OZONE MANUFACTURING PTY LTD v FC of T

Members:
RW Dunne SM

Tribunal:
Administrative Appeals Tribunal, Adelaide

MEDIA NEUTRAL CITATION: [2013] AATA 420

Decision date: 21 June 2013

RW Dunne (Senior Member)

INTRODUCTION

1. The applicant in this case is a proprietary limited company, Ozone Manufacturing Pty Ltd ("applicant"). It carries on a business designing and manufacturing what it calls "environmental technology". As part of its business, the applicant is said to have undertaken research and development ("R&D") activities in relation to a project called the "Beverage Equipment Purification Project" (the "Project"), which sought to develop three beverage purifier devices. In 2002, the applicant registered its R&D activities with the Industry Research and Development Board ("AusIndustry") under s 39J of the Industry Research and Development Act 1986.

2. On 13 May 2003, the applicant lodged its 2001/2002 taxation return. The taxation return contained an election by the applicant to claim an R&D tax offset of $388,601 pursuant to s 73I of the Income Tax Assessment Act 1936 ("ITAA 1936"). Following a tax audit, on 30 August 2007 the respondent issued a notice under s 73IA of the ITAA 1936 assessing the applicant's entitlement to the R&D tax offset for the 2001/2002 tax year as "nil". On 5 October 2007, the applicant lodged an objection against the respondent's assessment. The respondent decided to disallow the objection in full on 20 March 2008. The applicant applied to this Tribunal on 20 May 2008 for a review of the respondent's decision.

3. At the lengthy hearing, the applicant was represented by its Chief Executive Officer, Mr S Oke and the respondent was represented by Mr R Sallis (of counsel). I received into evidence the T documents (Exhibit R1), the supplementary T documents (Exhibit R2) and the further supplementary T documents (Exhibit R3) lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975, together with the following exhibits:

ISSUE FOR THE TRIBUNAL

4. The issue for the Tribunal is whether the applicant is entitled to a tax offset pursuant to s 73I of the ITAA 1936 for the 2001/2002 tax offset year and, if so, to what extent is the applicant so entitled.

LEGISLATION

5. The provisions of the ITAA 1936 and the Taxation Administration Act 1953 ("TAA") that are relevant in the present proceedings are as follows:

ITAA 1936

"73B Certain expenditure on research and development activities

Object of this section

(1AAA) The object of this section is to provide a tax incentive, in the form of a deduction, to encourage research and development activities in Australia and make eligible companies more internationally competitive by:

  • (a) encouraging the development by eligible companies of innovative products, processes and services; and
  • (b) increasing investment by eligible companies in defined research and development activities; and
  • (c) promoting the technological advancement of eligible companies through a focus on innovation or high technical risk in defined research and development activities; and
  • (d) encouraging the use by eligible companies of strategic research and development planning; and
  • (e) creating an environment that is conducive to increased commercialisation of new processes and product technologies developed by eligible companies.

The benefits of the tax incentive are targeted by being limited to particular expenditure on certain defined activities.

….

Definitions

(1) In this section, unless the contrary intention appears:

…

"feedstock expenditure , in relation to an eligible company, means expenditure incurred by the company in acquiring or producing materials or goods to be the subject of processing or transformation by the company in research and development activities, and includes expenditure incurred by the company on any energy input directly into the processing or transformation.

…

interest expenditure , in relation to an eligible company in relation to a year of income, means interest, or an amount in the nature of interest, incurred by the company during the year of income in the financing of research and development activities.

…

research and development activities means:

  • (a) systematic, investigative and experimental activities that involve innovation or high levels of technical risk and are carried on for the purpose of:

    • ATC 5705

      (i) acquiring new knowledge (whether or not that knowledge will have a specific practical application); or
    • (ii) creating new or improved materials, products, devices, processes or services; or
  • (b) other activities that are carried on for a purpose directly related to the carrying on of activities of the kind referred to in paragraph (a).

research and development expenditure , in relation to an eligible company in relation to a year of income, means expenditure (other than core technology expenditure, interest expenditure, feedstock expenditure, excluded plant expenditure or expenditure incurred in the acquisition or construction of a building or of an extension, alteration or improvement to a building) incurred by the company during the year of income, being:

  • (a) contracted expenditure of the company;
  • (b) salary expenditure of the company, being expenditure incurred on or after 1 July 1985; or
  • (c) other expenditure incurred on or after 1 July 1985 directly in respect of research and development activities carried on by or on behalf of the company on or after 1 July 1985;

    and includes any eligible feedstock expenditure that the company has in respect of the year of income in respect of related research and development activities.

…

salary expenditure , in relation to an eligible company in relation to a year of income, means the sum of:

  • (a) the expenditure, not being expenditure referred to in paragraph (b), incurred by the company during the year of income by way of salaries, wages, allowances, bonuses, overtime payments or penalty rate payments for officers or employees of the company, being expenditure incurred directly in respect of research and development activities carried on by or on behalf of the company on or after 1 July 1985;
  • (b) in relation to each officer or employee of the company who was engaged at any time during the year of income in research and development activities carried on by or on behalf of the company - so much of the expenditure incurred by the company during the year of income in respect of annual leave, sick leave or long service leave for that officer or employee or contributions to superannuation funds in respect of that officer or employee as bears to that amount the same proportion as the proportion of the year of income during which that officer or employee was engaged in research and development activities carried on by or on behalf of the company bears to the proportion of the year of income during which that officer or employee was engaged in any activities carried on by or on behalf of the company; and
  • (c) so much of the expenditure incurred by the company during the year of income on pay-roll tax and premiums for workers' compensation insurance as the Commissioner considers reasonable having regard to:
    • (i) the amount of the expenditure incurred by the company during the year of income to which paragraph (a) or (b) applies;
    • (ii) the total expenditure incurred by the company during the year of income in respect of salaries, wages, allowances, bonuses, overtime payments, penalty rate payments, annual leave, sick leave and long service leave in respect of all officers and employees of the company; and
    • (iii) such other matters as the Commissioner considers relevant. …"

"73BA Deduction for certain assets etc. used for the purpose of carrying on research and development activities

…

Entitlement to deduction

  • (2) If an eligible company has a notional Division 40 deduction for a section 73BA depreciating asset for a year of income, the company is entitled to a deduction under

    ATC 5706

    this section for the asset for the year of income.

    Amount of deduction

  • (3) If the eligible company's aggregate research and development amount for the year of income is more than $20,000, the deduction is equal to the notional Division 40 deduction multiplied by 1.25. If not, it equals the notional Division 40 deduction.

    No deduction if earlier small business or Division 40 low-value pool deductions allowable

  • (4) An eligible company is not entitled to a deduction under this section for a section 73BA depreciating asset for any period if the company was entitled to:
    • (a) a deduction for the asset for any earlier period under Subdivision 328-D (about small business entities) of the Income Tax Assessment Act 1997; or
    • (b) a deduction for the asset for any earlier period under Division 40 of that Act, in a case to which section 40-440 (about low-value pools) of that Act applied."

"73I Tax offset instead of deduction under section 73B, 73BA, 73BH or 73QA

  • (1) An eligible company can choose a tax offset instead of a deduction under section 73B (except subsection 73B(14C)), 73BA, 73BH or 73QA for a year of income (the tax offset year) if it is eligible to make that choice (see section 73J).
  • (2) The choice must be made:
    • (a) in the company's return of income for the tax offset year; or
    • (b) by notice in writing given to the Commissioner:
      • (i) for a year of income starting before the commencement of this subsection - before the end of the period that the Commissioner could amend an assessment for the company assuming such an assessment were made at that commencement; or
      • (ii) otherwise - before the end of the period that the Commissioner could amend an assessment for the company for the tax offset year.
  • (3) The eligible company's tax offset for the tax offset year is 30 cents for each dollar that the company could, apart from subsection (4), deduct for that year under section 73B (except subsection 73B(14C)), 73BA, 73BH or 73QA.
  • … "

"73IA Objections

  • (1) The Commissioner may give an eligible company a written notice specifying the amount of a tax offset allowable to the company under section 73I. The notice must specify that it was issued under this subsection and may contain such other information as the Commissioner thinks fit.
  • (2) If an eligible company is dissatisfied with the notice, the company may object in the manner set out in Part IVC of the Taxation Administration Act 1953."

"73J Eligibility for tax offset

  • (1) An eligible company is eligible to choose the tax offset for the tax offset year if:
    • (a) it could, apart from subsection 73I(4), deduct an amount under section 73B (except subsection 73B(14C)), 73BA, 73BH or 73QA for that year; and
    • (b) either:
      • (i) all or part of the amount that the company could, apart from subsection 73I(4), have deducted is contracted expenditure; or
      • (ii) its aggregate research and development amount for the tax offset year exceeds $20,000; and
    • (c) the aggregate research and development amount for the tax offset year of the company and of persons with which it is grouped (while they are grouped in that year) is not more than $2,000,000; and
    • (d) the R&D group turnover of the company for that year is less than $5,000,000.

    Note: Section 73L sets out the persons with which the company is grouped.

    …"

ATC 5707

"262A Keeping of records
  • (1) [Person must keep records] Subject to this section, a person carrying on a business must keep records that record and explain all transactions and other acts engaged in by the person that are relevant for any purpose of this Act.

    Note: There is an administrative penalty if you do not keep or retain records as required by this section: see section 288-25 in Schedule 1 to the Taxation Administration Act 1953.

    …

  • (2) [Documents to be kept] The records to be kept under subsection (1) include:
    • (a) any documents that are relevant for the purpose of ascertaining the person's income and expenditure; and
    • (b) documents containing particulars of any election, choice, estimate, determination or calculation made by the person under this Act and, in the case of an estimate, determination or calculation, particulars showing the basis on which and method by which the estimate, determination or calculation was made.

    …"

TAA

" 14ZZK Grounds of objection and burden of proof

On an application for review of a reviewable objection decision:

  • …
  • (b) the applicant has the burden of proving that:
    • (i) if the taxation decision concerned is an assessment (other than a franking assessment) - the assessment is excessive; or
    • (ii) …; or
    • (iii) in any other case, the taxation decision concerned should not have been made or should have been made differently.

    …"

BACKGROUND

6. During the 2001/2001 tax year, the applicant's sole director (and a shareholder) was Mr Simon Oke. The applicant's research and development manager was Mr Neil Raymond.

7. On 14 May 2003, following the lodgement of the applicant's 2001/2002 taxation return, the respondent and the applicant entered into a settlement deed ("Settlement Deed" or "Deed"). The Settlement Deed required certain actions by both parties. The applicant's obligations included the obligation to pay the respondent the sum of $65,986.16 by 15 May 2003. The applicant made the payment on 15 May 2003. Under the Settlement Deed the respondent agreed that all claims of the respondent "in respect of the taxation returns of Ozone for the period up to 30 June 2002 …" (which prima facie would include the year in dispute in these proceedings) were settled. This agreement by the respondent was expressed to be conditional upon satisfactory assessment of the applicant's 2001/2002 taxation return, which assessment would be processed within 28 days of 14 May 2003.

8. The applicant's 2001/2002 taxation return disclosed that no assessable income had been derived by the applicant in the 2001/2002 tax year. It also disclosed that the applicant had incurred R&D expenditure of $966,540 pursuant to s 73B, together with incremental expenditure of $87,163 pursuant to s 73Y, of the ITAA 1936. On 13 August 2003, the respondent notified the applicant that it had been selected for a risk review assessment in relation to its claim for the R&D tax offset in respect of the 2001/2002 tax year. On 30 October 2003, the respondent notified the applicant that it was ceasing its risk review assessment and commencing a specific issue audit of the applicant's claim for the R&D tax offset. Following a meeting with officers of the respondent, on 30 May 2004 the applicant supplied the respondent with a document in which it recalculated its R&D expenditure for the 2001/2002 tax year. The following table sets out a comparison between the applicant's original R&D claims and the recalculated amounts:

ATC 5708


  Applicant's Original Claim Recalculated Claim
Salary Expenses $405,843 $307,650
Other Expenditure:    
Overheads for staff $92,295 0
Factory overheads $25,085 0
Superannuation 0 $21,176
Bank interest 0 $37,669
Repairs& maintenance 0 $3,340
Depreciation 0 $23,893
Building rent 0 $65,870
Purchases $442,897 $337,027
Subscriptions $420 $420
Travel 0 $12,580
Telephone 0 $19,986
Light & power 0 $3,752
Insurance 0 $2,367
Workcover 0 $9,242
Payroll tax 0 $3,962
General overheads 0 $9,706
TOTAL $966,540 $898,640

9. On 14 and 15 July 2004, officers of the respondent attended at the business premises of the applicant to commence the audit of the R&D records maintained by the applicant. By letter dated 3 March 2005, the respondent advised the applicant that it had not substantiated its claim for R&D expenditure for the 2001/2002 tax year. The respondent's actions resulted in the following adjustments to the applicant's 2001/2002 taxation return:

The adjustments to the applicant's 2001/2002 taxation return are reflected in the following table:

    Amount Claimed by Applicant Respondent's adjusted amount
RECONCILIATION TO TAXABLE INCOME OR LOSS      
ADD R&D accounting expenditure claimed under R&D concession D $966,540 0
LESS R&D concession claim L $1,208,175 0

ATC 5709

(199%, not 50% increment      
R&D incremental concession-additional 50% increment M $87,163 0
ADD Election to take R&D tax offset Y $1,295,338 $170,283/L 0 $1,136,823/L
  Taxable income or loss T    
LOSSES INFORMATION      
Tax losses carried forward to later income years U $1,543,455 $2,509,995
CALCULATION STATEMENT      
Other refundable credits including R&D tax offset Z $388,601.70 0
Total amount of tax refundable S $388,601.70 0

10. On 14 March 2005, the respondent issued an "adjustment sheet" stating that the R&D tax offset had been denied, and on 15 March 2005 a "notice of assessment" issued to the applicant stating that its taxable income was $0. As there was no taxable income and no tax was payable, the applicant was unable to object in the manner set out in Part IVC of the TAA. As a consequence, it filed an application in the Federal Court pursuant to s 39B of the Judiciary Act 1903 by lodging an Application and Statement of Claim against the respondent. In the Application the applicant claimed a declaration that it "is entitled to a R&D tax offset in the amount of $388,601 for the financial year ending 30 June 2002" and "an order requiring the Respondent to credit the Applicant's Running Balance Account with the R&D tax offset of $388,601 …".

11. As a result of the application in the Federal Court, s 73IA was inserted into the ITAA 1936 and the applicant requested that the respondent issue a notice under s 73IA to enable it to object to the decision in relation to the amount of the tax offset allowable for the 2001/2002 tax year. The respondent issued the s 73IA notice and the applicant lodged its objection in respect of that notice.

12. In paragraphs 13 and 14 of its amended statement of facts, issues and contentions the applicant stated:

  • "13. A Project Plan was prepared and amended from time to time during the project. This and other records were created and kept by the applicant to record the Project's activities.
  • 14. This type of record and detail recorded were based on Ausindustry guidelines for R&D grants, methodologies developed jointly by Ausindustry and the applicant and the Guide to R&D current at the time that was published by Ausindustry and the respondent."

13. In paragraphs 16 and 17 of the amended statement of facts, issues and contentions the applicant further stated:

" Research and Development expenses

  • 16. The expenditure on the Project included:
    • 16.1 Staff salaries being for project management, development technicians, and administrative and research support and actual research work (apportioned where work done for both R&D and the applicant's manufacturing role). And related expenditure for superannuation and WorkCover premiums;
    • 16.2 Materials;
    • 16.3 Depreciation for plant and equipment used for the Project;
    • 16.4 Interest on borrowed funds used for the Project;
    • 16.5 Travel costs in relation to the Project;
    • 16.6 Building rent;
    • 16.7 Light and power;
    • 16.8 Telephone expenses;
    • 16.9 Other expenses.

      ATC 5710

    Research and Development Substantiation

  • 17. Contemporaneous detailed records were created and kept by the applicant to record these expenses."

EVIDENCE

14. The proceedings in this matter involved 19 hearing days and numerous directions hearings. The hearing proper, which included the evidence of the parties' witnesses, was recorded in approximately 1,500 pages of transcript. Because of this, and to assist in explaining the reasons for my decision, it is necessary for me to provide the relevant oral evidence and numerous appropriate extracts from the transcript.

