Industry Research and Development Board v Phai See Investments Pty Limited

Background 3 There are three syndicates which are relevant to these proceedings. The first is the "Budplan Personal Syndicate", which is the subject of a prospectus dated 5 December 1995. This syndicate was formed to develop tea tree oil based applications in acne treatment, hospital and antiseptic products and oral hygiene. The prospectus stated that the Budplan Personal Syndicate is one of two syndicates formed concurrently, the other being Company Budplan No 1. 4 The second syndicate is "Company Budplan No 1", which is the subject of a prospectus dated 8 May 1996. This is the Budplan company syndicate referred to in the first prospectus and was also formed to develop tea tree oil based applications in acne treatment, hospital and antiseptic products and oral hygiene. Phai See became a member of this syndicate on 22 May 1996. 5 The third syndicate is "Company Budplan No 2" which is the subject of a prospectus dated 3 June 1996. This syndicate was formed to develop tea tree oil based applications in the areas of skin care, bath and shower products, deodorants and hair care excluding dandruff prevention and treatment, (sometimes referred to as "cosmeceuticals"). Mainstar became a member of this syndicate on 28 June 1996. 6 Each of the prospectuses described the investment scheme to which the prospectus related as "a business and collaborative research proposal for products featuring Australian Tea Tree Oil". 7 Participants in each syndicate entered into a management agreement under which each participant appointed Business & Research Management Pty Ltd ("BARM") as its agent for the purpose of carrying on the business referred to in the prospectus. Participants also entered into a research agreement with Australian Tea Tree Oil Research Institute Ltd ("ATTORI") under which ATTORI undertook to perform the research and development work for the business of the Budplan.

Relevant statutory provisions 8 At the relevant time s 39J of the Act provided as follows: "39J. (1) Where: (a) an eligible company applies to the Board for registration in respect of a year of income; (b) the company provides to the Board such information in relation to its research and development activities, or proposed research and development activities, as the Board reasonably requires; and (c) there are no grounds under section 39K on which the Board is entitled to refuse to register the company in respect of that year of income; the Board shall register the company in relation to that year of income." 9 Section 39K of the Act relevantly provided that the Board was entitled to refuse to register an eligible company in respect of a year of income on the ground that the activities that were carried on by or on behalf of the company in that year of income are not, or do not include, "research and development activities". 10 Section 39A(2) of the Act relevantly provided that expressions used in Part IIIA of the Act that were defined by s 73B of the Income Tax Assessment Act 1936 (Cth) ("ITAA") have the same meaning as in that section. The term "research and development activities" was relevantly defined in s 73B(1) to mean: "(a) systematic, investigative or experimental activities that involve innovation or technical risk and are carried on for the purpose of: (i) acquiring new knowledge (whether or not that knowledge will have a specific practical application); or (ii) creating new or improved materials, products, devices, processes or services; or (b) other activities that are carried on for a purpose directly related to the carrying on of activities of the kind referred to in paragraph (a)." AAT referred to the activities described in par (a) as "core activities" and those described in par (b) as "supporting activities". 11 The object of the Act (s 3) is to promote the development, and improve the efficiency and international competitiveness, of Australian industry by encouraging research and development activities. The point of registration under s 39J of the Act is found in s 73B(13) of ITAA. Subject to that section, deductions were available to eligible companies (loosely, Australian companies) incurring particular types of expenditure on research and development in an amount equal to the expenditure in the year of income multiplied by 1.5. One of the conditions to be met before an eligible company could satisfy the requirements for deduction is that it is registered in relation to the year of income under ITAA (s 73B(10)). That is, registration is a prerequisite of eligibility to a deduction under s 73B of ITAA. 12 Prior to the Research & Development Legislation Amendment Act 1988, the provisions as to registration were to be found in s 73B(12) of ITAA. Under that section the Board was obliged to register an eligible company seeking registration provided it furnished the Board with such "information relating to the research and development activities of the company" as the Board reasonably requested. Section 73B(12) of ITAA was repealed by the 1988 amending act, and the legislative authority for the registration of companies was relocated in what became ss 39J and 39P of the Act. ITAA did not contain a provision equivalent to s 39K. 13 The Explanatory Memorandum for the Research & Development Legislation Amendment Bill 1988 stated (cl 43(k)): "Proposed section 39K provides for the grounds on which a company may be refused registration, principally that the proposed activities are not research and development activities. Other grounds may be specified in regulations, provided such grounds relate to a matter which the Board has power to determine." Clause 4 of the Explanatory Memorandum stated: "To reduce the incidence of companies being required to reimburse tax benefits subsequent to a tax audit, the Bill empowers the Board to refuse to register a company if the activities cited in the application for registration are not R & D activities or for such other specified reasons as may be within the Board's authority to determine."

