Thanks Dan.
I've actually sorted this out. If you go to /TMWFLOW/VC_PHMD in SM34 you will see what actions are allowed in each phase.
Development without Release had TEST_ASSIGN (which means you can assign existing defects to this phase). Where as Test had TEST_CREATE (create new defecst against this phase).
I have modified it so we can create defects in below phases:
Development without Release
Development with Release
Test
However, I've only allowed transports to be created in Test 
Thanks!!
Shaun