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Export Market Development Grants Bill 1997



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D E P A R T M E N T O F T H E P A R L I A M E N T A R Y L I B R A R Y

Information and Research Services

Export Market Development Grants Bill 1997

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

Bills Digest

No's. 118-119 1996-97

ISBN 1323-9031

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Information and Research Services

Export Market Development Grants Bill 1997

Lee Jones Law and Bills Digest Group 18 March 1997

Bills Digest No. 118 1996-97

Contents

Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Proposed Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Main Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Part 1 - Preliminary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Part 2 - Entitlement to Grant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Part 3 - Persons Eligible for a Grant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Part 4 - Eligible Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Part 5 - Eligible Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Part 6 - Amount of Grant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Provisional Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Capping Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Part 7 - Application for, and Payment of Grant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Part 8 - Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Concluding Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Export Market Development Grants Bill 1997

Date Introduced: 27 February 1997

House: House of Representatives

Portfolio: Trade

Commencement: The Act commences on 1 July 1997

Purpose

The purpose of this bill is to:

• place a cap on total grants paid under the Export Market Development Grants Scheme (EMDG Scheme)

• make a number of changes to the criteria for eligibility for a grant and the determination of the amount of the grant (the latter being a consequence of the funding cap)

• simplify the legislation.

Background

Introduction

The EMDG Scheme was established in 1974 by the Export Market Development Grants Act 1974 (Act). The scheme is administered by the Australian Trade Commission (Austrade) and provides a financial incentive in the form of a taxable grant which represents a partial reimbursement of promotional expenditure incurred in pursuit of exports. Grants are based primarily on expenditure incurred by Australian persons or companies seeking to create or expand exports of their products in overseas markets.

2 Export Market Development Grants Bill 1997

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

An entitlement to a grant arises where the applicant:

• has incurred at least $30 000 of eligible revenue (reduced to $20 000 under this Bill)

• has export revenue of less than $25 million (this limit remains the same under this Bill), and

• is not the grantee in respect of 8 or more previous grants.

A grant is calculated at 50% of eligible expenditure after the first $15 000. Applicants who have received at least 2 prior grants are subject to a performance test which is assessed against costs such as travel expenses, special promotional literature and overseas representation. Grants are limited to $200 000 for individuals and $500 000 for approved trading houses.

The significant statistics in respect of the scheme are set out below1.

1992-93 1993-94 1994-95 1995-96

Claimants 2,473 3,277 3,497 3,712

Total of Grants

$181 million

$195 million

$197.6 million

$202.4 million

Exports generated by claimants

$3.74 billion (approx)

$5.2 billion

$5.1 billion

$5.7 billion

Ratio of Exports to Grants

21:1

27:1

26:1

28:1

In 1994, Austrade conducted an internal evaluation of the EMDG Scheme. Key findings and recommendations of the evaluation included:

• the EMDG Scheme is achieving its objective of encouraging firms to seek out and develop export markets

• revenues from taxes on grant receipts and profits on additional exports were estimated to return 42% of the cost of the scheme to the Commonwealth

• most of the growth in the EMDG Scheme has come from the services sector

Export Market Development Grants Bill 1997 3

Warning:

This Digest was prepared for debate.It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

• the minimum level of qualifying expenditure, the grant rate, number of grants and performance test were largely appropriate

• the number of firms claiming grants and then dropping out of the EMDG Scheme was not ideal

• the EMDG Scheme should be extended to all claimants in the tourism sector

• the EMDG Scheme should be extended for a further 5 years2.

Proposed Changes

The Bill proposes to alter the scheme as follows:

• A funding cap of $150 million will be placed on the scheme (although this is not contained in the legislation but was announced in the Budget). That amount includes costs of administering the scheme which the Bill caps at 5%, i.e. $7.5 million.

• The funding cap is managed by paying grants in full where the amount of the grant (i.e. 50% of eligible expenditure less $7 500) does not exceed an amount determined by the Minister (called the initial payment ceiling amount). Where the amount of the grant exceeds that amount, 2 consequence flow:

− the excess is reduced by applying a payout factor, and

− an advance is made on account of the grant, to the extent of the initial payment ceiling amount, and the balance (i.e. the reduced excess) is paid after a balance distribution date (to be determined by the Minister).

• an additional eligibility criterion is imposed, namely that the applicant's income must not be more than $50 million.

• the number of types of activities in respect of which expenses are claimable has been reduced. The following expenses are no longer claimable:

− expenses for preparation of tenders and quotations

− expenses for packaging and labelling eligible goods

− expenses for educational courses on international business development and foreign language training

− expenses for foreign registration of eligible industrial property rights

− expenses for insurance to protect eligible industrial property rights

4 Export Market Development Grants Bill 1997

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

− air fares in respect of marketing visits are claimable during the first 2 grant years only.