AAT's decision in relation to Phai See 14 AAT was satisfied that after 30 June 1996 ATTORI was engaged in activities which constituted research and development activities. The question thus became whether Phai See and/or Mainstar could point to activities occurring in the year ended 30 June 1996 which could be directly related to the carrying on of the subsequent core activities. The supporting activities on which Phai See primarily relied consisted of the commissioning and preparation of product development briefs. 15 In April 1996 BARM enlisted the assistance of Main Camp Marketing Pty Ltd in relation to the marketing and research requirements of BARM as specified in the Budplan personal prospectus. Main Camp Marketing Pty Ltd in turn commissioned Xanadu Consulting Pty Ltd ("Xanadu") to assist in the preparation of research and development briefs in the fields of acne, oral care, antiseptics and disinfectants. Three product development briefs were prepared by Xanadu for Main Camp Marketing Pty Ltd as follows: 27 May 1996 : acne products 13 June 1996 : oral hygiene products 13 June 1996 : antiseptic products 16 AAT found: - that the product development briefs and the work that went into their production had utility for the subsequent research work carried out;

• the product development briefs form a link, possibly the primary link, in the chain of research and development;

• the production of the briefs should properly be regarded as supporting activities and thus "research and development activities". 17 AAT then considered whether the three development briefs were prepared "on behalf of" the participants in Company Budplan No 1, including Phai See. AAT found that: - Company Budplan No 1 and Budplan Personal Syndicate each covered identical products. The proposed research and the intended business of each are described in their respective prospectuses in identical terms;

• there was a close relationship between Main Camp Marketing Pty Ltd and BARM, which was the agent for the investors in both the company plan and the personal plan;

• the substance of both prospectuses linked the company plan with the personal plan. The two were described as proceeding concurrently and there was a reference to sharing of the net earnings from product sales;

• the intention of all relevant parties was that the two plans (which are separate only for technical taxation reasons) were intended to benefit from the initial supporting activities;

• although the first step leading to the production of the product development briefs was a request from BARM made in connection with the personal plan, it is clear that whatever resulted was also to be used in connection with Company Budplan 1, even though it was not until 22 May 1996 that the prospectus for Company Budplan No 1 was issued, and management agreements between BARM and the participants in the company plan were entered into;

• the words "on behalf of" do not require an agency relationship; it is sufficient if all relevant parties intended that the product development briefs were to be used in connection with both plans.

