Purpose of the Bill

The purpose of the Customs Tariff Amendment (Incorporation of Proposals and Other Measures) Bill 2020 (the Bill) is to amend the Customs Tariff Act 1995 (the Act) to:

• legislate existing Customs Tariff Proposals to allow importers to retrospectively claim a ‘free’ rate of customs duty for eligible COVID-19 related medical and hygiene products imported into Australia between 1 February and 31 December 2020
• amend the tariff classification of certain goods
• remove the $12,000 customs duty on imported used and second-hand motor vehicles that are Peruvian or Trans-Pacific Partnership originating goods
• repeal redundant provisions specifying phasing rates of customs duty.

Background

Australia’s tariff classification system

The Act imposes tariff or customs duty on goods imported into Australia. The rate of duty applicable to imported goods is determined by the tariff classification to which those goods belong.[1] The rate of duty that the importers pay affects the amount of customs/revenue received by the Government. Furthermore, tariff/customs duty can be used to protect domestic producers from foreign competition and imports.[2]

Australia’s tariff classification system is based on the International Convention on the Harmonized Commodity Description and Coding System (referred to as the Harmonized System).[3] The Harmonized System (HS) has been developed by and is the responsibility of the World Customs Organization (WCO).[4] The HS is enforced in Australian law via the Customs Tariff Act 1995.

The Act contains thousands of HS codes. The HS codes are typically 6 to 10 digits long and they describe specific goods. For example:

• Chapter 8 of the HS codes is a broad description, titled ‘Edible fruit and nuts, peel of citrus fruit or melons’
• Heading 6 of Chapter 8 is more specific, titled ‘Grapes, Fresh or Dried’
• Subheading 10.00 of Heading 6 is very specifically called ‘Fresh’.[5]

The HS code given to fresh grapes is 0806.10.00, indicating the goods’ classification Chapter, Heading and Subheading. Businesses that wish to import fresh grapes into Australia must pay the customs duty rate associated with the HS code 0806.10.00, which is currently five per cent of the value of the import (unless the grapes are imported from a free trade partner country and eligible for free trade agreement preferential duty rates).

The HS codes are used by more than 200 countries and allow customs authorities around the world to identify goods consistently. Additionally, the HS codes are used to apply relevant customs duties, taxes and regulations.[6] According to the WCO, ‘the Harmonized Systems is thus a universal economic language and code for goods, and an indispensable tool for international trade’.[7]

In his second reading speech for the Bill, the Assistant Minister for Customs, Community Safety and Multicultural Affairs, Jason Wood, explains:

The Harmonized Systems provides means for identifying a good as it moves from one country to another, ensuring that what Australia calls a ‘tomato’ is the same as what every other user of the Harmonized System calls a ‘tomato’.[8]

It is important to keep in mind that tariff classification is inherently imperfect because there are different ways to describe a product and it can be difficult to attribute a HS code to a specific product. For example, a tomato can be described as a fruit or a vegetable. As a result, Australian Border Force and importing businesses sometimes disagree on the tariff classification of imported goods.

Over the past few years, the Administrative Appeals Tribunal (AAT) and the High Court did not accept the Government’s position in cases concerning the tariff classification and tax treatment of certain imported goods such as vitamin gummies, wheeled garbage bins and pipes.[9] The Government considers that these decisions ‘have caused Australia’s [tariff] classifications to become misaligned with international practice’.[10] Consequently, the Australian Government seeks in this Bill to amend Australia’s tariff classification of certain imported goods.[11]

Committee consideration

Senate Standing Committee for the Scrutiny of Bills

The Scrutiny of Bills Committee had no comment on the Bill.[12]

Senate Standing Committee for the Selection of Bills

The Selection of Bills Committee has twice deferred consideration of whether the Bill should be referred to a committee for inquiry and report.[13]

Financial implications

The amendments relating to the incorporation of Customs Tariff Proposal (No. 1) 2020 and Customs Tariff Proposal (No.2) 2020 into the Act are estimated to reduce customs duty receipts by $15.8 million over the period between 1 February 2020 and 31 December of 2020.[14]

The Government considers that the amendments relating to the realignment of Australian tariff classification practice and international tariff classification practice will have negligible financial impact.[15] However, these amendments may result in certain imported goods being subject to a new tariff rate, currently those goods may be imported duty-free or at a lower rate. Further, the Government may receive some additional customs duty collections for those goods.