15. Mr Oke acted as the applicant's representative. He took the evidence in chief of Mr Raymond, gave his own evidence in chief and cross-examined the respondent's witnesses.

Evidence of Applicant's Witnesses

Mr Raymond

16. In his witness statement, comprising 32 paragraphs and a Schedule, Mr Raymond makes the following statements that appear to me to be of relevance in reaching my decision:

  • "11. In addition to myself the following employees of Ozone were involved in R&D activities as part of the Project in the following capacities: Other staff may have also been involved to a lesser degree.
    NAME POSITION/ROLE
    Simon Oke Ozone CEO / Managing the overall Project
    Lynette McKenzie Ozone Accounts Manager / Administering the financial aspects of the Project
    Michael Graney Ozone Purchasing Officer / Placing orders for the Project and adding parts details to the Ozone Axapta operating system in the server
    Mathew Solly Ozone Storeman / receiving and dispatch of goods ordered for the Project
    Richard Shaw Ozone Marketing Manager / market research and assisting with administration of the Project
    Alan Hodgeson Ozone Production Manager / coordinated activities of non R&D staff used on the Project.
    Andrew Merritt Ozone Purifiers Supervisor / assisted with the product development of the CF1, CF2 on the Project
    Russel Odlum R&D Technician / full time R&D work including building & testing prototypes, sourcing parts.
    Anthony Jaekel R&D Technician / full time R&D work including communicating with suppliers, parts drawings and documentation.
  • 12. Ozone's R&D staff, referred to in paragraph 11 above, worked in both the factory R&D area of the South Road premises and in the office R&D area) as well as sharing amenities (including the lunch room, toilets and carpark). However, because all of the machinery, fabrication and welding equipment used by R&D staff for the Project was also primarily used by production staff (located in the production area) the areas which housed the machinery, fabrication and welding equipment served a dual purpose. There was

    ATC 5711

    a specific storage area for R&D equipment and stock which included separate racking which was assigned to R&D storage but was kept within the general storage area which was accessed by production and R&D staff. For example, production staff did all forklift operation for Ozone and would access materials stored in the R&D storage area when required for R&D purposes.

    …

  • 15. The products referred to in the Project are as follows:
    • 15.1 The CF1 and CF2 products which are ozone generating air purifiers and can be used to remove odours for example, in food processing areas, reduce food spoilage rates in cool rooms.
    • 15.2 The FR1 product which is used in Icemakers on soft drink dispensers in fast food stores. The oxidants produced by the FR1 are dosed into the water to eliminate legionella growth and biofilm buildup in the Icemaker.
    • 15.3 The FR2 product which is designed to add oxidants to the air space inside the refrigerated shipping containers to reduce spoilage rates in the produce being shipped.
    • 15.4 The WT1 product which is a point of use water purifier which purifies tap water by adding oxidants which kills microbes living in the tap water.
    • 15.5 The WL2 product which is an advanced oxidation generator designed to clean beer lines in beer dispensing systems in licenced premises.

      …

  • 25. I recorded in the Outlook public folders time spent on tasks / activities for the Project on behalf of myself and other staff, as I was supervising their activities an example is shown below which comes from the WL2 task running list. Morning meetings were usually held almost every day to plan activities for the day so I had a clear understanding of the time spent on each activity. The time spent on activities was recorded in the electronic task folder …
  • 26. Other staff members also added data related to their time spent on activities and for other employees, [sic] The formal time recording methodology used was the same as Ozone had successfully used previously on previous grants. The best description of this methodology is shown at page 113 of Ozone's Documents and the persons responsible for the formal recording of time spent by all Ozone staff on the project were Richard Shaw and Lynette McKenzie. As R&D Manager I was fully occupied with achieving our stated goals with the products side of the Project.

    …"

17. In giving his evidence in chief, Mr Raymond was referred by Mr Oke to various generic documents in Volumes 2 and 3 of Exhibit A1. Volume 2 contained documents relating to the FR1, the FR2 and other products. The FR1 was a product targeting the food industry specifically to do with water purification and ice-makers. The FR2 was a product specifically designed to introduce oxidants, that is, ozone into refrigerated shipping containers. The WL2 was a beer line cleaning purifier.

18. Mr Oke referred Mr Raymond to Tab 13 in Volume 1 of Exhibit A1 and to page 156 behind the Tab. Mr Raymond said he had prepared Tab 13 (and also page 156) in Volume 1, but could not recall specifically whether he had assistance in doing so. Mr Oke next referred Mr Raymond to Volume 4 of Exhibit A1 and to the WT1 product, which Mr Raymond described as a tap water purifier. He said the next Tabs in the Volume were to the CF1 and CF2 products, the CF1 being a small 240 volt air purifier. The CF2 product was a larger more powerful version of the CF1. In reviewing the documents in Volumes 1, 2 and 3 Mr Raymond said that there were running logs in the Volumes which were predominantly for the period 1 July 2001 to 30 June 2002. He said the documents in the Volumes were contemporaneous. He confirmed that WT1, CF1 CF2 and Size 8 products were in Volumes 2, 3 and 4. In using the expression "contemporaneous", he said a document dated September 2001 would have been prepared and came into existence on that date.

19. Mr Oke then referred Mr Raymond to different Tabs in Volume 1 of Exhibit A1 and

ATC 5712

reached Tab 13 (R&D Work Performed Table). When asked about page 138 of the Table, Mr Raymond acknowledged that he had undertaken the majority of the preparation of the page. As to when the R&D Work Performed Table at page 138 was generated, he said it was not generated between 1 July 2001 and 30 June 2002 (Transcript 27/9/11, Page 64.15). He said he spent weeks, not necessarily full time, preparing the document, but by reference to source documents that were contemporaneous in the 2001/2002 tax year. When questioned by Mr Oke about Volume 7 of Exhibit A1, Mr Raymond said the documents in that Volume were contemporaneous, but then corrected himself by saying that clearly the documents were created after the 2001/2002 tax year (Transcript 27/9/11, Page 68.25).

20. Mr Oke asked Mr Raymond about a document called or known as the "stock matrix" or "cleaner matrix" and asked him to comment on what was said in the following paragraph:

"By cross-referencing the entries on the stock matrix which recorded the number of products required to met [sic] customer orders and deducting available stock also recorded on the stock matrix you would be able to identify with a reasonable degree of accuracy the purchase orders issued by Ozone to meet its customer sales." [Transcript 28/9/11, Page 6.40]

Mr Raymond said that he did not know how it would be possible, by reference to the stock matrix, to do what is described in the paragraph. He also said that he was not aware of anyone at the applicant on any occasion using the stock matrix to produce information about purchase orders from suppliers.

21. In cross examination by Mr Sallis, Mr Raymond was asked which of the attachments behind the Tabs in Volume 1 he had created. Mr Raymond responded by saying that he had created some attachments, but others he had not authored or added value to. In relation to the photograph on page 44 of Volume 1, he retracted his earlier evidence that it had been taken during the course of the tax audit. In relation to other digital photographs in Volume 1 he was unable to identify the date on which those photographs were taken. Mr Sallis again referred Mr Raymond to Tab 13 of Volume 1 (R&D Work Performed Table). Mr Raymond said he was not the author of the text on page 136, but he had prepared the majority of the table on page 138. He said he did not prepare the definitions at the top of the page. Then he said the content of the table on page 138 was not something that he prepared entirely on his own. Others had input into it, such as Ms Trang Lee, who was actively involved in its preparation. In answering further questions put to him by Mr Sallis about the table on page 138, the following exchange took place:

"… And the entries which flow from the left-hand side to the right-hand side of the table were your entries? ---Correct.

They're entries that you authored? ---Correct. As I said before, the columns, particularly the second column from the right, the days, not hours, some others may have been involved in various names there.

I'm sorry, I don't understand that? ---The - - -

Did you type the entries in the staff column? ---Yes. I typed the entry in the staff column.

Did you type the entries in the day's column? ---Yes, but the point I'm making is that it may have been in - after communication with others to establish - - -

After discussions with others? ---After I've spoken to others. For example, if someone else was working on it and I didn't have a clear recollection of how long was spent on it, I may have referred to them.

I see? ---So the - and then, of course, at project plan stages that comes out of - it's a little hard to read, but the word "done", for example, where number 1 row is, that formed design modelling, that forming tool costs and plastic parts cost analysis, material sourcing and strength tests, and that was on WT1 and there were a variety of people involved in that, so - and that text would have been generated from the documents that are, I think, at 1, number 1.

We will go through that again? --- Did I not explain that well?

ATC 5713

No, no. The text that appears under "R&D work done in related document example" is the text that you authored? ---That's correct.

The staff entries you've made on the document and where it's apparent from the document, you've made those entries yourself and where it's not, you've spoken to others? ---That's correct.

And where there's the heading "Days"? ---Where there's a heading "Days", I would have applied most of that data, but I'm not saying I applied all of that data.

You applied most of it, but where you're unsure about it, you had discussions with others? ---Correct.

And then what you got from those discussions, then you inputted it into the table? ---That's correct. …" [Transcript 28/9/11, Pages 42.45 - 43.40]

Mr Raymond then said he was responsible for the majority of the data that appeared in pages 138 to 169 in Tab 13 of Volume 1.

22. Mr Sallis referred Mr Raymond to the documents appearing in Volume 3 of Exhibit A1. When asked who had collated the documents in Volume 3, Mr Raymond said he did not believe that the Volumes were put together by the applicant, but had been put together by either the respondent or the applicant's lawyers at the time. Mr Sallis questioned Mr Raymond further about the information contained on page 138 of Tab 13 (R&D Work Performed Table). The following further exchange took place:

"…

Didn't you give evidence before lunch that you did have discussions in relation to a small portion of the data with other members of staff to clarify the extent of their input? ---Yes, to their participation as well. Yes, that's correct but not to necessarily establish whether or not the validity - I thought what you were asking me was I would discuss with other members of staff the validity of a given document. I did not do that, no. I just want to clarify that.

Understand. But in the majority of instances it's your data and you formed a view as to the days, hours and stage of project entries which appear in the right hand columns on the table? ---Yes, I formed a view on that and in some cases as I said that was discussed with others also.

Now in forming that view in the majority of instances from the document you then looked at the criterion on the top left of page 138 or had regard to it? ---Yes.

And R was for research and design? ---Yes.

D, as described and, A, as described on that document?---Yes.

And you then sought to classify the staff members involved in the staff column - - -?---That's correct.

- - - by reference to the document? ---That's correct.

A number of days or hours spent on the project? ---That's correct.

And where it's not - its portions of days in the days column where there's a decimal place, isn't it?---Yes.

So, for example, at the first entry - sorry. In relation to document 1 - - -? ---Yes.

- - - D is assigned 2.5? ---That's correct.

And that's intended to refer to two and a half days? ---That's correct.

And then by reference to the document you sought to identify the project stage which appears in the column on the furthest right? ---That's correct.

And you did this well after the work in question occurred? ---Yes.

And you did it during the course of a taxation audit? ---One of - well, the taxation audit, that's one of several, one of a couple, but also a formal task was set up on each occasion and sufficient time was allocated to be able to do a fairly thorough job on such matters so it wasn't done in a particularly short or rushed time.

But you don't recall when this task was completed, do you? ---This particular task, no. I would be probably guessing, I think, if I tried to tell you that.

And you understood that the purpose of this exercise was to assist the company to prove the claims for labour expenses in relation to

ATC 5714

the project? ---That - they are not the choice of words I would use. The purpose of this - if you're asking about the purpose of the document R&D table one of the major purposes is to be able to allow a third party such as the tribunal to correlate the documents, many documents, that we've been referring to such as page 617 which happens to be document number 165. It enables a third party to look and say, okay, and then who worked on it, etcetera. So it's not the only purpose to assign work time. …" [Transcript 28/9/11, Pages 71.45 - 73.5]

23. Mr Sallis then asked Mr Raymond about products that were involved in the applicant's R&D activities in the 2001/2002 tax year. Mr Raymond said the FR1 product had been developed from scratch during the course of the 2001/2002 year. The same applied to the FR2 product, which was a larger unit. As to the CF1 product, he said the applicant started producing the product before the 2001/2002 financial year, but the CF2 product was a start from scratch in that year. Also, he said the Size 8 product was not designed entirely from scratch in the 2001/2002 tax year. Mr Sallis then questioned Mr Raymond about the instruction manual and the work procedure. He said the instruction manual was the public document that goes with the finished product. The work procedure was how the applicant actually made the product in-house and was what was also called assembly instructions.

24. In relation to the stock matrix, Mr Raymond said it was at the stage that bills of materials were completed that an end product the applicant was manufacturing for commercial sale would appear on a stock matrix. There would be a hand-over to production, and production would then have the right to veto any aspect of the work that R&D had done, and ask them to repeat that work. The product would appear on the stock matrix after the production handover took place, but it wouldn't appear until all the preparatory work had been done. That was not the end of the role of R&D in relation to the product because it could be further developed from time to time by R&D after the handover. He said when he performed the recording exercise that appeared in Table 13 of Volume 1, he had reference to the contemporaneous records of the applicant. What he was doing was ascertaining the extent of the involvement of R&D staff during the 2001/2002 financial year with the products contained in the various Volumes, and he couldn't recall the dates of that involvement, other than by reference to the records in the Volumes.

25. Mr Sallis questioned Mr Raymond again about the information contained on page 138 of Tab 13 of Volume 1. He said the information contained in the second column from the right hand side of the document ("Project plan") originated from contemporaneous records that had been taken by Mr Richard Shaw. He said he had been told this and he did not generate the original data for the information. He then said he was responsible for the data appearing in six or seven of the eight columns in the Table and that, in his opinion, this was the majority of the information contained on page 138.

26. Mr Raymond further said that he did not prepare a time sheet during the course of his employment with the applicant, but said that time sheets were kept by other employees. He then said that there was no-one in the Adelaide employ of the applicant who ever kept records in the time sheet manner. The recording of time spent was done indirectly in the electronic diary, for example. He then said there were time cards that were hand-written with various details on them by various people, but he did not have a clear recollection of what was written, by which people. He said the time cards were, in fact, records of attendance for work. They did not record the activities undertaken during the course of employment by any staff member. When questioned further, he said that Ms McKenzie and Mr Richard Shaw were dealing with time recording. Time recording did not occur in his case because he was full-time R&D staff. The same occurred with Mr Jaekel, as he was also full-time R&D staff. He did not know whether it happened for Mr Graney or Mr Valente or Mr Merritt. They did not report to him and were not full-time R&D staff members. When I asked Mr Raymond whether the entries recorded under the heading "Days" on page 138 of Tab 13 were his entries, he said:

"… Yes, sir, those entries are mine, but, as I think I mentioned earlier, as in, I think

ATC 5715

yesterday, the original source information was generated by Mr Richard Shaw, possibly, I would suggest to you, with the assistance of Lynette McKenzie. So my response - I am - if you divided that column - the page 138 - table up into whatever there are, eight or nine columns, the one that I have the least involvement in is the column second from the right titled Days, not Hours". [Transcript, 29/9/11, Page 28.5]

27. Mr Sallis questioned Mr Raymond about the running logs relating to the applicant's products, such as WL2, FR1, FR2, CF2 and WE1, that were made in the R&D electronic diaries referred to in Tab 7 of Volume 1 of Exhibit A1. The running logs also appeared in Exhibit R10. Mr Sallis questioned Mr Raymond about the WL2 product. He said that, prior to the commencement of the 2001/2002 financial year, the applicant did not have a product called the WL2. It had a "prototype and a project in action". When questioned further he said there was at least one pre-existing and tested WL2 prototype that was put together by the applicant prior to the commencement of the 2001/2002 financial year. He also agreed that the WE1 had been developed by the applicant as early as 1999.

28. Mr Raymond then said that, from the running logs that had been considered, it was not possible for the Tribunal to identify the amount of time spent by any individual in relation to any of the prototypes or products to which the applicant referred during the 2001/2002 financial year. Then, when Mr Raymond agreed that he had a hand in preparing the goods inspection-inwards inspection sheets, the following exchange took place with Mr Sallis:

"…

Yes, and so forth. Now, from the log, you agree, the tribunal is not able to tell how much time you have spent involved in any of those activities? --- That's correct.

And there's really no record, that you know of, that was maintained by Ozone which would enable the tribunal to identify the extent of time that you spent on those activities? --- Well, there are other documents in evidence which were contemporaneous of work done. I mean, they - I don't recall which folders they're in, but the screen print documents month by month of - there's a drawings folder, there's another - I can't remember the title on it.

