies disposes of:

(i) eligible industrial property rights owned by the person; or

(ii) eligible know-how owned by the person; and

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

(c) the disposal is to a person resident outside Australia for use and enjoyment outside Australia; and

(d) the person incurs expenditure which, in the Commission's opinion, is incurred primarily and principally for the purpose of increasing the person's return on the disposal;

that expenditure is qualifying export development expenditure. "

7. The Tribunal understands that it is not the Commission's contention in these proceedings that whatever the nature of the rights Riverstone and subsequently Cash Converters Canada Inc enjoyed under the "franchise" agreements, they would not be either "eligible industrial property rights" or "eligible know-how" as those terms are defined in s3 of the Act. However, the Tribunal understands that a related issue is whether the rights which the applicant has under the relevant agreement are such. That issue will be considered later.

8. A further issue is whether, in any event, the applicant, a first-time claimant, has not met the Commission's grants entry test determination requirements pursuant to s13J(3) of the Act. More specifically, s13J(3) provides:

"13J(3) Grant is not payable to the claimant in respect of the claim unless the claimant passes the grants entry test at such time during the period:

(a) beginning at the start of the grant year; and

(b) ending immediately before the Commission determines whether the claimant is entitled to a grant;

as the Commission considers to be the appropriate time to apply the test."

9. The Commission made a written determination formulating the grants entry test pursuant to s13K. Although a disallowable instrument for the purposes of s46A of the Acts Interpretation Act 1901, it was not disallowed. Paragraph 3 of the determination provides that, for the period referred to in s13J(3) of the Act, a first-time claimant, among other things:

" (d) must have and be likely to continue to have financial resources capable of supporting the planned export activities;

... ; and

(h) must have planned export earnings which are not on their face unachievable."

10. The applicant sold its territory of Ontario sub-franchise rights in March 1997, that is, before the Commission's decision now under review, made on 5 June 1998. The Commission contends in this respect, among other things, that no grant can be payable to the applicant because it could not satisfy the grants entry test for the entire period specified in s13J(3).

11. Should the Tribunal decide that a grant is payable to the applicant then the parties have requested that the claim be remitted to the Commission for determination of quantum.

12. The Export Market Development Grants Act is beneficial legislation, being "An Act relating to Grants for the purpose of providing Incentives for the Development of Export Markets". Were it not beneficial legislation, then, on a literal approach to the first issue, the Tribunal might simply observe that the crucial sub-franchise agreement in evidence (T5), on its face, attests CCO Inc as a joint sub-franchisee for the territory of Ontario, and not the agent of the applicant and on that basis the claim fails. But the applicant has provided evidence which is intended to demonstrate that the agreement contained an error, that the inclusion of CCO Inc as joint sub-franchisor was unintended, went unnoticed for a time and when the error was detected then parties acknowledged the error and agreed to rectify it.

13. The evidence is now considered in relation to this first issue.

First Issue - Whether CCO Inc a Joint Owner of Franchise for Ontario: the evidence

14. Mr Mark Thurston ("Mr Thurston"), the only witness, gave evidence on behalf of the applicant. He explained that his son Mr Rhett Thurston (whom, for convenience, we shall refer to as "Rhett") worked for Mr Cumin's predecessor organisation which eventually became Cash Converters in the early 1990s. In 1993, together with Rhett and two others they formed a partnership and opened two Cash Converter franchised stores in Sydney. Rhett and a partner each managed a store whilst Mr Thurston's role was to assist in the setting up of the businesses, the systems, establishing the finance and a general overview of operations. This was an active role and required regular travel to Sydney. The Cash Converters franchise involved a standard format for pawning, buying and selling goods, for store colour scheme, for advertising and administrative systems generally.

15. A Mr Russell Percival was also independently running three Cash Converters stores in Sydney and it was through this common interest that he and the Thurstons became acquainted and which later led to a business arrangement critical to these proceedings.

16. In 1994 Mr Percival acquired, through his company Riverstone Nominees Pty Ltd, ("Riverstone") the Canadian rights to the Cash Converter franchise for the territory of Canada. Subsequently, Mr Percival incorporated a Canadian company, Cash Converters Canada Inc, and Riverstone granted it those rights to the territory of Canada. In turn, Rhett incorporated a Canadian company, CCO Inc. It is the role of CCO Inc which is critical to this issue.

17. T5 (p.10) is a copy of an agreement ("the head agreement") entered into by various parties, including the applicant, to give effect to the sub-franchise license for the territory of Ontario in question. The directors of the applicant at all material times were Mr Thurston, his spouse Mrs Sandra Lee Thurston and their son Rhett (T15, p.133). Mr Thurston told the Tribunal that the applicant acted solely as trustee of the "Cash Converters Ontario Unit Trust". He also told the Tribunal that the company CCO Inc was incorporated in Canada by Rhett and that Rhett was its only shareholder and director. His evidence was that CCO Inc was established with the intention of providing Rhett with his own company which would benefit from its involvement as agent in establishing sub-franchisees for the Cash Converter system in Ontario.