An agency relationship? 18 The Board submits that in reaching its conclusion, AAT misconstrued the words "carried on by or on behalf of the company" in s 39K of the Act. In the Board's submission the expression "on behalf of the company" connotes an agency relationship. The Board further submits that the construction of the expression "by or on behalf of" for which it contends is supported by s 39J(1)(b) of the Act where there is a reference to the ownership of the activities in the expression "its research and development activities". A requirement for registration under s 39J is that the company be the sole owner of the activities. This construction arises from the ordinary meaning of the words "its" and the phrase "by or on behalf of" and is further supported by the provisions of s 39P which provide for joint registration of companies in respect of shared or collaborative activities. The applications considered by AAT were made under s 39J, and not s 39P. 19 The phrase "on behalf of" is not an expression which has a strict legal meaning. It may be used in conjunction with a wide range of relationships, "all however in some way concerned with the standing of one person as auxiliary to or representative of another person or thing": R v Toohey; Ex parte The Attorney-General for the Northern Territory of Australia (1980) 145 CLR 374 at 386. It is necessary to have regard to the context in which the expression "on behalf of" is used in order to determine the scope of the relationships to which it applies: R v Portus; Ex Parte Federated Clerks Union of Australia (1949) 79 CLR 428 at 438. 20 In some contexts "on behalf of" does contemplate a representative capacity or agency relationship, see eg, Metropolitan Waste Disposal Authority v Willoughby Waste Disposals Pty Ltd (1987) 9 NSWLR 7 at 10. In other contexts the phrase has a wider signification. Thus in R v Portus (supra), Qantas, a corporate entity, was held to act on behalf of the Commonwealth because its function was relevantly to act "in the interests of" the Commonwealth. The authorities were reviewed by the NSW Court of Appeal in Citizens Airport Environment Association Inc v Maritime Services Board (1993) 30 NSWLR 207, but to borrow the words of Kirby J in his dissenting judgment, cases decided in a different statutory context "cast only dim light" on the resolution of the instant problem. 21 The starting point is s 39J, which is the source of the entitlement to registration. The phrase "by or on behalf of" does not appear in s 39J. Section 39J requires an eligible company to specify "its research and development activities". In the context, "its" does not signify ownership. Research and development activities are things which have been done, or are proposed to be done. The information which is the product of the activities may be owned, but the activities themselves are events or actions which are done, rather than owned. 22 Registration under s 39J is a prerequisite to eligibility for a deduction under s 79B, but is not of itself the source of an entitlement to a deduction. Entitlement to a deduction depends upon the company incurring contracted expenditure (s 73B(13)) or research and development expenditure (s 73B(14)). "Contracted expenditure" is defined so as to encompass expenditure incurred by an eligible company to specified bodies in consideration for the body funding or performing research and development activities "on behalf of" the eligible company. Research and development expenditure is defined so as to include (inter alia) expenditure incurred on or after 1 July 1985 directly in research and development activities and carried on "by or on behalf of" the company. 23 Thus "its" research and development activities necessarily extend to research and development activities performed "on behalf of" the company seeking registration. 24 The object of the Act would not be furthered by confining research and development activities performed "on behalf of" the company to those activities which are done in a representative capacity or pursuant to an agency relationship. The legislative policy is to provide tax incentives to Australian companies to encourage research and development which will improve the efficiency and international competitiveness of Australian industry. 25 The provision to be construed is contained in a statutory scheme which is an incentive and relieving provision, not one imposing tax or preventing avoidance. In Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 at 632 Kirby J said: "Provisions of this kind, affording relief to the taxpayer, have conventionally been treated as, to some extent, beneficial. It has been said that they 'should not be narrowly construed and should be interpreted to promote the purpose or object underlying the relevant Act'. [Plessey Australia Pty Ltd v Federal Commissioner of Taxation (1989) 20 ATR 1538 at 1543; 89 ALR 395 at 400. See also Federal Commissioner of Taxation v Top of the Cross Pty Ltd (1981) 57 FLR 294 at 305; 37 ALR 623 at 633; Penrith Rugby League Club Ltd v Commissioner of Land Tax [1983] 2 NSWLR 616 at 622.] Each case must depend upon its own statutory language and apparent statutory purposes. However, I consider that the foregoing approach is the correct one." 26 The company is required to nominate the activities which are "its research and development activities", and which provide the explanation for its registration application. The Explanatory Memorandum (see par 13 above) suggests that it is the nature of the activity, rather than the relationship between the company and the body which is to perform the activity which is of concern at the registration stage. 27 A company is entitled, in my view, to nominate activities as "its research and development activities" if the activities have been done or will be done for it by others. It is, I think, in that sense that "on behalf of" is used in s 39F of the Act, which provides for registration of Australian research agencies to perform research and development activities "on behalf of" registered eligible companies. One would ordinarily expect that the phrase would be used in a constant sense in Part IIIA of the Act, although of course R v Toohey (supra) is a case where the same phrase was used in two different senses within the same section. 28 Whether a particular activity has been or will be done for a company is largely a question of fact. The mere fact that a company acquires the results of a research and development activity conducted by another would not necessarily lead to the conclusion that the activity which produced those results was done for it or on its behalf. 29 Here, the activity was initiated by BARM and undertaken by Xanadu. BARM was, or was intended to be, the manager of all three syndicates. There was evidence before AAT from representatives of BARM (Mr Lear) and of Xanadu (Mr Middleton) that product development briefs were commissioned and prepared for the benefit of the participants in both plans, albeit at the time of commissioning of the reports. Company Budplan No 1 had not been established, but was in the process of development. 30 AAT's finding that it was the intention of all relevant parties that the product development briefs were to be used in connection with both plans does not involve an error of law. It is that factual finding which sustains the conclusion that the briefs were prepared on behalf of (in the sense of "for") the participants in Company Budplan No 1, as well as on behalf of the participants in the Budplan Personal Syndicate. 31 There is no warrant for a conclusion that research and development activities which are carried out "on behalf of" a company will only enliven the operation of s 39J if they are carried out for the company to the exclusion of all others. Section 39P is facilitative. It does not cut down what would otherwise be the operation of s 39J. 32 The Board submits that there is no evidence to support AAT's finding that "whatever resulted was also to be used in connection with company plan 1". The evidence, it is submitted, points to the contrary position, namely that the commissioning of the product development briefs was done deliberately on behalf of the members of the Personal Budplan Syndicate above. 33 The issue is not whether this Court would have made the same findings of fact as AAT. It is whether there was an absence of any evidence to support a material finding of fact: Federal Commissioner of Taxation v Service (1999) 99 ATC 4886 at 4890 (on appeal 2000 ATC 4176). There was at least evidence from Mr Lear of BARM (Appeal Book ("AB") 1418) and Mr Middleton of Xanadu (AB 1488) which was capable of sustaining the finding made. There was evidence which might be regarded as pointing in the opposite direction, eg the terms of the letters from Mr Priest of 17 and 24 April and from Mr Lear of 7 May 1996, and the document (at AB 64) which suggested that the product development briefs for Company Budplan No 1 would be prepared within two weeks of 16 June 1996, a date after the completion of the briefs in question. But the choice between evidence which points in different directions is a matter for AAT.