I can tell we're going to descend into this debate again. It's one thing to say there's a reference to an activity which occurred on a given day. You understand that? --- Yes.

It's another thing to say there's a record of the amount of time spent on an activity on a given day? --- Yes, I understand the difference. Yes.

My question is: there's no document, that you are aware of, that was maintained by Ozone which would - no contemporaneous document - which would enable this tribunal to identify the amount of time you spent in relation to, for example, the preparation of work procedures manuals? --- That's correct.

Or the other items, the inspection sheets, the client instructions and so forth? --- That's correct.

And there's no document which would enable the tribunal to identify the amount of time you spent attending to activities related to products not the subject of the R&D logs, for example, that we have discussed? --- That is correct.

…" [Transcript 22/11/11, Page 129.20 - 129.40]

29. Mr Raymond then said that he was not aware of any document maintained by the applicant that would enable the Tribunal to identify the amount of time Mr Jaekel spent in preparation of assembly procedures, client instructions or inwards inspection documents during the course of the 2001/2002 financial year. He also said the same position applied for Mr Merritt, Mr Odlum and in relation to all of the employees of the applicant (Transcript 22/11/11, Page 130.5 - 130.25) .

30. Mr Sallis referred Mr Raymond to Volume 3 of Exhibit A1 and suggested to him that there were tested prototypes of the FR1 in the field prior to the commencement of the 2001/2002 financial year. Mr Raymond said that the thought that was a possibility, but he could not be sure. He said Richard Shaw had a high involvement in the technical aspects of the

ATC 5716

FR1 and FR2. When he was referred to page 761 of Volume 3 of Exhibit A1, which contained technical information regarding the FR1 feedstock temperature, Mr Raymond said he was unsure whether he would have prepared the document. He said whether he would have done some of the background work to enable the preparation of the document was the sort of thing that could be found in other documents before the Tribunal.

31. Mr Sallis again turned to Tab 13 of Volume 1 and questioned Mr Raymond about his entries in the columns on page 138 of the Tab. The following exchange then took place:

"…

And what you did is you put - if you look at your table, there's a left hand column at the table at page 138? --- Yes.

You entered the number 1 on the left hand column? --- Yes, yes.

Now, in the column to the right of that appeared the date. Now, that date, was a date you obtained from the document, or was it - sorry? --- We - well, the date column was not - yes, the date is the same as on the document. Column 1, or the first column, as you say, is the document numbers.

Yes. So you entered a date in the date column by reference to the documents? --- No sir. I think we should clarify something at the start, sir. The - my input on this table was very limited, by - I retrieved the documents in question from the Ozone hardcopy filing systems, trawled through them, collated the documents into the appropriate project names, then into project codes as shown in the fourth column, and then collated them, so that they were in the correct time frame. My input after that was quite limited, sir.

Well, did you enter - did you make the entries under the heading Week Numbers? --- I don't think so, no.

Okay. Now, you didn't have a - you don't recall having a diary in front of you when you went through this process? --- No, sir, I don't want to give the - sorry, I don't want to give the Tribunal the impression that I authored this document, I did not. I had some input into it which is what I've already described, sir, that is finding the data wherever possible, and I've already pointed out that the information I don't believe is complete. Some of our colleagues who unfortunately since left the company, I believe some of the files would have been lost in that transition, but I don't want to give the Tribunal the impression that I am the author of this table. I am not. I am an assistant, I have helped with it.

Okay. Did you make the entries under the heading Product Code? --- I think, yes.

Okay. Then there's a heading R&D Work Done? --- Yes.

And Related Document Example? --- Yes.

That is your entry? --- No.

Somebody else's? --- I believe so.

Then there's the heading Staff? --- Yes.

And it's divided into a series of Staff Members by Reference, so document 1 if you like? --- Yes.

Simon Oke, Richard Shaw, D and A; did you make those entries? --- No, sir.

Okay. Then there's Days Not Hours, 2.0, 1.0, etcetera, in relation to the first document; did you make those entries? --- No, sir.

Did you input that information into this table? --- No, sir.

And then there's the heading Project Plan Stages; did you input that information? --- No, sir.

Was that the case in relation to each of the entries throughout the rest of the document? --- Yes, that's correct.

Mr Raymond, did you lie to the Tribunal during the course of your earlier evidence in relation to this table? --- I don't believe so, not knowingly, sir.

…" [Transcript 24/11/11, Pages 239.30 - 240.40]

Mr Sallis then referred Mr Raymond to Tab 10 of Volume 1. When he asked whether he was responsible, at any stage of his employment with the applicant, for obtaining the contemporaneous records of the data that

ATC 5717

appeared in the timesheet documents in Tab 10, Mr Raymond said he did not believe so.

32. After referring Mr Raymond to his earlier evidence on 28 September 2011 regarding his entries on pages 136 and 138 of Tab 13, the following exchange took place:

"You agree you stated that you had applied most of the data in that document that commences behind tab 13 at page 138? --- Yes.

That's what you told this Tribunal? --- That's what I told this Tribunal approximately, I think, four weeks ago, yes.

Yes. That's entirely different to what you've told this Tribunal this morning, isn't it? --- It is different. Not entirely different, but it is different.

You see, a moment ago when I asked you about the entries in the table, and in particular about the entries Staff, Days, in the third and second to right column on the table …? --- Yes.

You said that you did not entire [sic] those entries onto the table? --- That's correct.

That was not information that you put into the table? --- That contradicts what you just read out.

Yes. So I will ask you my question again: when you gave that evidence that I just read out, were you lying to the Tribunal? --- No, sir. My memory is not great on such matters obviously. It is certainly not my intention to lie to the Tribunal in any way, shape, or form, or to mislead the Tribunal.

You've had time to reflect on the document since, have you? --- I beg your pardon?

You've had time to think about tab 13 document in exhibit A1? --- As I say, my memory is not great on the matter.

Did you tell Mr Oke that you were going to change your evidence in relation to the table? --- Sir, I don't - there's not an intention to change my evidence, that's what I'm saying. My recollection has changed over the period of four weeks since the transcript you just read out was given, or the evidence that you read out was given.

Do you tell the tribunal this morning that you are not the author of the entries in the columns entitled Staff, Days and Project Plan Stages? --- Yes, that's what I'm saying this morning. Yes, sir.

They are not entries that you had any involvement in collating the data for the purpose of preparing this table? --- Writing the data for staff and days, not hours. That is correct: I did not collate that information…." [Transcript 24/11/11, Pages 245.16 - 246.10]

33. Later, Mr Sallis questioned Mr Raymond again about his earlier response on 26 September 2011 to Mr Oke's enquiry regarding the "bundle of papers" comprising pages 136 to 169 of Tab 13. The question by Mr Sallis, and Mr Raymond's answer, was:

"Those answers you gave were to suggest to the tribunal that you were the person who prepared, if not all of, the lion's share, of the documents behind table 13; correct? ---That's correct.

Those answers were false, weren't they? ---Yes.

Thank you." [Transcript 24/11/11, Page 250.5]

34. Mr Sallis proceeded to question Mr Raymond about the various purchase orders that appeared in Volumes 5 and 6 of Exhibit A1 and whether he observed R&D expense stamps on the purchase orders. Mr Raymond said that he could not recall seeing an R&D stamp on the purchase orders, nor could he recall using such a stamp in his work activities for the applicant.

35. Mr Raymond was referred to page 113 in Tab 10 of Volume 1, which read in part:

"Where a staff member was known to be working full time on the Project during the week, then an entry was made on an electronic summary time sheet each week."

Mr Raymond said that he was not familiar with any document that was prepared on a weekly basis that recorded time spent by staff performing mixed functions. He said time was recorded by Mr Richard Shaw in Sydney and by Ms Lynette McKenzie in Adelaide. He was then referred to the next clause on page 113 of Tab 10, which read:

ATC 5718

"Where a staff member was known to be working part time on the project but on a defined task of the project and where that task was delegated and it was known that the task was carried out as delegated, then an entry was made on an electronic summary time sheet each week."

Mr Raymond said that he never directed anyone who he supervised to report to either Mr Shaw or Ms McKenzie as to the amount of time they were spending on R&D related activities. He was not aware of any other person, who was involved in R&D activities at his direction, being asked about the amount of time they spent on such activities during the 2001/2002 financial year.

36. When Mr Raymond was referred to what was called a "Time Sheet" on page 116 of Volume 1, the following exchange took place:

"Okay. Could you turn to page 116 of volume 1? --- Yes.

This is a document with which you are familiar? --- I have seen the document, yes.

And you are aware that the document sets out involvement in relation to - or purported involvement of employees, including yourself, in relation to the oxidation purifier beverage industry R and D project, 30 - sorry, I think it's 13 July 2001 to 30 June 2002? --- Yes.

And it does so on a week by week basis through the entirety of the 2002 financial year? --- Yes.

And you understand the document to be an apportionment of the time on an employee by employee basis as referred to in the staff column? --- Yes.

On a week by week basis for all of the weeks of the 2002 financial year? --- Yes.

So I will come back and I will ask you the question. When did you first become aware that this methodology was used during the course of the 2002 financial year? --- The methodology, I believe, is based on the same methodology that was used by other - by Ozone on other grants prior to the 2002 financial year. So when I found this methodology would be very hard to say, sir. But I believe it to be the same or similar or based upon other AusIndustry grants.

You see, I want to suggest to you that you've made that up? --- Okay. You can suggest whatever you like, sir.

What's your response to that? --- I disagree.

…" [Transcript 24/11/11, Pages 273.27 - 274.7]

37. In Mr Raymond's absence, Mr Sallis applied to tender witness statements from Mr Richard Shaw that had been obtained by the Australian Federal Police and which he intended to use in the cross examination of Mr Raymond. When Mr Oke opposed the tendering of the statements, Mr Sallis withdrew his application.

38. When Mr Oke commenced re-examination, he sought to question Mr Raymond on the inconsistencies he said occurred in the evidence in chief he gave, in relation to Tab 13 of Volume 1, and in the evidence he gave in cross examination. After several attempts and objections by Mr Sallis, I was unable to allow Mr Oke to proceed with his form of re-examination. However, Mr Raymond said that during the cross examination in November he had endeavoured to clarify the mistake, error and misleading information that he had given in his evidence in September.

Mr Oke

39. In his witness statement, comprising 101 paragraphs and five Annexures, Mr Oke makes the following statements that appear to me to be of relevance in reaching my decision:

  • "16. Ozone had five people involved in managing the logistics of the Project including record keeping at the time. The last 4 were also involved in the actual R&D work.
    • 16.1 Lynette McKenzie, the accounts manager at the time was based in Adelaide, involved with record keeping for the Project companywide;
    • 16.2 Richard Shaw, a chemist who was a project manager at the time (and who also worked directly on the Project's research activities). He was the key person in Sydney;

      ATC 5719

    • 16.3 Neil Raymond, the R&D Manager in Adelaide (who also worked directly on the Project's research activities);
    • 16.4 Phil Duke, the Technical Manager in Adelaide (who also worked on some of the Project's research activities, including in the field); and
    • 16.5 Myself (who worked directly in the engineering and research activities associated with the Project). I was based in Sydney but spent a substantial amount of time in Adelaide. I would attend Adelaide as necessary.

    …

  • 18 During the period that Ozone received various grants from AusIndustry and was audited by AusIndustry, proforma time sheets were prepared by Ozone in consultation with AusIndustry. When Ozone started to undertake R&D projects with relevance to the R&D Tax Offset, the same method was adopted, given that AusIndustry was involved and AusIndustry decides whether what is in the application form satisfies the definition of R&D. It was a method of recording which AusIndustry deemed to be satisfactory for R&D projects and its grants.

    …

  • 33 A record of the time spent by each employee on the Project was recorded contemporaneously, mainly by Richard Shaw or otherwise, and to a minor degree, by Lynette McKenzie, Neil Raymond, Phil Duke or myself in electronic format.

    …

  • 35 The diaries, files and tasks were all centralised in a server including a particular system we use called Microsoft Public Folder System which is actually a cross-relational database where data is recorded contemporaneously by all Managers and also by some non-managers who work on the Project. Those entries were recorded by the person who was managing the employee, the entry activity was shared between the five people who were managing and running logistics for the Project.

    …

  • 52 When the purchase order was placed, if it was for R&D expenditure a R&D stamp would be put on it before it was filed. Purchase orders were placed by a whole range of people in the company and after the purchase order was placed they would be printed, stamped and filed. They were filed in files by month in the designated R&D filing cabinet.

    …

  • 56 The Work Performed Table refers to documents created by Ozone contemporaneously during various stages of the Project. The Work Performed Table document was prepared by Ozone's staff for provision to the ATO during the course of these proceedings. On the left hand column at page 138 of Ozone's Documents there is a document number reference and the document number corresponds to documents contained within folders 2 to 4 of Ozone's Documents, being hard copy documents which evidence the work undertaken during the course of the Project. These documents were created at various stages of the Project. Folders 5 and 6 of Ozone's Documents contain orders and bills which correspond to the Purchase Order Table.

    …"

40. Mr Oke gave his own oral evidence in chief, with no objection from Mr Sallis for the respondent. Mr Raymond was present at the bar table.

41. It was Mr Oke's evidence that the Project finished on 30 June 2002, but some of the R&D projects such as the WL2 project, the FR1 project and the CF1 project continued on into the 2002/2003 financial year. Ms Lynette McKenzie was involved in the administrative side only of the Project, so she was involved in record-keeping for the Project and that included input into the time sheet and the purchase order table. Mr Richard Shaw was Marketing Manager and he was the key person in charge of the time sheet and purchase order records, together with Mr Oke. Mr Shaw was located in Sydney, although he travelled to Adelaide on occasions during the 2001/2002 financial year.

42. Mr Oke referred to paragraph 33 of his witness statement (under the heading "Time Sheets"), and he said:

ATC 5720

"…

Neil Raymond was very aware of the work being done and his input into time and Phil Duke's input into time, I can explain as follows, I think. I have been listening to the debate through the evidence about time and I think I can describe it in the best way as follows. There are of course several aspects of time. Three of which have relevance to this matter, I think, are that time can refer to the date of course. It can refer to the amount of time spent in a qualitative fashion such as a lot, a little or something in between. Or it can refer to the amount of time spent in a quantified fashion, such as 4.5 hours.

Now Neil Raymond and Phil Duke had key roles with the first two aspects of that time, when events occurred and the qualitative aspect, were they a lot, a little or trivial or massive. Neil in regards to staff based at the South Road Winfield plant and Phil Duke in respect to staff based in the interstate offices because although my recollection is his title was technical manager rather than national sales manager, the fact is that every day his life was supporting the salesmen in the field. But the actual recording of the data into cells in the table was by Richard Shaw and myself. Richard Shaw overwhelmingly in the Sydney office and myself about half in Sydney and half in Adelaide on alternate weeks." [Transcript 25/11/11, Pages 384.35 - 385.5]

43. Mr Oke then referred to pages 946 and 947 of Volume 3 of Exhibit R1. He said the pages comprised the original time sheets relating to the Project for the 2001/2002 financial year which had been filled in by Mr Shaw and himself, contemporaneously. He said the times were filled in by himself and Mr Shaw when the work occurred, either the same day or the following day or at the end of the week. Mr Oke then referred to paragraph 52 of his witness statement and to the placement of an R&D stamp on purchase orders. He said that once the orders were approved, where they were R&D related, either Mr Shaw or Mr Oke would place an R&D stamp on them. The R&D stamp was imposed in Sydney and the purchase orders were then placed in a filing cabinet in Sydney. Two hard copies of the purchase orders existed, one in Adelaide, where it was used for normal accounts purposes for reconciling bills, and one in Sydney for the R&D records.

44. Mr Oke then referred to paragraph 56 of his witness statement. This referred to the Work Performed Table contained on page 138 of Tab 13 of Volume 1. He said that the third, fifth, sixth, seventh and eighth column on page 138 was recorded contemporaneously. But the first, second and fourth columns were added later because there was a task to locate documents to prove what the applicant was saying. Mr Oke also referred to paragraph 69 of his witness statement, to texts by Carnegie and Pugh and to pages 107 and 108 ("Project Plan") appearing in Tab 8 of Volume 1. He said Tab 8 helped to "prove the nexus between labour expenditure claimed and material purchases claimed relative to a certain task and, of course, it relates to the labour through the work performed table at tab 13, and it relates to both the labour and the purchase order through the timeline document at tab 9 …".