18. There are several things to note about the head agreement. It provides, on its first, second and thirty third pages for dates to be entered. No dates were entered despite the document having been executed by all eight parties to the head agreement. The document is unstamped so no proximate date of execution can be gleaned on its face. And more critically, the title page and the second page each nominate the applicant and CCO Inc as "sub-franchisor"

19.

20. . Indeed, the second page which is headed "Sub-Franchise Agreement" states:

" SUB-FRANCHISE AGREEMENT

MEMORANDUM OF AGREEMENT made as of the _ day of ___________

BETWEEN:

Cash Converters Pty Ltd, a corporation governed by the laws of Australia.

(hereinafter referred to as the "Master Franchisor")

OF THE FIRST PART,

Riverstone Nominees Pty Ltd, a corporation governed by the laws of Australia.

(hereinafter referred to as the "Riverstone")

OF THE SECOND PART,

Cash Converters Canada Inc, a corporation governed by the laws of Ontario, Canada.

(hereinafter referred to as the "Franchisor")

OF THE THIRD PART,

- and -

Cash Converters Ontario Pty Ltd, a corporation governed by the laws of Australia and Cash Converters Ontario Inc, a corporation governed by the laws of Ontario, Canada.

(hereinafter referred to as the "Sub-Franchisor")

OF THE FOURTH PART,

- and -

Rhett Mark Thurston and Mark Ashley Thurston and Sandra Lee Thurston

(hereinafter individually referred to as the "Covenantor" and collectively referred to as the "Covenantors").

OF THE FIFTH PART,"

21. The recital on page 3 of the head agreement states that the Master Franchisor franchises businesses of second hand dealers and merchandise under the name "Cash Converters" and that Riverstone has the franchise rights for Canada and the right to grant sub-franchise rights to persons within Canada. It continues:

"AND WHEREAS the Franchisor [that is, Cash Converters Canada Inc]

by agreement with Riverstone has agreed to perform franchisor related services on behalf of Riverstone and otherwise act as the representative of the Franchised System in Canada.

AND WHEREAS the Sub-Franchisor [that is, the applicant and CCO Inc] has requested the Franchisor [that is, Cash Converters Canada Inc] and Riverstone to enter into this Sub-Franchise Agreement to enable the Sub-Franchisor to market, promote and distribute the Franchised System in the Territory [that is, in effect, Ontario] to any person."

Article 2, on page 6 (T5, p.15) of the head agreement provides:

"ARTICLE 2

GRANT OF FRANCHISE RIGHTS

2.1 In consideration of the payment by the Sub-Franchisor of any sums agreed to be paid under section 2.2 and the performance and observance of the conditions and obligations in this Agreement on the part of the Sub-Franchisor, Riverstone hereby grants to the Sub-Franchisor the right and authority for the Term and within the Territory to market, promote and distribute the Franchised System and the right to use and/or apply the Intellectual Property by operating and granting the right to operate Franchised Businesses.

2.2 The Sub-Franchisor shall pay a fee of $150,000 (Aus) for this Agreement as follows:

(a) upon execution of this Agreement, $50,000;

(b) On the 15th September 1995 - $50,000.

(c) On the 15th March 1995 - $50,000.

Such fee is hereby deemed to be fully earned and non-refundable for any reason whatsoever upon execution of this Agreement."

22. Mr Thurston told the Tribunal that the actual deposit paid, on 23 January 1995, was $10,000 (A1, p17-19). Indeed, the deposit was paid from a National Australia Bank account, number 6-286, in the name of RM and MA Thurston (that is, Rhett and Mr Thurston) styled "Rhett Mark Thurston, Mark Ashley Thurston Cash Converters Ontario Account" (A1, p.19).

23. The funds deposited to that account, for the purpose of this payment, to Riverstone, came from the trustee for the Thurston Family Trust (a company called Sunshine Investments Pty Ltd). Mr Thurston's evidence was that the lesser sum of $10,000 was, by agreement with Mr Percival (the personality behind Riverstone), an instalment of the initial payment due. On 26 June 1995 two payments, one of $10,000 and another of $20,000 were made to Riverstone from the same account (A1, p.20). Mr Thurston said that these also were funded by loans from the trustee for Thurston Family Trust. And a similar payment, of $50,000 was made to Riverstone on 15 September 1995, also funded in the same way. These payments, together with the initial $10,000.00 deposit, total $90,000. The balance sheet of the applicant (Cash Converters Ontario Unit Trust) as at 30 June 1996 (T21), shows a non-current asset "Franchise costs $60,000" which is explained in the accompanying note as "Cash Converters International Ltd, Master Franchise Rights - Canada (15/09/95) $60,000". Clearly the two do not reconcile nor does the noted description accorded the asset assist the Tribunal in establishing ownership in fact of the sub-franchise in question. In this regard the applicant introduced, in support of its contention, a copy of the applicant's 1996/97 income tax return, completed in July 1997, showing a capital gain arising from the disposal of the rights in question (A1, p.33). This shows $80,000 (and not $90,000.00) as the cost base, but shows the acquisition date as 15 September 1995. The Tribunal does not consider that this document can be relied upon by the applicant as having significant weight in support of its contention, for two reasons. For capital gains tax purposes, if the rights had been acquired pursuant to the contract in question, then a much earlier acquisition date would be expected to have been shown on the return. This would have the effect of producing a lower assessable taxable gain due to indexation of the cost base. Secondly, the Tribunal is mindful that by July 1997, before the return was completed, the question of exclusive ownership of the rights in question was very much a live issue, having been recognised in the March 1997 agreement (A10) giving rise to the capital gain.

