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ADMINISTRATIVE REVIEW COUNCIL

REPORT TO THE ATTORNEY-GENERAL

REVIEW OF DECISIONS UNDER INDUSTRY RESEARCH AND DEVELOPMENT LEGISLATION

Report No. 31

Australian Government Publishing Service Canberra 1988 © Commonwealth of Australia 1988

ISBN 0 644 08668 8

This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without written permission from the Director Publishing and Marketing, AGPS. Inquiries should be directed to the Manager, AGPS Press, Australian Government Publishing Service, GPO Box 84, Canberra, ACT 2601.

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ii ADMINISTRATIVE REVIEW COUNCIL

GPO Box 9955 Canberra, ACT 2601

15 September 1988

Dear Attorney-General, I have pleasure in submitting to you a report by the Administrative Review Council on Review of Decisions under Industry Research and Development Legislation.

Yours sincerely,

(Dr) C.A. Saunders President

The Hon Lionel Bowen, MP Attorney-General Parliament House Canberra ACT 2600

iii The members of the Administrative Review Council at the date of the Council’s adoption of this report were:

Dr C.A. Saunders (Chair) Justice T.R. Hartigan Professor D.C. Pearce Justice Elizabeth Evatt, AO Mr P. Brazil Mr R.L. Brown Mr J.H.P. Disney Mr P.J. Flood Mr S.A. Hamilton Mr W.E. Impey Mr J.F. Muir Mr H.F. Vorrath

The members of the committee responsible for overseeing the report were:

Mr P. Brazil (Chair) Justice Elizabeth Evatt, AO Mr P.J. Flood Mr J.F. Muir Ms H.F. Vorrath

The Council expresses its gratitude to the members of its secretariat both past and present for the assistance given by them in preparing this report. In particular it wishes to thank the Director of Research, Mr Denis O’Brien, former Principal Project Officer, Mr Ron Fraser and Project Officer, Mr Phillip White, who had responsibility for this protect.

iv CONTENTS

Paragraph Page Summary vii

List of recommendations ix

Introduction 1 Context of report 1 1 Scope of report 3 1 Consultation 8 2

Chapter 1: Decisions relating to grants under Industry Research and Development legislation 3 Assistance to industry for research and development - background 9 3 Purpose of scheme 14 4 Incentives Act 18 4 Industry Research and Development Act 1986-grants for industry research and development scheme 19 5 Industry Research and Development Board 21 5 Discretionary grants 24 6 Declarations concerning eligible companies 27 6 Generic technology grants and national interest agreements 29 7 Industry Research and Development Act-National Procurement Development Program 30 7

Chapter 2: Decisions by Industry Research and Development Board in relation to income tax concessions 9 Tax deduction for expenditure on research and development 32 9 Registration 36 10 Registration of eligible companies 37 10 Joint registration 48 13 Registration of research agencies 51 14 Cancellation of registration of research agencies 56 15 Certificates given by the Board 15 Certificate as to research and development activities 58 15 Certificate as to exploitation of results, or Australian content, of activities 64 17 Certificate of non-compliance 68 18 Certificate in respect of companies jointly registered 71 18

Chapter 3: Decisions under Management and Investment Companies legislation 20 Purpose of the MIC program 75 20 Wind-up of program announced 76 20 Present volume of business under program 81 21 Scheme of the Act 82 22 Membership of the MIC Licensing Board 84 24 Present extent of AAT review 85 24

v Paragraph Page Decisions not subject to review on merits 86 24 Decisions to refuse to grant a licence and concerning the level of approved capital 90 25 Decisions to suspend a licence 96 26 Decisions to direct a licensee to take action in relation to a contravention of the Act or Regulations 103 28 Decisions to refuse to certify a business entity as an eligible business entity 104 28 Decisions to cancel certifications of business entities 118 30 Decisions to give or withhold certain approvals 123 31

Chapter 4: Section 77F of the Income Tax Assessment Act 33 Specification of date of deemed disposal of shares 127 33 Moneys paid before grant of licence 129 33 Relocation of Board’s powers in its own Act 131 4=33

Chapter 5: Review of decisions of an expert body 35

Chapter 6: Internal review and notification of rights of review 38 Internal review 146 38 Notification of rights of review 154 40

Appendix 1: Powers under Research and Development and Related Legislation 41

Appendix 2: Membership of the Industry Research and Development Board 46

Appendix 3: Membership of the Management and Investment Companies Licensing Board 48

vi SUMMARY

This report examines discretionary powers of the Industry Research and Development Board under the Industry Research and Development Act 1986 and discretionary powers of the Management and Investment Companies Licensing Board under the Management and Investment Companies Act 1983 and the Income Tax Assessment Act 1936.

2. The Industry Research and Development Act contains provisions for grants for industry research and development and provisions relating to tax concessions for expenditure on research and development. Under the grants scheme the Industry Research and Development Board has discretionary powers in respect of discretionary grants (s.28), generic technology grants (s.31) and national interest agreements (s.33). These decision making powers are examined in chapter 1. Although decisions made in exercise of the powers appear prima facie to be suitable for review on the merits by the Administrative Appeals Tribunal, the report concludes, for the reasons set out in the chapter, that it is not appropriate to make them subject to review.

3. The various discretionary powers of the Industry Research and Development Board in relation to income tax deductions for research and development expenditure are discussed in chapter 2. The powers are powers to register companies (ss.39J and 39K) and research agencies (s.39F), a power to cancel the registration of research agencies (s.39G), and a power to give to the Commissioner of Taxation various certificates in relation to the tax deduction (ss.39L, 39M, 39N and 39P(4)). Decisions made in exercise of these powers are not presently reviewable on the merits. The Council considers that it would be appropriate to make them reviewable.

4. The recent announcement by the government of its proposal to bring the management and investment companies program to an end on 30 June 1991 raises questions about the desirability of the Council making a report concerning that program. For the reasons set out in chapter 3, however, the Council has decided to proceed.

5. Under the Management and Investment Companies Act, the Administrative Appeals Tribunal at present has jurisdiction to review decisions of the Management and Investment Companies Licensing Board to revoke or to refuse to renew licences or to refuse to approve the surrender of a licence. The Council considers that these review provisions are appropriate. In chapter 3 several other decisions of the Board which have not been made subject to review on the merits are examined. The Council’s conclusion is that decisions of the Board to refuse to grant a management and investment company licence and decisions concerning the level of approved capital of a management and investment company are not suitable for review on the merits. However, other decisions of the Board should be made subject to review on the merits:  decisions relating to the certification of a business entity as an eligible business entity i.e. one in which a management and investment company can invest (s.29);  decisions to cancel a certification of a business entity as an eligible business entity (ss.30(1) and (2));  decisions to refuse to give an approval for certain activities (ss.33, 36(1), 37 and 44); and  decisions to specify a date by which prescribed interests in a business entity must be disposed of (ss.36(2), (2A) and (2B)).

vii 6. The Council in chapter 4 recommends that a determination of a date by the Board under section 77F(9) of the Income Tax Assessment Act, being a date by which owners of shares m a management and investment company shall be deemed to have disposed of the shares, and a refusal by the Board under section 77F(15) of that Act to recognise pre-licence investments in a management and investment company, should be made subject to review on the merits.

7. An argument against review that is addressed in chapter 5 is the argument that it is inappropriate for the Administrative Appeals Tribunal to review decisions of expert bodes such as the two Boards. Both the Industry Research and Development Board and the Management and Investment Companies Licensing Board are called upon to exercise a high level of scientific, technological, economic and managerial expertise in making decisions and each is comprised of people with considerable knowledge in these fields. However, for the reasons set out in the chapter, the Council concludes that the argument against review based on expertise of the primary decision maker is not persuasive.

8. In chapter 6, the question of the appropriateness of internal review as a precondition to appeal to the Administrative Appeals Tribunal is examined. The Council considers that the Research and Development Act and the Management and Investment Companies Act ought to contain provisions for internal review by the respective Boards as a prerequisite to appeal but not where the legislation requires the Board to reconsider a decision it proposes to make in the light of submissions from the affected party. Chapter 6 also recommends amendment of the legislation to ensure that persons affected by reviewable decisions are told of their rights of review.

viii LIST OF RECOMMENDATIONS

Recommendation 1: Review of decisions not to register a company as an eligible company under section 39J(paras 37-47) A decision of the Industry Research and Development Board under section 39J of the Industry Research and Development Act not to register a company in relation to a year of income ought to be made subject to review by the Administrative Appeals Tribunal.

Recommendation 2: Review of decisions not to register companies jointly under section 39P (paras 48-50) A decision of the Industry Research and Development Board under section 39P of the Industry Research and Development Act not to register companies jointly in relation to a year of income or years of income ought to be made subject to review by the Administrative Appeals Tribunal.

Recommendation 3: Review of decisions in respect of the registration of a body of persons as a research agency in respect of a class of R&D activities (paras 51-55) A decision of the Industry Research and Development Board under section 39F of the Industry Research and Development Act:  to refuse an application to register a body as a research agency;  to refuse an application to register a body as a research agency in respect of a particular class of research and development activities; or  to refuse an application to vary the registration of a body that is a registered research agency; ought to be made subject to review by the Administrative Appeals Tribunal.

Recommendation 4: Review of decisions to cancel the registration of a research agency under section 39G (paras 56-57) A decision of the Industry Research and Development Board under section 39G of the Industry Research and Development Act to cancel the registration of a research agency ought to be made subject to review by the Administrative Appeals Tribunal.

Recommendation 5: Review of decisions to give a certificate under section 39L (paras 58-63) A decision of the Industry Research and Development Board to give a certificate under section 39L of the Industry Research and Development Act ought to be made subject to review by the Administrative Appeals Tribunal.

Recommendation 6: Review of decisions to give a certificate under section 39M (paras 64-67) A decision of the Industry Research and Development Board to give a certificate under section 39M of the Industry Research and Development Act ought to be made subject to review by the Administrative Appeals Tribunal.

Recommendation 7: Review of decisions to give a certificate under section 39N (paras 68-70) A decision of the Industry Research and Development Board to give a certificate under section 39N of the Industry Research and Development Act ought to be made subject to review by the Administrative Appeals Tribunal.

Recommendation 8: Review of decisions to give a certificate under section 39P(4) (paras 71-74)

ix A decision of the Industry Research and Development Board to give a certificate under section 39P(4) of the Industry Research and Development Act ought to be made subject to review by the Administrative Appeals Tribunal.

Recommendation 9: Review of decisions in respect of the certification of a business entity as an eligible business entity in relation to a MIC (paras 104-117) A decision of the Management and Investment Companies Licensing Board under section 29 of the Management and Investment Companies Act to refuse to certify a business entity as an eligible business entity in relation to a licensee or to impose or vary conditions in relation to the certification of a business entity ought to be made subject to review by the Administrative Appeals Tribunal.

Recommendation 10: Review of decisions cancelling certifications of business entities as eligible business entities in relation to MICs (paras 118-122) A decision of the Management and Investment Companies Licensing Board under section 30(1) or (2) of the Management and Investment Companies Act to cancel the certification of a business entity in relation to a licensee ought to be made subject to review by the Administrative Appeals Tribunal.

Recommendation 11: Review of decisions refusing to give an approval for certain activities and specifying a date by which prescribed interests in a business entity must be disposed of (paras 123-125) A decision of the Management and Investment Companies Licensing Board to refuse to give an approval under section 33, 36(1), 37 or 44 of the Management and Investment Companies Act, and a decision of the Board specifying a date under section 36(2), (2A) or (28) of the Act, ought to be made subject to review by the Administrative Appeals Tribunal.

Recommendation 12: Review of the determination of a date by which owners of shares in a MIC shall be deemed to have disposed of their shares and review of refusals of the Board to recognise pre-licence investments in a MIC (paras 1 27-131) (1) A determination of a date by the Management and Investment Companies Licensing Board under section 77F(9) of the Income Tax Assessment Act, being a date by which owners of shares in a MIC should be deemed to have disposed of those shares, ought to be made subject to review by the Administrative Appeals Tribunal. (2) A refusal of the Board under section 77F(15) of the Income Tax Assessment Act to give a notification to the Commissioner of Taxation in relation to a payment on a share in a MIC before the MIC was licensed ought to be made subject to review by the Administrative Appeals Tribunal. (3) The Board’s powers under sections 77F(9) and 77F(15) of the Income Tax Assessment Act ought to be relocated from that Act to the Management and Investment Companies Act.

Recommendation 13: Internal review (paras 146-153) (1) The Industry Research and Development Act and the Management and Investment Companies Act ought to contain provisions for internal review by the respective Boards as a prerequisite to appeal to the Administrative Appeals Tribunal.

x (2) Internal review as a prerequisite to appeal to the Administrative Appeals Tribunal should not, however, apply in relation to decisions of the Industry Research and Development Board to cancel the registration of a research agency under section 39G of the Industry Research and Development Act or in relation to decisions of the Board to give certificates under section 39M, 39N or 39P(4) of the Act.

Recommendation 14: Notification of rights of review (paras 154-156) The Industry Research and Development Act and the Management and Investment Companies Act ought to be amended to provide for notification by the respective Boards of rights of review on the merits in relation to relevant decisions.

xi INTRODUCTION

Context of report 1. This report deals with review of decisions made under what may broadly be characterised as industry research and development legislation, including legislation aimed at promoting the development of high technology enterprises through assisting the establishment and development of a private sector venture capital market in Australia. The report concludes the Council’s examination of legislation in the industry, technology and commerce portfolio. The earlier focus of that examination has been a discrete project on review of decisions under ‘customs and excise’ legislation. The stages of the customs and excise project which have been completed and published are: stage 1 (concerned with import control and customs by-law decisions), stage 2 (concerned mainly with remaining decisions under the Customs Act and Regulations), stage 3 (concerned with anti-dumping and countervailing duty decisions) and stage 4 (concerned with censorship).

2. The Attorney-General has recently referred to the Australian Law Reform Commission the review of the Customs Act, the Excise Act and related legislation. The Attorney-General has directed that the Commission, in considering this reference, consult with the Administrative Review Council. The Commission’s reference covers the legislation for which the Australian Customs Service is responsible, which includes the remaining legislation (mainly in the excise area) not covered in other stages of the Council’s customs and excise project.

Scope of report 3. The purpose of the report is to consider whether certain decision making powers under industry research and development legislation should be made subject to review on the merits. Appendix 1 contains a table setting out the powers under the legislation which are examined in the report.