• tourism service providers are now eligible for the full amount of the grant, i.e. 50% of expenditure rather than 25%.

• trusts are excluded from the scheme.

It is interesting to note that whilst the legislation does not commence until 1 July 1997, it is 'effectively' retrospective because the changes apply to all EMDG claims for the 1996-97 year.

Main Provisions

This Bill comprises 9 Parts. The eligibility for and amount of the grant are contained in Parts 2 to 6 (inclusive). Part 7 deals with applications for and payment of grants. Part 8 contains a number of miscellaneous provisions and Part 9 is interpretation.

Part 1 - Preliminary

This is the preliminary part which provides that the Act commences on 1 July 1997.

Part 2 - Entitlement to Grant

This Part contains only clause 4 and sets up the overall framework for entitlement to a grant. It provides a person is entitled to a grant where the person:

• is eligible (under Part 3)

• has incurred eligible expenses (under Part 5) in relation to eligible products (under Part 4), and

• has applied for a grant (under Part 7).

The amount of the grant is calculated under Part 6.

Clearly Parts 3 to 7 contain the substantive provisions which 'fill out' the framework.

Export Market Development Grants Bill 1997 5

Warning:

This Digest was prepared for debate.It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Part 3 - Persons Eligible for a Grant

The underlying principle is that only small or medium Australian businesses that are developing export markets and have a prospect of success should be eligible (clause 5).

Clause 6 and 7 provide the criteria for eligibility for grants. The scheme is only open to Australian resident individuals, corporations and associations established under Australian law, and joint ventures and trading houses approved by Austrade.

In the case of persons other than approved joint ventures and approved trading houses the following rules apply for eligibility:

• the person must genuinely carry on business in Australia

• in the case of an individual, the person must have been a resident at the time of carrying on the business in Australia

• the person must not have received a grant in respect of 8 or more previous years. Certain grants made before 20 May 1985 and grants in respect of tourism before 1 July 1990 are to be disregarded. This limitation does not apply where the grant will be in respect of a new market (see clause 8).

• the person's income for the grant year must not exceed $50 000 000

• the person's export earnings for the grant year must not exceed $25 000 000 (export earnings which result from trade with New Zealand or trade with foreign countries which are the subject of trade sanctions are disregarded)

• the person must not be under insolvency administration and must not have any outstanding disqualifying convictions (i.e. conviction for an offence that disqualifies a person from managing a corporation, false pretences or fraud relating to an application for a grant. A conviction is outstanding until 5 years after the conviction was recorded or the person was released from prison)

• where a person is applying for a grant for the first time, the person must have registered with Austrade and have taken a grants entry test (to determine the prospect of success of the export enterprise) (in accordance with clauses 18 to 22)

In the case of an approved joint venture the following rules apply for eligibility:

• the joint venture cannot have been a grantee in respect of 5 or more previous grant years. Certain grants made before 20 May 1985 and grants in respect of tourism before 1 July 1990 are to be disregarded (under clause 8).

• the joint venture's export earning for the grant year must not exceed $25 000 000.

6 Export Market Development Grants Bill 1997

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

• it must be the case that no associate of the joint venture is under insolvency administration when application is made for the grant

• there cannot be any disqualifying convictions outstanding against the joint venture.

In the case of an approved trading house, the following rules apply for eligibility:

• it must be the case that neither the trading house nor any associate of it is under insolvency administration when application is made for the grant

• there cannot be any disqualifying convictions outstanding against the trading house.

Part 4 - Eligible Products

The underlying principle is that a product should be eligible only if it is substantially of Australian origin (clause 23).

Clause 24 deals with eligible goods. A distinction is drawn between goods made in Australia and those made outside Australia.

Goods made in Australia are eligible goods if at least 50% of the free on board value of the goods is attributable to components produced in Australia, the cost of labour performed on the goods in Australia, the overheads incurred in Australia in connection with the making of the goods and any mark-up included in the free on board value of the goods (referred to as the 50% Australian content rule).

Goods made outside Australia are eligible goods if at least 75% of the value of the components use in the making of the goods is attributable to goods that meet the 50% Australian content rule (referred to as the 75% Australian content rule).

Austrade may determine that goods, which would otherwise qualify as eligible goods, are not eligible goods if it is of the view that the Australian input in those goods is not sufficient to ensure that Australia will derive a significant net benefit from their export. Conversely, Austrade may determine that goods that would not otherwise qualify as eligible goods are eligible goods if Australia will derive a significant net benefit from their export.

Clause 25 deals with eligible services.