24. As an aside, the payment of the initial $10,000 to Riverstone on 25 January 1995, mentioned above, serves to establish a proximate date when the agreement in principle, which became the head agreement, was reached between the parties. But, for other reasons mentioned below there is considerable doubt that the head agreement was then in existence and its more likely execution time is some time in July 1995 at the earliest.

In addition to the above, the bank statements for account 6-286 (A1, p20-21) show the following transfer of funds to CCO Inc:

7 June 1995 $20,020.00

26 June 1995 $10,020.00

15 Sept 1995 $5,020.00

25. Mr Thurston explained that these payments were by way of loans to CCO Inc to provide it with working capital. Indeed, his evidence was that CCO Inc was not then generating any income and relied on such funding to meet its ongoing financial obligations.

26. It seems from the evidence that bank account 6-286 was intended to be the operating account for the applicant in its role as trustee for the Cash Converters Ontario Unit Trust, but for reasons mentioned below, because the applicant was not then in existence, it was in Rhett's and Mr Thurston's names jointly. This evidence leaves open the intimation that from the outset it was intended that this venture be one jointly between Mr Thurston (or his family interests) and Rhett on his own behalf - an inference in keeping with the parties to the head agreement as subsequently executed.

27. It was apparent to the Tribunal from Mr Thurston's evidence that he left these matters of detail to his accountants, with whom, he said, he had discussed the entire arrangement before it was consummated by the head agreement.

28. Indeed, Mr Thurston said he commissioned a report from his accountants, Duncan McPhail and Company Pty Ltd, to be advised on the appropriate entity structure to adopt for the purpose of the investment in the Cash Converters sub-franchise in Ontario. Part of this report, being a copy of a letter dated 12 July 1995, is in evidence (A1, pp.1-11). That report begins by saying that it "summarises our numerous meetings and telephone discussions and faxes regarding the most appropriate operating structure for the 'Sub Master' of Cash Converters for the province of Ontario in Canada." (A1, p.1) It proceeds to say that in arriving at the most appropriate structure one consideration was to maximise Australian export market development grants. It then opines that "it would be necessary for an Australian entity to own the 'Sub Master' for Ontario if you wish to access Export Market Development Grants ..." (A1, p.2).

29. That letter of advice, at page 5 (A1, p.5) makes reference to "a Canadian Controlled Private Corporation ... as marketing agent in Canada ...". Later however, (A1, p.7) the letter makes the following comment: "As the overall arrangement regarding the 'Sub Master' is a 50/50 deal then ...", no doubt a reference to an intention to share equally any profits (or losses presumably) arising from the so called Sub Master arrangement for the province of Ontario. That intention was confirmed by Mr Thurston in oral evidence and in an undated letter to which we refer shortly. The Duncan McPhail and Company letter at page 9 (A1, p.9) then makes reference to the fact that "because it is a 50/50 arrangement between Rhett and [Mr Thurston]" and that Mr Thurston, on behalf of the Thurston Family Trust, "will genuinely be doing substantial work to ensure the smooth operation and profit maximising potential of the Ontario 'Sub Master', it may be appropriate that the consulting company (presumably the applicant) receive a consulting fee ideally approximating the net profit in the [Canadian Controlled Private Corporation]." It is not clear from the advice how that would result in a 50/50 split - rather one would assume it to attribute the entire Canadian sourced profits to the applicant, something consistent with the applicant being the sole owner of the Ontario sub-franchise rights.

30. Finally, in its apparent disclaimer paragraph at page 10 (A1, p.10), Duncan McPhail and Company say that they have not examined the "Sub Master" agreement for the province of Ontario.

31. The Tribunal finds that this evidence, together with other evidence referred to later, serves to reinforce an ultimate conclusion that as at 12 (or 10) July 1995 the head agreement did not exist or at least no copy was yet received by Mr Thurston. Otherwise the accountant's disclaimer is a rather strange statement when in fact such an examination of the deed, if it did exist, would have been critical to the entire basis of the advice given and to not examine it may well be tantamount to negligence. Had the accountants examined the deed, that is, the head agreement (T5) had it existed, they surely would have discovered that their advice, confirmed diagrammatically in the Appendix at page 11, was frustrated by the very agreement critical to the advice they were giving. So whilst the advice, standing alone, shows that it was the intention of Duncan McPhail and Company to ensure that a separate Canadian corporation controlled exclusively by Rhett would act as marketing agent (see the Appendix), the existence of the letter of advice does not, of itself, establish an error in the agreement (which most likely was executed after the letter was received). Indeed, in the Tribunal's opinion, the accountant's references to the profit sharing ratio of 50/50 between the applicant (as trustee) and the Canadian based company to be incorporated by Rhett, suggests strongly that that may have been uppermost in the mind of Mr Thurston, clearly the principal architect of the arrangement, in January 1995 and probably also at the time of entering into the head agreement. That is, the applicant and CCO Inc were named as co-owners despite the advice of Duncan McPhail and Company proximate to the time when the agreement in question was most likely executed. That this was the carrying into effect of Mr Thurston's clear intention to share profits 50/50 may explain the applicant and CCO Inc as having been named, in the head agreement, as joint sub-franchisees.