45. Mr Oke then spoke about the stock matrix and referred to the summary of the applicant's position which he said was set out in its notice of objection on page 70 of Volume 1 of Exhibit R1. He said he had created the stock matrix that was used by the applicant in relation to the Project (Transcript 12/12/11, Page 448.10). Further, he said he designed the stock matrix to be a "purely production operational document". He did not design it with any intention for it to be used by R&D, and as the creator of it he could think of no possible way in which it could add any value to R&D during a project or in terms of post-analysis. In relation to feedstock expenditure, he said that the applicant had no feedstock expenditure R&D issues because the applicant had no feedstock expenditure. No prototype was ever sold and no sample was ever sold. Prototypes and samples developed through the R&D process either ended up in the bin, or were stored in a modest museum.

46. In cross examination, Mr Sallis asked Mr Oke about the applicant's claims for AusIndustry research and development grants. Mr Oke acknowledged that he had become intimately aware of the requirements of AusIndustry for the purposes of record- keeping

ATC 5721

and he said he complied with the AusIndustry record keeping-requirements for grants. Insofar as the record-keeping went for the purposes of the 2001/2002 financial year R&D tax offset claim, he said he based the applicant's record-keeping on the same processes that had been in place when substantiating claims for the grants to AusIndustry. And in the 2001/2002 financial year, there was no AusIndustry grant. He said he was aware of the AusIndustry guidelines that the applicant keep contemporaneous records of research and development activities undertaken during any given grant period.

47. Mr Sallis then referred Mr Oke to page 251 of Volume 1 of Exhibit R3, which was a letter to Mr Oke from AusIndustry dated 16 April 1999. It related to a grant for "Advanced Oxidation Generators for Food Processing" and read in part:

"You should be aware that, at appropriate times during the course of the project and following its completion, your claims of eligible expenditure will be subject to audit. Therefore, to provide a complete account of work undertaken in the course of the project and associated expenditure, you should maintain appropriate accounting and operating records including:

  • ○ financial accounts, in accordance with normal accounting standards and supported by such documents as invoices, receipts, bank statements, job cost cards, etc for all receipt and expenditure of project monies; and
  • ○ diaries or other such records to describe the amount of time spent and work performed each day by all research personnel.

    …"

Mr Oke responded by saying he was aware of the records required prior to the 2001/2002 financial year. He said during the period that the applicant received various grants from AusIndustry and was audited by AusIndustry, pro forma time sheets were prepared by the applicant in consultation with AusIndustry. When the applicant started to undertake R&D projects with relevance to the R&D tax offset, the same method was adopted in the 2001/2002 financial year. When questioned further, Mr Oke acknowledged that, in the time sheets appearing in the table on pages 116 and 117 in Tab 10 of Volume 1 of Exhibit A1, the table itself was not contemporaneous. It was based on entries made on pages 946 and 947 of Volume 3 of Exhibit R1. He then said that the entries on pages 946 and 947 were placed there by Mr Richard Shaw first, and then by himself. He could not identify the entries in the pages that were placed by Mr Shaw and was not able to identify the entries he had placed in the pages. He then said that the data overwhelmingly placed in the documents by Mr Shaw were the entries in page 946 under the heading "Week Beginning (Monday) Dates, All Figures show Days Per Week". He said the same applied in relation to the entries on page 947 (Transcript 7/2/12, Page 477.40-45).

48. Mr Sallis then referred Mr Oke to the letter from the respondent dated 13 August 2003 (Exhibit R1, Volume 1 at pages 150-153) in which the respondent requested copies of supporting documents, such as time sheets, relating to the 2001/2002 financial year. When he was asked whether a copy of the timesheets at pages 946 and 947 of Volume 3 of Exhibit R1 had been provided, Mr Oke said that he did not know. He said "… the answer is in the T Documents and you would know the answer. But I can't be expected to know" (Transcript 7/2/12 at page 483.25). When Mr Sallis referred Mr Oke to pages 693 to 696 of Volume 3 of Exhibit R3, which was an AusIndustry minute dated 17 November 2003, Mr Oke agreed that there was an AusIndustry audit of the applicant, relating to the period from February 2003 to June 2003, where a meeting took place on 13 and 14 November 2003. This meeting occurred approximately one week before the respondent's tax audit meeting on site which took place on 21 November 2003.

49. Mr Oke agreed that he was present at the meeting with the AusIndustry auditors and was asked a series of questions about how the applicant substantiated its claim for labour expenses. He could not recall the AusIndustry auditor recommending "that it would be prudent for each team member to keep a diary, setting out task and time taken. (He) suggested time sheets could be created so as to make clear what info required and these could be stored centrally." When asked about time sheets maintained by the applicant's staff, Mr Oke said

ATC 5722

that the only time sheet that existed for R&D was the document that appeared on pages 946 and 947 of Volume 3. He then said that the documents which recorded the amount of time spent by employees on R&D activities were in what was the Work Performed Table. When referred to page 138 of Tab 13 of Volume 1, Mr Oke said that "… this tab 13 document, again, the actual black and white printing of this document was not contemporaneous; however columns 3, 5, 6, 7 and 8 were contemporaneous." Mr Oke then said that staff themselves did not fill out time sheets recording the number of hours they spent on a particular activity relating to research and development. There would be some exceptions to do with electronic diaries, but these diaries did not record the number of hours spent by staff on a given task, they did so only in part. He said the only full record of who did what and when was to be found contemporaneously in the time sheet and the contemporaneous version of the work performed table.

50. When questioned further about the 2003 AusIndustry audit, Mr Oke said that the grant during the 2003 period was approved by AusIndustry in full. There were no grants during the 2002 financial year when there was the beverage industry project, which is the subject of the R&D tax offset. When Mr Sallis suggested that the materials expense that the respondent sought as part of the 2003 grant had been disallowed, Mr Oke said that other materials had been allowed. He then acknowledged that the claim for prototype materials in the 2003 year was to a large extent disallowed. The AusIndustry audit related to the period from 1 February 2003 to 20 June 2003, which Mr Oke accepted was correct.

51. Mr Sallis then referred Mr Oke to the letter from the respondent dated 24 May 2004 (Volume 1 of Exhibit R1 at page 172), which read:

" INCOME TAX - R&D TAX CONCESSION AUDIT

We refer to the audit of Research and Development (R&D) tax offset claim of Ozone Manufacturing Pty Ltd for the year ended 30 June 2002.

Since our visit on 21 November 2003 you have made numerous promises to supply the documentation we require to verity your claim but have failed to do so.

Last Friday, 21 May 2004, Leonie from your office informed me that I would 'be receiving something today' but again nothing has been received.

In the absence of the information requested we intend to disallow the whole of your claim for Research and Development expenses. Some of the amounts may be allowable under other provisions of the income tax law, but as such would not be eligible expenses for the purpose of the R&D Tax Offset.

Note that if the records previously requested are not produced by 7 June 2004 your claim will be adjusted.

…"

When Mr Sallis suggested that the applicant had not supplied pages 946 and 947 (in Volume 3 of Exhibit R1) prior to 24 May 2004, Mr Oke said "I have absolutely no idea but I am sure that the answer to that is in these T documents".

52. Mr Sallis referred Mr Oke to Volume 1 of Exhibit R1 on pages 183-190, which was the report of the respondent's audit visit to the applicant's premises on 14 and 15 July 2004. The auditors attending were Mr Jim Robinson and Mr Tony Olivari and the applicant's representative was Mr Oke. The following extracts have been taken from the audit report of Mr Olivari on page 186:

"On receiving the final enlarged copy with names ('the time sheet') we noted the total R&D wage expense was $337,297 with the R&D project utilisation amount being $307,650, the later amount was claimed in the amended claim. We asked how the difference arose and Simon referred to Phil Duke. He then said the figures came from the companies Quicken wages package. Referring to the time sheet I asked how they arrived at the days per week said to be for R&D.

Simon said the days were recorded at the time.

I said was that at the end of each week.

Simon said that it varies a little bit.

ATC 5723

I asked who recorded the days spent on R&D, the employee.

Simon said no not the individual, himself or Phil.

I asked how he managed to monitor the days worked on R&D for 28 staff when they kept no diary, the times were recorded weekly and he spent most of his time in Sydney.

Simon then said it was 'mainly Phil'."

53. When Mr Sallis suggested to Mr Oke that he told the tax auditors in July 2004 that it was Phil Duke who was mainly responsible for the entry of the time records, Mr Oke said he could not recall what was said during the course of the auditors' visit. He then denied that what he said was that Mr Duke was mainly responsible for the entries in relation to the Adelaide staff. He said the minute taken by Mr Olivari had been taken out of context. When Mr Sallis asked further questions about Mr Duke's involvement, the following exchange took place:

"… Are you telling this tribunal, on oath, that Mr Duke place some of the data entries on the document at pages 946 and 947? --- Yes, all five people knew - - -

No, no, I'm just asking you about Mr Duke at the moment? --- Yes. Yes.

And that he did that in relation to one or more employees who worked on the R and D activities in Adelaide during the 2002 financial year? --- Yes. …" [Transcript 7/2/12, Page 521.20]

Mr Sallis then referred to an extract from Mr Oke's opening in these proceedings and he said:

"So I don't know if you have the transcripts of 26 September 2011, page 20 of the transcript. You commenced your opening, Mr Oke, on 26 September 2011 and you said, after saying that you would try standing to address the tribunal, this:

Sir, the applicant, Ozone -

and I read from line 23 -

Sir, the applicant, Ozone, undertook contemporaneous records which were detailed. For example, the T documents at page 946 shows the contemporaneous labour records.

Do your recall saying that to the tribunal? --- Yes.

Then you say at 946 and 947:

Unfortunately it's not a particularly good copy of it, sir. It looks like an A3 sheet might have been folded so I will be able to present a better one, but they are the contemporaneous labour records. It's not the case that they don't exist, so basically they do exist. They were prepared contemporaneously. They were provided to Mr Olivari, the auditor for the respondent as early as 2003. They were prepared on a weekly basis by Ozone's staff by referring to detailed contemporaneous research logs.

? --- Yes. Which bit of that is of concern?

So, Mr Oke, they weren't prepared, according to your opening, by speaking with staff? --- Which bit of that - I agree with all of that. Which bit of that is the story? Which bit of that is the problem?

This is a different story to that which you've told the tribunal before? --- How so? How so?

You see, you've told the tribunal that they were prepared by yourself and by Mr Shaw by speaking with the employees, for example? --- Yes.

And that they were prepared by yourself by reference to your knowledge of work undertaken in your factory? --- Yes.

You did not tell the tribunal in your witness statement that they were prepared on a weekly basis by Ozone's staff by referring to detailed contemporaneous logs? --- May I have my witness statement?

Yes, you may? --- Thank you.

Well, I want to suggest to you that you didn't? --- Well, I can't comment without the witness statement. At the moment you're trying to get me to, I think, make a comparison between a transcript I don't have and a witness statement that I've just been handed. Now, what exactly do you want me to do? You want me to find something in my witness statement which talks about how the timesheets were prepared?

ATC 5724

So in your witness statements, if you turn to paragraph 33? --- Yes.

You explain the process? --- Yes.

And you say at paragraph 33:

A record of the time spent by each employee on the project was recorded contemporaneously mainly by Richard Shaw or otherwise and to a minor degree by Lynette McKenzie, Neil Raymond, Phil Duke or myself in electronic format.

--- Yes.

…" (Transcript 7/2/12, Page 522.10 - Page 523.25)

54. When Mr Sallis suggested that the applicant did not maintain time sheets in the form of pages 946 and 947 during the course of the 2001/2002 financial year, Mr Oke said that the documents were unable to be provided because the respondent, through others, had exercised their access powers and removed most of the applicant's tax documents from its site. The applicant did not have access to the documents.

55. After Mr Sallis asked about finding the documents that were the subject of the drawing logs referred to in Folders 2, 3, 4 and 7 of Exhibit A1, Mr Oke said that the Tribunal would be able to tell, by reference to the documents, how much time was spent in undertaking the work the subject of the documents by looking at contemporaneous records. Mr Oke said that the contemporaneous records could be found in Tab 13 of Volume 1, and behind Tab 9 of Volume 1. When asked to reference the documents in Folders 2, 3 and 4 to the R&D Work Performed Table in Tab 13 of Volume 1, Mr Oke said:

"--- No, no, I can't do that sitting here, because as you know, and as we've discussed, in folders 2, 3 and 4 there are many documents which - with rings, numbers with rings placed around them which are in folders 2, 3 and 4, and they map back to the R and D table, and in the R and D table they are organised in numerical order, and thus, it's a very simple matter to go from those documents to other data, but it is more difficult to go from other data to those documents. As I've said before, it could be done. In that three month exercise we didn't - it seemed to us to be a foolish exercise to do it. It seemed to us that the tribunal would be more interested in the mapping which we provided, that is, from the documents to the table - from the documents in folders 2, 3 and 4 to the table behind the relevant tab in this folder one. …" [Transcript 9/2/12, Page 711.20]

56. Mr Sallis questioned Mr Oke further about the Work Performed Table in Tab 13 of Folder 1 and the evidence that Mr Raymond had given concerning his involvement as author of the table. Mr Oke then said:

"… The work performed table - so - so - you need a precise answer here, don't you? The R&D table existed and was contemporaneous. It was taken as the source document by Mr Raymond and his team and expanded and turned into the work performed table to address the nexus issue which the Tax Office was then asking us to address. Now, that work to turn the R&D table, which was contemporaneous, into the work performed table at around the 2008/2009 time, that work was overwhelmingly done by Mr Raymond. He did the work, led the way with a team of other people whose names I've previously listed.

…

Mr Raymond was responsible for - for placing the majority of the data on the work performed table when it was expanded from the R&D table. So he took the contemporaneous document and expanded it. …" [Transcript 20/2/12, Page 806.10 - 806.25]

Evidence of Respondent's Witnesses

Ms McKenzie

57. In her witness statement, comprising 60 paragraphs and 10 Annexures, Ms McKenzie makes the following statements that appear to me to be of relevance in reaching my decision in these proceedings:

" Timesheets

  • 9. Ozone maintained a system of timesheets for its employees.
  • 10. These timesheets were completed by various managers being Alan Hodgson for production, myself for administration and

    ATC 5725

    Paul Middleton (and thereafter Phil Duke) for sales staff.
  • 11. The timesheets recorded the attendance of staff at work. They contained records of various leave (sick or annual leave) and public holidays.
  • 12. The timesheet was ticked at the end of the fortnight by the production managers.
  • 13. The timesheet did not provide details the type of work performed by the employees. They were basically attendance records.
  • …
  • 25. Ozone used a stock matrix.
  • …
  • 30. My involvement in the preparation of the stock matrix was, on a weekly basis, to go through the customer sales worksheets provided by the Ozone sales team. From the worksheets I identify the quantity of products sold by the sales team. I totalled the number of each product sold and then entered the total of customer ordered products onto the stock matrix in the appropriate product categories.
  • …"

58. In giving her evidence in chief, Ms McKenzie said that the contents of her witness statement and the annexures were true and correct to the best of her knowledge. She confirmed that she was employed by the applicant until December 2001. After she left her employment, she said she performed work duties for the applicant to maintain the payment of wages to all the staff and salesmen, production, admin.

59. In cross examination by Mr Oke, Ms McKenzie first said that there were no time sheets for research and development. She did not prepare time sheets for research and development as "research and development was on the same list as production". She said Neil Raymond was in the research and development department and the time sheet for Neil's department, with production, was "all together". She said Anthony Jaekel was employed in research and development. She thought he reported to Mr Oke and to Mr Raymond. Nobody prepared the time sheet for Mr Raymond. She said he was treated the same as she and Vicky Hodgson were.