Other amendments in this Bill will have no financial impact.[16]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible with human rights.[17]

Parliamentary Joint Committee on Human Rights

The Committee had no comment on the Bill.[18]

Key issues and provisions

The Bill contains one schedule consisting of eight parts:

Part 1 – Incorporation of proposals

In accordance with the procedure explained in the box above, on 29 April 2020, a Notice of intention to propose customs tariff alterations was gazetted, giving notice under section 273EA of the Customs Act 1901 of the intention to propose a free rate of customs duty for medical and hygiene products capable of use in combatting COVID-19, within seven sitting days of the House of Representatives.[23] The notice advised that the free rate of customs duty would apply from 1 February to 31 July 2020.[24]

Subsequently, on 13 May 2020 (which was the second sitting day after the gazettal) the Assistant Minister for Customs, Community Safety and Multicultural Affairs Jason Wood proposed Customs Tariff Proposal (No. 1) 2020, to allow eligible COVID-19 medical and hygiene products to be imported to Australia at a ‘free’ rate of customs duty from 1 February to 31 July 2020. Regardless of the products’ country of origin. Medical and hygiene products eligible for the ‘free’ customs duty rate included face masks, gloves, clothes or gowns, goggles, glasses, eye visors or face shields, disinfectant (excluding hand sanitisers), soaps and COVID-19 test kits.[25]

In a media release, Assistant Minister Wood explained:

This measure will help ensure Australia remains a competitive market for essential medical and hygiene goods, and allow the Australian community to continue to source these goods for those who need it most such as healthcare professionals and essential workers.[26]

When it became clear that easy access to supplies to address COVID-19 would be needed past the original end date of 31 July 2020, a further Notice of Intention to Propose Customs Tariff Alterations - Notice (No. 2) 2020 was gazetted to extend the free rate of customs duty on relevant goods from 1 August to 31 December 2020.[27]  Again, in keeping with the procedure under section 273EA of the Customs Act, this was followed by Assistant Minister Wood tabling the Customs Tariff Proposal (No.2) 2020 on 27 August 2020 (the fourth sitting day after the gazettal). It applied to the same products as the original proposal.[28]

Part 1 of the Bill (item 1) incorporates the two Tariff Proposals into the Act, inserting new table item 57 in Schedule 4 of the Act that will cover the same goods covered by the Proposals and for the same period covered by the Proposals. Schedule 4 of the Act sets out concessional rates of duty for specified goods.

On 14 December 2020 a Notice of Intention to Propose Customs Tariff Alterations - Notice (No. 3) 2020 was gazetted, indicating an intention for a further proposal to be moved within seven sitting days of the House of Representatives, extending the ‘free’ rate of customs duty for eligible medical and hygiene products from 1 January 2021 to 30 June 2021.[29] Assistant Minister Wood tabled Customs Tariff Proposal (No.1) 2021 on 3 February 2021 (the second sitting day after the gazettal).[30] As explained above, this change will be incorporated into the Act by a future Bill.

Part 2 – Used or second-hand vehicles

Part 2 of the Bill (items 2 to 6) contains amendments to remove the $12,000 special customs duty on used or second-hand motor vehicles that are Peruvian or Trans-Pacific Partnership originating goods imported into Australia.

Tariff/customs duty on imported goods can be used to protect domestic industries from foreign competition.[31] On the other hand, some economists view tariffs as inefficient because tariffs could potentially discourage international trade and have a negative effect on economic growth.[32]

Countries that pursue a free trade policy may be committed to remove or reduce tariffs by signing free trade agreements. A free trade agreement is an international treaty between two or more countries that reduces or eliminates certain barriers to trade. At the time of writing, Australia has signed 15 free trade agreements with other countries or economies, with a number of other free trade agreements under negotiation.[33]

In 2014, the Productivity Commission recommended that the $12,000 customs duty on imported second-hand vehicles be removed from the Customs Tariff Act as soon as practicable.[34]

Mr Paul Fletcher, the former Minister for Major Projects, Territories and Local Government, said:

Although this duty is not often applied, it is on the statute books, costing more to administer than it raises — and is seen by consumers as a hurdle to importing second-hand cars even in the specific circumstances where such imports are permitted. By removing this duty, we will provide more options for Australian consumers.[35]

In August 2017, the Customs Tariff Amendment (Incorporation of Proposal and Other Measures) Act 2017 amended the Act to remove the $12,000 customs duty on imported second-hand motor vehicles.[36]

The policy implication of customs duty removal is that Australian consumers can potentially access more affordable overseas second-hand vehicles, provided that the overseas vehicles meet Australian fuel efficiency and road safety standards.[37] The last of Australia’s domestic mass production car factories was closed down in 2017 (Australia still locally produces trucks and buses and a very small number of cars), therefore the removal of the $12,000 customs duty does not affect domestic car manufacturing industry.