4. After a brief overview of the present and previous research and development legislation, chapter 1 of the report examines the provisions of the Industry Research and Development Act 1986 relating to grants for industry research and development. Chapter 2 considers the provisions relating to taxation concessions for expenditure by companies on research and development activities (see Income Tax Assessment Act 1936, s.73B and Part 111A of the Industry Research and Development Act 1986).

5. Chapter 3 considers whether there ought to be provision for review on the merits of decisions made under powers conferred by the Management and Investment Companies Act 1983. Chapter 4 examines companion provisions contained in section 77F of the Income Tax Assessment Act 1936 for a 100% tax deduction for investments by taxpayers in licensed management and investment companies.

6. An issue common to a discussion of review on the merits of decisions of both the Industry Research and Development Board and the Management and Investment Companies Licensing Board is whether it is appropriate to confer a review function on the Administrative Appeals Tribunal (AAT) having regard to the expertise of both Boards in their decision making areas. This issue is discussed in chapter 5.

1 7. If a facility for review by the AAT of particular decisions is thought to be appropriate, a further issue is whether aggrieved parties should be required to seek internal review of those decisions before any approach to the AAT. This issue is dealt with in chapter 6. The chapter also considers what provision ought to apply for notifying parties about their rights of review of particular decisions.

Consultation 8. As a first step in the preparation of this report, the Council in April 1988 circulated a discussion paper to all persons and bodies the Council could identify as having an interest in decisions under industry research and development legislation. Submissions on the issues raised in the paper were received from only three bodies, the Industry Research and Development Board, the Management and Investment Companies Licensing Board and the Law Society of South Australia. Broadly, the former Board and the Law Society of South Australia agreed with the suggestions made in the paper concerning review on the merits by the AAT of relevant decisions, while the latter Board expressed disagreement with proposals for extension of review of its decisions. The few submissions received may indicate a degree of general satisfaction with the proposals in the paper.

2 CHAPTER 1 DECISIONS RELATING TO GRANTS UNDER INDUSTRY RESEARCH AND DEVELOPMENT LEGISLATION

Assistance to industry for research and development-background 9. From 1976 until 30 June 1985 the principal avenue for governmental assistance to industry for research and development was provided by means of the Industrial Research and Development Incentives Act 1976 (‘the Incentives Act’). The Act provided for government assistance for industrial research and development in 3 forms:  commencement grants;  project grants; and  arrangements for carrying out public interest projects.

10. The Incentives Act established the Australian Industrial Research and Development Incentives Board with the function of encouraging industrial research and development in Australia, in part through making grants or arrangements for carrying out public interest projects.

11. The Incentives Act included ‘sunset clauses’ which provided that the final ‘grant year’ in respect of which a commencement grant under the Act could be made began on 1 July 1985 (s.1(1), definition of ‘grant year’), that no project grant could be made in relation to a project which was to be commenced after 1 July 1986 (s.30(2)), and that a project agreement should not provide for payment of a project grant in respect of expenditure in a year subsequent to the year commencing on 1 July 1988 (s.32(3)). In anticipation of the expiration of the power to make grants, the government announced in May 1985 that legislation would be introduced to permit income tax deductions at the rate of 150% of relevant expenditure incurred by Australian companies in respect of research and development activities, during the period commencing on 1 July 1985 and ending on 30 July 1991.

12. Legislation to give effect to this announcement was enacted on 25 June 1986 in the form of the Income Tax Assessment Amendment (Research and Development) Act 1986 (the ITA(R&D) Act). This Act introduced into the Income Tax Assessment Act 1936 section 73B which provided for special tax concessions of 150% for expenditure incurred by companies on research and development activities carried on in Australia and which did not otherwise attract government assistance.

13. The provisions introduced by the ITA(R&D) Act were supplemented by the Industry Research and Development Act 1986 (the Research and Development Act). That Act made provision for new kinds of grants in place of those provided for in the Incentives Act, and it repealed the provisions of the Incentives Act concerning public interest projects and replaced them with provisions concerning agreements for national interest projects. The Research and Development Act established a new Board known as the Industry Research and Development Board and repealed those sections of the Incentives Act which established and governed the operation of the Australian Industrial Research and Development Incentives Board. The Act also provided that where the Incentives Act referred to the Board or the Chairman it should be read, unless the context otherwise required, as including a reference to the new Board or the Chairperson of the new Board respectively (s.50(h) of the Research and Development Act). These provisions enabled the new Board, established to carry out functions under the Research and Development Act, to administer the residual functions of the old Board in relation, for example, to continuing projects for which grants had already been authorised.

3 Purpose of scheme 14. The rationale of the scheme was to improve Australia’s international competitiveness by encouraging technological innovation and to overcome the low level of private sector R&D in Australia compared with overseas countries. Business expenditure on R&D in Australia as a proportion of GDP was about 0.37% in 1984-85 and this ranks low among OECD countries. A target for business expenditure on R&D of 1% of GDP to be achieved by 1990 was set by the Government (Industries Assistance Commission, Annual Report 1986-87, p. 67). The achievement of this target would imply a sizeable increase in expenditure on R&D.

15. The general worth of concessions in respect of industry R&D has been the subject of comment from time to time. However, in its report of September 1987 to the Prime Minister entitled ‘Improving Australia’s Competitiveness Through Industrial Research and Development’, the Australian Science and Technology Council (ASTEC) concluded favourably on the scheme. It reported that, since the introduction of the taxation concession, there had been a considerable increase in the reported level of industrial R&D. The report estimated that the total expenditure by registered companies on R&D to the end of 1986-87 would be about $1 250 million. It stated that over 2 000 companies had registered for the taxation concession. The taxation concession, the report noted, provided the bulk of the Government’s assistance to industry for R&D. Initial estimates of the revenue foregone as a result of the scheme were in the order of $100 million in 1986-87. The report estimated, however, that that cost would blow out somewhat to a figure of around $ 150 million. The report concluded that the taxation concession was essential for the continued growth of R&D in Australian industry and a strengthening of indigenous technological capability.

16. Officers of the Council’s Secretariat have been informed by experts in the-area that the existence of government grants for R&D expenditure and the taxation concession are of vital importance for the financing by a company of an R&D project. Following the October 1987 stock market crash such grants are often the only form of risk capital available to a company.

17. In the Economic Statement presented to Parliament on 25 May 1988, the Treasurer said that the 150% research and development tax incentive will be reduced to 100% from 30 June 1991.

Incentives Act 18. In the Council’s view, it is unnecessary to examine the Incentives Act in the context of this report since, although it presently has some continuing operation, the year commencing 1 July 1988 is the final year in which expenditure is entitled to payment of a project grant.

Industry Research and Development Act 1986 – grants for Industry Research and Development scheme 19. The Research and Development Act makes provision for the following 3 types of grants for industry research and development (see Senate, Hansard, 8 May 1966, pp. 2580 ff. and House of Representatives, Hansard, 4 June 1986, pp. 4573 ff., for second reading speeches):  Discretionary grants (s.28(1)), which are made in relation to expenditure by companies on projects of research and development activities and which provide a level of effective support similar to that provided under the tax concessions provided in the 1986 ITA(R&D) Act. They are designed to assist companies which are not in a position to benefit from the special research and development tax concessions (see chapter 2) because in their initial years of operation they do not make profits.  Generic technology grants (s.31(1)), which are designed to support new or emerging technologies of fundamental significance for industry competitiveness but unlikely to develop if left to the market alone.

4  National interest agreements (s.33), which are entered into in relation to projects with significant national benefits which would not be undertaken by industry on a commercial basis. These correspond to the public interest projects provided for under the Incentives Act.

20. The Industry Research and Development Board has adopted the objective of making sure that industrial research and development make the greatest possible contribution to the efficiency and international competitiveness of Australian industry by such means as:  developing strategies for individual technologies;  education;  administering the tax scheme for industry research and development; and  promotional activities.

Industry Research and Development Board 21. The Board consists of:  a chairperson;  where the Minister considers it appropriate-the person who at anytime is performing the duties of an office in the Australian Public Service that is designated by the Minister by notice in writing publishing in the Gazette; and  not less than 4, nor more than 13, other members.

22. The current membership of the Board is set out in Appendix 2 together with some biographical information on each member. In general terms it may be said that the Board includes a range of expertise in science, technology, management and economics. The Board is assisted in its functions by specialist committees. It has clearly been constituted in such a way as to enable it to make decisions requiring the application of a high level of scientific, technological, economic, and management expertise to the performance of its functions, including the making of decisions concerning applications for the various kinds of grants.

23. Section 20 of the Act provides that the Minister may from time to time give directions to the Board with respect to the policies and practices to be followed by the Board in the performance of its functions and the exercise of its powers under the Act. The matters on which the Minister may give directions include the policies and practices to be followed by the Board with respect to the entering into by the Board of discretionary grant agreements, generic technology agreements or national interest agreements and the provisions to be included in such agreements. The Board is required to comply with any such directions that are in force. The Minister is required to consult the Board before giving such directions, and to publish in the Gazette particulars of any directions given (s.20(2) and (3)). The Minister has so far given directions to the Board with respect to the entering into by the Board of discretionary grant agreements (Commonwealth Gazette, 3 February 1987) and generic technology agreements (Commonwealth Gazette, 13 January 1 987).

Discretionary grants 24. Section 28 of the Act provides that the Board may, at its discretion, enter into an agreement with a company, which has applied to the Board for a grant, for and in relation to the making of a grant to it of financial assistance (a ‘discretionary grant’) in respect of expenditure in respect of a project of research and development activities. In order to be in a position to submit a valid application a company must satisfy certain prerequisites set out in section 28. The Board is prohibited from entering into such an agreement after 30 June 1991 or in relation to a project which will commence after that date.

25. While a decision concerning the making of a grant appears prima facie to be suitable for review on the merits because such a decision will have a significant effect on the company concerned, the Council considers that review would not be appropriate. The provisions of the Act have the result that the Board is, in effect, called upon to apportion a finite resource (see ARC, Eleventh Annual Report 1986-87, para 246). The Act provides that payment of grants or a payment under a national interest agreement (collectively known as ‘subsidies’) shall be made out of money appropriated by the

5 Parliament for the purposes of the Act (s.40), and that the Board shall not authorise a payment of a subsidy, or an advance in respect of a subsidy, unless money appropriated by the Parliament is available for the payment of that subsidy or advance together with all other subsidies or advances that have been authorised but not paid (s.43). Under section 41 the Minister is required, as soon as practicable after each 1 July, to specify, by notice in writing to the Chairperson of the Board, the total amount expected to be available to the Board during the financial year. One of the functions of the Board is to make recommendations to the Minister on the proportions of that money which should be committed in respect of each of the categories of discretionary grants, generic technology grants and payments under national interest agreements (s.7(b)).

26. In making a decision under section 28 the Board is thus required not to pay or commit amounts in respect of discretionary grants over and above the amounts specified by the Minister. In arriving at decisions in relation to discretionary grants from limited funds the Board will need to take account of the amounts committed and the amounts remaining in the fund at that time, and will need to consider each application both on its merits and in relation to other grants and applications, both existing and potential, for that financial year. The Council has in the past suggested that decisions of this kind are not appropriate for AAT review, because any review tribunal would not be in a position to compare all applicants who are subject to such interrelated decisions, and would need to rely heavily on the primary decision maker’s opinion as to the current management of the ‘fund’ and on other competing applications for funds (Eleventh Annual Report 1986-87, para. 246). Another way of expressing the case against review of these decisions is to say that the polycentric elements of the decisions are so significant that review on the merits is inappropriate. By ‘polycentric’ is meant that one decision once made communicates itself to the making of other related decisions, changing the conditions so that a new bass must be found for the other decisions.

Declarations concerning eligible companies 27. The Act defines an eligible company as one which carries on an eligible activity in Australia or one in respect of which a declaration by the Board under section 27 is in force. An issue is whether declarations (or revocations of declarations) by the Board under section 27 of an ‘eligible company’ should be subject to review on the merit. The discretion vested in the Board is a wide one. The Board, where it considers it would be consistent with the object of the Act for a company which proposes to commence to carry on an eligible activity in Australia to be an eligible company, ‘may . . . declare that company to be an eligible company for the purposes of (the) Act other than Part 111A’. The discretion is intended to be used only in relation to companies not yet carrying on an eligible activity in Australia but which the Board expects shortly to do so and in respect of which it wishes to be able to exercise its powers under section 28 in relation to that company. A decision under the power is closely bound up with a decision under section 28 and the Council’s understanding is that, in practice, it would be exercised either in conjunction with an exercise of the latter power favourably to the company or in anticipation of such an exercise of the latter power. The Board’s decision may therefore be classified as essentially a facultative or preliminary decision and thus inappropriate for AAT review (see ARC, Eleventh Annual Report 1986-87, para, 246). In practice, the question of a refusal to make a declaration under section 27 does not arise, as the power to make a declaration is only exercised when a decision has been made to enter into an agreement for the making of grants to a company that is about to carry on an eligible activity.

28. In the circumstances where any declaration under section 27 is made only in conjunction with the entering into of a grant agreement, the power of the Board under subsection 27(2) to revoke a declaration would not appear to arise. Discussions with the staff of the Board confirm that this is so. Accordingly, in the Council’s view, there would be no point in conferring a right of review in relation to a revocation decision.

Generic technology grants and national interest agreements 29. For similar reasons to those which apply in the case of discretionary grants (paras 24-26) the Council is of the view that it would be inappropriate to provide for review of

6 decisions of the Board relating to generic technology grants (see s.31(1)) or decisions relating to making national interest agreements (see s.33).

Industry Research and Development Act - National Procurement Development Program 30. Under section 19 of the Industry Research and Development Act the Minister may give to the Board additional functions if those functions relate to the object of the Act, which is said in section 3 to be to promote the development, and improve the efficiency and international competitiveness, of Australian industry by encouraging research and development activities. Pursuant to section 19, the Minister on 26 November 1987 directed the Board to establish the National Procurement Development Program (Gazette No. GN1, 13 January 1988). The object of the program is to support within Australia industry, product development and demonstration projects directed towards meeting forward government purchasing requirements and generating internationally competitive goods, services or systems. The program has been designed to help Australian companies work with government departments to develop new products. On 22 December 1987, the Minister under section 20 gave directions to the Board in the performance of its National Procurement Development Program function (Gazette No. GN1, 13 January 1988).