60. Ms McKenzie said that she could not ever recall seeing an R&D expense stamp, and that she did not purchase such a stamp. When she was a full-time employee stationery was purchased by Michael Graney and a stamp would probably fall into the stationery sphere. When Mr Oke asked her about a stock matrix she said:

"… It was to make sure that the products - the products we had on the shelf, the products we sold, and the products to be manufactured were all listed on the matrix, so that anybody could go to the matrix at any time and see what has been sold, what has been ordered, what has - what was left on stock. [Transcript 27.9.11, Page 83.30]

…

Matthew Solly would go out the back and he would fill in his part of the - the matrix. Then, I think, Alan did his part of the production side on the matrix, and then I did my part on the side of the matrix. My part was to actually coordinate all of the sales orders and put all of the products listed in the - for the sales this particular week, put them in the matrix. [Transcript 27/9/11, P 83.45-84.5]

…"

She said she could not recall whether anyone from the R&D section was involved with the stock matrix. All of the products in the stock matrix were being sold to customers. She thought parts were on the matrix as well, because a product couldn't be made without the parts. When Mr Oke put to her that the stock matrix would not give any information at all about purchase orders that would be, or could be, or had been issued to suppliers, Ms McKenzie said "I think you're wrong".

61. Mr Oke referred Ms McKenzie to paragraph 46 of her witness statement, which read:

"If a full set of Stock Matrix and Stock Sheets were available, I would be able to cross reference them to the purchase orders and would get an even more accurate picture than by reference to the Stock Matrix alone."

When Mr Oke put to her that she had not performed the cross-referencing she referred to

ATC 5726

in paragraphs 37 and 46 of her witness statement, Ms McKenzie said, "I did it every week from the production - from - from production, from sales, from purchasing. Everything went in - in the stock sheet as far as the products went and in the matrix also." When Mr Oke suggested that the word "purchase" referred to in paragraph 37 should be "sales", Ms McKenzie agreed that she had made a mistake. When he put to her that there was no relationship between anything to do with research and development and anything on a stock matrix or a stock sheet, she agreed. She also agreed that Neil Raymond, Anthony Jaekel, Andrew Merritt, Russell Odlum and Guiseppe Valente were full time research and development staff in the year 2000.

Mr Hodgson

62. In his witness statement, comprising 184 paragraphs and eight Annexures, Mr Hodgson makes the following statements that appear to me to be of relevance in reaching my decision in these proceedings:

"…

  • 31. It would be unusual for me to spend any more than 45 minutes a week, if that, on any R & D related activities. On average I would have spent less time than that per week.
  • …
  • 39. The Matrix was used to monitor the stock levels of modules and products for the purposes of identifying materials and product re-order and manufacture dates.
  • …
  • 55. Regularly I would sit down with Simon Oke and consider what products/modules/parts were to be manufactured or ordered as a first priority.
  • 56. If Simon wasn't in Adelaide I spoke to him by telephone. Meetings with Simon to discuss the Matrix commonly took approximately half an hour.
  • …
  • 71. I notice that a stamped entry "R&D expense" appears at the top right hand corner of the document.
  • 72. During the course of my employment at Ozone I am certain that I never saw a purchase order marked with such a stamp.
  • …
  • 98. I have been shown a document entitled "Oxidation Purifier (Beverage Industry) R & D Project - Timesheet (1 July 01 - 30 June 02)" found in the Respondent's "T-Documents" Vol. 3 at pages 946 and 947.
  • …
  • 100. As I understand the document entries made horizontally across the row where my name appears indicate that I spent one day per week during most weeks (with some exceptions in relation to weeks where I am recorded as spending two or three days per week) on research and development related activities.
  • 101. I say that those entries, if I understand them correctly, are incorrect and are a gross exaggeration of the amount of time I spent on R & D in any given week.
  • …
  • 103. Row 5 of the sheet as I understand it indicates that Michael Graney spent from 0-2 days per week on research and development.
  • 104. I say that the times recorded on the document grossly exaggerate the amount of time that Michael Graney spent on activities directly or indirectly related to research and development.
  • 105. As his direct supervisor I am able to say that at most he may have spent up to 5 hours in a given week on research and development related activities. Michael Graney's work on a daily basis was not related to sourcing R & D components. Mostly he spent well under 5 hours per week on R & D related activities.
  • …
  • 109. Ben Morgan is referred to in row 11 of the timesheet.
  • 110. I note there are a series of entries horizontally along the row which I understand record that Ben Morgan spent between 0-2 days per week on research and development.

    ATC 5727

  • 111. I consider these entries also to be a gross exaggeration of the amount of time he spent (directly or indirectly) on research and development related activities.
  • …
  • 113. He had no research and development related duties at all of which I am aware.
  • 114. Looking at the timesheet Darren Murphy is recorded as performing R & D related activities between 0-2 days per week.
  • …
  • 116. I consider that the timesheet records relating to Darren Murphy's involvement in R & D to be false in their entirety.
  • 117. To the best of my knowledge Darren Murphy never had any involvement in R & D during the time that I was employed at Ozone.
  • 118. Row 15 includes an entry in relation to David Solly. It records that he spent between 0-4 days per week on research and development activities.
  • …
  • 120. I consider the time recordings are false and a gross exaggeration of the amount of time David Solly spent on activities (directly or indirectly) related to research and development.
  • …
  • 123. Looking at the timesheet I note that entries across row 18 suggest that he spent between 0-1 day per week on research and development related duties.
  • 124. I say that this entry is wrong and a gross exaggeration of the amount of time Matthew Solly spent (directly or indirectly) on research and development related activities.
  • …
  • 126. I estimate that this would have taken Matthew no more than 30 minutes per week at most. Matthew's main activities (and it was a true full time position) were related to his role as a storeman. In addition he also assisted with the assembly of modular products and preparation of manuals for dispatch to customers for products sold by Ozone.
  • …"

63. Mr Hodgson said that the contents of his witness statement and the annexures were true and correct to the best of his knowledge. He said that during the course of his employment with the applicant he did not keep time sheets recording the activities or work that he did. He did not discuss with anyone at the applicant, on a daily or weekly basis, any of the activities that he did involving research and development. Nor did he direct any of the staff that he was in charge of to perform time sheet recording of the activities or work that they did.

64. In cross examination by Mr Oke, Mr Hodgson said production, R&D and admin used the applicant's stock matrix. It was a production tool and an administration tool as far as purchasing went and he could not think of any relationship between the matrix and the R&D functions. He said that the matrix essentially listed the modules that were needed to comprise a product. When Mr Oke questioned Mr Hodgson about the environmental room, he said the dosing machine was in it and he took care of the structure, the dosing machine and, indirectly, the moulding tables. He said Mr Raymond gave him guidance and documentation on temperature control in the environmental room.

65. When Mr Oke put to him that he engaged in process research and development together with Russell Odlum and David Solly, Mr Hodgson disagreed. He did agree that research and development could apply either to a product or a process. He said that Anthony Jaekel, to the best of his recollection, was not a member of the production team. He said he wanted to change his witness statement regarding the section of the applicant in which Anthony Jaekel worked. In relation to Russell Odlum, he said that he was not always in production, but was in research and development for some of the 2001/2002 financial year. Primarily and for the greater part of his time, Mr Odlum was a production team member. Although he was not in the R&D department, from time to time he was engaged in research and development activities. The same could be said for Michael Graney, Guiseppe Valente, Andrew Merritt and Russell Odlum.

66.

ATC 5728

In relation to purchase orders, Mr Hodgson said he recalled the orders made their way from the factory to Sydney in an overnight satchel for Mr Oke to approve and that was done once a week. The same satchel process was not followed for R&D orders.

67. When Mr Oke put to him that it wasn't possible for any data about R &D to be extracted from the stock matrix, Mr Hodgson disagreed. He said it would be a long-winded and somewhat difficult process, but not impossible. When Mr Oke questioned Mr Hodgson about where components could be purchased, Mr Hodgson expressed the view that sourcing substitute or replacement components at a better rate, in his opinion, did not constitute R&D. However, he said that sourcing would come closer to R &D than purchasing. In canvassing Mr Hodgson's various activities with the applicant, Mr Oke asked whether a prototype hand-over meeting was research and development. Mr Hodgson said that, to him, it was not. Mr Hodgson also refuted the suggestion by Mr Oke that the work he did in the environmental room was all process R&D.

Mr Solly

68. Mr Solly said that the contents of his witness statement and the annexures were true and correct to the best of his knowledge. In his witness statement, comprising 125 paragraphs and various annexures, Mr Solly makes the following statements that appear to me to be of relevance in reaching my decision in these proceedings:

  • "8. I have been shown a document known as the stock matrix ("the matrix"). A copy appears at pages 1604 - 1609 of Volume 2 of the Respondent's Further Supplementary Documents.
  • …
  • 10. I was familiar with the matrix because as an assembler, I was required to assemble parts for the production team by reference to the matrix.
  • …
  • 13. It was part of my job to count the number of parts and write them onto the matrix document.
  • …
  • 117. I have been shown a document entitled Oxidation Purifiers (beverage industry) R & D Project - timesheet (1 July 2001 to 30 June 2002). A copy of that document is attached as Attachment 5 to this statement.
  • 118. About two thirds the way down the page appears an initial MSO.
  • 119. I understand this to be a reference to myself.
  • 120. The document seems to refer to research, development and related admin activity for the 2001/2002 year on a week by week basis.
  • 121. A series of figures follow across the sheet.
  • 122. As I understand it, the figures represent that I spent one day a week on research development or related administration (R & D activities).
  • 123. I consider those figures to be a gross exaggeration of the amount of time that I spent on R&D related activities.
  • 124. I was very occasionally involved in R & D in the sense that I would receive materials identified for R & D purposes and would place them in the R & D area.
  • 125. At most, in weeks when I was involved in processing R & D stock in the manner referred to above, I spent at most one hour per week doing so. This did not happen every week.
  • …"

69. In giving his evidence in chief, Mr Solly was shown Exhibit R7, the stock matrix. He acknowledged that there were product codes in the matrix for products manufactured by the applicant during the course of his employment. When asked by Mr Sallis whether the product codes for different products assumed the codes of pre-existing products from time to time, he said the times of the codes actually never changed. Things were upgraded if things need to be upgraded. Whenever a new product came into existence a new code was placed on the matrix. He then said that he did not maintain time sheets recording the activities that he undertook during any given day or week during the course of his employment with the applicant. He also said that he did not report to anyone at any time during the course of his

ATC 5729

employment regarding the activities that he undertook, on either a daily or weekly basis. He was never asked questions on a daily or weekly basis, or any other basis, by the applicant's staff as to the extent of time that he was involved in R&D activities.

70. In cross examination, Mr Oke referred to the CF1 product that was manufactured by the applicant. Mr Solly agreed that there were numerous problems with the CF1 and that there was a major upgrade, not a new product. When asked about packing procedures for products, Mr Solly said that he was in charge of writing them.

71. In re-examination, Mr Sallis asked Mr Solly whether he could provide a comparator with the amount of materials that could have been used in both R&D and in production. Mr Solly referred to the purchase order annexed to his statement which dealt with a carton of twelve of the 400gram buytlmastic adhesive. Mr Solly said that, to his best recall, adhesive buytlmastic was used in production as opposed to research and development. It was probably 80 per cent of the time used more in production than in design and development.

Mr Jaekel

72. Mr Jaekel said that the contents of his witness statement and the annexures were true and correct to the best of his knowledge. In his witness statement comprising 132 paragraphs and various annexures, Mr Jaekel makes the following statements that appear to me to be of relevance in reaching my decision in these proceedings:

"…

  • 53. Neil Raymond was the research and development manager throughout the time of my employment with Ozone.
  • 54. He was the person primarily responsible for the design of prototypes.
  • 55. Neil Raymond mainly worked on his own however at times he received assistance from Joe Valente and to a small degree, from Andrew Merritt and Russell Odlum.
  • 56. Prior to the late nineties, Andrew Merritt's role was to assist in the production of prototypes as part of the design and development team.
  • 57. Together with, Neil Raymond, Joe Valente and myself - we worked as a separate team.
  • …
  • 59. When Andrew Merritt left the R&D team, (which then was compromised of Neil Raymond, Joe Valente and myself), he became the head of purifier production and servicing. His job title at that stage became Production Supervisor.
  • …
  • 63. Andrew on my estimate spent approximately 80% of his day in that area.
  • …
  • 69. At the start of my employment Alan Hodgson was the Production Manager in charge of manufacturing.
  • …
  • 71. His duties were overseeing all aspects of commercial production.
  • …
  • 101. Modules carried in stock by Ozone (as well as any already assembled products ready for sale) were recorded on a document called "the matrix".
  • …
  • 103. The matrix itself is a very detailed record listing not only the available stock and modules but also the required modules to build any given product.
  • …
  • 123. No formal system of time recording on a given activity or project was maintained by myself or anybody else at Ozone to the best of my knowledge.
  • …
  • 129. At T-Documents T102 and T103 (at pages 946 and 947) there is a document entitled "Oxidation purifiers (beverage industry) R&D project - timesheets - 1 July 2001 to 30 June 2002).
  • 130. I have briefly looked down the list of entries on that documents. I understand that they state that the amount of time claimed during the 2002 year to have been spent by various Ozone employees in days per week on research and development.

    ATC 5730

  • 131. With the exception of the entries in relation to Neil Raymond, I consider that all of the claimed times are either exaggerated or grossly exaggerated and that the individuals whose initials and names appear thereon did not spend anywhere near that amount of time in research and development activities according to my own definition of what that involves.
  • …"

73. In giving his evidence in chief, Mr Jaekel was referred to the R&D logs on page 68 of Tab 5 in Volume 1 of Exhibit A1. In looking at the icons appearing in the logs, Mr Jaekel said that he was not able to say what stage a particular project or product was at without looking inside the files that related to the icons. He was then referred to the icons appearing in page 97 of Tab 7 in Volume 1 of Exhibit A1. He said that the icons did not tell him anything about the stage to which a project involving the WE1 product had progressed. He then said that he had not seen any of the documents appearing in Volume 1 prior to the hearing and that he had not seen the documents behind Tabs 5, 6 and 7 in hard copy form as the appeared in Volume 1 of Exhibit A1.

74. In cross examination by Mr Oke, Mr Jaekel said that if he could open the icons appearing in the logs in Volume 1 he would be able to tell what was inside the log. He then agreed that, although the hard copy logs appeared in the Volumes, the technology relating to the documents would enable him to click on tasks in Outlook, in Office and Microsoft, opening the icons and being able to read the information behind the icons. When questioned further by Mr Oke, Mr Jaekel agreed that in the 2001/2002 financial year Ozone was in the thick of research and development and early stage manufacturing of all of the air and water purifiers being developed at that time. Mr Jaekel said that he recalled a process used at the applicant called the change form process, and a mantra called continuous improvement or continuous product improvement. He said that change form was a form which was designed to modify an existing product that was already in production which would specify what the change was and why it needed to be done. It stopped things getting changed in an ad hoc way to avoid creating new problems. He then said that the change form procedure changed product designs, in a minor or major way. It was systematic and it occurred a great deal during the period in question. He also agreed that the CF1 product existed prior to the year in question and went through a major upgrade. In relation to his own work, he said that in 2001/2002 financial year the majority of his time was spent in R&D.

75. In re-examination, Mr Sallis referred Mr Jaekel to Volume 4 of Exhibit A1 which contained photographs (at pages 1057, 1058 and 1059 dated 18 July 2001) of the CF1 product. After examining the photographs, Mr Jaekel said that a prototype of the CF1 would have been completed before 18 July 2001. He said he believed Mr Raymond would have completed his involvement in the CF1 upgrade by the commencement of the 2001/2002 financial year.

Mr Graney

76. In giving his evidence in chief, Mr Graney said that his witness statement and the annexures were true to the best of his recall and belief. In the witness statement, comprising 125 paragraphs and 5 annexures, Mr Graney makes the following statements that appear to me to be of relevance in reaching my decision in these proceedings:

"…

  • 29. The Matrix was a document with which I was very familiar. It was comprised of 6 A3 pages stuck together. I was the person who often had to stick it together.
  • 30. From the Matrix it was possible to ascertain the number of modules in stock, (by reference to the hand written entries of Matthew Solly the storeman), as well as the number of products on hand and the modules required to build them.
  • …
  • 88. The Matrix was essentially the production bible. It directly linked production orders to customer orders.
  • 89. On the Matrix no R&D items were recorded.
  • …
  • 96. Absent a "D&D annotation appearing on a purchase order, it is not possible to

    ATC 5731

    ascertain whether a generic component was used in the ordinary production and manufacturing activities of Ozone or alternatively whether the product was required/used for R&D in the making of a prototype or in the making of a sample.
  • 97. If a particular module was removed from stock and applied to an R&D activity, no records were kept regarding the removal of the module from stock and the use of the module on an R&D prototype.
  • 98. On the occasions that I completed purchase orders for R&D, I did not make any annotation on those purchase orders that would identify them as a R&D related.
  • …
  • 102. I was not aware of any required procedure in the office whereby a person completing a purchase order was required to identify it as for commercial production purposes or an actual or proposed R&D activity.
  • …
  • 105. In the above regard I am able to say that during the 2001/2002 year I was virtually the only individual who completed purchase orders (apart from when I was absent from work).
  • …"

77. When Mr Sallis referred him to Annexure 1 to his witness statement relating to bills of materials, Mr Graney said that bills of materials went into a folder and purchase orders would also go into the folder. In the folder, purchase orders for research and development were separated from productions purchase orders. He said regularly 20 to 30 R&D purchase orders appeared in the folder over a 12 month period. The volume of purchase orders for production purposes was 600 to 800 over a 12 month period. He then said that, other than the physical placement of the purchase orders into one side of the divider in the folder, there was no other way of identifying whether a purchase order was to meet the research and development requirements of the applicant, as opposed to the production requirements. While he was with the applicant, no research and development stamp was affixed to the purchase orders.