32. This leads the Tribunal to consider the evidence as to when it is purported that the so called error in the head agreement was discovered. We do not know when the agreement was executed but, for reasons above, it seems most likely that it did not exist prior to the first payment of $10,000 to Riverstone, on 25 January 1995 (A1, p.19), although an agreement in principal may then have been reached between Mr Thurston and Mr Percival.

33. In a letter of advice from Exportise to Mr Thurston, dated 19 May 1995 (A1, pp.13-14) its author states inter alia:

"In summary the company you have told us you are likely to incorporate in Australia, namely Cash Converters Ontario Pty Ltd, to sell the franchises in Ontario Province, Canada should be eligible to claim Export Market Development Grants providing that it meets all of the normal eligibility criteria that Gareth has outlined to you.

As discussed we have attached for your information a draft of an agreement between Cash Converters Ontario Pty Ltd and the Canadian Marketing Company. This agreement provides for CCO to reimburse CMC for certain expenses. These expenses should then be eligible expenditure, providing they are adequately substantiated as to purpose and payment, for EMDG purposes."

The applicant was incorporated on 11 July 1995 (T15, p133).

34. The executed head agreement (T5, p.10) bears the Common Seal of the applicant alongside the signatures of Rhett and Mr Thurston, each signing in their capacity as directors (T5, p.123).

35. Exhibit A7 bears a facsimile stamp "30-Jan-1998 P.02". It is a handwritten note and is reproduced in its entirety below:

" CCO P/L

15/7/95 62/48 Mount St

Perth WA 6000

Rhett,

A quick note to remind you that the Submaster agreement has been drafted and executed wrongly, Im sorry I didnt pick this up Before but it needs to be corrected. Can you please arrange it.

(initials of Mr Thurston)

M Thurston

1 x PAGE (sic) Director"

36. The Tribunal notes that this is dated 15 July 1995 but bears a facsimile machine date of 30 January 1998. Also, Mr Thurston, who admitted to its authorship, has written on it "1 x page" when the facsimile has imprinted "P.02" thereon. Mr Thurston's evidence is that he has mislaid the original copy sent by facsimile to his son Rhett and the copy produced in evidence was a facsimile sent by Rhett to him on 30 January 1998, being a facsimile of the original facsimile received by Rhett. If this were so then one would expect there to be two facsimile date imprints thereon, or, in the alternative at least, that the original facsimile received by Rhett would have been produced at the hearing given the time lapse since January 1998 and the hearing in December of that year. In the light of the entirety of the evidence in this regard, the Tribunal is of the opinion that this is not a true copy of a facsimile sent on 15 July 1995 and cannot be given any weight.

37. Other relevant evidence tendered through Mr Thurston is a copy of a purported letter of August 8, 1995 on Cash Converters International Franchise Group (Cash Converters Canada Inc) letterhead and signed by Russell Percival and Leanne Percival in their respective capacities of director of Riverstone (A8). Exhibit A8 bears a facsimile date of 29 January 1998. That letter is addressed to CCO Inc and the applicant and headed "Error in Sub-Franchise Agreement for Province of Ontario". It purports to "acknowledge and confirm that ... the recently executed Sub-Franchise Agreement for the Province of Ontario, Canada" was incorrect in its inclusion of CCO Inc as Sub-Franchisor "when in fact it should have been cited an agent of the principal Sub-Franchisor", namely [the applicant]. It then informs the recipients that at their expense they may have new documents prepared to correct the error. It is relevant to note that a copy of that letter together with a copy of a purported letter from CCO Inc, signed by Rhett, to Mr Russell Percival in Toronto, dated 20 July 1995 were sent as attachments to a letter from Rhett dated January 30, 1998 to Denver Davies, Exportise, Perth, the export market development grant advisers to the applicant (T37, pp.228, 229 and 230). These do not bear any facsimile date.

38. These letters, produced in the T documents, were sent by Exportise to an officer within the Commission, under cover of a letter of 16 February 1998, in response to a request by the Commission for evidence supporting the applicant's contention that the head agreement contained an error (T37). It seems that if the error had been discovered in July 1995 as purported by Mr Thurston and steps were then taken to rectify it because of its critical role in regard to the claim in question, and the realisation by the applicant that it was a significant matter, one supposes the applicant would have drawn the Commission's attention to the fact, rather that the other way around as appears to be the case from the evidence. Further, the fact that no substitute agreement was prepared belies the inference that the so called error was indeed discovered between the head agreement's execution (which must have been after 12 July 1995) and on or before 15 July 1995, when Mr Thurston wrote to Rhett to "remind" him of the error (A7). So the Tribunal is asked to accept that the head agreement was executed in both Australia and Canada by the parties within 3 days during which time an error was discovered but too late because the deed had been executed (although not stamped, which it seems it never was). In the circumstances of the evidence and for additional reasons which follow this paragraph, it is difficult for the Tribunal to accept the letters (Exhibit A8 and T37, pp.229 & 230) as genuine.