31. This program is a non-statutory program and the grants scheme under it has not been examined by the Council for the purposes of this report. It may be that, under present arrangements, the question of review on the merits of decisions under the scheme does not arise because the decisions are not made in the exercise of powers conferred by an ‘enactment’ as defined in section 3(1) of the AAT Act. In any event, the Council has taken the view in relation to decisions concerning grants under the statutory scheme that review on the merits should not be provided for.

7 CHAPTER 2 DECISIONS BY INDUSTRY RESEARCH AND DEVELOPMENT BOARD IN RELATION - TO INCOME TAX CONCESSIONS

Tax deduction for expenditure on research and development 32. Section 73B of the Income Tax Assessment Act 1936 (the ITA Act) allows a deduction of up to 150% from the assessable income of a company which is registered in relation to a year of income for expenditure of the company relating (broadly speaking) to ‘research and development activities’. The principal provisions concerning the allowable deduction are to be found in subsections (13), (14) and (15), although other subsections elaborate on these provisions. The 150% deduction applies only where the company’s aggregate research and development expenditure for the year is $50,000 or more. Where the expenditure is less than $50,000 but more than $20,000, the deduction is available at a phased-in rate of between 100% and 150%. However, R&D expenditure of less than $50,000 will be eligible for the full 150% deduction where that expenditure is contracted to a registered research agency (see paras 51-52).

33. The Research and Development Legislation Amendment Act 1988 (the R&D Amendment Act), which came into operation on 1 July 1988, amended section 73B of the ITA Act and transferred to the Industry Research and Development Act the provisions (Part 111A) dealing with functions of the Industry Research and Development Board in relation to income tax concessions. The explanatory memorandum to the R&D Amendment Act stated that the purpose of the Act was to amend the ITA Act and the Industry Research and Development Act to increase the effectiveness of the 150% tax concession in stimulating investment in research and development by industry in Australia and to ensure that Australia obtains a proper return on revenue subsidised R&D. It went on to say that the Act would increase the efficiency of administration of the tax concession by transferring to the Research and Development Act those powers and functions of the Board which were previously provided for in the ITA Act.

34. The R&D Amendment Act also gave legislative effect to a number of proposals that had been announced by the Treasurer and the Minister for Industry, Technology and Commerce on 20 November 1987. The effect of the amendments is that:  the Board is empowered to refuse to register a company if the activities of the company do not include R&D activities;  the Board’s powers to ensure that R&D projects have sufficient Australian content, and that the results of R&D are exploited on normal commercial terms and for the benefit of the Australian economy, have been broadened;  a new category of research body, the Registered Research Agency, has been created to extend the circumstances in which access to the tax concession is available for contracted expenditure incurred by companies whose annual R&D expenditure is less than $50,000; and  the Board is empowered to register participating companies jointly so that investment is encouraged in R&D projects that are too big or too risky to be advanced solely by those with the ability directly to use the results.

35. The Commissioner of Taxation has issued two Income Tax Rulings on the operation of section 73B. Ruling No. IT 2442 addressed specific aspects of the interpretation of section 73B such as expenditure eligible for the concession, substantiation of claims and the sale of products or by-products of R&D activities. Ruling No. IT 2451, issued on

8 26 November 1 987, is a follow up to Ruling IT 2442 and provides a more detailed discussion of the general principles governing investment in R&D projects. Specific aspects discussed in that Ruling include effective ownership, a proper interest in R&D activities, R&D activities in partnership and researcher’s rights. Ruling IT 2451 does not reflect the amendments made by the R&D Amendment Act.

Registration 36. To be eligible under section 73B for a deduction from its assessable income in relation to a particular year of income an eligible company must be registered in relation to that year of income under section 39J or 39P of the Industry Research and Development Act (see subsection 73B(10)). Also, under the Industry Research and Development Act a body of persons can be registered as a research agency for the purpose of performing a particular class of R&D activities on behalf of registered eligible companies. The effect of registration of the research agency is that a company can claim a deduction for R&D work done by that research agency on its behalf.

Registration of eligible companies 37. Sections 39J(1) and 39K of the Industry Research and Development Act provide 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.

39K. (1) It is a ground on which the Board is entitled to refuse to register an eligible company in respect of a year of income that the activities that were, or are to be, carried on by or on behalf of the company in that year of income are not, or do not include, research and development activities. (2) Subject to subsection (3), the regulations may specify other grounds on which the Board is entitled to refuse to register a company in respect of any year of income or in respect of a particular year of income or years of income (3) The regulations may not specify a ground unless it relates to a matter the determination of which under this Part is a function of the Board.

38. Section 39A(2) of the Industry Research and Development Act provides that expressions used in Part 111A of that Act that are defined in section 73B of the ITA Act have the same meaning as in section 73B. The term ‘research and development activities’ is defined in section 73B(1) to mean: (a) systematic, investigative or experimental activities that- (i) are carried on in Australia or in an external Territory; (ii) involve innovation or technical risk; and (iii) are carried on for the purpose- (A) of acquiring new knowledge (whether or not that knowledge will have a specific practical application); or (B) creating new or improved materials, products, devices, processes or services; or (b) other activities that- (i) are carried on in Australia or in an external Territory; and (ii) are carried on for a purpose directly related to the carrying on of activities of the kind referred to in paragraph (a).

39. Sections 73B(2) and (2A) provide that, for the purposes of that definition, certain activities (for example, market research, quality control, management studies, etc) shall be taken not to be systematic, investigative or experimental activities. These sub-sections bear a resemblance to

9 provisions in the superseded Industrial Research and Development Incentives Act 1976 (especially the definition of ‘industrial research and development’ in section 4(1) of that Act and the exclusion of certain activities from the scope of that definition in section 4(3)). The latter have been the subject of a small number of decisions of the AAT which have served to shed light on the meaning of those provisions

40. Recent circulars issued by the Board provide guidance in relation to its interpretation of the term ‘research and development’.

41. It can be seen from the provisions of the Industry Research and Development Act that the Board has a discretion as to what information it requires an applicant to provide in relation to that company’s research and development activities (the requirement must be reasonable) and a discretion to refuse to register a company if the company’s activities are not research and development activities or if the company fails to meet other criteria that may be set out in the regulations.

42. Prior to the insertion of section 39J into the Research and Development Act a decision of the Board to register a company as eligible for the taxation concession was made under section 73B(12) of the ITA. That provision contained a discretion, similar to that in section 39J, as to what information the Board could require The Senate Standing Committee for the Scrutiny of Bills, in its Alert Digest No. 10 of 1986 (4 June 1986) drew attention to the fact that decisions under subsection (12) were not reviewable. The Minister for Industry, Technology and Commerce responded as follows: Section 73B(12) of the Bill requires the Industry Research and Development Board to register any eligible company that makes an application for registration. The Board can determine the information it ‘reasonably requires’ for this registration procedure to occur. A copy of the current registration form is enclosed. You will note that the information is provided on a confidential basis and that registration covers both the 1985-86 and 1986-87 fiscal years. The document is essentially a statement of intent by companies together with some information on resources devoted to research and development.

In practical terms, it is expected that the Board will not refuse registration if companies do not provide all the information requested. Rather, the Board may advise the Australian Taxation Office that a particular company has not provided complete information. It would then be a matter for the Tax Office to decide whether to audit the Company’s subsequent taxation return.

I have, as the Minister for Industry, Technology and Commerce, the power to direct the Board under its enabling legislation, the Industry Research and Development Bill 1986, and will use that power as necessary to ensure the Board acts fairly and equitably toward all companies wishing to register for the tax concession.

The Committee thanked the Minister for his assurance in relation to the manner in which the Board’s discretion would be exercised and made no further comment. (See the Committee’s Twelfth Report of 1986, 17 September 1986, pp. 13-14.)

43. The Senate Standing Committee for the Scrutiny of Bills in its Alert Digest No. 7 of 1988 (18 May 1988) and Report No. 8 of 1988 (25 May 1988) drew attention to the fact that section 39J gave the Board an unreviewable discretion to register a company as entitled to a tax deduction. The Committee said that, although the Minister acknowledged in his second reading speech that the Act would give additional discretionary powers to the Board, the only avenue of redress for a company dissatisfied with a decision of the Board would be by action in the Federal Court under the AD(JR) Act rather than the speedier and less expensive procedure of review by the AAT. The Council understands that the Minister has replied to the Committee. The substance of the reply will not, however, be known until the Committee has formally reported to the Senate.

44. A decision of the Board to require information from a company in relation to its research and development activities may be characterised as a facultative or preliminary decision preceding any decision of the Board concerning registration of the company. In the Council’s view, it would not be

10 appropriate to provide for review by the AAT of a decision of the Board concerning requests for information. On the other hand, a decision of the Board not to register a company is clearly capable of affecting in a particular way the interests of the company because a deduction is not allowable from the assessable income of the company unless the company is registered. Such a decision is, therefore, prima facie suitable for review on the merits by the AAT. The Council is of the view that there are no grounds for displacing the presumption in favour of review.

45. The Council’s Secretariat has been advised that a decision as to registration under the previous registration provision (section 73B(12) of the ITA Act) was often not formally communicated to an applicant company. The company would include the registration application with its income tax return, and because of the self-assessment provisions of the ITA Act, the registration would be queried only if the Commissioner sought advice from the Board. The new section 39J of the Industry Research and Development Act, however, requires the Board to be satisfied that there are no grounds under section 39K for refusing to register the eligible company. Thus, the Board is required to determine, among other things, whether the relevant activities that were or are to be carried on by or on behalf of a company are not, or do not include, research and development activities. The new registration provisions thus place a greater onus on the Board in relation to registration.

46. The argument in favour of review on the merits of decisions of the Board not to register a company for the purposes of the tax deduction is strengthened when regard is had to the fact that all decisions of the Commissioner of Taxation leading up to the making of a tax assessment by the Commissioner are reviewable as part of the assessment decision. It is anomalous that review on the merits is not available in relation to an interposed decision of the Board which will be the critical decision on which the assessment decision of the Commissioner will turn.

47. Subject to the qualification discussed in chapter 6 concerning internal review of Board decisions, the Board in its submission to the Council said that it had no objection to review on the merits by the AAT of its decisions concerning registration of eligible companies.

11 Recommendation 1: Review of decisions not to register a company as an eligible company under section 39J A decision of the Industry Research and Development Board under section 39J of the Industry Research and Development Act not to register a company in relation to a year of income ought to be made subject to review by the Administrative Appeals Tribunal. Joint registration 48. Section 39P of the Industry Research and Development Act enables the Board to register several companies jointly in relation to a proposed project involving research and development activities. The aim of the provision is to encourage companies which have no direct means of using the results of R&D to invest in R&D ventures – in particular R&D ventures that are too large or risky for any one company to advance alone. The section provides, through the process of joint registration, a basis for prior ‘in principle’ approval of the proposed venture so as to give some assurance to portfolio investors that they will be entitled to deductions under the 150% tax concession scheme in respect of their contributions to the arrangements. The section also empowers the Board to preclude deductions from future expenditure if it is of the opinion that the venture is not progressing on the basis that was approved (see paras 71-74 below). 49. Section 39P(2) states that an application for joint registration must contain information concerning:  the amount of expenditure expected to be incurred in respect of the R&D activities in the project:  proposals for the exploitation of any results of the R&D activities; and  such particulars of the project as the Board requires. Section 39P(3) provides that the Board may jointly register companies if it is of the opinion that:  the proposed activities are R&D activities;  at least one of the companies is not related to any of the others;  the total expenditure on the project will exceed $ 1,000,000;  at least some of the companies would not be able to utilise the results of the R&D in their businesses and those companies will expend more than $ 1,000,000 between them on R&D activities included in the project;  the results of the R&D activities will be exploited on normal commercial terms and for the benefit of the Australian economy;  the activities will have an adequate Australian content; and  there are no grounds on which the Board would be entitled to refuse to register any of the companies under section 39J if the companies had made separate applications. 50. A decision of the Board under section 39P not to register companies jointly in respect of a year of income is clearly capable of affecting in a particular way the business interests of a company and is therefore prima facie suitable for review on the merits. As with a decision of the Board not to register a company as an eligible company under section 39J, the Council considers that the decision is not otherwise inappropriate for review. Recommendation 2: Review of decisions not to register companies jointly under section 39P A decision of the Industry Research and Development Board under section 39P of the Industry Research and Development Act not to register companies jointly in relation to a year of income or years of income ought to be made subject to review by the Administrative Appeals Tribunal.

12 Registration of research agencies 51. The Research and Development Legislation Amendment Act 1988 amended the definition of contracted expenditure in section 73B(1) of the ITA Act and introduced into the Industry Research and Development Act a provision to allow for the registration of research agencies (section 39F). The purpose behind these amendments was to increase access by smaller firms to expert R&D and to give them the benefits of exemption from the threshold of annual R&D expenditure and an opportunity to claim for advance payments for contracted research. The status of registered research agencies (RRAs) replace from 30 June 1988 the special status under section 73B of the ITA Act of approved research institutes (as defined in section 73B(1) of the ITA Act) but, unlike those bodies, RRAs may be privately owned and profit making entities.

52. Under section 73B(13) of the ITA Act, where an eligible company incurs a contracted expenditure during a year of income, an amount equal to 150% of that expenditure is deductible whether or not the company has met the threshold requirements of section 73B (R&D expenditure of a least $20,000 p.a.). So far as relevant, ‘contracted expenditure’ is defined in section 73B(1) to mean expenditure incurred by an eligible company to a body that was, or is taken to have been, registered under section 39F of the Industry Research and Development Act in consideration of that body performing R&D activities on behalf of that company.

53. Under section 39F any body of persons may seek registration as an RRA. The Board in consultation with the Commissioner of Taxation is to establish criteria to be met by bodies wishing to be registered. The criteria are to be published before the end of September 1988 both in the Gazette and in such other manner as the Board thinks appropriate (section 39F(2)) and are to be tabled in Parliament and subject to disallowance in the same way as regulations (section 39F(11)) and section 46A of the Acts Interpretation Act 1901). If the Board is satisfied that an applicant meets the criteria, it shall register the applicant as a research agency in respect of such class of R&D activities as it considers the applicant is qualified to perform (s.39F(5)). Under section 39F(6), the Board may, on application from an RRA, vary the class of R&D activities in respect of which the RRA is registered if it satisfied that the RRA is qualified to perform those additional activities.