78. When further questioned by Mr Sallis, Mr Graney said that he did not report to Mr Oke the amount of time he spent on research and development ordering of parts, or any other research and development activity. Moreover, he did not report to anyone regarding time spent on research and development activities.

79. In re-examination, Mr Oke referred Mr Graney to paragraph 113 of his witness statement and to his earlier evidence that there would have been 20 to 30 R&D purchase orders for a 12 month period. When Mr Oke suggested that he had added up the purchase orders in Annexure 5 and said he had found in excess of 100 R&D purchase orders, Mr Graney was unable to account for the discrepancy. He said he had done the best he could. When Mr Oke asked Mr Graney whether he recalled change forms, Mr Graney said it was a form that was used to document any changes that needed to be made to modules or products. When questioned further, Mr Graney said that change forms were not necessarily research and development, but were possibly design and development.

80. Mr Oke referred Mr Graney to paragraph 95 of his witness statement, which read:

"Using the Matrix I could take the bills of material entries and check that they corresponded with the weekly stock take for each given week and check that against the Purchase Orders I've been shown. This would also make the determining of the purpose (ie R & D or production) of a Purchase Order even more accurate."

He asked Mr Graney whether he wanted to change the statement "by deleting what was in the brackets" in the last sentence. Mr Graney said that he thought he could.

81. In re-examination, Mr Sallis referred Mr Graney to paragraph 95 of his witness statement, excluding the words in brackets from the last sentence. When asked what the purpose of the purchase order would be if the words in brackets were excluded, Mr Graney said:

"… Whether it would be R&D or production. If there's a bill of materials, there's a purchase order, purchase order number would have been written on the bill of materials and it's an easy way to cross-reference the purchase order to the bill of materials, anything that was outside of that

ATC 5732

scope, would I - I assume would be classed as R&D." [Transcript 21.11.11, Page 69.25]

THE APPLICANT'S ARGUMENTS

82. In broad terms, the following arguments were put by Mr Oke for the applicant:

THE RESPONDENT'S ARGUMENTS

83. In broad terms, the following arguments were put by Mr Sallis for the respondent:

CONSIDERATION

Is the applicant entitled to a tax offset pursuant to section 73I of the ITAA 1936 for the 2001/2002 tax offset year and, if so, to what extent is the applicant so entitled.

Introduction

84. The ITAA 1936 provides tax deductions for eligible companies that undertake research and development activities and incur research and development expenditure. Section 73B(1) defines "research and development activities" in two inter-related parts. If a project is found to involve: (a) systematic, investigative and experimental activities, then consideration is to be given to: (b) other activities carried on for a purpose directly related to them. The activities in (a) have come to be known as "core activities" and those in (b) as "supporting activities". Section 73B(2C), at the relevant time, excluded various activities from being "core activities", but did not stop those activities from being "research and development activities" altogether. For present purposes, those excluded activities included market research, market testing or market development, quality control, cosmetic modifications or stylistic changes, pre-production activities such as demonstration of commercial viability, tooling-up and trial runs and statutory requirement compliance. Under s 73B(14), a deduction is allowable to an eligible company in respect of research and development expenditure. Section 73B(1)

ATC 5733

defines "research and development expenditure" in relation to an eligible company to mean expenditure (other than core technology expenditure, interest expenditure, feedstock expenditure, excluded plant expenditure or expenditure incurred in the acquisition or construction of a building or of an extension, alteration or improvement of a building) incurred by the company, being contracted expenditure, salary expenditure or other expenditure incurred directly in respect of research and development activities carried on by or on behalf of the company, and includes any eligible feedstock expenditure that the company has in respect of related research and development activities.

85. As I have mentioned in paragraph 44 of these reasons, the applicant has referred to the texts by Carnegie and Pugh and to pages 107-108 in Tab 8 of Volume 1 of Exhibit A1. Its determination of what its "research and development expenditure" was for the tax offset year may have been based on a conception of eligible activities drawn from this material. The material shows a significant emphasis on the process of developing a product with reference to such matters as investigating, as part of that process, the nature and size of any market for the product, what aesthetic requirements a client may have, and what documentation may be required both to assist the production of the product and to assist the operation of the product by someone who has purchased it. The statutory scheme described in s 73B illustrates that the breath of eligible R&D activities is not as wide as what the applicant appears to have thought, unless those of its activities falling within the exclusions in s 73B(2C) can be shown objectively to have been carried on for a purpose directly related to its core activities.

86. In paragraph 334 of its closing submissions, the respondent states that the "texts" by Carnegie and Pugh, which are said to form the basis of pages 107 and 108 in Tab 8 of Volume 1 (the applicant's "Project Plan"), do not reference the definition of "research and development activities" in s 73B(1). In response, in paragraph 84 of its closing submissions (as I read it) the applicant asserts that this is an "extraordinary statement". I agree with what the respondent has stated. In my view, the complaint by the applicant in paragraph 84 of its closing submissions is misconceived.

87. Section 73I applies to certain deductions to which some eligible companies are entitled, for the year of income starting on or after 1 July 2001 and subsequent years. Section 73I(1) enables an eligible company to choose a tax offset instead of a deduction under, relevantly, s 73B or 73Y for a year of income, if it is eligible to make that choice under s 73J. Under s 73J(1)(a) the eligible company can only choose the R&D tax offset if it can, apart from s 73I(4), deduct an amount or amounts under certain provisions including, relevantly, s 73B and 73Y. Under s 73J(1)(b), as it read at the relevant time, an eligible company can only choose the R&D tax offset if its aggregate research and development amount for the tax offset year exceeded $20,000. I note that the respondent accepts that the applicant satisfies s 73J(1)(c) and (d) and that, if it is entitled to choose the R&D tax offset because it is held that it also satisfies s 73J(1)(a) and (b), it has properly made the choice to do so under s 73I(2).

Applicant's Witnesses

Evidence of Mr Raymond

88. Mr Raymond was at times uncomfortable in the witness box. His discomfort increased over his lengthy, but necessary, cross-examination. He was described by both himself and Mr Oke as a key witness to the applicant's case. Yet despite these assertions, it is clear from his evidence that he had no role to play in recording time relating to the labour component of the applicant's employees engaged on eligible R&D activities. His oral evidence bore little or no resemblance to his witness statement. The witness statement was generally vague and failed to focus on some of the important issues in the applicant's case, such as time recording methods and the R&D Work Performed Table in Tab 13 of Volume 1. The Tab 13 Table was said to be cross-referable to the documents contained in Volumes 2-4 of Exhibit A1. If the Tab 13 Table was intended to be cross-referable to the Volumes 2-4 documents, that documentation was provided without correct page numbers and in random date order, nor did it follow the order

ATC 5734

of Tab 13. If it was intended that assistance would be gained by reference to Annexure B to the applicant's closing submissions, that was not realistically achievable. Thus, seeking to test the applicant's claim by reference to the documents was virtually impossible.

89. In Mr Raymond's evidence in chief, he often provided more information than was necessary when responding to questions directed to him by Mr Oke. The same often applied in his cross-examination by Mr Sallis, providing information in response that was often irrelevant and distractive. Moreover, Mr Raymond's evidence in chief is to be contrasted to the evidence he gave in cross-examination. Obtaining a direct answer to a question on any area of controversy proved to be difficult on numerous occasions, and several times I requested him to give a direct answer to questions capable of such an answer during the cross-examination.

90. On the first hearing day, Mr Raymond testified that he was the person who prepared the R&D Work Performed Table appearing behind Tab 13 in Volume 1. Prior to this point, neither Mr Raymond's nor Mr Oke's witness statements provided any insight as to who was the author of the Tab 13 Table. In examination in chief, he testified that the Tab 13 Table (including page 138) was prepared over a period of weeks, not necessarily full time, after the 2001/2002 tax year, and he said he did the majority of the preparation of Tab 13. In cross-examination, Mr Raymond departed from his earlier evidence. Initially, he said that, whilst he was not the author of the Tab 13 Table (commencing at page 136), he had been directed by Mr Oke to prepare the majority of the Table from pages 138-169, but he did not prepare the definitions at the top of page 138.

91. On the third hearing day, Mr Raymond confirmed that he was responsible for the majority of the data that appeared on pages 138-169 of Tab 13, and he appeared to say that the document was first prepared during the course of an audit after the 2001/2002 tax year. Later, he described in detail the process involving his preparation of the Tab 13 Table (at page 138). The process included the extracting of documents, ascribing numbers, grouping documents into product code, analysing the documents and recording his best estimate of the date of the document to be recorded in the "Days" column of page 138.

92. In cross examining Mr Raymond further about the columns in page 138 of Tab 13, Mr Sallis referred him again to the definitions at the top of page 138. In relation to the entries in the "Days" column (Column 7) and the "Project plan" column (Column 8), Mr Raymond confirmed that he undertook these tasks well after the work in question had occurred, during the course of one of several audits. He went on to infer that he did this because R&D staff who worked on the project did not keep daily or weekly time records of their activities.

93. Initially Mr Raymond denied knowingly lying in his earlier evidence regarding the preparation of Tab 13. After he was referred to his earlier evidence, he agreed that this evidence suggested that he was the person who prepared the lion's share of the Tab 13 document, and was false. In relation to his evidence regarding the Volumes 2-4 materials, Mr Raymond agreed that none of the documents stated the amount of time spent on any particular R&D activities, and that one could ascertain the time spent on activities he undertook throughout the course of the 2001/2002 tax year which were unrelated to the Project. One could identify an activity from the documents which referred to other members of staff, however, not the amount of time spent on the activities.

Evidence of Mr Oke

94. Mr Oke represented the applicant which he referred to as a "so called naïve litigant". Although he had no formal legal training, he was articulate and obviously had presentation experience from his own dealings with the respondent in relation to the applicant's past taxation affairs. He testified that the applicant had "a very good working relationship with AusIndustry" and that "pro forma time sheets were prepared by [the applicant] in consultation with AusIndustry. When [the applicant] started to undertake R&D projects with relevance to the R&D Tax Offset, the same method was adopted, given that AusIndustry was involved and AusIndustry decides whether what is in the application form satisfies the definition of R&D". Mr Oke also testified that "the only

ATC 5735

body which determines if the company has engaged in activities which satisfy the definition of R&D is AusIndustry", and then that "the R&D tax offset is jointly administered by AusIndustry and the ATO". In my view, these two latter statements are not accurate.

95. In relation to the time sheets, at paragraph 33 of his witness statement (under the heading "Time Sheets"), Mr Oke stated that a record of time spent by each employee on the Project was recorded contemporaneously, "mainly by Richard Shaw or otherwise, and to a minor degree, by Lynette McKenzie, Neil Raymond, Phil Duke or myself in electronic format". Despite what he said in his witness statement, Mr Oke later said that the time sheet entries were recorded contemporaneously "mainly by Richard Shaw and myself without a shadow of a doubt". Mr Sallis submitted that the phrase "mainly by Richard Shaw or otherwise" was a vague description of the alleged time recording processes of the applicant. Mr Oke submitted that the full phrase in paragraph 33 was clear. I do not agree. To me, the words "or otherwise" suggest that the majority of the time recording was made by Mr Shaw and that the other staff members, including Mr Oke, attended to time recording to a minor degree. In cross examination, Mr Oke confirmed that he was aware of AusIndustry requirements to keep contemporaneous records including "diaries or such other records describing amounts of time spent and work performed each day by all research personnel (Transcript 7/2/12 at p 471.40-473.10). He said he was already aware of the AusIndustry requirements prior to the 2001/2002 tax year (transcript 7/2/12 at p 473.10). On the evidence, the applicant did not keep diaries or such other records of time spent and work performed each day by all research personnel.

96. Mr Oke was cross examined by Mr Sallis in relation to what was described as the different stories he had told regarding the manner in which the applicant kept records to substantiate its claim for R&D labour expenses. The first story related to a tax audit visit with Messrs Robinson and Olivari from the respondent on 21 November 2003. He had informed the respondent that salary expenditure was calculated by reference to time sheets, which were maintained "by person by week, including Simon. Used in calculation of salary and include job numbers". He argued that the work reference to job numbers was a reference to a separate document, namely the Work Performed Table. At that stage, he suggested that in addition to the electronic time sheet document, the so- called job numbers were contemporaneously recorded at the same time in the Work Performed Table. When referred to the tax audit interview with Messrs Robinson and Olivari on 14-15 July 2004, he informed the auditors that the applicant arrived at the days per week figure through recording the time employees spent at the end of each week by himself or Phillip Duke. When pressed as to how he managed to monitor the days worked on R&D for the 28 staff when the staff kept no diary, Mr Oke stated it was "mainly Phil" that recorded the times. When taken to the auditor's notes on 14-15 July 2004 where it was suggested that Mr Shaw had no involvement in the making of time entries in the data on pages 946 and 947 in Volume 3 of Exhibit R1, Mr Oke said:

"No, that is incorrect and what I'm saying is that these minutes taken by Mr Olivari have a bias put into them and are misleading because you focused on the name Phil, which has come out of the context of the Quicken wages package. So if we had a tape we could play it and listen to it, no doubt. So there was clearly a conversation about the Quicken wages package. A feature of Quicken wages package is that it is not in Sydney. Richard Shaw and Simon Oke could not use it. It was not on the server network. Only Lynette McKenzie and Phil Duke had access to it. Further, I note that Phil Duke has been nominated always as one of the people who has been involved in record keeping. At the Adelaide end he would have been the major person, [sic] the Adelaide end." [Transcript 7/2/12 at p 511.45 - 512.5]

97. Mr Oke was cross examined with respect to the Tab 13 Table. He said the data was obtained for the Table from his own knowledge, then from discussions with staff and then also from any relevant documents typically on his desk that day or week. He agreed the Table only cross-referenced the documents in Volumes 2-4

ATC 5736

and not activities in Volume 1, and was at pains to point out that he was not saying, and no one was ever saying, that the times in the Tab 13 Table recorded the amount of time taken to prepare the document by cross reference to Volumes 2-4.

98. In his witness statement and his evidence in chief, Mr Oke testified that when a purchase order was placed for R&D expenditure an R&D stamp would be affixed to it, before being filed by month in a designated R&D filing cabinet. He initially said that the R&D stamp was placed in Sydney and the purchase orders were placed in the filing cabinet in Sydney (Transcript 12/12/11, Pages 417.20 - 418.8). In cross examination, he was referred to purchase orders during the course of the AusIndustry audit (Exhibit R3, Volume 3 at p 693-720), none of which had the R&D expense stamp on them. Mr Sallis submitted that Mr Oke's evidence in relation to the contemporaneous affixing of the R&D expense stamp to purchase orders ought to be rejected. I accept this submission. The AusIndustry materials demonstrate that the applicant had no such system in place both in November 2003 and during the 2001/2002 tax year. A receipt for the purchase of the stamp was not produced and the evidence that Ms McKenzie both purchased the stamp and affixed it to the R&D purchase orders in the 2001/2002 tax year was denied by her.

Respondent's Witnesses

99. I have read the witness statements and oral evidence of the respondent's witnesses. I have also read the applicant's closing submissions relating to that evidence. For the most part, I find the applicant's submissions to be of no real substance, are irrelevant or are at times incorrect. The evidence in these proceedings that is important, in my view, is that of Mr Raymond and Mr Oke.