39. Exhibits A6 and A5 are the first and last signature pages of sub-franchise agreements to license two separate Cash Converters franchise stores in Ontario, Canada. Similarly, exhibit A4 is a complete agreement to license a Cash Converters franchised store at Queen Street Brampton, Ontario, Canada. Exhibit A6 is dated 1 April 1995, A4 is dated 25 July 1995 and A5 is dated 15 November 1995. In each instance the "Sub-Franchisor" party to the agreement is the applicant and CCO Inc. So it seems that by 25 July 1995 the so called error had not been detected. For had it been detected by 15 July 1995, as asserted by the applicant, then both Mr Thurston and Rhett, who each signed each of the three agreements mentioned, would have made sure that at least the agreements executed on 25 July 1995 and 15 November 1995 respectively reflected the correct party as they purport. And further, by comparison, exhibit A10, the original of the assignment of the sub-franchise rights to the territory of Ontario to a Cyprian company, dated 1 March 1997 (post the claim year 1995/1996), shows only the applicant as the sub-franchisor and includes the following clause:

"AND WHEREAS Ontario [a reference to CCO Inc] entered into the Subfranchise Agreement [a reference to the head agreement] as agent for and on behalf of the Subfranchisor only, and not as principal."

40. Therefore, the evidence is that by March 1997 when the decision to sell the Ontario rights to the Cash Converters sub-franchise contract was made, the applicant and CCO Inc had discovered the purported error.

41. The Tribunal cannot accept that the so called error in the head agreement was discovered when the applicant says it was but rather, the only reasonable inference is that the so called error was "discovered" some time after 15 November 1995 and before 1 March 1997. But notwithstanding, since the applicant claims that CCO Inc was only ever intended to be its agent then no reason or explanation was provided to the Tribunal as to why it was mentioned in the head agreement in the first place. In other words, if it was never intended to be party to the agreement then why was it included? The Tribunal is satisfied that Mr Thurston is an experienced and intelligent businessman who would not be likely to miss such a fundamental error in a critical agreement.

42. The export market development grant claim for 1995/1996, the year in question, was lodged on or about 2 December 1996 (T13). Neither it nor the accompanying Export Market Plan Guide for the Grants Entry Test, also dated 2 December 1996, make any mention of the purported error in the head agreement. It is not possible from the T documents to ascertain just when the Commission received a copy of the head agreement and alluded to the difficulty which it implies but the letter from Exportise to the Commission of 16 February 1998 indicates that the contention was then established. However, that is probably of little consequence in view of the conclusion of fact which the Tribunal has reached in this respect.

43. And if it is necessary to add weight to the conclusion reached by the Tribunal above then at T4, p.8 there appears a copy of another critical letter, being one written by Mr Thurston in his capacity as a director of the applicant to Rhett (addressed this time to Mr R Thurston) at CCO Inc in Canada. This letter also is undated. It confirms the appointment of CCO Inc as the sole marketing and distribution agent for the Province of Ontario in Canada in relation to the franchise rights held by the applicant as trustee for the Cash Converters Ontario Unit Trust. It then proceeds to set out the detailed arrangement, the basis for reimbursement of expenses and remuneration for services. When asked as to when this letter was written and sent, Mr Thurston was quite uncertain and could only guess that it was written and sent soon after the head agreement was executed.

44. In relation to that letter, purporting to appoint CCO Inc as agent in Canada for the applicant, the evidence given by Mr Thurston is that none of the essential requirements of that agreement were actually carried into effect. The agreement provides:

"You [that is, CCO Inc] are to invoice us [that is, the applicant] for the expenses on a monthly basis. Each invoice should be accompanied by a report detailing your activities for the period. All expenses should be supported by source documentation."