Charles IFE 34 In Re Charles IFE Pty Ltd & Industry Research & Development Board (1995) 39 ALD 635 ("Charles IFE") the Tribunal expressed the view (at par 87) that activities which were "in some way inputs to, or of assistance to, accepted R and D activities" might be regarded as supporting activities. In the present case, AAT disagreed with that view: "It is not enough ... that the supporting activities merely assist the implementation of core activities. The supporting activities must be not only related but directly related and must not only be directly related to the core activities, but must also be directly related to the carrying on of the core activities." 35 The Board accepts that AAT correctly expressed the necessary relationship between "supporting activities" and "core activities" for the purpose of par (b) of the definition of "research and development activities" in s 73B of ITAA. However, the Board submits that whilst the supporting activities may be relevant to or of assistance to the core activities they do not directly relate to the carrying on of the core activities, and AAT made an error of law in so finding. 36 AAT applied the correct legal test and concluded that the product development briefs were directly related to the carrying on of the core activities. Whether the requisite relationship exists is a factual question, involving elements of judgment and degree. The Board's submission invites a merits review of AAT's conclusion, rather than raising any question of law. 37 The Board's appeal should therefore be dismissed.

Mainstar's appeal 38 AAT made the following further findings specifically in relation to Mainstar's application: - No product development briefs were prepared for Company Budplan 2 prior to 30 June 1996. They were not prepared until September 1996 (par 36); - Preparation of product development briefs for cosmeceuticals was sought from Mr Middleton prior to 30 June 1996, but he declined the invitation, since this was an area outside his expertise (par 36); - The three product development briefs which were prepared before June 1996 are not available to Mainstar, as they did not deal with the products targeted by Company Budplan 2 (par 42); - The involvement of Technical Consultancy Services Pty Limited and Mr Staton could not be regarded as a supporting activity because of its timing (par 37). AAT concluded: "In the absence of any other supporting activities assisting the second applicant's case, it must therefore fail." (par 36) 39 Mainstar claims that before AAT, it relied on the following activities which were performed in the year ended 30 June 1996, allegedly on behalf of Mainstar, as supporting activities: "(a) the retaining of an English pharmaceutical consultant, Mr John Cannell, to advise on UK and European regulatory requirements for relevantly, cosmetic treatments and products, comprising a letter dated 14 June 1996 from Mr Priest to Mr Cannell (AB 1655) and his reply dated 25 June 1996 (AB 1657-1667); (b) the commissioning, and receipt, of a report by Mr Cannell entitled "Medicinal and Cosmetic Products in the EC" (AB 1659) relevantly concerning "allowable" cosmetic claims (AB 1660) and information package requirements for cosmetics (AB 1661); (c) supporting activities which were common to Company Plan 1 and company Plan 2, in particular the supporting activities relating to tea tree oil's "mode of action" (see the oral evidence of Dr Bell at AB 219.2 and of Mr Priest at AB 353.9) and a preservative system based on tea tree oil (see paragraphs 66-67 of the statement of Mr Priest at AB 1683 and his oral evidence at AB 385.6). These common supporting activities included the product development brief for acne (see Mr Priest's oral evidence at AB 407.5 and AB 409.6) and discussions between Mr Priest and Mr Staton of Technical Consultancy Services Pty Limited and other potential researchers (see Mr Priest's oral evidence at AB 403.1); (d) the Product Concept Development Report prepared by Mr Robert Jarmyn which was annexed to the letter from Mr Priest to Mr Middleton of 24 April 1996 (AB 1512-1522) on which Professor Brown opined, in evidence which was unchallenged before the Tribunal (AB 2889), that: 'It is plain that the research and development which was, subsequent to the report undertaken under the respective Company Budplans, followed and flowed from this report. That research and development is directly related to the report.' (e) the attempt to commission Mr Middleton to prepare a product development brief for cosmeceuticals, to which the Tribunal refers in paragraph 36 of its Reasons quoted above (see AB 1489). (f) the report prepared by Sue Akeroyd and Associates in June 1996 (see AB 1677.1 and AB 2331) which Professor Brown referred to, in his evidence which was relevantly unchallenged, as 'a step in the process of any research and development which any scientist/researcher would usually take' (AB 2883.9)." 40 Mainstar says that AAT was bound to take these matters into account and, except in relation to the activities referred to in par (e), failed to consider them. Mainstar submits that a failure by AAT to take into account relevant considerations which it was bound to take into account in reaching its decision constitutes an error of law: Sullivan v Department of Transport (1978) 20 ALR 323 at 349, 350; Kuswardana v Minister for Immigration & Multicultural Affairs (1981) 35 ALR 186 at 200. 