54. In the Council’s view, decisions by the Board whether or not a body meets the registration criteria and decisions concerning what R&D activities the body is qualified to perform will affect in a particular way the interests of the applicant body and also the interests of eligible companies that wish to have that body undertake R&D an their behalf. Although the Board in deciding whether to register a body is required to consider the criteria it has developed and that have been subjected to parliamentary scrutiny, the decision whether a body meets those criteria and the decision concerning the R&D activities it is qualified to perform are, in the Council’s opinion, appropriate for review on the merits by the AAT.

55. The Board also has a discretionary power under section 39F(9) to determine how much an applicant must pay towards meeting the costs of any inquiries the Board must make in respect of the application. The section, however, sets a limit on the amount which may be charged of $1,000 or such higher amount as is prescribed by regulation. Although the Board has a discretion as to the amount to be charged, it is constrained by the limit set by the Parliament. The purpose of the provision is cost recovery. Judicial review proceedings would be available to an applicant if the Board exercised the discretion for a purpose other than cost recovery. For these reasons, the Council considers that a decision of the Board under section 39F(9) as to the amount to charge an applicant is not appropriate for review on the merits by the AAT.

Recommendation 3: Review of decisions in respect of the registration of a body of persons as a research agency in respect of a class of R&D activities

13 A decision of the Industry Research and Development Board under section 39F of the Industry Research and Development Act:  to refuse an application to register a body as a research agency;  to refuse an application to register a body as a research agency in respect of a particular class of research and development activities; or  to refuse an application to vary the registration of a body that is a registered research agency; ought to be made subject to review by the Administrative Appeals Tribunal.

Cancellation of registration of research agencies 56. Section 39G(1) of the Industry Research and Development Act requires the Board to determine the grounds on which the registration of a research agency may be cancelled and to publish the grounds in the Gazette and in such other manner as it thinks appropriate. Where the Board is of the opinion that grounds exist for cancelling the registration of a research agency, it is required to give the agency an opportunity to make a submission to it within 90 days (s.39G(3)). If, following the submission or the expiration of the 90 day period, the Board is satisfied that the ground has been established, it may cancel the registration of the research agency (s.39G(4)).

57. A decision of the Board to cancel the registration of a research agency is clearly capable of affecting in a particular way the interests of the research agency and companies for whom the agency is undertaking R&D activity. In the Council’s view, such a decision should be subject to review on the merits.

Recommendation 4: Review of decisions to cancel the registration of a research agency under section 39G A decision of the Industry Research and Development Board under section 39G of the Industry Research and Development Act to cancel the registration of a research agency ought to be made subject to review by the Administrative Appeals Tribunal.

Certificates given by the Board Certificate as to research and development activities 58. Section 39L of the Industry Research and Development Act provides that the Board may, and shall if requested by the Commissioner of Taxation to do so, give to the Commissioner a certificate stating whether particular activities carried on by or on behalf of a company were research and development activities. Section 73B(34) of the ITA Act provides that a certificate by the Board stating that activities carried on by an eligible company were R&D activities is binding on the Commissioner. As mentioned above (paras 38-40), the term ‘research and development activities’ is defined in section 73B(1).

59. There is no provision, in either the ITA Act or the Industry Research and Development Act for review on the merits of a decision of the Board under section 39L. Under the ITA Act a taxpayer may lodge an objection against an assessment and the Commissioner is required to consider it and either disallow it or allow it either wholly or in part (ss.185 and 186). A taxpayer who is dissatisfied with a decision of the Commissioner made on the objection may request the Commissioner to refer the decision to the AAT or to the Federal Court (s.187). However, in relation to a decision of the Commissioner which turns on a certificate of the Board under section 39L of the Industry Research and Development Act, the AAT would stand in the shoes of the Commissioner and would be equally bound by the Board’s determination. The Federal Court would only be able to set aside the decision of the Commissioner if in some way it were wrong in law: if there were a valid determination by the Board, the court would be unable to modify the assessment. There is thus no way in which a company may obtain review on the merits of a determination of the Board under section 39L.

60. It is clear that a certificate given by the Board to the effect that particular activities are or are not ‘research and development activities’ may affect in a particular way a company’s interests. Many

14 provisions concerning entitlement to a deduction involve the application of that concept. The phrase ‘research and development activities’ enters into the definition of many of the key concepts employed in section 73B of the ITA Act (for example, ‘building expenditure’, ‘contracted expenditure’, ‘pilot plant’, ‘plant expenditure’, ‘research and development expenditure’, and ‘salary expenditure’: see subsections 73B(1) and (2)). It also occurs specifically in a large number of other subsections (for example, subsections (7), (8), (9), (15), (28) and (31)). The power to determine whether particular activities are ‘research and development activities’ is therefore a crucial one. Application of the Council’s normal guidelines concerning the effect of the exercise of the power being capable of affecting rights or interests in a particular way would lead to a prima facie presumption that determinations made under the power should be made subject to review on the merits.

61. Before the R&D Amendment Act came into force, the power of the Board to make determinations concerning whether particular activities were R&D activities was set out in section 73B(34) of the ITA Act. The question whether decisions of the Board under section 73B(34) as it then was should be subject to merits review was raised by the Senate Standing Committee for the Scrutiny of Bills. The Minister for Industry, Technology and Commerce responded as follows (Twelfth Report of 1986, 17 September 1986, at p. 15): As to the Committee’s comments on Sections 73B(34) and (35), I understand that the Taxation Office wished to proceed with the new Section of the Act without provision for appeals against the determinations of the Board. However, I have written to the Treasurer advising that should the current appeals conditions be considered inappropriate, the legislation could be amended so that determinations by the IR&D Board will be held to be determinations by the Commissioner. This would allow all of the ordinary appeals arrangements of the taxation system to operate. Since the legislation will be primarily administered by the Commissioner of Taxation, it may be appropriate to take up this matter with the Treasurer. The Committee also wrote the Treasurer but no response was received. The Committee continued to draw subsections 73B(34) and (35) to the attention of the Senate.

62. This response by the Minister indicates his general agreement to the notion of review on the merits of certifications by the Board. In its submission to the Council, the Board also said that it had no objection to review by the AAT of its decision whether a particular activity carried on by an eligible company was an R&D activity as long as internal review was a precondition for appeal to the AAT (see chapter 6). The Law Society of South Australia in its submission specifically supported review by the AAT of certificate decisions of the Board.

63. In the Council’s view, a decision of the Board under section 39L should be made subject to review on the merits by the AAT.

15 Recommendation 5: Review of decisions to give a certificate under section 39L A decision of the Industry Research and Development Board to give a certificate under section 39L of the Industry Research arid Development Act ought to be made subject to review by the Administrative Appeals Tribunal.

Certificate as to exploitation of results, or Australian content, of activities 64. Section 73B(33) of the ITA Act is designed to ensure that maximum benefits accrue to Australia from commercialisation of the research and development work subsidised by concessions given under the scheme. The section provides that a deduction under section 73B is not allowable and is deemed never to have been allowable for expenditure in respect of which the Board has given to the Commissioner a certificate under section 39M of the Industry Research and Development Act. Section 39M allows the Board to give a certificate if it is of the opinion that the results of the R&D have been exploited otherwise than on normal commercial terms or for the benefit of the Australian economy or that the R&D activities do not have an adequate Australian content. Before giving a certificate under section 39M in relation to a company, the Board must give the company an opportunity of making a submission to the Board and must consider any submission made.

65. The meaning of the terms ‘exploitation otherwise than on normal commercial terms’ and ‘exploitation otherwise than for the benefit of the Australian economy’ is set out in sections 39C and 39D respectively of the Industry Research and Development Act. Exploitation will be otherwise than on normal commercial terms if, in the opinion of the Board, the terms of a contract or transaction relating to the exploitation are different from those that would have applied had the parties been dealing at arm’s length and from positions of comparable bargaining power. Exploitation will be otherwise than for the benefit of the Australian economy if, in the opinion of the Board, the profits or gains to Australian residents from the exploitation of a significant aspect of the results of an R&D activity are not commensurate with the amount expended in the carrying on of that activity in Australia. Section 39D(2) sets out matters to which the Board must have regard in forming its opinion under section 39D(1): the value of the result of the activity, the profits or gains to non residents accruing from the exploitation of the result of the activity, the amounts expended both inside and outside Australia in the carrying on of the activity and any other matter the Board considers relevant.

66. Section 39E requires the Board to formulate and publish in the Gazette guidelines on what is meant by research and development activities having an adequate Australian content. Section 39E(3) sets out some matters that the Board may use as the basis of the guidelines such as the proportion of the expenditure incurred by Australian residents on the activities, the extent to which the activities are to be carried on in Australia and the extent to which the activities involve the use of imported plant or technology. The Board is precluded from certifying that activities do not have an adequate Australian content if they complied with the guidelines that were in force when the expenditure was incurred (s.39E(4)). The guidelines are to be tabled in the Parliament and subject to disallowance in the same way as regulations (section 39E(5) and section 46A of the Acts Interpretation Act 1901). As with criteria under section 39F (para. 53), guidelines under section 39E are to be published before the end of September 1988 (s.39E(1)).

67. The exercise by the Board of the power to issue a certificate under section 39M is capable of affecting in a particular way the business interests of a company and is therefore prima facie appropriate to be made subject to review on the merits. The definitions of relevant terms in the Act and the guidelines to be developed as to whether the activities have adequate Australian content would assist the AAT in its task. In the Council’s opinion there are no reasons why review on the merits would be inappropriate.

16 Recommendation 6: Review of decisions to give a certificate under section 39M A decision of the Industry Research and Development Board to give a certificate under section 39M of the Industry Research and Development Act ought to be made subject to review by the Administrative Appeals Tribunal.

Certificate of non-compliance 68. Under section 39N of the Industry Research and Development Act, the Board may require a company registered under the Act to give it certain information relating to activities of the company that the Board needs to perform any of its functions. If the company does not give the information within a reasonable period the Board may issue a notice requiring the production of the information within 30 days. If the company then fails to comply with that notice the Board may give to the Commissioner of Taxation a certificate stating that the company has failed to comply with a notice. The taxation consequences of such a certificate is that under section 73B(33A) of the ITA Act a deduction is not allowable under section 73B, and is deemed never to have been allowable, in respect of the activities referred to in the certificate.

69. The explanatory memorandum to the R&D Amendment Act which inserted section 39N into the Industry Research and Development Act stated that the purpose of the section is to prevent companies which have obtained tax benefits to which they are not entitled from frustrating the processes by which the Board might cause them to lose deductions.

70. As with a decision to issue a certificate under section 39M, the issuing of a certificate under section 39N will have a significant impact on the business affairs of a company. The Council is of the view that such a discretionary power of the Board should be subject to review on the merits.

Recommendation 7: Review of decisions to give a certificate under section 39N A decision of the Industry Research and Development Board to give a certificate under section 39N of the Industry Research and Development Act ought to be made subject to review by the Administrative Appeals Tribunal.

Certificate in respect of companies jointly registered 71. If, subsequent to the joint registration of companies under section 39P of the Industry Research and Development Act, it appears to the Board that any of the money paid by them has not been or is not being expended on research and development activities, the results of the activities have not been or will not be appropriately exploited, the activities do not have an adequate Australian content or any of the companies has disposed of its rights to the exploitation of the results of the research and development before the project is concluded, the Board may give a certificate to the Commissioner of Taxation to that effect (section 39P(4)). The Board is required before giving a certificate to afford the company concerned an opportunity to make a submission and then to consider any submission made.

72. The issues the Board will have to consider in determining whether to issue a certificate under section 39P(4) are similar to the issues it must consider in relation to a certificate under section 39M.

17 73. Section 73B(33B) of the ITA Act provides that the taxation consequence of a certificate under section 39P(4) is that a deduction is not allowable under section 73B in respect of expenditure incurred by the company or companies to which the certificate relates after the date on which the Board gave notice to the company or companies of its intention to issue a certificate.

74. For the same reasons as apply in relation to the giving of certificates under sections 39M and 39N, the Council considers that a decision of the Board to issue a certificate under section 39P(4) should be subject to review on the merits.

Recommendation 8: Review of decisions to give a certificate under section 39P(4) A decision of the Industry Research and Development Board to give a certificate under section 39P(4) of the Industry Research and Development Act ought to be made subject to review by the Administrative Appeals Tribunal.

18 CHAPTER 3 DECISIONS UNDER MANAGEMENT AND INVESTMENT COMPANIES LEGISLATION

Purpose of the MIC program 75. The Management and Investment Companies Act 1983 (the Act) has aims similar to but not identical with those underlying the research and development legislation discussed in chapters 1 and 2. The Act was intended to promote the establishment and development of a private sector venture capital market in Australia and to provide management and financial support to young, innovative, export-oriented enterprises with the potential for rapid growth. Venture capital may be defined as the provision of funds, unsupported by collateral, in an enterprise whose future is subject to a high degree of risk. The Act provides for the establishment of management and investment companies (MICs) to be licensed by a Management and Investment Companies Licensing Board (the Board). The Act is complemented by the provisions of section 77F of the Income Tax Assessment Act which were enacted in June 1984. Those provisions are designed to encourage investors to participate in licensed MICs by providing a 100% tax deduction for investments in such companies in the year in which the capital is subscribed. MICs in turn are expected to invest in businesses which have been declared eligible for such investment by the Board on the basis, in part at least, of criteria laid down in the legislation (see para. 107). The Board itself has described the scheme as designed ‘to promote the development in Australia of young, high-growth businesses utilising innovative technology’. (See Management and Investment Companies Licensing Board, Annual Report 1983-84 (ALPS, 1985), at p. iii; and see Annual Report 1985-86, Appendix B, ‘Basic Features of the Program’. See also the second reading speeches and debates, House of Representatives, Hansard, 30 November 1983, pp. 3074-5, and 1 December 1983, pp. 3139-62; Senate, Hansard, 2 December 1983, pp. 3200-3, and 14 December 1983, pp. 3802-12 and Annual Report 1986-87. The booklet The Management and Investment Companies Program, November 1984, and the 1986-87 Annual Report of the Industries Assistance Commission are also very useful.)