45. Presumably this letter followed the draft provided by Exportise in its letter to Mr Thurston of 19 May 1995 (A1, pp13-14) but, as stated, Mr Thurston was unable to recall just when the letter may have been written. The fact that the conditions of the agreement were not followed by CCO Inc despite the applicant making irregular payments to it, leads to the conclusion that either the parties did not see it as important or the agreement was not in existence for the entire claim year. Mr Thurston's evidence in this respect was that on his visits to Canada he perused CCO Inc's expenditure documentation and satisfied himself that the reimbursable expenditures as agreed had in fact been incurred. He said that he and Rhett were in regular communication and he was fairly well appraised of what CCO Inc was doing, so obviating the need for formal monthly reports to be filed by CCO Inc, as agreed in the letter referred to above (T4). This might or might not be a reasonable explanation of the failure to require such reports and accounting. However, if the applicant and CCO Inc were indeed intended to be co-owners of the sub-franchise for Ontario then what actually occurred in terms of funding and accounting for those moneys and related activities of CCO Inc would seem to have been reasonable business-like behaviour in those circumstances. The evidence of the overt acts in relation to supervision of and expenditures incurred by, CCO Inc and the informal arrangement to keep it in funds sourced from the Thurston Family Trust, leads to the more likely conclusion that the mutual understanding between Mr Thurston and Rhett for the duration of the claim year was that they were involved, through the applicant and CCO Inc respectively, in a joint business arrangement probably more reasonably described as a partnership. Further, the T documents, (p.216) contain a copy of draft financial statements of CCO Inc for the year ended 31 July 1996, prepared on 22 February 1997. These show inter alia, an expense termed "royalties" of $131,054 (matched in the balance sheet by a current liability for the same amount) which suggests that it was acting as a principal rather than an agent in relation to sub-franchise agreements entered into. This obtains because Article 3.1 of the head agreement (T5, p.16) requires the "sub-franchisor", that is, the applicant and CCO Inc, to pay to Cash Converters Canada Inc a "franchise royalty". The head agreement defines the "franchise royalty" as fifty per cent of the "gross receipts" (also widely defined to embrace fees payable to the "sub-franchisor" pursuant to a "franchise agreement" for sub-franchisee licences in the territory of Ontario). Mr Thurston was unable to explain this apparent inconsistency with his evidence that CCO Inc was acting only as agent and entitled only to a reimbursement of expenses and commission, as set out in the letter of appointment at T4. An obvious reason for the accruing of the liability for royalty payments due by CCO Inc is that it considered itself liable pursuant to the head agreement.

46. For all of the above reasons, the Tribunal is not reasonably satisfied that CCO Inc was acting only as agent for the applicant during the claim year, and therefore the requirements of s.11C(1)(a) have not been met.

47. On the basis of that finding alone the Tribunal can affirm the decision under review. However, out of a sense of thoroughness and with due respect to the submissions of the parties, the Tribunal now considers two further issues: whether the applicant meets the statutory criteria of s11Z(8) and (9) of the Act in relation to eligible industrial property rights or eligible know-how owned by it; and, whether in any event the applicant was able to satisfy the grants entry test.

Second Issue - whether, for the purpose of s11Z of the Act, the applicant owned eligible industrial property rights or eligible know-how.

48. On the assumption that notwithstanding the first finding of fact above, that in any event the applicant is entitled, at law, to its claim or part-thereof, it is incumbent on the Tribunal to consider what was the nature of the rights which the applicant possessed pursuant to the head agreement and whether it met the requirements of Division 4 of the Act in relation to "qualifying export development expenditure".

49. Article 8 of the head agreement (T5, p.26) states:

"ARTICLE 8

INTELLECTUAL PROPERTY

8.1 The Sub-Franchisor acknowledges confirms and agrees that:

(a) It will not contest or impugn in any legal proceeding or otherwise, the proprietorship, ownership and interest of the Master Franchisor, Riverstone and/or the Franchisor in the Franchised System or the Intellectual property.

(b) The rights granted to the Sub-Franchisor under this Agreement shall in no way affect the exclusive ownership of the Master Franchisor in and to the Franchised System and the Intellectual Property.

(c) Subject to Article 2 and other than in the Territory, Riverstone has the sole right, authority and absolute discretion (together with all rights to royalties and any other fees) to grant any franchises, licences, privileges or endorsements in respect of the Franchised System and the Intellectual Property;

..."

Article 1 provides relevant definitions:

"ARTICLE 1

INTERPRETATION

1.1 In this Agreement, unless the context otherwise requires:

...

(m) "Franchised System" means the Franchisor's specialised system for the operation, management and promotion of Franchised Businesses incorporating the use an application of the Intellectual Property in connection therewith.

(o) "Intellectual Property" means:

(i) the Marketing and Operating Manuals;

(ii) the Name;

(iii) the Materials;

(iv) the Logos;

(v) the Trade-Marks;

(vi) the Colours;

(vii) the Copyright; and

(viii) all other intellectual property belonging to the Franchisor or Master Franchisor;

(y) "Territory" means the Province(s) of Ontario (excluding all areas East of a line drawn South to North, 5 kilometres West of Kingston. The area excluded includes Ottawa and Environs), Canada;

50. Part of the recital to the head agreement (T5, p.12) states that:

"... the Sub-Franchisor has requested the Franchisor and Riverstone to enter into this Sub-Franchise Agreement to enable the Sub-Franchisor to market, promote and distribute the Franchised System in the Territory to any person."

51. The Tribunal is of the opinion that it would be unlawful for anyone to set up a business which apes or copies the attributes of the business of Cash Converters using its name and in breach of its intellectual property rights, as it would then be holding out that it is part of the business owned and controlled by the Master Franchisor. The purpose of the Sub-Franchise Agreement (the head agreement) is clearly to licence the applicant to do something which would otherwise be unlawful. The substance of what they are licensed to do would seem to fit within the broad definition of "franchise" as found in Butterworths Encyclopaedic Australian Legal Dictionary:

"Franchise

Trade and Commerce

1. A business arrangement which allows an individual, partnership or company to operate under the name of an already established business. A franchise is a system in which one organisation ('franchisor') grants the right to produce, sell or use a developed product, service or brand to another organisation ('franchisee'). Royalties based on turnover are usually paid by the franchisee. The franchisee agrees to comply with the franchisor's policies in respect of buying, marketing, and management. The franchisor may offer advertising and back-up services."