An internal service (i.e. supplied within Australia) is an eligible internal service if it is supplied to a person that is not a resident of Australia.

A tourism service is an eligible tourism service if it is supplied in Australia to a person that is not a resident of Australia or the service is supplied in Australia to a resident of

Export Market Development Grants Bill 1997 7

Warning:

This Digest was prepared for debate.It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Australia for supply by that person, in the course of trade, to a person that is not a resident of Australia.

An external service is an eligible external service if the service is supplied outside Australia to a person that is not a resident of Australia.

Austrade may determine that an eligible service is not eligible if the Australian input in the service is not sufficient to ensure that Australia will derive a significant net benefit from the supply of the service.

Clauses 26 and 27 deal with intellectual property and know-how. These will qualify as eligible intellectual property and eligible know-how if they resulted to a substantial extent from research or work done in Australia.

Part 5 - Eligible Expenses

The underlying principle is that only expenses relating to specific promotional activities genuinely incurred by applicants for the purpose of marketing eligible products in foreign countries should qualify (clause 28).

Expenses are eligible expenses upon satisfaction of the following:

• the expenses must be claimable expenses in respect of an eligible promotional activity (see below)

• if the applicant is an approved trading house or approved joint venture, the expenses must relate to the approved activity, project or purpose of the trading house or joint venture

• the expenses must be incurred by the grantee during the grant year (or the immediately preceding year where the applicant has not previously received a grant)

• the total of expenses satisfying these conditions must be at least $20 000.

'Eligible promotional activity' and 'claimable expenses' in respect of those activities are defined in section 33. There are six types of eligible promotional activities and the corresponding claimable expenses are:

8 Export Market Development Grants Bill 1997

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Item No. Activity Expenses

1

maintaining an overseas representative on a long term basis in a foreign country so much of the expenses incurred by the applicant in the grant year in maintaining

the representative and meeting the

expenses incurred by the representative in soliciting business for the applicant that together with the expenses of other representatives does not exceed $200 000

2

any visit (referred to as a 'marketing visit') made by the applicant or its agent to any place in or outside Australia

all expenses incurred by the applicant in payments to person not closely related to the applicant and that are allowable expenses, i.e. $200 per working day up to 21 days, all transport expenses (except airfares), air fares if the applicant is not the grantee in respect of more than one previous year (only 65% if first class) (see clause 34)

3

any communication by the applicant or its agent with a potential buyer or a

distributor, representative or consultant

all reasonable expenses incurred by the applicant in payments to persons that were not closely related to the applicant

4

the provision, of free samples to a person that is not a resident of Australia, as follows:

- provision outside Australia of

samples relating to any eligible product of the applicant;

- provision in Australia of samples relating to eligible tourism services supplied by the applicant

all reasonable expenses incurred by the applicant that are attributable to the actual cost of providing the samples

5

participation by the applicant or its agent in a trade fair, or the provision by the applicant or its agent of promotional literature or other advertising material

all reasonable expenses incurred by the applicant in payments to persons that were not closely related to the applicant

6

engaging as a consultant on a short term basis (either in or outside Australia) a person that, in Austrade's opinion, is not closely related to the applicant

all reasonable expenses incurred by the applicant

Note that each activity is only eligible to the extent to which it is carried out for an 'approved promotional purpose'. An activity is carried out for an approved promotional

Export Market Development Grants Bill 1997 9

Warning:

This Digest was prepared for debate.It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

purpose if it is carried out for the purpose of creating, seeking or increasing demand or opportunity in a foreign country for eligible goods or services or eligible intellectual property or know-how (clause 37). In the case of eligible intellectual property or intellectual know how an activity is carried out for an approved promotional purpose if it is carried out for the purpose of increasing the applicant's return on the disposal of the intellectual property or know-how (the return must be by way of a royalty or licence fee) (clause 38).

There are 17 types of expenses which are specifically excluded from being a claimable expense (clause 40). The significant exclusions are:

• expenses of a capital nature (clause 41)

• expenses incurred in respect of an eligible promotional activity related to trade with New Zealand, or trade with a country that has been declared subject to trade sanctions (clauses 43 and 44)

• expenses of an applicant that is a grantee in respect of 8 or more previous years where those expenses do not relate to a new market (clause 50)

• expenses to the extent to which they were incurred by the applicant in its capacity as trustee of a trust estate (clause 54)

Part 6 - Amount of Grant

Calculation of the amount of the grant is made in 2 stages.

• the maximum amount that each applicant is entitled to is calculated (called the 'provisional amount')

• then, because the amount available for payment of grants is fixed, a capping mechanism is applied to ensure that all applicants entitled to a grant receive a share of the amount available for distribution (clause 61).