Wind-up of program announced 76. As with the R&D scheme referred to in chapters 1 and 2, there has been much speculation about the future of the MIC program. The Management and Investment Companies Act and the Income Tax Assessment Act were amended in 1987 to provide a phasing-out mechanism which would allow a MIC voluntarily to leave the program in a non-prejudicial fashion. The amendment inserted a new section 23A in the former Act providing for the voluntary surrender by a MIC of its licence. Companion amendments of the Income Tax Assessment Act ensured that the clawback provisions, which deny the income tax deduction if shares in a MIC are disposed of within 4 years of the MIC being licensed or within 4 years or the shares becoming fully paid up or if the MIC’s licence is revoked or not renewed, would not be triggered by a surrender of the licence.

77. These phasing-out arrangements were followed by an announcement by the government in the Treasurer’s Economic Statement of May 1 988 that the government had decided that the scheme would continue until 30 June 1991 but would be terminated on that date. As the Treasurer noted, the proposed termination date extends by 3 years that recommended by a report of the Bureau of Industry Economics (BIE) of July 1987 which recommended termination of the program on 30 June 1988. The BIE considered that the program had achieved the desired effect and possible benefits from continuing the program after 1988 would not justify the cost of the program. In announcing that the 100% taxation deduction would be withdrawn from 1991-92, the Treasurer said that the clawback arrangements would continue to apply beyond that date.

19 78. On 25 May 1988 the Minister for Industry, Technology and Commerce issued the following statement concerning the government’s decision: In reaching this decision the Government has recognised the continuing relevance of the scheme’s objectives of assisting the growth of new innovative businesses. The Program is making a positive contribution to the necessary task of structural adjustment and thereby improving economic efficiency.

The Government is conscious of the progress achieved by the MICs to date but concluded that more time is needed for the MICs to mature and to demonstrate to Australian investors that managed venture capital portfolios can provide economic returns.

The MICs are intended to provide such a demonstration and the institutional basis for further expansion of the market. It is in this context that the setback suffered by the fledgling venture capital industry as a result of the October 1987 stock market crash has influenced the Government’s decision,

79. In the light of the government’s announcement that it proposes that the scheme be terminated on 30 June 1991, the Council has given careful consideration to the question whether it should proceed with this report in so far as it concerns the MIC program. Several factors have, however, influenced the Council’s thinking in deciding to proceed. First, even on the government’s announced lifespan for the program, it still has some years to run. This was emphasised by the call by the Board in August for applicants for new MIC licences. Secondly, although the proposed wind-up of the program represents the government’s present intention, there is no guarantee that, if a change in economic or other circumstances were to occur, the program would not continue beyond the date proposed by the government. Finally, even if the program is wound up as proposed, it is possible that, in the future, another program with similar characteristics will be introduced by the government. If that were to happen, the recommendations made by the Council in this report may be of assistance in the setting up of that other program.

80. Ultimately, however, any decision to provide for review on the merits of relevant decisions of the Board, is a matter for the government and the Parliament. While the Council has, in this report, recommended that certain decisions of the Board which are not currently reviewable be made subject to review by the AAT, it recognises that the government may consider that those recommendations ought not to be implemented because of the likely limited lifespan of the MIC program.

Present volume of business under program 81. As at 30 June 1988 the 11 licensed MICs had a capital base of $230 million consisting of $195 million from taxpaying sources utilising the 100% tax concession, $ 20 million from non-taxable sources and $15 million representing bonus shares issued by MICs from their asset revaluation reserves. The MICs had, by the end of June 1988, invested over $143 million in 141 different businesses. By the end of June 1988, of the 122 current investee businesses, 25 had less than 1 year of MIC involvement, 42 had 1 to 2 years, 41 had 2 to 3 years and 14 had 3 to 4 years.

20 Scheme of the Act 82. The Act provides for the licensing of MICs by the Board (s.21). In granting a licence, the Board is required to specify in the licence the amount of approved capital of the licensee for the purposes of the Act. The Minister is empowered to specify to the Board the total amount that may be approved by the Board as the approved capital of licensees in a particular year and the aggregate of amounts approved by the Board shall not exceed the aggregate of any amounts specified by the Minister (s.18). (This provision limits the total amounts which attract the tax deduction, and thereby limits the cost to the government and minimises use of the deduction for tax avoidance purposes. In a statement made on 8 October 1987 the Minister for Industry, Technology and Commerce said that the present upper limit of $20 million in revenue foregone per annum will be retained for the life of the program.) The licensed companies are then expected to invest in business entities (which may be companies, partnerships, unit trusts or sole traders who are natural persons) which have been declared eligible by the Board.

83. The Act provides that a licensee shall not hold interests in a particular eligible business entity which exceed in the aggregate an amount equal to 20% of the approved capital of the licensee or of the shareholders’ funds of the licensee, whichever is the greater (s.32). This ensures that licensees diversify their investments. As the Board’s publicity expresses it, the licensee venture capital companies seek to offset the risk inherent in a single project by holding a portfolio of investments. The Act also provides that a licensee shall not hold ownership interests in a particular eligible business entity which exceed 50%, or such higher percentage as the Board approves, of the total of the amounts of all ownership interests in the business entity (s.33(1)). The diagram in Figure 1 shows the basic form of the legislative scheme.

21 22 Membership of the MIC Licensing Board 84. The Act provides that the Board shall consist of the Chairman, the holder of an office in the Department of Industry, Technology and Commerce which is designated by the Minister, and from 4 to 6 other members (s.7(1)). The Chairman and the other members apart from the departmental member are appointed by the Governor-General and are appointed as part-time members. Appointed members hold office for a term not exceeding 3 years, but are eligible for reappointment. The names of the present members of the Board and their current positions are set out in Appendix 3. The present and past members of the Board have had a wide range of experience in the following fields: finance and accountancy, management and management consultancy, marketing, and high technology management.

Present extent of AAT review 85. The Act presently provides in section 47 for review by the AAT of decisions of the Board to revoke a licence, to refuse to approve the surrender of a licence or to refuse to renew a licence (ss.23(1) 23A(1) and 25(3) respectively). The Council considers that review of those decisions is appropriate.

Decisions not subject to review on merits 86. Several important decisions of the Board, however, have not been made subject to AAT review. The decisions are:  refusing to grant a licence and concerning the level of approved capital: - to refuse to grant a licence to an applicant (s.21(1)); - to specify in a licence the amount of approved capital of the licensee (s.21(1)); - to grant a licence subject to conditions, to vary or revoke any of the conditions of a licence, or to impose further conditions (s.21(5)); - to increase or refuse to increase the amount of the approved capital specified in a licence (s.38(2));  suspending a licence (s.24);  directing a licensee to take action in relation to a contravention of the Act or regulations (s.26);  refusing to certify a business entity as an eligible business entity: - to refuse to certify a business entity as an eligible business entity in relation to the licensee, to impose or vary conditions in respect of certification, to request the licensee to furnish further information to the Board or to refuse to extend the period of certification (s.29);  cancelling certifications of business entities: - to cancel a certification under section 29 (s.30(1) and (2));  giving or withholding certain approvals: - to grant or refuse approval for a licensee to hold an additional percentage of ownership interests in a particular business entity (s.33(1)); - to approve or refuse to approve a plan submitted by a licensee for the reduction of its ownership interests in a business entity to a permitted amount (s.33(3)): - when the certification of the business entity has been cancelled, to approve or refuse to approve the continued holding by a licensee of prescribed interests in a business entity, to approve or refuse to approve the acquisition by a licensee of additional prescribed interests in a business entity or to approve or refuse to approve a later date by which all prescribed interests must be disposed of (s.36); - to approve or refuse to approve the investing of moneys, being assets of a licensee, by a licensee (s.37(1)); - to approve or refuse to approve the investment of moneys, being assets of a licensee, in any manner not otherwise authorised by or under the relevant part of the Act (s.37(2)); - to approve or refuse to approve the acquisition by a person of any interests in shares in a licensee if the acquisition would result in the person acquiring a ‘substantial ownership’ interest in the licensee’ (s.44).

23 87. The Senate Standing Committee on the Scrutiny of Bills drew attention to decisions under some of the above discretionary powers as not being subject to review on the merits (Sixteenth Report, 14 December 1983).

88. The question of the appropriateness of provisions for review on the merits of each of the classes of decisions set out above is considered in detail below. At the outset, however, the Council mentions a general point made by the Board in its submission to the Council. In expressing opposition to any recommendation of the Council for extension of review on the merits of its decisions, the Board said that, before taking any action which may have an impact on a MIC, the Board consults the MIC and seeks to resolve the issue, bearing in mind the responsibilities under the Act of both the MIC and itself. The Board said that it takes action under the Act as a last resort. It also expressed the view that review by the AAT of the decisions concerned would be likely to be against the best interests of businesses operating in a rapidly changing environment.

89. In the Council’s view, this is not an argument against providing for AAT review. The resolution of disputes by consultation and negotiation is to be encouraged and it is a welcome result if most are resolved by these means. That does not, however, detract from the provision of a facility for adjudication and resolution of disputes which the parties find intractable. In any event, if, as the Board suggests, disputes are normally resolved by consultation, there would not seem to be a difficulty in providing for review by the AAT as appeals to it can be expected to be infrequent.

Decisions to refuse to grant a licence and concerning the level of approved capital 90. A decision of the Board under section 21(1) to refuse to grant a management and investment company licence to an applicant, or to set at a certain level the approved capital of a licensee company, is clearly capable of affecting in a particular way the business interests of the company concerned. Prima facie, therefore, it would appear appropriate that the decision be subject to review on the merits. Furthermore, the Board’s discretion to grant or refuse a licence is not subject to any statutorily prescribed criteria or prerequisites, although the Minister may give binding directions to the Board with respect to the policies and practices to be followed by the Board in the performance of its functions and the exercise of its powers under the Act (s.17).

91. However, the Council considers that other considerations displace the prima facie presumption in favour of review. The principal reason for proposing that decisions of the Board to refuse to grant a licence or to set at a certain level the approved capital of a licensee should not be made subject to review is that the decisions concern the allocation of limited resources. Under section 21(3), where it seems to the Board that fewer licences may be granted than there are satisfactory applicants, because of the amount of approved capital specified under section 18 by the Minister in relation to a particular financial year, the Board is required to grant licences to those applicants it considers are likely if licensed to assist most effectively the formation and development of the business entities the Act is intended to promote. In the latter half of 1987, for example, the Board decided not to grant any new MIC licences that year. At the same time the Board approved the raising of additional capital of $41 million by the existing MICs, and allocated that amount among the existing MICs on the basis of the belief that each MIC had an excellent commercial opportunity to successfully demonstrate the profitability of venture capital investment. The Board said that the decisions as to the increases in approved capital were made after a rigorous examination of each MIC’s capital requirements, other possible sources of capital and commitments to existing investees as well as their management teams, investment performance, projected investment rate, prospects for ultimate success and their compliance with the letter and spirit of the MIC program. The decisions were made against a background of the MICs’ requests for increases in tax-concessional capital totalling $114.5 million. (See Media Release of 16 November 1987).

92. The Council considers that decisions of the Board concerning the grant of licences come within the category of decisions involving the apportionment of a finite resource referred to by the

24 Council in its Eleventh Annual Report 1986-87, at para. 246. (See also paras 25-26 above.) A connected reason is that a review body would be forced to rely in a significant number of cases on the opinion of the Board because of its knowledge of the other applicants for licences, both successful and unsuccessful.

93. Similar reasoning to that set out above apples in relation to decisions of the Board setting the approved capital of licensees for the purposes of the Act, as provided for in section 21(1) of the Act, decisions of the Board to increase the amount of the approved capital specified in a licence under section 21(1) (s.38(2)) and decisions of the Board relating to the conditions on which a licence is granted (s.21(5)).

94. It might be argued that a further reason for not considering this class of decisions appropriate for review on the merits is the specialised knowledge and experience of the members of the Board. This was the reason for the absence of review given in the explanatory memorandum accompanying the Bill: Such decisions require the exercise of judgment requiring a high level of relevant experience and constitute a major part of the role for which the specially constituted, independent Board is to be established.

95. In the Council’s view, however, this argument is not sufficient to preclude review on the merits. The issue of review of decisions requiring expertise of a primary decision maker is dealt with in chapter 5.

Decisions to suspend a licence 96. Under section 24(1) the Board is empowered to suspend a licence for a period not exceeding 2 months on any ground referred to in section 23(1) as a ground on which the Board may revoke a licence. It may also suspend a licence where it is satisfied that the licensee is likely to contravene the Act or regulations. It may not suspend a licence on any other ground

97. It is not clear whether under section 24(1) the suspension of a licence where the Board is satisfied that there is likely to be a contravention of the Act or regulations is limited to a 2 month period. A possible interpretation of section 24(1) is that there is no such limitation. On the other hand, in its submission to the Council the Board said that it believed that the intention of the provision was that all suspensions should not exceed 2 months. It went on to say that it would treat the provision according to that intention. For the purposes of this report the Council assumes that this reading of the provision is correct.

98. Section 28 illustrates that a suspension may have significant consequences for the business interests of a licensee. Under that section a licensee shall not, while its licence is suspended, issue any shares, call up any share capital, or accept from a member of the licensee the whole or a part of the amount remaining unpaid on any shares unless the amount was called up and due before the suspension. Where a-call for payment has already been made, and the time fixed for payment occurs during a period of suspension, any payment made before the suspension must be repaid. The disadvantage to a licensee suspended for a period of up to 2 months thus arses from an inability to issue shares or raise or receive share capital during that period, even though the detriment is not a lasting one. In addition, a licensee may suffer detriment to its reputation as the result of a suspension, the fact of which is required to be made public by the Board by means of a notice published in the Gazette (s.27).

99. The intention of the legislature in providing a power of suspension appears to be to prevent taxpayers qualifying for a tax deduction - and also to prevent them investing their money-by prohibiting the issue of shares by the licensee or the making of payments to the licensee towards share capital in a situation where doubts have arisen as to the performance or competence of the licensee. The measure is aimed at protecting the revenue for a finite period during which the Board will conduct investigations and discussions with the licensee designed to secure compliance with the requirements

25 and aims of the legislation and with any directions of the Board. In addition, suspension will safeguard investors from committing capital funds or further capital funds to a company which may not be fulfilling the purposes of the legislation and which may be in danger of having its licence revoked. If resolution of the problems within the period of suspension proves impossible, it could be expected that the Board would usually proceed to revoke the licence, a decision which would then be subject to review by the AAT (s. 47).