41 Section 43(2) of the Administrative Appeals Tribunal Act 1975 (Cth) obliges AAT to give reasons for its decision. Section 43(2B) of that Act requires those reasons to include AAT's findings on material questions of fact, and a reference to the evidence or other material on which those findings were based. A failure to provide adequate reasons is an error of law which may vitiate the decision: Comcare v Lees (1997) 151 ALR 647; Minister for Immigration and Multicultural Affairs v Singh (2000) FCR 469 at [39] and [55]. 42 Whether the activities in question are supporting activities is a question of fact, rather than a matter involving the exercise of a statutory power or discretion. Factual errors are not the subject of judicial review. Thus the issue is not whether AAT failed to take relevant considerations into account in reaching its decision on that factual question, but whether AAT failed to give adequate reasons for its decision so as to vitiate that decision. In Martin v Australian Postal Corporation [1999] FCA 655 at [18] Burchett J suggests that a deficiency in reasoning may also be seen as a failure to consider relevant matters, or as suggesting that irrelevant matters have been considered. With respect, I have reservations as to whether that is so, at least in the present context. However, the matter was not argued, and it is not necessary for me to pursue the question as to whether a deficiency in reasoning may also be characterised in the manner suggested by Burchett J. 43 In Martin at [19] Burchett J said that the essence of the requirement that the Tribunal give reasons is that its decision must be understandable. Two purposes are thereby served. The first is that a party concerned may be able to see the basis of the decision, and whether it is legally sound, or affected by some error. The second is that the discipline of the necessity to render reasons helps to keep any Tribunal on the path of sound reasoning and sound conclusions. These observations were endorsed by Tamberlin J in Chapman v Australian Postal Corporation [2000] FCA 1700. 44 The notes to s 43 in the Butterworths Federal Court Practice (65,685.162) state that a failure to consider a submission worthy of serious consideration constitutes an error of law. The authorities on this topic were reviewed by Heerey J in Comcare v Forbutt [2000] FCA 837. AAT is not obliged to deal with every argument raised and every possibility that could be adverted to. But the reasons must be sufficient to expose why the decision went the way it did: see Minister for Immigration & Multicultural Affairs v Singh (supra) at [62] 45 AAT does not expressly refer to the activities mentioned in pars (a), (b), (c), (d) and (f) above in its reasons for decision. In the Board's submission, it is sufficiently clear from pars [36] and [46] of AAT's reasons that the activities in question were not regarded by AAT as amounting to supporting activities: the production of the product development briefs was the first step along the road to research and development, hence activities antecedent thereto could not qualify as "supporting activities". The further question of whether these activities were carried out on behalf of Mainstar was not addressed by AAT. 46 AAT's reasons are entitled to a beneficial construction, but I am unable to extract from those reasons a finding that activities antecedent to the production of product development briefs are incapable of amounting to supporting activities. If that were so, then why address, on behalf of both Phai See and Mainstar, the involvement of Technical Consultancy Services Pty Ltd prior to 30 June 1996 in par 37 of AAT's reasons? 47 Mainstar submits that par 37 of AAT's reasons addresses only one of a number of matters which were expressly relied upon by Mainstar as constituting "supporting activities" conducted on its behalf prior to 30 June 1996. The case was put to AAT on the basis that whilst those activities were not conducted exclusively for the benefit of Mainstar, they were supporting activities conducted for the common benefit of all of the plans earlier referred to, in circumstances where they satisfied the description, in relation to each plan as, "its research and development" activities. Thus Mr Priest said (at AB 409): "You've given some general evidence so far but I want to be specific now about cosmeceuticals, were you doing anything about company Budplan number 2 towards developing product development briefs and getting the research there under way in or prior to June of 1996?---I can't be specific, no, other than the work that was being carried out was really being carried out in most cases with a view to all the projects that we were going into." 48 That case might fail, as a matter of fact, for any number of reasons. The so called "common activities" might not be regarded as "supporting activities". AAT might conclude that even if they were supporting activities in the abstract, the activities were not conducted on behalf of Mainstar, even if the activities, or some of them, had some relevance to Mainstar's proposed operations. There is no finding in relation to Mainstar, equivalent to that referred to in par 30 above. 