100. In the case of Ms McKenzie, she was nervous in giving her oral evidence and at times became upset. She made mistakes, but they were not in my view significant. However, importantly, she did say that, to her knowledge, the applicant did not maintain any time sheets recording the R&D activities of employees. Mr Oke, for the applicant, submitted that Ms McKenzie was concerned and agitated that the matter before the Tribunal might "rub off on her", affect her financially and that this biased her testimony. These comments are inappropriate and I do not accept them. Other comments made by Mr Oke about Ms McKenzie in the applicant's closing submissions were largely irrelevant.

101. In the case of Mr Hodgson, it is clear that he had a good recollection of the applicant's business operations in the 2001/2002 tax year. Based on that recollection, he said his involvement in R&D activities was "very little". However, it is apparent that he was involved in the applicant's process R&D. He said his input into R&D had been grossly exaggerated in the contemporaneous time sheet document appearing at page 946 of Volume 3 of Exhibit R1. He said he never kept time sheets recording the work he did, nor did he discuss with anyone at the applicant, on a daily or weekly basis, any of the activities in which he was involved that related to R&D. I am satisfied that he was truthful in giving his evidence.

102. In Mr Solly's case, his evidence was both credible and impressive. He said he did not maintain time sheets recording the activities that he undertook during any day or week during the course of his employment with the applicant. He also said that he did not report to anyone at any time regarding the activities that he undertook, on either a daily or weekly basis. He made appropriate concessions in relation to his evidence. He was open to and agreed with propositions put to him by Mr Oke, during the course of his cross examination, in the areas he was unsure of. I do not accept that his evidence was biased, and Mr Oke's comments about the preparation of his witness statement are irrelevant.

103. With Mr Jaekel, he gave evidence that, to the best of his knowledge, there was no formal system of recording time on any given activity or project maintained by himself or anyone else at the applicant. He expressed the view that the time sheets appearing at pages 946 and 947 in Volume 3 of Exhibit R1, with the exception of times relating to Mr Raymond, were either exaggerated or grossly exaggerated in so far as they suggested the individuals identified by the documents spent time involved with research and development activities. In

ATC 5737

relation to the icons appearing in the logs in Tab 5 and Tab 7 of Volume 1 of Exhibit A1, he said the icons did not tell him anything about the stage a particular project or product had reached without looking inside the files that related to the icons.

104. In the case of Mr Graney, his evidence was that the stock matrix directly linked production orders to customer orders. By reference to weekly stock matrices for a given year and customer orders of the applicant, it was possible to identify with reasonable accuracy whether purchase orders were used to meet the applicant's ordinary commercial requirements. I accept his evidence in this regard. Further, he also said that he did not report to Mr Oke the amount of time he spent on research and development activities, nor did he talk to anyone else regarding time spent on research and development activities.

105. All, if not most, of the respondent's witnesses were asked by Mr Oke to advance their own definition of what constituted research and development. In my view, the meaning or wording of such a definition in the minds of these witnesses had little or no importance to the issue of the claim for the R&D tax offset that was before me.

Stock Matrix

106. Much evidence has been given in these proceedings in relation to the stock matrix. Mr Oke's evidence on the subject has been inconsistent. Initially, he said he did not believe that the applicant had anything called a stock matrix. Later, he said he "created it" and designed it to be a "purely production operational document". In his interview with the respondent's auditors on 15 July 2004, he said he had a large prepared form with all the products and forms listed and once a week went around doing a physical stock count. The auditors asked for copies of the stock matrices for June/July 01 and 02 which Mr Oke said he could provide, but he did not. He later said that there was clearly a document which he knew to exist called a "cleaner matrix". That document had nothing to do with R&D.

107. Despite Mr Oke's denial of the existence of the stock matrix, it is clear that the matrix (Exhibit R7) was a critical document relating to the applicant's ordinary production activities in the 2001/2002 tax year. Mr Hodgson pointed out how the matrix could be used to identify the relationship between purchase orders used for ordinary production purposes and those used for R&D. He testified that the stock matrix was the key to ascertaining whether a purchase order related to production or to R&D. As its existence was acknowledged by Mr Raymond and virtually all of the respondents witnesses, it is difficult for me to understand why a copy (or copies) of the stock matrix could not be provided during the course of the tax audit, and it was requested by the respondent in writing on several occasions.

108. In its closing submissions, the respondent has accepted that the stock matrix was used for production. In my view, there is evidence to support the proposition that there was a stock matrix that may not have been used for R&D activities, but in the applicant's commercial or production activities.

Settlement Deed

109. The applicant seeks to rely upon the Settlement Deed between itself and the respondent dated 14 May 2003 and argues that the respondent failed to honour its agreement, the subject of the Deed.

110. Clause 3 of the Deed reads:

"3. RELEASE

The DCT agrees that as and with effect from the Execution Date:

  • 3.1 the DCT shall not have any claim or recourse against Ozone in respect of the Claims, nor shall the DCT be entitled to any compensation from Ozone in respect of the Claims; and
  • 3.2 the DCT hereby forever and absolutely releases and discharges Ozone from any and all actions, claims, proceedings, demands, costs, expenses, losses or damages which it may have now or in the future against Ozone arising out of or in connection with the Claims; and
  • 3.3 this is conditional upon satisfactory assessment of Ozone's 2002 tax return, such assessment which will be processed within 28 days of the Execution Date."

111. The word "Claims" is defined in clause 1.2 of the Deed to mean all claims of the respondent in respect of the taxation returns of

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the applicant for the period up to 30 June 2002, and in respect of the BAS provisions up to and including June 2002 and including general interest charges calculated to 14 May 2003. The applicant's obligations are set out in clause 2.2 of the Deed. They included lodging and paying the April 2003 IAS by 21 May 2003, lodging any BAS or IAS outstanding at the Execution Date by 15 June 2003, lodging and paying all BAS and IAS for May 2003 and June 2003 on time, and lodging its 2002/2003 taxation return by 31 July 2003.

112. From the materials contained in Exhibit R1 it is clear that the applicant did not comply with its IAS and BAS lodgement and payment obligations under clause 2.2.4 of the Deed. Moreover, the Deed was expressly stated to be conditional upon "satisfactory assessment of Ozone's 2002 tax return" (clause 3.3). It is clear that there was no such satisfactory assessment. The respondent did not have the materials required to undertake a satisfactory assessment because the respondent contended he was still to receive materials considered satisfactory for the purposes of assessing the R&D tax offset claim, the subject of the 2001/2002 taxation return.

113. The respondent then contended that, even if the applicant had complied with the terms of the Deed and the construction of the Deed, as contended for by the applicant was correct, as a matter of law the revenue could not be estopped from exercising and fulfilling its statutory audit obligations under the ITAA 1936. I agree with this contention.

114. There are numerous decisions which address and uphold the principle at public law that government authorities cannot be estopped at common law from exercising statutory powers and functions and that any agreement to the contrary is void. The general principal can be stated as follows:

"… estoppel by representation cannot prevent the performance of a statutory duty or the exercise of a statutory discretion" (see
Brickworks Ltd v Council of the Shire of Warringah (1963) 108 CLR 568 at 577 per Windeyer J.)

115. In
Attorney-General (NSW) v Quin (1990) 170 CLR 1 at pages 17-18, Mason CJ made this useful statement of the law:

"… The Executive cannot by representation or promise disable itself from, or hinder itself in, performing a statutory duty or exercising a statutory discretion to be performed or exercised in the public interest, by binding itself not to perform the duty or exercise the discretion in a particular way in advance of the actual performance of the duty or exercise of the power…

…

What I have just said does not deny the availability of estoppel against the Executive, arising from conduct amounting to a representation, when holding the Executive to its representation does not significantly hinder the exercise of the relevant discretion in the public interest. And, as the public interest necessarily comprehends an element of justice to the individual, one cannot exclude the possibility that the courts might in some situations grant relief on the basis that a refusal to hold the Executive to a representation by means of estoppel will occasion greater harm to the public interest by causing grave injustice to the individual who acted on the representation than any detriment to that interest that will arise from holding the Executive to its representation and thus narrowing the exercise of the discretion …"

116. In its submission, the applicant has argued that the word "assessment" as used in the Deed refers to a "deemed assessment" within the meaning given to that expression under the ITAA 1936. In doing so, the applicant refers to the legislative provisions with respect to "deemed assessments" (under s 166A(a)) and "ordinary assessments" (under s 170(2)(b)). The applicant then concludes that, as it is clear that the Deed did not intend to refer to an "ordinary assessment", clause 3.3 of the Deed must be referring to a "deemed assessment". In my view, the applicant's argument is fallacious. The word "assessment" was defined in s 6(1) of the ITAA 1936 at the relevant time as meaning (unless the contrary appears) "the ascertainment of the amount of taxable income … and of the tax payable on that taxable income …". The applicant's

ATC 5739

2001/2002 taxation return disclosed that there was no taxable income and no tax payable by the entity. As is clear from the decision in
Commissioner of Taxation v BCD Technologies Pty Ltd (2005) 144 FCR 457, a return which on its face represented a deemed assessment, but which did not disclose an amount of tax to be paid by the taxpayer, could not represent at the relevant time an "assessment". Accordingly, the suggested interpretation of the reference to the word "assessment" as being a reference to a "deemed assessment" is incorrect in relation to the 2001/2002 tax year. So too is the suggestion implicit in paragraph 3 of the applicant's submission that the deemed assessment occurred at a date after the date of signing of the Deed (see paragraph 3d of the applicant's submission). Were s 166A to be relevant, it would operate such that the deemed assessment occurred on the day that the 2001/2002 taxation return was furnished to the respondent. The section, however, is not relevant to the R&D tax offset claimed by the applicant.

117. It is clear that the notice of assessment provisions of the ITAA 1936 are materially different from those under which R&D tax offset notices are issued by the respondent. Under s 73IA, the respondent may give a written notice specifying the amount of a tax offset allowable to a company under s 73I. A notice under s 73IA does not arise from scrutiny by the respondent's officers of the items making up a company's assessable income and allowable deductions. Rather, the contemplated notice refers only to the ascertainment of the amount of R&D tax offset allowable to the company in question. Moreover, notices under s 73IA have very different legal form and legal status to notices of assessment in Part IV of the ITAA 1936. For example, the s 73IA notice contemplates a claim by a taxpayer for an amount of money from the Commonwealth, in circumstances where the refundable tax offset provisions apply. Deemed assessments which led at the relevant time to notices of assessment related to a claim for an amount of money by the respondent on behalf the Commonwealth. Further, there are no statutory provisions which suggest that a s 73IA notice might fall within the description of a "deemed assessment" or an "ordinary assessment" or an "amended assessment" or a "default assessment".

118. A further reason for rejecting the interpretation suggested by the applicant is that applying a statutory definition to determine whether the words of the Deed intend to refer to a "deemed assessment" or to an "ordinary assessment" gives rise to artificial and unintended results that are neither supported by the text of the Deed, nor by the extrinsic circumstances which led to the entry into the Deed. It is clear that what was intended by clause 3.3 of the Deed was that the applicant's 2001/2002 taxation return would be processed by the respondent administratively within 28 days of the Deed's execution date. The Deed neither allowed for, nor contemplated, any audit activities by the respondent to establish the validity of the R&D tax offset claim. The applicant does not appear to dispute this in paragraph 7 of its submission. In that paragraph the applicant writes: "Neither party envisaged or expected or discussed the likelihood of any future audit."

119. In any event, as the respondent has submitted (which submission I accept), it would be an absurd interpretation to construe clause 3.3 of the Deed as meaning that an audit-type review was to be completed and the applicant's 2001/2002 taxation return processed within 28 days of its execution. The extrinsic evidence indicates the 2001/2002 return had only been lodged with the respondent the day before the signing of the Deed and, as was known to the applicant, neither at the time of signing the Deed, nor within the 28 day period thereafter, did the respondent have any evidentiary materials to enable it to perform any meaningful review or audit of the applicant's claim for the R&D offset. An interpretation of a clause which gives rise to absurdity is not to be preferred over a more sensible and reasonable interpretation.

120. An apposite statement of principle may be found in
DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 429 in the joint judgment of Stephen, Mason and Jacobs JJ, which reads:

"A court may admit evidence of surrounding circumstances in the form of 'mutually known facts' to identify the

ATC 5740

meaning of a descriptive term' and it may admit evidence of the 'genesis' and objectively the 'aim' of a transaction to show that the attribution of a strict legal meaning would 'make the transaction futile' …".

121. As the respondent has suggested, in the present case the extrinsic evidence of the "genesis" and "aim" of the Deed is apparent. It appears the applicant had a sizable tax debt, which as at 31 January 2003, led to the respondent issuing a Creditors Statutory Demand for $443,162.51. The compromise proposed that such indebtedness be discharged in part by the payment of $65,986.16 by the applicant by 15 May 2003, and in part through the application of an R&D tax offset of $388,601, which the applicant represented to the respondent it was entitled to under the relevant self-assessment provisions. There was no express exclusion of the respondent's power to audit the applicant's 2001/2002 R&D tax offset claim. It appears that the parties simply did not turn their minds to a review or audit at the time. In the circumstances, the interpretation urged by the applicant seeks to extend the operation of clause 3 to obtain a benefit well beyond that which was ever intended or agreed to by the parties.

122. In its submission, the applicant asserts that the general words of release within the Deed ought to be construed in such a way as to release the applicant from all claims by the respondent relevantly in respect of the period up to 30 June 2002, irrespective of whether or not the applicant was entitled to the R&D tax offset amount it represented it was entitled to in its 2001/2002 taxation return. Such a contention overlooks the fundamental consideration that the dispute to be resolved between the parties by entering into the Deed had nothing to do with the claim by the applicant that it was entitled to the R&D tax offset, the subject of the 2001/2002 return. It seems clear from the evidence that, at the time the parties entered into the Deed, the respondent was seeking to wind-up the applicant because of its unpaid taxation liabilities. As at January 2003, insofar as they were then known to the respondent, the amount due and payable by the applicant (as I have said) was $443,162.51. By its submission, the applicant has sought to extend the meaning of the general words of release in the Deed to cover subject-matter that was, on any reasonable view, not within the contemplation of the parties at the time. The parties simply were not considering whether or not the $388,601 self-assessed tax offset amount was an amount that the applicant was entitled to.

123. In the case of
Grant v John Grant & Sons Pty Ltd [1954] 91 CLR 112, the High Court was called upon to consider the ability of a party to rely upon general words of a release as a means of escaping fulfilment of obligations falling outside the true purpose of the transaction, the subject of a settlement deed. The High Court found that the general words in a release are to be limited always to that thing or those things which were specially in the contemplation of the parties at the time when the release was given. In the present case, the entitlement of the applicant to the claimed R&D tax offset was simply not a matter that was contemplated by the parties. Nor was any exclusion of the respondent's power to carry out an audit and to subsequently disallow the claimed offset. As there was simply no dispute between the parties at the time the Deed was executed, regarding either the extent of the applicant's outstanding taxation liabilities, or whether the applicant was entitled to the R&D tax offset claimed, the respondent submitted (which further submission I accept) that in accordance with the reasoning in Grant it would be unconscionable and improper to construe the Deed as releasing the applicant in the manner and to the extent that has been submitted for the applicant.

124. As I have noted above, the winding-up proceedings and the payment of the applicant's outstanding taxation liabilities were agreed to be resolved by the applicant paying the sum of $65,986, and the respondent applying the $388,601 R&D tax offset amount which the applicant claimed it was entitled to in its 2001/2002 taxation return. Through subsequent review and audit processes, the respondent ascertained that the applicant was not entitled to the $388,601 tax offset. If the respondent is correct and it was in fact the case that the applicant was not entitled to the $388,601 R&D tax offset claimed under self-assessment, the respondent has submitted that there has been a partial failure of consideration relating to the

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bulk of the consideration required of the applicant to secure the benefit of the release provisions under the Deed. I agree with this further submission.

125. Absent an actual entitlement to the sum of $388,601, it is difficult to imagine how it could be that the Deed would be able to bind the respondent. As the respondent suggested, the position is analogous to delivery of a cheque to the respondent in the sum of $388,601, which cheque was incapable of being cleared as the funds promised by the applicant were not available in the applicant's account. At best, the applicant might be entitled to a refund, or perhaps more likely a credit of the amount of $65,986 against its indebtedness to the respondent for the sum of $443,162.51. The applicant in effect seeks specific performance of the general provisions of the release contained in the Deed in circumstances where the applicant has, on the respondent's submission, failed to perform its obligations under the Deed, both as a consequence of the $388,601 R&D tax offset credit not being lawfully available to it, as well as by virtue of it having failed to comply with its other lodgement and payment obligations under the Deed. This appears evident from a reading of page 134 of Volume 1 of Exhibit R1.

