Hi, I'll try to fill in the gaps for you. Please find my answers below.
The first major problem is that I can't get Toolset to combine taxonomies within a menu system so that visitors can navigate to a page for an activity plus a destination. The pages are there when i go to the the standard wordpress URLs...but i can't make a menu that points to them.
If the link destinations for some menu items are variable depending on what page you are visiting when you use the menu, then this is something that Toolset probably can't help you accomplish with a standard menu. Personally, I feel that it would be really confusing if the same link went to different destinations based where I was when I clicked it. This seems like quite a difference from standard web interfaces. Think about Amazon's Departments menu. These links aren't variable based on your location in the site. They are constant, and this is what Users expect. But if your site has a different need, I understand. I just wanted to caution you on this type of non-standard interface.
The menu systems in WordPress are designed to point to constant locations, not locations that vary based on your current location in the site. Toolset's search features are designed to work with URL parameters, not custom directory structures, so any changes to this would require some custom code...and I don't think it will be cost-effective to try to change that.
I have tried using menus and taxonomy views but it never combines the taxonomies, instead it always just takes you to one taxonomy...I assume I am missing something simple here as surely there is a way to do this?
Right, these menu items are designed to take you to a standard WordPress Archive or a single result page, not to a filtered custom search. Further, they are designed to link to the same destination no matter where they are displayed on your site. It sounds like neither of these really works for the navigation you have in mind, so it might require a more custom approach.
Please note i tried using the parametric search as a menu but the URL's created are not very user friendly and the search would not be indexed by google.
Views custom searches depend on URL parameters, and there's no way to automatically convert these to use a custom directory structure. Whenever a user manipulates a filter on a search form, the resulting URL structure will use URL parameters like this. One alternative here is to create custom Pages that represent each possible combination of destinations and activities, and place a View on each Page that is filtered by the proper criteria. These Pages all get added to your site map, and can be linked to using custom menu links or simple HTML links in your content. It's not automated or efficient, unfortunately, but it's more friendly to SEO.
The second problem is to do with filtering by archive...it only filters by the first taxomomy and not the second.
It is possible to filter by a different taxonomy on a taxonomy archive, so we should be able to get this working as expected. Can you share a screenshot showing your entire WordPress Archive? I would like to see how you have the Loops Selection, Query Filters, and Filter Editor set up. Please expand each section so I can see all the settings and code.
Thank you.