49 In relation to items (a) and (b) in par 39 above, it was submitted by the Board that it was "quite clear" that the communications in question did not include the subject matter of Company Budplan No 2, with which Mainstar alone was concerned. The communications do deal with "cosmetic products", which are the subject of Budplan No 2. I cannot exclude the possibility, merely by reading the letters, that a trier of fact might conclude that, at least in part, the communications were relevant to Budplan No 2. Relevance to Budplan No 2 is not of itself sufficient to characterise the communications as supporting activities, still less as activities conducted by or on behalf of Mainstar. But I do not accept that a trier of fact must necessarily exclude the communications in question when considering whether supporting activities were conducted on behalf of Mainstar in the relevant year on the ground that the communications have nothing to do with Budplan No 2. 50 No specific submissions were put by the Board in relation to item (c) above. There was some evidence before AAT capable of supporting a conclusion that work of a systematic, investigative or experimental nature was carried out which was not specific to either Company Budplan 1 or 2, because the work was relevant to both plans. See for example Dr Bell (at AB 219). 51 In relation to item (d) above the Board contends that the Product Concept Development Report is in respect of Acne Treatment, Hospital and Antiseptic Products and Oral Hygiene - products with which Mainstar was not concerned. The report preceded any product development brief. But the report contains specific reference to cosmeceuticals, and there was evidence from Professor Brown, which, if accepted, linked subsequent research and development to that report. 52 As to item (e) above it is clear from par 36 of its reasons that AAT had the unsuccessful attempt to commission Mr Middleton well in mind. Whilst there is no express statement to this effect, a fair reading of AAT's reasons is that it did not regard this unsuccessful attempt as a supporting activity. 53 As to item (f), in June 1996 Sue Akeroyd and Associates prepared a report for Xanadu styled "Acne Treatment Options". In Mr Priest's statement, this report was cited as a consultants' report into the state of the industry for acne treatment dated June 1996. Presumably this report is relied upon as an illustration of the commonality of activity between the various Budplans, as its relevance to Mainstar's application otherwise escapes me. So far as I can see, this report was not the subject of specific submission to AAT in the paragraphs of the written submission to which my attention was directed. Nor is it the subject of specific reference in par 4 of Mainstar's notice of appeal. I am not satisfied that item (f) adds anything to item (c). 54 I have earlier rejected the Board's submission that an activity will only be carried on by or on behalf of a particular company if conducted on behalf of that company alone. I did not understand the Board otherwise to submit that the case outlined in par 47 above was one which, as a matter of law, was incapable of resulting in a decision in Mainstar's favour, except to the extent that a submission to that effect was inherent in the specific submissions dealt with in pars 49-53 above. 55 I have earlier rejected the Board's principle submission that AAT declined to recognise the activities in question as supporting activities because they antedated the product development briefs, the production of which was the first step in research and development. That only leaves the statement in par 36 of AAT's reasons: "In the absence of any other supporting activities assisting [Mainstar's] case, it must therefore fail", as constituting AAT's reasons for rejecting Mainstar's claim. 56 That statement contains at least the seeds of ambiguity. It might convey that unless there are other supporting activities the claim must fail, or it might convey that because AAT has adjudged that there are no other supporting activities the claim fails. The fact that AAT, in par 37, went on to consider an alleged supporting activity relied by Phai See and Mainstar suggests that the former is the case. 57 Whichever construction be placed on par 36 of AAT's reasons, there has been, in my view, a substantial failure by AAT to state its reasons for rejecting the case put by Mainstar that activities conducted for the common benefit of all the plans in the year to 30 June1996 were supporting activities which satisfied the description, in relation to Mainstar, of "its" research and development activities. Whilst one can speculate about the matter, AAT does not explain why it rejected the case which was articulated by Mainstar. AAT does not indicate the path which it followed in coming to its conclusion. At least on the current state of the authorities, a failure to give adequate reasons is an error of law, and the matter must be remitted to AAT for further consideration.