52. In Trade Practices Commission v Ansett Transport Industries (Operations) Pty Ltd 20 ALR 31, Northrop J said, at p.53, in relation to the legal nature of a commercial franchise:

"In some cases the operator by means of a franchise agreement permits the franchisee to have the benefit of the name of the franchisor in return for a fee. Other types of franchise agreements provide for the franchisee receiving a commission. Variations exist as to the specific terms of franchise agreement."

53. In the Tribunal's opinion the nature of the arrangement between the parties to the head agreement fits squarely into the nature of a commercial franchise as defined above. The applicant was therefore not itself the owner of the intellectual property rights.

54. "Eligible industrial property rights", "eligible know-how" and "know-how" are defined respectively, in s3 of the Act as:

" "eligible industrial property rights" means rights in relation to inventions or trade marks, or copyright in relation to works, designs and other things, being:

(a) inventions, works, designs or things that, in the opinion of the Commission, have, to a substantial extent, resulted from research or work performed in Australia; or

(b) trade marks that, in the opinion of the Commission, were first used in Australia or have increased in significance or value by reason of their use in Australia;

"eligible know-how" means know-how that, in the opinion of the Commission, has to a substantial extent resulted from research or other work performed in Australia;

"know-how" means knowledge or information in relation to industrial or other operations, and includes drawings, models or other material things, or services, supplied for the purpose of enabling or facilitating the use or enjoyment of such knowledge or information, of rights in relation to inventions or trade marks or of copyright in relation to works, designs or other things."

55. The "Franchised System" described in the head agreement no doubt fits these definitions in that it was developed in Australia through the initiatives of Mr Cumins and it inherently includes copyright privileges at least in relation to the "Materials" which include the "Marketing and Operating Manuals" as well as a registered trade-mark and associated rights. These inferences are drawn from the evidence of Mr Thurston and exhibit A2. Exhibit A4, produced as a typical sub-franchise agreement which acknowledges the ownership of the Cash Converters proprietary rights, trade-marks and copyrights etc and serves to license a Canadian based company to establish a Cash Converters outlet in the province of Ontario in consideration of many things, including a payment to the applicant (and CCO Inc) of the "Initial Franchise Fee" amounting to $50,000.

56. On the basis of the evidence the Tribunal finds, as fact, that the applicant, being an Australian registered company the majority of whose directors were permanent residents of Australia and whom conducted the affairs and management of the applicant for the most part whilst physically present in Australia, maintained its business office and bank account in Australia and complied with relevant Australian business laws, was carrying on business in Australia.

57. Also, on the evidence the Tribunal finds, but for the impediments imposed by the first finding of fact, the applicant, in relation to the claim year, was primarily and principally engaged, through its director Mr Thurston and through the efforts of Rhett, in creating or seeking opportunities for; or in creating or increasing demand for; the disposal to persons resident outside Australia (namely, in Ontario Canada) of the franchised rights for conducting a business in the name of Cash Converters.

58. Because the Tribunal is not required, at this time, to decide on the question of whether the claimed expenditure in question is "claimable expenditure" in terms of Division 2 of the Act, no finding is made as to whether, in those respects only, the expenditure incurred is "qualifying export development expenditure" for the purpose of s11Z(8) or (9). However, because of the previous finding, subject only to the qualification relating to Division 2, the Tribunal finds that the remaining criteria of those two sub-sections are met.

59. The remaining issue is whether, in any event, the applicant has met the grants entry test.

Third issue - whether the applicant has met the grants entry test.

60. The grants entry test was enacted by the Export Market Development Grants Amendment Act (No.1) 1996 (Act No.23, 1996). By s5 it applies in relation to a balance-year claim or full-year claim in relation to the grant year beginning 1 July 1995. The applicant's claim in question, made on 2 December 1996 (T13), is a full-year claim for the 1995/1996 grant year and so is affected by these amendments.

61. The amendments inserted Division 2B - Grants entry test for first time claimants, are contained in sections 13J, 13K and 13L. It is common ground that the applicant is a first time claimant and therefore it must pass the grants entry test to be eligible for a grant (s13J). Sub-section 13J(3) is reproduced above. Sub-section 13J(4) stipulates that the grants entry test is the test formulated under s13K which states:

"13K Grants entry test

(1) The Commission may make a written determination formulating a test, to be known as the grants entry test.

(2) The test may confer a power on the Commission.

(3) The test may require:

(a) an existing document to be given to the Commission; or

(b) a document to be prepared and given to the Commission.

(4) Subsection (3) does not, by implication, limit subsection (1).

(5) The Commission must give a free copy of the determination to any person who asks for a copy.

(6) A determination under subsection (1) is a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901.

62. The Commission made the relevant determination on 26 July 1996 (Exhibit A3). The relevant provisions of the test which are challenged by the respondent are contained in paragraphs (d) and (h) and are relevantly:

"A first-time claimant at any time during the period referred to in Section 13J(3):

...