Financial Statements

126. The respondent referred to a comparison of financial statements concerning the affairs of the applicant that were received by the respondent and AusIndustry. Mr Oke explained that the respondent's figures were taxation return figures, whereas the AusIndustry figures were draft management accounts. The respondent submitted that the differences in the figures were most likely explicable on the basis of dishonest accounting by the applicant at the direction of Mr Oke. I do not accept this submission and agree with the explanation that was given by Mr Oke.

Prototypes and Feedstock Expenditure

127. The issues relating to "prototypes" and "feedstock expenditure" have been raised by the parties in this case but, in my opinion, they are not as important as the "record keeping" and "substantiation" issues under s 262A of the ITAA 1936. However, for completeness, I will address them briefly in the following paragraphs.

Prototypes

128. The applicant led evidence that the Project was to research and develop three beverage purifier devices. Market research undertaken by the applicant prior to the Project revealed that there was a high demand for the devices within the food and beverage industry. The items the subject of the Project were invariably described by the applicant as "prototypes" throughout its evidence, and photographs of various prototypes were provided at pages 19-61 of Volume 1 of Exhibit A1. In cross examination, Mr Raymond admitted that the photographs were not taken contemporaneously. On the evidence, many items referred to as "prototypes" by the applicant were experimental items developed as the object of R&D activities, used in the R&D operations for testing, and were not destroyed, rendered useless or otherwise consumed in those operations. Thus, arguably, they were s 73BA depreciating assets and expenditure on their construction was "excluded plant expenditure". The costs associated with the design and construction of these items should have formed a part of the cost bases of those assets, and their decline in value should have been claimed under s 73BA, and not as part of "research and development expenditure" under s 73B(14).

129. The applicant has failed to substantiate the extent to which its disputed expenditure related to the construction and use of various prototypes. Thus, the costs associated with the design and construction of the prototypes should have been accounted for as the cost base of depreciating assets, and not as "research and development expenditure" under s 73B(14).

130. The applicant argues that the prototypes made during the 2001/2002 tax year were binned/dumped/destroyed, after systematic experimentation and testing concluded because they were consumed by that testing or they were failures. A few prototypes were kept in a museum for future reference. These prototypes have zero market value as they have no sale value and salvage value. Therefore, they are neither feedstock expenditure nor plant assets, and are not subject to depreciation. The

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respondent submitted that there was no evidential basis for the majority of the applicant's submissions. I tend to agree with this submission. Moreover, the point in issue concerned a failure to properly record and substantiate salient details concerning the construction of various prototypes. Mere allegations of zero market value of these prototypes cannot overcome the operation of the definition of "research and development expenditure", when it precludes "excluded plant expenditure", or overcome the operation of s 73BA. The records of the applicant do not allow a proper determination of the extent to which its expenditure qualifies as the basis of deductions under either s 73B or 73BA. The photographic evidence is incapable of proving how many prototypes of the type in question the applicant had on hand at 30 June 2002, just as the rest of the applicant's material is incapable of showing how many such prototypes may have been built, and either scrapped or stopped being used.

Feedstock Expenditure

131. In relation to the feedstock expenditure issue, there is a clear conflict in the evidence of the applicant's witnesses and those of the respondent concerning whether or not any prototypes were sold, and hence what their market value may have been. The respondent does not seek to positively quantify any amount of "feedstock expenditure", "feedstock input" or "feedstock output". The available records in evidence do not permit any such quantification. The respondent's primary submission is that the material before the Tribunal does not allow for a proper determination of the extent to which that expenditure might form the basis of deductions under s 73B. I accept that submission.

Record Keeping and Substantiation

132. In its statement of facts, issues and contentions the respondent flagged to the applicant, prior to the commencement of these proceedings, that it contended the applicant did not maintain contemporaneous business records relating to its eligible R&D activities. Nor did the applicant maintain contemporaneous business and accounting records which substantiated, either in whole or in part, its claim for R&D expenditure. Moreover, the respondent has contended that no contemporaneous records were maintained by the applicant showing the amount of time worked on eligible R&D activities or on the cost of materials expended during the course of any such activities. In its amended statement of facts, issues and contentions the applicant has asserted that the type of record and detail it recorded has been based on AusIndustry Guidelines for R&D grants and AusIndustry methodologies. These were said to have been jointly developed by AusIndustry and the applicant and governed the types of records that were prepared and used by the applicant during the 2001/2002 tax year. However, in relation to the applicant's projects, there is evidence that AusIndustry required records to be maintained to describe the amount of time spent and work performed each day by all research personnel, and adequate records maintained to substantiate claims for all costs incurred. On the evidence before me, it is apparent that these records were not maintained.

133. It is also clear from paragraph 23 of its statement of facts, issues and contentions that the respondent considered the records produced by the applicant did not substantiate the R&D tax offset claim for the 2001/2002 tax year. Nor did the records substantiate the applicant's R&D expenditure. The two largest components of the applicant's R&D tax offset claim were for the salaries of employees engaged on R&D activities, and for materials said by the applicant to have been purchased for the construction of prototypes and samples by R&D employees. In relation to the labour component of the R&D tax offset claim, the applicant produced a paper copy of an electronic time sheet (Tab 10 of Volume 1 of Exhibit A1), which was said to have been based on and derived from the information contained on pages 946 and 947 of Volume 3 of Exhibit R1. The applicant also referred to the R&D Work Performed Table on pages 138-169 of Tab 13 Volume 1 of Exhibit A1, to be read with a further paper copy of an electronic record described as the "Project Timeline", which appears behind Tab 9 in Volume 1 of Exhibit A1. In relation to the claim for materials said to have been used by the applicant in its R&D activities, a number of purchase orders were produced, which were said to be used in R&D

ATC 5743

in the 2001/2002 tax year, on which an R&D expense stamp was imprinted. However, as I have said in paragraph 98 above, I do not accept that the applicant's contemporaneous affixing of the R&D expense stamp to purchase orders for R&D expenditure took place during the 2001/2002 tax year.

134. The ITAA 1936 makes it clear in s 262A(1) that a person carrying on a business must keep records that record and explain all transactions and other acts engaged in by the person that are relevant for the purposes of the Act. Under s 262A(2), the records to be kept include:

135. It is clear that eligible companies intending to claim the R&D tax offset must maintain adequate contemporaneous records which substantiate the carrying on of claimed R&D activities and the incurring of expenditure in relation to those activities. Moreover, as the R&D tax offset claim involves an election or choice, the records must include sufficient particulars which show the basis on which the election or choice has been made. As substantiation of expenditure is involved, the records should show what time has been spent on the R&D activities in respect of which the tax offset is claimed. It follows that the applicant's ordinary business records should be sufficient for a relevant independent third party (such as the Tribunal) to be able to readily verify the amount of the expenditure on R&D activities and the relationship of the expenditure to those activities. The applicant should also maintain records or documentation to support the apportionment of expenditure between R&D activities and other business activities, such as time sheets or time cards, which are capable of reasonably straight-forward analysis.

136. Mr Oke submitted that the contemporaneous records of the applicant were of a kind which satisfied s 262A of the ITAA 1936. Although the contemporaneous records may have purported to record and explain all the transactions engaged in by the applicant, in my view, the records that were before the Tribunal, insofar as they provided particulars relating to the applicant's R&D tax offset claim in the 2001/2002 tax year, were not of a kind which satisfied s 262A. The manner in which the applicant's records were presented in Volumes 1 to 7 of Exhibit A1, and then analysed by Mr Raymond and Mr Oke in their evidence, made the Tribunal's requirement to have a clear and complete (but confident) understanding of the records almost impossible. I will give examples in the following paragraphs of what I mean.

137. When Mr Sallis referred to the embedded icons in the logs in Tab 7 of Volume 1 of Exhibit A1, he suggested to Mr Raymond that it was highly unrealistic for the Tribunal to have to go through the embedded documents as they appeared in the logs, as opposed to the volumes of materials that had been produced by the applicant. In response, Mr Raymond said:

"…

My response to your suggestion is this: all of the data that was prepared by Ozone Manufacturing was prepared on the basis of an audit. It was not prepared, necessarily, for a - an AAT tribunal. It was also prepared under the understanding that there was an agreement, a signed agreement, between the ATO and Ozone Manufacturing that this matter would not be proceeding. I think it was dated some time in 2003. So I apologise to the tribunal if the data is not clear enough, but I - I stand by what I just said.

…" [Transcript 23/11/11, Page 216.35]

138. Later, Mr Sallis questioned Mr Oke about a document under the hand of Mr Odlum in the Volumes 2 to 7 materials in Exhibit A1. When Mr Sallis asked whether it would be possible for him to quantify the number of hours spent by Mr Odlum in Volumes 2 to 7, Mr Oke said:

ATC 5744

"There would be significant ability for you to estimate. There would be a reduced ability for you to do so precisely…".

When Mr Sallis asked whether the Tribunal could reconcile the number of hours recorded with respect to Mr Odlum off the time sheet, Mr Oke said:

"Speaking generally, it would be difficult for the tribunal to do that with precision for many entries. …"

Then, when Mr Sallis asked whether it would be a feasible exercise for the Tribunal to try and cross-reference the documents referred to in the R&D log (behind Tab 5 in Volume 1) with the materials in Volumes 2 to 4 in Exhibit A1, Mr Oke said:

"It would take a long time, it would be feasible, and it could be done. … it would be laborious and would take a long period of time, but it could be done."

When Mr Sallis suggested that it would not be practical for the Tribunal to seek to engage upon the exercise, Mr Oke said:

"If the tribunal had a large amount of time, it would be practical. If the tribunal was - had little time, it would not."

139. The responses in paragraphs 137 and 138 above by the applicant's witnesses were indicative of the attitude Mr Raymond and Mr Oke displayed when the Tribunal was attempting to analyse and understand the records of the applicant. Also, there were often occasions when questions were asked of Mr Raymond and Mr Oke about the records of the applicant, and the response by them was (or was like):

"…the answer is in the T Documents and you would know the answer. But I can't be expected to know …" or

"…I have absolutely no idea but I am sure that the answer to that is in these T documents…"

140. Nearing the end of the hearing proper, Mr Sallis suggested to Mr Oke that the reason why the applicant's documents were presented to the Tribunal in the way they were presented was to make it difficult to follow what the documents actually did substantiate. He went on to question whether the reason why the documents were in the way they appeared in Volumes 1 to 7 of Exhibit A1 was to obscure the ability of the Tribunal to test the authenticity of the records that had been proffered to substantiate the applicant's R&D tax offset claim. (Although I do not accept that there was any deliberate action taken for or on behalf of the applicant in the presentation of its documents, the Tribunal found considerable difficulty in being satisfied that the records were able to properly substantiate the applicant's tax offset claim.) In response to Mr Sallis, Mr Oke proposed "paginating" the materials in Volumes 2 to 4 of Exhibit A1. However, as all the evidence had been given and the hearing was moving to closing submissions, I was not willing to accept new paginated materials in the T documents and to re-hear the evidence that had already been given.

Burden of Proof

141. It seems clear, from the terms of s 73I, that the process of assessing the amount of the R&D tax offset that eligible companies are entitled to depends on establishing the extent to which, but for its choice under 73I, it would be entitled to deduct certain amounts under, relevantly, s 73B, 73BA and 73Y of the ITAA 1936.

142. Under s 73IA of the ITAA 1936, the respondent may give an eligible company a written notice specifying the amount of a tax offset allowable to the company under s 73I. If the company is dissatisfied with the notice, it may object in the manner set out in Part IVC of the TAA, which deals with taxation objections, reviews and appeals. The relevant provisions of Part IVC that presently apply are contained in s 14ZZK(b) of the TAA. These provisions relate to burden of proof. In proceedings before the Tribunal, neither party carries the burden of proof. However, under s 14ZZK(b)(iii), when the Tribunal reviews an objection decision the taxpayer applying for review has the burden of proving that the decision should not have been made or should have been made differently. Where notice is given by the respondent under s 73IA, in seeking to show that the notice should not have been made, or should have been make differently, the taxpayer (in this case, the applicant) must put its case before the Tribunal

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and produce records and other evidence in support of the case.

143. Mr Sallis has suggested that there is no decision of a court or tribunal addressing the nature of the onus under s 14ZZK(b)(iii) in relation to a notice issued under s 73IA. I have also been unable to find such a decision. He has submitted that, although not directly on point, the authorities (see
Commissioner of Taxation v Munro (1997) 97 ATC 5041 per Lockhart J at 5049-5051, Bell
IXL Investments Ltd v Life Therapeutics Ltd [2008] FCA 1457 per Middleton J at paragraphs 21, 22 & 37 and
Uratoriu v Federal Commissioner of Taxation [2010] FCA 1157 per McKerracher J at paragraph 27) on the nature of the onus under 14ZZK(b)(i), concerning proving that an assessment is "excessive", are capable of providing guidance about the nature of the onus borne by the applicant in relation to the issue of the notice under s 73IA of the ITAA 1936. I agree with this submission.

144. I note that, in
Sharkey v FCofT [2007] AATA 1435, Senior Member Taylor SC considered the nature of the onus borne by the taxpayer there under s14ZZK(b)(iii) in relation to a review of an objection decision to do with a request to remit certain penalties. At paragraph [22] of his reasons, Senior Member Taylor said:

"Because the Tribunal's review function is not limited, or at least not necessarily limited, to consideration of the matters dealt with by the Commissioner an applicant for review does not have to show that the actual decision made by the Commissioner was 'wrong' - in the sense that would apply to the review of a curial discretionary decision: see
Dinsdale v R (2000) 202 CLR 321; 175 ALR 315; [2000] HCA 54; BC200006053 at [3];
Gronow v Gronow (1979) 144 CLR 513; 29 ALR 129;
House v R (1936) 55 CLR 499 at 504-5. Indeed, it may be neither necessary nor sufficient for an applicant to establish the Commissioner's 'error' in that sense. This is because the Applicant's 'burden of proving' relates to the result of the decision rather than to the reasons or procedure that underlie it: see
Commissioner of Taxation v Dalco (1989-1990) 168 CLR 614. What subsection 14ZZK(b) of the Taxation Administration Act 1953 requires is that an applicant has the burden of satisfying the Tribunal that the original decision - in the sense of the result of that decision - is not the appropriate outcome. That satisfaction may be derived from significant new or additional material that was not before the Commissioner. It may also be derived from a re-evaluation of the appropriateness of the result of the original decision, or of a different evaluation of elements of the reasoning by which the impugned result had been achieved. However derived, the satisfaction required is that the Commissioner's decision 'should' have been different and in that sense is not an appropriate result of the exercise of the statutory power or discretion. The language of subsection 14ZZK(b) of the Taxation Administration Act 1953 suggests that the required satisfaction will not be attained, consistent with the apparent purpose of the 'burden of proving' requirement, by an assessment that some other result of the exercise of the discretionary decision is merely marginally preferable in all the circumstances. But the practical reality in most cases is more likely to be that proper consideration of all of the material will lead the Tribunal to a state of comfortable satisfaction that a particular outcome is either 'correct or preferable' in all the circumstances. Comfortable satisfaction that a different result is 'preferable' will justify the Tribunal in regarding an applicant for review as having discharged the burden imposed by subsection 14ZZK(b) of the Taxation Administration Act 1953 - of showing that the taxation decision 'should not have been made or should have been made differently'. "

145. At several times during the course of the hearing, Mr Oke said or inferred that the respondent's decision to issue the notice under s 73IA should not have been made or should have been made differently. In the final analysis, he was unable to provide any new or additional material which showed that the respondent's decision was incorrect or should have been made differently. In the absence of such material, the Tribunal is not satisfied that the

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decision under review is not the correct and preferable outcome.

CONCLUSION

146. For the reasons that are outlined above, the records provided by the applicant are insufficient to substantiate the activities and the expenditure relating to or supporting the R&D tax offset claim. The records do not establish the nexus between the expenditure and the activities, such that it can be said that the expenditure was incurred directly in respect of the R&D activities carried out by the applicant during the 2001/2002 tax year. It follows that the applicant is not entitled to the R&D tax offset for the 2001/2002 tax offset year.

DECISION

147. The objection decision under review is affirmed.

 

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