Charles IFE 58 In par 9 of AAT's reasons, AAT disagreed with observations by a previous Tribunal that activities which "were in some way inputs to or of assistance to accepted R&D activities" might be regarded as supporting activities. AAT said: "It is not enough, in my view, that supporting activities merely assist the implementation of core activities. The supporting activities must not only be related but directly related and must not only be directly related to the core activities, but must also be directly related to the carrying on of the core activities". 59 Mainstar says that this exposition of par (b) of the definition of "research and development activities" in s 73B of ITAA involves an error of law, as activities which are inputs to, or of assistance to core activities may be carried on for a purpose directly related to the carrying on of core activities. 60 There is no error in AAT's exposition. AAT did not decide that activities which are inputs to, or of assistance to core activities, would not be eligible where they were carried on for a purpose directly related to the carrying on of the core activities. Rather, AAT stated the test in terms of the statutory language, rather than the looser, less exact language employed in Charles IFE.

Conclusion 61 In matter No 553 of 2000 the Board's appeal is dismissed with costs. 62 In matter No 555 of 2000 Mainstar's appeal is allowed, the decision of the Administrative Appeals Tribunal of 28 April 2000 confirming the decision of the Industry Research and Development Board not to register Mainstar as an eligible company under s 39J of the Industry Research and Development Act 1986 in respect of the 1995/1996 year of income is set aside, and the matter is remitted to AAT to be determined in accordance with law. The Board is to pay Mainstar's costs of this appeal. I certify that the preceding sixty-two (62) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hely.

Associate: Dated: 10 May 2001 Counsel for the Industry Research and Development Board: Mr A Robertson SC Dr A Gelbart

Solicitor for the Industry Research and Development Board: Australian Government Solicitor

Counsel for Phai See Investments Pty Ltd and Mainstar One Holdings Pty Ltd: Mr G Downes QC Mr M Richmond

Solicitor for Phai See Investments Pty Ltd and Mainstar One Holdings Pty Ltd: Kemp Strang

Date of Hearing: 9 April 2001

Date of Judgment: 10 May 2001