(d) must have and be likely to continue to have financial resources capable of supporting the planned export activities;

... and

(h) must have planned export earnings which are not on their face unachievable."

63. A copy of the Grants Entry Test Assessment Form, as completed by Commission between 18 March 1997 and 25 June 1997 indicates that the assessor was not satisfied that the applicant had "passed" the two tests above. He noted on the form (T24, p.171) "No cash flows available at visit made 25/6/97. Unable to recommend claimant passes GET. Claim was unsubstantiated."

64. The balance sheet for the applicant appears at T35, p.202. It shows that as at 30 June 1996, the end of the claim year, the applicant's liabilities exceeded its assets by $186,500, it had no liquid assets and its only current assets were $100 owed by the Thurston Investment Trust and $45,000 owed by Cash Converters Canada - Sydney. At the same time its current liabilities totalled $292,540. On the face of it, the applicant at that time was insolvent. Also, for the year ended 30 June 1996 the applicant had incurred a trading loss of $186,602, clearly funded by loans from related parties. Further, CCO Inc which is shown as a creditor was owed $122,089. That liability arose by book entry dated 30 June 1996 bringing to account so called "representation fees" as an expense (T35, p.200).

65. The only other relevant evidence about the applicant's ability to continue beyond 30 June 1996 to have available sufficient financial resources to support its planned export activities (referred to shortly) was oral evidence by Mr Thurston. He told the Tribunal that he and his family investment entities had sufficient financial resources to maintain the applicant in its endeavours. Nothing was produced in evidence to support this claim. The Tribunal notes that the applicant sold its sub-franchise rights in March 1997. Indeed, according to the copy of the applicant's income tax return for the year following, ended 30 June 1997 (A1, pp.28-33) no income was derived in that year although further expenses totalling $58,416 were claimed as tax deductions. The only assessable income reported for that year is the capital gain of $8,001 arising from the sale of the Ontario franchise rights. These facts contrast significantly with the projections for export sales in each of the two financial years ended 30 June 1997 and 1998 of $500,000 and net operating profits of $200,000 and $180,000 respectively; (T16, p.136). Bearing in mind that those estimates were made almost six months into the 1996/1997 period, by the applicant's accountant, and when compared with the then reality, they seem rather fanciful.

66. The Tribunal understands one of the applicant's submission, in this respect, to be that new business funding can be sourced from owners and or by loans from financial institutions. We would add that, once established, then retained profits is another source of funding. The submission continues that therefore, unless a business has gone into bankruptcy or ceased then there is always a likelihood of it being able to continue. The Tribunal does not accept that to be a reasonable proposition in terms of applying the grants entry test. The test should be applied on available information and reasonable projections which with hindsight, such as is the present case, one can test their reasonableness. In the Tribunal's opinion, at the time that the test is applied, by reference to s13J(3), there must be available evidence to provide a reasonable inference that the test is met. The test is not that actual results have been predicted with accuracy but that the expectations were, at the time, reasonable.

67. In the absence of any evidence supporting Mr Thurston's assertion that sufficient funding from family related sources would have been made available if the applicant's business was to continue, the Tribunal concludes that the applicant has not demonstrated that at the time of the claim it had and would have been likely to continue to have financial resources capable of supporting its planned export activities. The Tribunal is of the opinion that any commercial financial institution would require much more information than was put before the Tribunal before any positive decision would be made to make available risk finance to the applicant.

68. On the basis of the evidence before it, the Tribunal concludes that the applicant, in relation to the grant year in question, with particular reference to paragraph 2(d) of the Schedule, has not passed the grants entry test formulated under s13K of the Act. Therefore, in terms of s13J(3) of the Act, a grant is not payable.

69. Further, and for the sake of completeness (although unnecessary) the Tribunal notes that the applicant concluded a sale in March 1997 of its relevant franchise rights (A10 and A1, pp.34-41) and derived no export income from sales since the end of the claim year, 30 June 1996 till then(supra). These facts alone support a conclusion that the planned export earnings referred to above would not, at the time they were estimated in December 1996, have been on their face achievable. For this reason the Tribunal does not accept that the applicant has acquitted its onus in relation to the grants entry test paragraph 2(h) of the Schedule pursuant to the s13K of the Act.

Decision

70. Pursuant to s43(1)(a) of the Administrative Appeals Tribunal Act 1975, and for the above reasons, the Tribunal affirms the decision under review.

I certify that this and the 26 preceding pages are a true copy of the decision and reasons for decision herein of Deputy President T E Barnett, OBE; Associate Professor R D Fayle, Senior Member; Dr M Wood, Member.

Signed: (signed) .....................................................................................

R Johnston, Associate

Date/s of Hearing 11, 23 December 1998

Date of Decision 16 February 1999

Counsel for the Applicant Mr F Carles

Solicitor for Applicant Carles Solicitors

Counsel for the Respondent Mr J D Allanson of Counsel

Solicitor for the Respondent Mr T Burrows, Office of the Australian Government Solicitor