100. In the Council’s view, the nature of the grounds on which the Board is permitted to suspend a licence would not preclude review of such decisions by the AAT. One set of grounds comprises the grounds set out in section 23(1), on the basis of which the Board is empowered to revoke a licence, and AAT review of revocation decisions has already been incorporated in the legislation. A decision based on the ground that the Board is satisfied that a licensee is likely to contravene the Act or regulations may present greater difficulty, but in principle it should be possible for the AAT to evaluate the evidence which is claimed to support the decision of the Board.

101. However, the Council has in the past recognised that in some cases it will be inappropriate to provide for review of decisions which take formal effect for only a short period (see Report No. 28, Review of Customs and Excise Decisions. Stage Three, Anti-dumping and Countervailing Duty Decisions, paras 86-88). In some such cases it may be that the effect on the rights or interests of an individual or a company or other organisation will be so slight or transitory as not to constitute a significant interference with those rights or interests. (However, note the contrasting situation where the effects of a suspension are serious and AAT review has been provided for: for example, section 16R of the Australian Meat and Livestock Corporation Act 1977.) Again, the period may be so short that a reviewing body would be unlikely to provide an adequate and timely remedy.

102. Although the possible effects on a licensee of a decision to suspend the licence are likely to be serious, the Council considers on balance that the short-term nature of the decision renders it inappropriate for review on the merits.

Decisions to direct a licensee to take action in relation to a contravention of the Act or Regulations 103. Under section 26, where the Board is satisfied that a licensee has contravened the Act or regulations, it is empowered, before revoking, suspending or refusing to renew a licence, to direct the licensee to take action in relation to the contravention within such time as is specified in the notice. If the licensee takes that action within the specified period, the Board is prohibited from revoking, suspending or refusing to renew the licence on the ground of that contravention. The Council is of the view that it is unnecessary to provide for review of such decisions since, if the licensee does not accept the need to comply with the directions of the Board, it may decide to ignore them or refuse to carry them out. This could be expected to lead ultimately to the Board revoking or refusing to renew the licence, and such a decision by the Board may be tested in a review by the AAT. (See s.47 and para. 85 above.) It would be inappropriate to provide a right of review that would hedge around with formality a power that is designed to avoid, if possible, the need for formal action by the Board to revoke, suspend or refuse to renew a licence

Decisions to refuse to certify a business entity as an eligible business entity 104. Under section 29 a licensee MIC, which proposes to acquire a prescribed interest in a business entity that is not already an ‘eligible business entity in relation to the licensee’, shall apply to the Board to certify the business entity as an eligible business entity in relation to the licensee. The Board is required to certify the business entity as an eligible business entity, or to refuse so to certify the business entity, or to request the licensee to furnish further information. The Board also may impose conditions when certifying an eligible business entity or at any time vary or revoke such conditions or impose further conditions. It may also extend the period of certification of the business entity. No provision is made for review of a decision of the Board under this section.

26 105. In the Council’s view, the Board’s power under section 29(3)(c) to request a licensee to furnish further information is not appropriate for review on the merits, since the power is purely facultative. (See ARC Eleventh Annual Report 1986-87, para. 246, and Report No. 23, Review of Customs and Excise Decisions: Stage Two, para. 77.) A decision made in exercise of the power merely enables the making of a substantive decision by the Board to certify or not to certify the business entity.

106. It may be noted that in order to speed up the certification process the Board has adopted the practice of delegating to individual members of the Board the power to certify certain business entities as eligible business entities under section 29, as authorised by section 15(1).

107. The Board is given a discretion to certify a business entity as an eligible business entity in relation to a licensee if the business entity meets certain criteria specified in the Act (s.29(6)). Those criteria require (subject to the important qualification mentioned below) that the business entity:  is engaged in one of the kinds of business activities which is set out in the legislation (manufacturing, prescribed agricultural, forestry or fishing activities, postal, telegraphic and other communication services, architectural, surveying, consultant engineering, scientific and technical or data processing services, the production or supply of software for computers or prescribed services relating to education or training);  is carrying on its principal business activities or research and development activities (or both) in Australia;  has not more than 100 employees or a net worth of not more than $6 million, or such other amount as is prescribed;  is expected by the Board to have an average growth rate in sales over the next 3 years of more than 20%;  has as its primary business activity an activity that is less than 10 years old; and  is, in the opinion of the Board, a ‘prescribed business entity’, which is defined as a business entity that has, or proposes to have, in relation to the present or proposed business activities in which it is or proposes to be primarily engaged, at least 3 of the following features to a significant extent: (a) the use of innovative technology; (b) an export orientation; (c) international competitiveness; (d) the potential for rapid growth; (e) the potential for creating skilled employment in Australia. (See s.29(6) and definition of ‘prescribed business entity’ in s.3(1).)

108. The Board is empowered to certify a business entity as an eligible business entity even when it does not meet the first 5 of the criteria set out above, but it may not certify a business entity which does not satisfy the required number of ‘features’ of a ‘prescribed business entity’ as set out above (s.29(7)). Those last mentioned features are thus crucial to decisions under the legislation.

109. It should be noted that, even if the Board considers that all the relevant legislative criteria are satisfied, the Board is not compelled to certify the particular business entity as an eligible business entity in relation to the particular MIC licensee, but retains a discretion not to certify it. Given the comprehensive nature of the criteria set out in the legislation in relation to business entities themselves, it seems likely that the considerations which would influence the Board in the exercise of this residual discretion would largely concern the appropriateness of a particular MIC, with its specific characteristics, investing in a particular business entity.

110. A decision by the Board to certify a business entity under section 29 is a necessary prerequisite to a licensee investing in that business entity (ss.31, 32, 33, 34 and 35), but it remains entirely a matter for the licensee MIC to decide whether or not it will actually invest in it.

27 111. The Board has advised that between the beginning of the program and the end of June 1988, 256 applications for certification had been made to it, and were decided as follows: ______Certified as eligible businesses 224 Withdrawn 13 Refused 19 Total 256

112. Refusals are clearly the exception. The grounds on which the 19 applications were refused mainly concerned the requirement under section 29(6)(f) that the Board be satisfied that the relevant business entity is a ‘prescribed business entity’ (see para. 107 above). The interpretation of other provisions of the Act was also relevant in the making of some decisions. However, some refusals were a result, partly or wholly, of the application of policies developed by the Board in relation to such matters as applications for certification of overseas companies, whether particular industry sectors were short of venture capital, the investment mechanisms applicable to business entities, what types of business are appropriate for the programs, and so on. 113. The Board’s Secretariat has informed the Council’s Secretariat that the 256 applications related to only 195 different businesses. In some instances, more than one MIC had applied for certification of the same business. In the exercise of its discretion, the Board has occasionally refused to certify a particular business in relation to a MIC if the business has already been certified in relation to another MIC.

114. The Board’s Secretariat has also informed the Council’s Secretariat that the 19 refusals related to 19 different businesses, 8 of which were subsequently certified in relation to the MIC in respect of which the application had originally been refused or were certified in relation to another MIC or received MIC support through being acquired by another MIC investee business. Effectively therefore only 11 businesses have been refused certification by the Board. These figures reflect the fact that, while no formal appeal mechanism is set down in the Act, MICs are free to repackage applications and apply again to the Board. The Secretariat of the Board has said that it is not aware of complaints having been made to the Board about the procedure.

115. A decision of the Board not to certify a business entity as eligible in relation to a particular licensee MIC or to impose or vary conditions is undoubtedly capable of affecting in a particular way interests of the MIC and the business entity concerned by precluding the possibility of investment by the former in the latter. The question is therefore whether there are grounds for displacing the prima facie presumption that such decisions should be subject to review on the merits. The Council considers that there are not.

116. The discretionary power conferred on the Board to certify or not to certify a business entity in relation to a particular MIC is very wide. Although the Board is required to consider specific criteria contained in the Act, it is not obliged to grant certification even when those criteria are met. This leaves a considerable scope and need for the development by the Board of its own policies for the administration of these provisions of the Act, and the application of such policies is evident in a number of the refusals of certification so far made by the Board. If the AAT were to be given the power to review decisions of the Board under section 29, the AAT would, in accordance with the principles it has established, give appropriate weight to policies developed and applied by the Board (Aston and Secretary, Department of Primary Industry (1985) 8 ALD 366).

117. In all the circumstances, the Council is of the view that a decision of the Board to refuse to certify a business entity as an eligible business entity in relation to a licensee or to impose conditions when certifying an eligible business entity or at any time to vary such conditions or impose further conditions should be subject to review on the merits.

Recommendation 9: Review of decisions in respect of the certification of a business entity as an eligible business entity in relation to a MIC

28 A decision of the Management and Investment Companies Licensing Board under section 29 of the Management and Investment Companies Act to refuse to certify a business entity as an eligible business entity in relation to a licensee or to impose or vary conditions in relation to the certification of a business entity ought to be made subject to review by the Administrative Appeals Tribunal.

Decisions to cancel certifications of business entities 118. Under section 30 a certification of a business entity as an eligible business entity in relation to a licensee may only be cancelled by the Board:  if the business entity has failed to comply with a condition imposed on it by the Board under section 29(5A);  if the business entity is not primarily engaged in a business activity referred to in section 29(6)(a);  if the business entity does not carry on its principal business activities, or research and development operations, in Australia; or  if the Board is satisfied that an officer of the business entity or licensee has furnished, or authorised to be furnished, misleading information in relation to the business entity (s.30(1)).

119. The Council considers that there are no difficulties of principle or practice in making decisions based on those grounds subject to review on the merits.

120. A further ground for cancellation of the certification of a business entity is where the Board is satisfied that the business entity is not a ‘prescribed business entity’ as defined in section 3(1) (s.30(2), and see para. 107 above). In the Council’s view, a decision to cancel a certification on this ground is appropriate for review on the merits by the AAT because, although the Board is not given any discretion in a case where it is satisfied as required, a review body standing in the shoes of the Board might reach a different view on whether the business entity was in fact a ‘prescribed business entity’. It is true that the features referred to in the definition in section 3(1) may involve the AAT in difficult discriminations in the making of which it might require expert evidence - for example, in determining whether the technology being used by a particular business entity is ‘innovative’ or not, whether the business entity’s ‘international competitiveness’ is high, or whether the entity has the ‘potential for rapid growth’ or ‘the potential for creating skilled employment in Australia’. However, while the criteria to be applied involve some difficulty in their application, their technical nature does not preclude review by the AAT which is capable of being constituted by members having expertise in the area concerned and before which the parties may lead expert evidence.

121. It is common for review to be provided of decisions which involve the cancellation or revocation of an entitlement to some valuable right or resource, such as a licence (as in s.23 of the Act) or a professional or trade certificate or registration. Likewise certification as an eligible business entity in relation to a particular MIC constitutes a valuable resource for both the eligible business entity and the MIC. Consequently a decision to cancel a certification under section 29 may have a significant effect on the interests of both the licensee and the business entity.

122. The provisions of the AAT Act would enable either the licensee or the business entity to apply for review of a cancellation decision or to be joined as a party (AAT Act, ss.27 and 30).

Recommendation 10: Review of decisions cancelling certifications of business entities as eligible business entities in relation to MICs A decision of the Management and Investment Companies Licensing Board under section 30(1) or (2) of the Management and Investment Companies Act to cancel the certification of a business entity in relation to a licensee ought to be made subject to review by the Administrative Appeals Tribunal.

29 Decisions to give or withhold certain approvals 123. The Board is empowered by the Act to give or refuse approvals of several kinds involving actions by a licensee or another person. The licensee or person would be unable to take those actions without the Board’s approval in each case. The approvals are as follows:  approval that a licensee hold a percentage of ownership interests in a particular business entity exceeding in the aggregate 50% of the total of the amounts of all ownership interests in the business entity (s.33(1));  approval of a plan submitted by a licensee, which is in breach of the provisions of section 33(1), for reducing the aggregate amount of its ownership interests in a business entity to the permitted amount (s.33(3)):  approval of the continued holding by a licensee of prescribed interests in a business entity, or approval of the acquisition by a licensee of additional prescribed interests in a business entity, when the certification of the business entity has been cancelled (s.36(1)), and specification of a date by which all prescribed interests held by the licensee in the business entity must be disposed of (s.36(2), (2A) or (2B));  approval, by notice published in the Gazette, of a licensee investing moneys, being assets of the licensee, in certain ways (s.37(1));  approval of a licensee investing moneys, being assets of the licensee, in any manner not otherwise authorised by or under the Act, subject to a prohibition against approving certain kinds of investment (s.37(2));  approval of a person acquiring interests in shares in a licensee if the acquisition would result in the person acquiring a substantial ownership interest in the licensee (s.44).

124. Refusals by the Board to give an approval under section 33(1) or (3) may have serious consequences for the business interests of a licensee or a business entity that a licensee has invested in. Refusals by the Board under section 37(1) or (2) to approve investments of a licensee may also significantly affect the business interests of a licensee. A refusal by the Board under section 44 to approve the acquiring by a person of a substantial ownership interest in a licensee may significantly affect both the interests of the person and the licensee. All these decisions appear prima facie to be suitable to be made amenable to review on the merits by the AAT. In the Council’s view, no circumstances surrounding the decision making powers concerned displace the prima facie presumption in favour of review.

125. Section 36 provides that, where the certification of a business entity is cancelled by the Board (or expires), the Board may approve the continued holding of ownership interests or other prescribed interests in the business entity, or the acquisition by the licensee in certain circumstances of additional prescribed interests in the business entity. However, if the Board gives such an approval, it may specify a date by which all prescribed interests held by the licensee in the business entity must be disposed of. If a licensee continues to hold, or acquires, prescribed interests in the business entity with the approval of the Board, the business entity is deemed to be an eligible business entity until the date specified by the Board. Thus, if the Board does not approve the continued holding or the acquisition of prescribed interests, or specifies a date for their disposal, the interests of the licensee and the business entity would be affected in a particular way. In the Council’s view, a facility for review by the AAT of these decisions would seem to be appropriate.

Recommendation 11: Review of decisions refusing to give an approval for certain activities and specifying a date by which prescribed interests in a business entity must be disposed of A decision of the Management and Investment Companies Licensing Board to refuse to give an approval under section 33, 36(1), 37 or 44 of the Management and Investment Companies Act, and a decision of the Board specifying a date under section 36(2), (2A) or (2B) of the Act, ought to be made subject to review by the Administrative Appeals Tribunal.