Provisional Amount

An applicant's provisional amount is 50% of the applicant's eligible expenses for the grant year less $7 500. An additional 3% of the amount calculated is payable if the applicant's eligible expenses do not include communication expenses (see item 3 in the table above) (clause 62).

10 Export Market Development Grants Bill 1997

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

If the applicant has received grants for 3 or more grant years (including the year in respect of which the calculation is being made) the provisional amount is subject to being reduced to a percentage of the applicant's export earnings for the grant year. The amounts to which the grant will be reduced are set out in clause 63 of the Bill.

The provisional grant amount is limited to $500 000 if the applicant is an approved trading house and $200 000 in any other case.

If the applicant has been a party to a transaction or arrangement that is likely to result in the applicant obtaining a grant or an increase in the amount of a grant, Austrade may adjust the applicant's provisional amount (clauses 64 and 96).

The total of the provisional grant amounts to all companies in a related company group is limited to $250 000 (clause 65).

Capping Mechanism

If the applicant's provisional grant amount does not exceed the initial payment ceiling amount (determined by the Minister under clause 68), the amount of the grant is the provisional grant amount.

If the applicant's provisional grant amount exceeds the initial payment ceiling amount the amount of the grant equals:

initial payment ceiling amount + (excess x payout factor)

− the payout factor is an amount determined by Austrade under clause 69

Part 7 - Application for, and Payment of Grant

An application for a grant must be made within 5 months of the end of the grant year (clause 70).

Clauses 74 to 79 deal with disqualified individuals helping in the preparation of applications for grants. If a disqualified individual helps to prepare an application, the application is taken not to have been made. The applicant may make a fresh application in certain circumstances (clause 77).

Determining the time at which an applicant is to receive a grant is relatively complex and is best described as follows:

The determination as to an entitlement is a 2 stage process:

Export Market Development Grants Bill 1997 11

Warning:

This Digest was prepared for debate.It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Stage 1 - determine whether the applicant is entitled to a grant (clause 80(1)(b))

Stage 2 - determine the amount of the grant (clause 80(1)(c)).

If Austrade's determination under Stage 1 is made before the balance distribution date (determined by the Minister under clause 68) and:

• the applicant's provisional grant amount does not exceed the initial payment ceiling amount - the grant becomes payable when Austrade determines the amount payable under Stage 2

• the applicant's provisional grant amount exceeds the initial payment ceiling amount - the applicant is entitled to an advance equal to the initial payment ceiling amount at the time of making the determination under stage 1 and the balance of the grant is payable after the balance distribution date for the year following the grant year (clause 81).

If Austrade's determination under Stage 1 is made after the balance distribution date the grant become payable:

• if the determination is made before 1 July next following the balance distribution date - on that 1 July; or

• in any other case - on the day on which the amount of the grant is determined under stage 2 (clause 82).

Part 8 - Miscellaneous

The most significant and potentially controversial aspect of this Part is clause 105. This clause provides that the costs of the administration of the Act are to be paid out of the money appropriated by the Parliament for the purpose of meeting payments under the Act. The costs of administration must not exceed 5% of the appropriation amount.

This Part deals with a number of additional matters including:

• the mechanism for approval of joint ventures and trading houses

• the effect of a change in ownership and the circumstances in which there will be deemed to be a continuity of the ownership for the purpose of determining eligible expenses, export earnings and whether a grant has previously been paid to the owner of the business

• the decisions of Austrade which are reviewable by the AAT

• accreditation of export market development grants consultants

12 Export Market Development Grants Bill 1997

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Concluding Comments

It has been suggested that3 the initial payment ceiling amount will be $50 000. The determination of the payout factor (which determines the amount that the applicant is entitled to received in excess of $50 000) cannot be calculated by Austrade until after the

grant year. Concern has been expressed that medium size companies will be discouraged from spending more than $110 000 on promoting exports because of the uncertainty of what they will receive back4.

The effect of clause 105 is that the amount available for the payment of grants is potentially reduced to $142.5 million which amounts to a 30% reduction on the 1995-96 year.

It is worthy of note the Bill achieves its goal of simplifying the current EMDG legislation. In stark contrast to the existing Act, the Bill is systematic, logical and relatively easy to read.

Endnotes

1 Australian Trade Commission, Annual Report: 1992-93, 1993-94, 1994-95, 1995-96 2 Australian Trade Commission, Helping to Meet the Export Challenge - An evaluation of the

Export Market Development Grants Scheme and the International Trade Enhancement Scheme, April 1994 3 Tightening of EMDG will damage SMEs, 27 August 1996, The Australian Financial Review,

Mark Abernethy 4 Ibid.