30 CHAPTER 4 SECTION 77F OF THE INCOME TAX ASSESSMENT ACT

126. Two powers contained in section 77F of the Income Tax Assessment Act (the ITA Act), which concerns the tax deduction applicable in the case of investment it a MIC, require discussion of the need for review. They are:  the power conferred on the Board by section 77F(9) to determine a day for the purposes of the tax clawback provisions following a revocation of a licence by the Board under the Management and Investment Companies Act or a refusal to renew a licence:  the power conferred on the Board by section 77F(15) to notify the Commissioner of Taxation that moneys paid on a share in a MIC before the MIC was license (were paid in anticipation of the grant of a licence to the MIC.

Specification of date of deemed disposal of shares 127. Section 77F(9) provides that, following a revocation of a licence or a refusal to renew a licence, every owner of shares in the licensee shall be deemed to have disposed of his shares on the day determined by the Board. The determination of a day by the Board may have serious consequences for a taxpayer as the Commissioner will adjust a deduction otherwise allowable if the deemed date of disposal of the share is within 4 years of the grant of the licence or within 4 years of the shares becoming fully paid up (s.77F(5)).

128. In the Council’s view, decisions by the Board under section 77F(9) are prima facie appropriate for review on the merits. No circumstances surrounding the decision appear to displace this prima facie presumption in favour of review.

Moneys paid before grant of licence 129. A notification by the Board under section 77F(15) that moneys paid on a share in a licensee before its licence was granted were paid in anticipation of the grant of the licence has the effect of allowing the tax deduction to apply in relation to the payment as if it were made following the grant of the licence. Section 77F(16) sets out certain matters to which the Board shall have regard in determining whether to give a notification. Section 77F(16)(d), in specifying as a catch-all matter to which the Board shall have regard ‘such other matters as the Board considers relevant’, indicates that a wide range of matters may be relevant to the Boards decision.

130. Any refusal of the Board to give a notification will obviously have a significant effect on a taxpayer as the payment made to the MIC before its licence was granted will not be eligible for the tax deduction. In the Council’s view, such a decision ought to be made amenable to review on the merits.

Relocation of Boards powers in its own Act 131. At present a taxpayer could not use the appeal provisions of the ITA Act to obtain review on the merits of a decision of the Board under section 77F(9). Although the taxpayer could, under section 187 of the ITA Act appeal to the AAT against an assessment of the Commissioner, the AAT, when determining the appeal, would stand in the shoes of the Commissioner and the Commissioner is required for the purposes of section 77F to take the date of disposal of shares as the date specified by the Board under section 77F(9). Likewise, the Commissioner is bound by any decision of the Board concerning the giving of, or a refusal to give, a notification under section 77F(1 5). Again, an appeal to the AAT against a decision of the Commissioner to disallow a deduction would not open up to review the Board’s discretion.

31 132. The Council has therefore concluded that both section 77F of the ITA Act and the Management and Investment Companies Act ought to be amended in the same way as the research and development provisions were recently amended (para. 33), so that the discretionary powers of the Board under sections 77F(9) and 77F(15) are relocated in its own Act. This would have the effect of enabling the review provision a to be located in that Act, which is the more logical place for it.

Recommendation 12: Review of the determination of a date by which owners of shares in a MIC shall be deemed to have disposed of their shares and review of refusals of the Board to recognise pre-licence investments in a MIC (1) A determination of a date by the Management and Investment Companies Licensing Board under section 77F(9) of the Income Tax Assessment Act, being a date by which owners of shares in a MIC should be deemed to have disposed of those shares, ought to be made subject to review by the Administrative Appeals Tribunal. (2) A refusal of the Board under section 77F(15) of the Income Tax Assessment Act to give a notification to the Commissioner of Taxation in relation to a payment on a share in a MIC before the MIC was licensed ought to be made subject to review by the Administrative Appeals Tribunal. (3) The Board’s powers under sections 77F(9) and 77F(15) of the Income Tax Assessment Act ought to be relocated from that Act to the Management and Investment Companies Act.

32 CHAPTER 5 REVIEW OF DECISIONS OF AN EXPERT BODY

133. A general and important question concerning review on the merits of decisions of the Industry Research and Development Board and of the MIC Licensing Board is whether it is appropriate for the AAT to review their decisions having regard to the expertise of their members and to the Boards’ detailed knowledge of the schemes and programs they administer.

134. The Industry Research and Development Board, in making decisions concerning subsidies or concerning declarations of eligible companies, is called upon to exercise a high level of scientific, technological, economic and management expertise and is required to take careful account of government policy m relation to industry development. As is noted above (para. 22), the Board at present consists of members with a broad range of expertise in the appropriate fields. It is assisted by expert committees and by a secretariat most of whose members also have expertise m those fields

135. The MIC Licensing Board is also comprised of members chosen for their commercial experience and background. In its submission to the Council, the Board said that it did not believe that it was appropriate for its decisions to be reviewed by a body which had neither relevant experience and background nor detailed knowledge of the MICs and the MIC program.

136. The general philosophy underlying the development of means of renew on the merits was that the exercise of discretionary power which may affect the interests of a person should be reviewable on the merits by an authority which has adequate powers to inform itself and make an independent and determinative judgment. A particular distinguishing feature of review on the merits by the AAT was that the function was vested in a general appeals tribunal, capable of hearing appeals from decisions made across the range of government activity. In performing this task the AAT has been influential in clarifying the intent and operation of legislation and successful in applying legislation to the facts of particular cases, particularly in those areas which were rarely litigated before courts of law. The role of the AAT in providing clear and authoritative interpretations on the effect of relevant legislative provisions has been acknowledged by government departments (see ARC Eleventh Annual Report 1986-87, chapter 5).

137. The membership of the AAT covers a wide range of expertise and experience, and it has a flexible constitution which enables it, for example, to assign presidential or more experienced members to cases where complex legal issues and matters of interpretation are involved. It has significant experience m the renew of discretionary decision making and can be constituted in a multi- disciplinary mode of required. If necessary, experts in particular fields can be appointed to it as part- time members. The AAT when reviewing a decision of an expert body would take into account the nature of the body and the nature of its decision making powers and would constitute itself appropriately.

138. For the purpose of the performance of the AAT’s review function, such things as manuals and press releases may properly be put before it to form part of the background of facts of which it ought to be informed when reaching its decision (Henry and Secretary, Department of Social Security (1986) 11 ALN, N10). Indeed, if the AAT is to do its job properly, it is important that policies of the decision maker be put before it and fully explained. If any policy guidelines of the decision maker are not put before it, review may, instead of ‘assisting to develop principled yet flexible decision making, intervene incongruously to disrupt the due course of administration’ (Justice Brennan in Becker and Minister for Immigration and Ethnic Affairs (1977) 1 ALD 158 at 162-3). The Industry Research and Development Board’s circulars, especially its guide to its interpretation of what constitutes research and development, are the sort of material that the AAT will have regard to.

33 139. In the Council’s view, the expertise of the Industry Research and Development Board and the MIC Licensing Board is not in itself sufficient to preclude review on the merits of their decisions (see ARC, Eleventh Annual Report 1986-87, para. 229). As the Council said in Report No. 16, Review of Decisions under the Broadcasting and Television Act 1942, an argument against review based solely on the expertise of the primary decision maker ‘does not place sufficient weight upon the need to review or check even the findings of experts or upon the ability to appoint experts to the Administrative Appeals Tribunal’ (para. 51).

140. Indeed, as has been mentioned above in relation to the MIC Licensing Board, certain of its decisions are already subject to review on the merits by the AAT. The Industry Research and Development Board, in its submission to the Council, saw no objection to review by the AAT of its decisions under the previous provisions of the ITA Act in relation to registration of companies and the issuing of certificates provided that provision was made for compulsory internal review as a precondition to appeal to the AAT.

141. Review of decisions of the latter Board, in particular, appears to be appropriate when regard is had to the history of government schemes to promote industrial research and development. Certain decisions of the former Australian Industrial Research and Development Incentives Board under the Incentives Act were subject to review on the merits by the AAT. The objectives of the Incentives Act were to promote the development and improve the efficiency of Australian industry by encouraging industrial research and development in Australia in matters relating to science and technology (s.3). The AAT when reviewing decisions under the Incentives Act was mindful of the objectives and philosophy of the Act. In Babinda Co-op Sugar Milling Association and Australian Industrial Research and Development Incentives Board (1980) 2 ALD 851 the Tribunal said: It is we consider important to keep steadily in mind the object of the present legislation, not only in respect of a consideration of each of the phrases which we have to consider, but also in respect of our total consideration of the Act as a whole.

(see also Norcim Investments and Australian Industrial Research and Development Incentives Board (1986) 11 ALD 37). The Industry Research and Development Board is the successor to the former Board and the objects of the Research and Development Act are almost identical to the objects of the Incentives Act. The AAT, therefore, has already considered issues which are, in substance, very similar to those it would be required to consider under the Industry Research and Development Act and in so doing has developed a body of precedent to guide it in its determinations.

142. Decisions of the Industry Research and Development Board and the MIC Licensing Board of the kind discussed in this report are not dissimilar in technical complexity from decisions in areas for which the AAT already has jurisdiction. At present the AAT considers such highly technical and diverse matters as:  complex financial and technical evidence under legislation such as the Insurance Act and Life Insurance Act;  complex scientific evidence under legislation such as the Biological Control Act 1984;  complex medical evidence in its social security and veterans jurisdictions;  the environmental impact of a decision under legislation such as the Antarctic Treaty (Environment Protection) Act and the Export Control (Unprocessed Wood) Regulations.

143. Furthermore, the AAT has jurisdiction to review decisions of expert bodies analogous to the Boards. It reviews, for example, decisions of the Export Development Grants Board made under the Export Market Development Grants Act 1974. That Act provides that a person shall not be appointed as a member of the Grants Board unless he appears to the Governor-General to be qualified for appointment by virtue of his knowledge of, or experience in, commerce or industry. The Grants Board makes decisions as to the grant entitlement of a person and, in so doing, assesses such things as whether the person has disposed of eligible know-how overseas. This requires an investigation of the question whether scientific or technical knowledge or information in relation to industrial operations

34 has resulted from research or other work performed in Australia. These decisions are similar in form and content to the decisions considered in this report.

144. Another reason why the nature of the Boards should not preclude review on the merits of their decisions relates to their relatively small size. This means that the expertise of members does not cover the entire range of technical expertise pertinent to the making of all decisions which they are called on to make. Furthermore, as can be seen from the discussion above of the certification of eligible business entities by the MIC Licensing Board (para. 111), the volume of certain decision making can be high. For these reasons, the Boards need to rely in many instances on the work of specialist committees or on individual Board members exercising the power of the Board under delegated authority. It may not, therefore, necessarily be correct to describe all decisions of a Board as having been made by experts in the field.

145. An argument against review based solely on the expertise of the primary decision maker also does not pay sufficient regard to the need for authoritative resolution of borderline cases where expert opinion may be divided. A review facility provides a mechanism for establishing principles which assist not only in the resolution of the case in hand but also in the resolution of other cases of a similar kind. Furthermore, although the Boards undoubtedly have technical expertise in the programs they administer, when it comes to the resolution of issues of fact, they do not have the expertise and experience of the AAT, nor the powers of the AAT, in gathering evidence and establishing facts and the credibility of evidence.

35 CHAPTER 6 INTERNAL REVIEW AND NOTIFICATION OF RIGHTS OF REVIEW

Internal review 146. The Industry Research and Development Board in its submission to the Council said that it had no objections to review on the merits by the AAT of its decisions under the previous provisions of the ITA Act as to registration of a company or as to the giving by it to the Commissioner of Taxation of certificates affecting the tax deductibility of certain expenditure of a company. The Board said, however, that aggrieved companies ought to be required to apply for internal review by the Board prior to being able to apply to the AAT for review of the internal review decision. The Board said that such a process of internal review would reflect the informal practice presently adopted and favoured by the Board.

147. In general terms, the Council agrees that internal review preceding review by the AAT is desirable. It makes sense to avoid having cases brought before the AAT if possible, as the nature of proceedings before the Tribunal involves a certain amount of expense. Furthermore, a system of internal review may avoid overburdening the Tribunal with cases that have no need to be brought before it.

148. On the other hand, whether a formal internal review mechanism should operate as a precondition to appeal to the AAT may depend on a variety of factors. Some of the factors relevant to the manner in which internal review should be conducted were identified in a paper by Mr Stephen Skehill, formerly Principal Member, Veterans’ Review Board, at the Administrative Law Seminar jointly hosted by the Council to May 1987. In his paper, ‘The Hidden Dimension of Administrative Law: Internal and First Tier Review’, Mr Skehill stated the factors as follows:  the nature, number and diversity of disputed decisions;  the number, location and identity of the relevant decision makers;  the value of the rights affected by those decisions;  the time constraints within which review should be conducted; and  the need to observe any legal constraints upon review.

In the Council’s letter of advice to the government on student assistance appeals (1 October 1987, Twelfth Annual Report 1987-88, letter 3) the Council said that the consequences of delay in the compulsory internal review system operating in the student assistance appeals area were so serious that, when taken with the requirement of appeal to a Student Assistance Review Tribunal before appeal to the AAT and the relatively small number of appeals, the step involving compulsory internal review by a senior authorised person could be dispensed with.

149. In the present circumstances, where the number of disputed decisions of the Industry Research and Development Board are likely to be few, and where the Board itself is well situated to conduct an internal review in some depth, the Council agrees with the Board that it would be desirable to provide in the legislation for internal review by the Board as a precondition to appeal to the AAT. The fact that the Board, in the exercise of its powers, needs to rely in many instances on the work of specialist committees strengthens the case in favour of formal internal reconsideration of its decisions as a prerequisite for appeal to the AAT.

150. The Council notes that reviewable decisions of the Industry Research and Development Board under the soon to be superseded Industrial Research and Development Incentives Act 1976 are subject to formal internal review. Section 41(6) of that Act provides that applications may only be made to the AAT for review of decisions of the Board that have been confirmed or varied by it following a reconsideration.

36 151. However, the Council considers that certain decisions of that Board under the Industry Research and Development Act which the Council has recommended in chapter 2 as suitable for review by the AAT ought not to be made subject to an internal reconsideration requirement. The decisions are:  decisions of the Board to cancel the registration of a research agency (recommendation 4);  decisions of the Board to give a certificate under section 39M of the Act (recommendation 6);  decisions of the Board to give a certificate under section 39N of the Act (recommendation 7); and  decisions of the Board to give a certificate under section 39P(4) of the Act (recommendation 8).

In each of these cases, the Board is required to give to the body affected notice m writing of the Board’s proposed decision and must allow the body a reasonable opportunity to make a submission to the Board in relation to the proposed decision. Given the pre-decisional notice requirements in these cases, the Council is of the mew that it would not be appropriate for an ex post facto reconsideration process to apply before any appeal was taken to the AAT.

152. The position of the MIC Licensing Board is somewhat different from that of the Industry Research and Development Board. The MIC Licensing Board may delegate certain of its powers to a member of the Board but the power of delegation does not include certain of the more important or more discretionary powers of the Board (s.15). None of the decisions of the Board presently subject to review by the AAT is able to be made under delegated authority from the Board (s.47).

153. Although this decision making structure indicates that many of the Board’s decisions will be made by the Board itself rather than a delegate, the Council sees merit in a formal internal review regime applying to all reviewable decisions prior to any appeal to the AAT, encompassing also those decisions presently subject to a direct right of appeal to the AAT.

Recommendation 13: Internal review (1) The Industry Research and Development Act and the Management and Investment Companies Act ought to contain provisions for internal review by the respective Boards as a prerequisite to appeal to the Administrative Appeals Tribunal. (2) Internal review as a prerequisite to appeal to the Administrative Appeals Tribunal should not, however, apply in relation to decisions of the Industry Research and Development Board to cancel the registration of a research agency under section 39G of the Industry Research and Development Act or in relation to decisions of the Board to give certificates under section 39M, 39N or 39P(4) of the Act.

37 Notification of rights of review 154. In the Council’s view, both the Industry Research and Development Act and the Management and Investment Companies Act should contain suitable provisions for notification by the respective Boards of rights of review in respect of those decisions which this report recommends as suitable for review on the merits. The provisions should require the Boards to inform persons affected of the two- tier review on the merits scheme (internal review, AAT) in those cases which the Council has suggested above should be made subject to that scheme. The form of notification should accord with the standard recommended by the Council in its Report No. 27, Access to Administrative Review, Stage One: Notification of Decisions and Rights of Review.

155. The Council notes that the Management and Investment Companies Act already contains a provision (s.48) for notification of review rights. The provision could be amended to give effect to the Council’s proposal.

156. In its submission to the Council, the Law Society of South Australia said that a copy of any certificate given by the Industry Research and Development Board to the Commissioner of Taxation under former sections 73B(33) and (34) of the ITA Act (now sections 39L and 39M of the Industry Research and Development Act) should be forwarded to the relevant taxpayer together with a notice of the taxpayer’s review rights. Section 390 of the Industry Research and Development Act provides that, where the Board gives to the Commissioner a certificate under Part IIIA of the Act (a certificate under ss.39L, 39M, 39N and 39P(4)), the Board must also give a copy of the certificate to the company concerned. The Council supports the suggestion of the Law Society which is aimed at assisting to protect the rights of persons affected by the giving of a certificate. In the Council’s view, the notification provision in the Industry Research and Development Act should be so drafted as to require a notice of rights of review to be given to the company together with the copy of the certificate in cases where a certificate decision of the Board is involved.

Recommendation 14: Notification of rights and review The Industry Research and Development Act and the Management and Investment Companies Act ought to be amended to provide for notification by the respective Boards of rights of review on the merits in relation to relevant decisions.

38 APPENDIX 1 POWERS UNDER RESEARCH AND DEVELOPMENT AND RELATED LEGISLATION

Is review on the Legislative Present review merits Provision Power provisions recommended? Industry Research and Development Act 1986 s.27(1) The Industry Research and Development None No Board (‘the Board’) may declare that a (para. 27) company is an eligible company for the purposes of the Act, where the Board considers that it would be consistent with the object of the Act for a company which proposes to commence to carry on an eligible activity in Australia to be an eligible company s.27(2) The Board may revoke a declaration made None No under s.27(1) (para. 28) s.28(1) The Board may, in its discretion, enter into None No an agreement with a company for and in (para. 24-26) relation to the making of a grant of financial assistance (a ‘discretionary gran’) in respect of a project of research and development activities

S.31(1) The Board may, in its discretion, enter into None No an agreement with a researcher for and in (para. 29) relation to a grant of assistance to the researcher in respect of a project of research and development activities in an area of generic technology (‘a generic project grant’) s.33(1) The Board may enter into an agreement None No with a researcher for the carrying out of a (para. 29) project where the Board is satisfied that it is in the national interest that the Commonwealth should undertake a project of research and development activities (‘a national interest agreement’)

39 Is review on the Legislative Present review merits Provision Power provisions recommended? s.39F(4) The Board shall, if it is satisfied that an None Yes applicant body meets the criteria, register (paras 51-55) the applicant as a research agency in respect of such research and development activities as the Board considers the applicant is qualified to perform s.39F(6) The Board may vary the class of research None Yes and development activities in respect of (paras 51-55) which a research agency is registered s.39G(4) The Board may cancel the registration of a None Yes research agency (paras 56-57) s.39J(1) Subject to certain conditions, the Board None Yes shall register an eligible company in (paras 37-47) relation to a year of income s.39L The Board may, and shall if required to do None Yes so by the Commissioner of Taxation, give (paras 58-63) to the Commissioner a certificate stating whether particular activities that have been carried on by or on behalf of an eligible company were research and development activities s.39M(1) The Board may give to the Commissioner None Yes of Taxation a certificate stating that in the (paras 64-67) opinion of the Board any of the results of particular research and development activities in respect of which expenditure has been incurred by an eligible company have been exploited otherwise than on normal commercial terms or in a manner that is for the benefit of the Australian economy or that those research and development activities do not have an adequate Australian content s.39N(2) The Board may give a certificate to the None Yes Commissioner of Taxation stating that a (paras 68-70) registered company has failed to comply with a notice requiring the company to give particular information to the Board

40 Is review on the Legislative Present review merits Provision Power provisions recommended? s.39P(3) The Board may jointly register 2 or more None Yes eligible companies in respect of a year of (paras 48-50) income s.39P(4) The Board may give a certificate to the None Yes Commissioner of Taxation stating that in (paras 71-74) respect of companies jointly registered under s.39P(3) it has formed a particular opinion about the companies or their activities

Management and Investment Companies Act 1983 s.21(1) The Management and Investment None Yes Companies Licensing Board (‘the Board’) (paras 90-95) may, in its discretion, grant or refuse to grant a licence to an applicant, and shall specify the approved capital of a licensee for the purposes of the Act s.21(5) The Board may impose conditions when None Yes granting a licence, and may vary or revoke (paras 90-95) any of the conditions of a licence, or impose further conditions s.23(1) The Board may revoke a licence on certain AAT N/A grounds s.23A The Board may approve the surrender of a AAT N/A licence s.24 The Board may suspend a licence None No (paras 96-102) s.25(3) The Board may refuse to renew a licence on AAT N/A certain grounds s.26 The Board may direct a licensee to take None No action in relation to a contravention of the (para 103) Act or regulations s.29(3) The Board may certify or refuse to certify a None Yes business entity as an eligible business entity (paras 104-117) in relation to a licensee, or direct the licensee to furnish further information to the Board

41 Is review on the Legislative Present review merits Provision Power provisions recommended? s.29(5A) The Board may impose conditions when None Yes certifying a business entity as an eligible (paras 104-117) business entity or impose conditions after it is so certified or vary or revoke any conditions so imposed s.30(1) The Board may cancel a certification under None Yes s.29 in certain circumstances (paras 118-122) s.30(2) The Board shall cancel a certification under None Yes s.29 in certain circumstances (paras 118-122) s.33(1) The Board may give approval for a licensee None Yes to hold an additional percentage of (paras 123-125) ownership interest in a particular business entity s.33(3) The Board may approve a plan submitted None Yes by a licensee for the reduction of its (paras 123-125) ownership interest in a business entity to a permitted amount s.36(1) The Board may approve the continued None Yes holding by a licensee of prescribed interests (paras 123-125) in a business entity, or approve or refuse to approve the acquisition by a licensee of additional prescribed interest in a business entity, when the certification of the business entity has been cancelled s.36(2) Where an approval is given under s.36(1), None Yes the Board shall specify a date by which all (paras 123-125) prescribed interest held by a licensee in a business entity must be disposed of s.36(2A) The Board may vary an approval given None Yes under s.36(1) by varying the date specified (paras 123-125) under s.36(2) s.36(28) Where it has not done so before, the Board None Yes shall specify a date by which prescribed (paras 123-125) interests held by a licensee in a business entity must be disposed of

42 Is review on the Legislative Present review merits Provision Power provisions recommended? s.37(1) The Board may approve the investing by None Yes licensees of moneys, being assets of the (paras 123-125) licensee, in certain ways s.37(2) The Board may approve the investing of None Yes moneys, being assets of a licensee, in a (paras 123-125) manner not otherwise authorised by or under the relevant part of the Act s.38(2) The Board may increase the amount of the None No approved capital specified in a licence (paras 90-95) s.44 The Board may approve the acquisition by None Yes a person of any interests in shares in a (paras 123-125) licensee in certain circumstances

Income Tax Assessment Act 1936 s.77F(9) Where the Board revokes a licence or None Yes refuses to renew a licence under the (paras 127-128) provisions of the Management and Investment Companies Act, it may for the purpose of the sub-section, determine a day in writing on which the owner shall be deemed to have disposed of his shares s.77F(15) The Board may notify the Commissioner of None Yes Taxation that, where moneys were paid on (paras 129-130) a share in a company before the company is granted a licence under section 21 of the Management and Investment Companies Act, it is of the opinion that the moneys were paid in anticipation of, or to ensure that the company would be eligible for, the grant of a licence

43 APPENDIX 2 MEMBERSHIP OF THE INDUSTRY RESEARCH AND DEVELOPMENT BOARD

Note: The following information was provided by the Department of Industry, Technology and Commerce.

Chairman WILLIAM AUSTIN KRICKER, BE(Elect. Eng.) (Hons), BSc (Hons) MBA Appointed to Australian Industrial Research and Development Incentives Board 1 July 1984 Managing Director, Australian Consolidated Hosiery Ltd; previously Managing Director, Courtaulds Hilton Pty Ltd, and other managerial and management consultant positions Fellow, Institute of Directors and Australian Institute of Management

Members PETER O. MILLER, AM, DEng (Hons), BE (Civil), FIE AUST, FICE, Hon FRAIA Appointed to Board Principal of Miller Milston and Ferris Fellow, Academy of Technological Sciences; Fellow Institution of Engineers, Australia; Fellow, Institution of Civil Engineers; Member, American Society of Civil Engineers; Honorary Fellow, Royal Australian Institute of Architects; Fellow, Australian Institute of Management; Fellow Institute of Arbitrators Australia; Councillor, Construction Industry Council; and many previous positions

PETER MATHER ROBINSON, BSc, PhD, DSc, CEng, FIM, FTS Appointed to Board Group General Manager, Technical, Metal Manufacturers Ltd; previously Research Scientist, Chief Research Scientist and Head of Division in CSIRO (in Divisions of Tribophysics, Materials Science and Manufacturing Technology); director of several companies; President and Chairman of Copper Development Association of Australia Director and former Federal President, Australasian Institute of Metals; Chairman, External Committee of Inquiry on CSIRO Commercial Activities, 1983; Member, Metal Trades Industry Association, National Technology Policy Committee; Member, Confederation of Australian Industry, Technology Development Policy Committee; numerous previous positions

ELIZABETH BLOMFIELD BRYAN, BA (Econ.), MA (Econ.) Appointed to Board Deputy Chief Manager, Industry Restructuring Unit, Australian Industry Development Corporation; previously Assistant Secretary, Policy Co-ordination Branch, Australian Department of Transport; other government and private sector positions

JOHN A. EADY, BSc(Hons), PhD

44 Appointed to Board General Manager, Comalco Research Centre, Comalco Aluminium Ltd Member (and previous office holder) of Australasian Institute of Metals; Member of American Society for Metals; Member of Australian Metals Research Committee; Member of Course Advisory Committee of the RMIT Department of Metallurgy and Mining

BRUCE WILLIAM HOLLOWAY, BSc. PhD. DSc. FAA Appointed to Board Professor of Genetics, Monash University Fellow Australian Academy of Science, and one-time Member of its Secretary (Biological Sciences) of the Academy

FRANK BARR-DAVID, B. App. Science (Hons), B. Eng (Hons), D. Eng Appointed to Board Chief, Technical Operations, Impact Systems Ltd; previously Board Member, IBM Australia and several positions at IBM including Director, Software Development Support Centre; Member Institute of Directors; Fellow AIM; Director Warren Centre. University of Sydney

ROBERT GEORGE SAUER, BA, LLB, M Com, AASA, CPA Appointed to Board Partner Barker Gosling Murphy & Moloney, Solicitors, Sydney; on the Board of a number of companies involved with R&D activities

PUBLIC SERVICE APPOINTEE The Board also has as a member the person performing the duties of First Assistant Secretary, Technology and Business Efficiency Division, Department of Industry Technology and Commerce. There is no person presently performing the duties of this office.

45 APPENDIX 3 MEMBERSHIP OF THE MANAGEMENT AND INVESTMENT COMPANIES LICENSING BOARD

Note: The following information was obtained from the Annual Reports of the Board. The information was correct as at 30 June 1988.

Chairman C. RALPH WARD-AMBLER, B Mech Eng Company director; previously Managing Director, McPherson's Limited, Melbourne (metal products); previous private sector employment and directorships; previously Associate Commissioner, Industries Assistance Commission

Members PETER D. AGARS, FASA Director, Touche Ross Services Pty Ltd, Adelaide (chartered accountants); previously Principal Finance Officer, South Australian Treasury and Director South Australian Public Service Board Australian Representative on International Federation of Accountants

MS ANNE V. GORMAN Director, Social Impacts, Sydney (management consultants)

ADRIAN F. CADDY Executive Director, MIC Licensing Board, Department of Industry, Technology and Commerce

J. ROBERT THOMAS, BEc, ABTA, FAIM Previously Chief Executive, Australian Industry Development Corporation; previous private sector employment and directorships One-time Chairman and Councillor of NSW Branch of Economics Society of Australia and New Zealand; one-time Chairman South Australian Chapter of Financial Executives Institute of Australia

LINDSAY G. CUMING Chairman, SIROTECH Ltd

46

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