On the other hand, differences in fuel efficiency standards and other administrative hurdles may continue to act as impediments to the imports of second-hand vehicles into Australia.[38]

The Free Trade Agreement between Australia and the Republic of Peru (PAFTA)[39] and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)[40] were negotiated prior to 2017, using versions of the Act that predated the removal of the $12,000 customs duty. The terms of both free trade agreements required that no unilateral tariff reductions could occur before the agreements were implemented, meaning the $12,000 customs duty had to remain for the time being.[41]

The PAFTA and the CPTPP entered into force in Australia on 11 February 2020 and 30 December 2018, respectively.[42] As the terms of the agreements only prohibited changes to tariffs before the agreements were implemented, their implementation meant that Australia can now unilaterally remove the $12,000 customs duty applied to Peruvian and Trans-Pacific Partnership originating goods, bringing them in line with the rest of the Act.[43]

Consequently, Part 2 of the Bill removes the $12,000 customs duty on used or second-hand motor vehicles that are Peruvian or Trans-Pacific Partnership originating goods. Trans-Pacific Partnership originating goods include goods originated from Canada, Japan, Mexico, New Zealand, Singapore and Vietnam.[44]

Part 3 – Formulated caffeinated beverages

Part 3 (items 7 to 9) contains amendments to separately identify and establish formulated caffeinated beverages as a new subheading under the broader, more generic water-based beverages classification heading. The amendments intend to improve monitoring under the Imported Food Inspection Scheme and tariff classification of formulated caffeinated beverages.[45]

Part 4 – Formulated supplementary food and formulated supplementary sports food

Similar to the amendments made by Part 3, the purpose of Part 4 (items 10 to 14) is to separately identify formulated supplementary food and formulated supplementary sports food as new subheadings under the more generic food preparations classification heading.[46] The amendments intend to improve monitoring under the Imported Food Inspection Scheme and tariff classification of formulated supplementary food and formulated supplementary sports food, which will be defined in the Australia New Zealand Food Standards Code.[47]

Part 5 – Vitamins and food supplements

Part 5 (items 15 to 18) introduces additional notes to the Act to clarify the tariff classification of vitamins and food supplements. This is intended to make a clear distinction between:

• products that contain vitamins or food supplements and
• products that are considered medicaments.[48]

According to the Explanatory Memorandum to the Bill, the rationale behind the amendment is that the Australian Government considers the outcome of Comptroller-General of Customs v Pharm-A-Care Laboratories Pty Ltd (Pharm-A-Care) to be inconsistent with international tariff classification practice used by other countries and the WCO.[49]

In the Pharm-A-Care case, Pharm-A-Care Laboratories had imported products containing vitamins or a plant extract (garcinia cambogia) with reputed health and weight loss benefits. The products are sold as gummies, this meant that the products appeared to be pastilles and included other ingredients such as glucose syrup, sucrose, gelatine, and flavourings. The Comptroller-General of Customs (Customs) argued that the imported products should be classified as either food preparations or sugar confectionary (under tariff classification heading 2106 and 1704 in the HS codes, respectively). The importing company argued that the products should be classified as medicaments under heading 3004.[50] Products classified as food preparations and sugar confectionary attract a customs duty rate of four per cent and five per cent respectively, whereas medicaments are duty-free.[51]

The dispute was first heard in the AAT, which determined that the classification heading 3004 ‘medicaments for therapeutic or prophylactic uses’ provides the most appropriate description to the imported products.[52] The Government appealed the AAT’s decision to the Full Court of the Federal Court, which dismissed the appeal.[53] The Government then appealed to the High Court, which found that that the AAT made no material error of law and had applied the Act correctly to the facts of this case.[54]

The AAT determined that the essential characteristic of the imported products is vitamins or the plant extract garcinia cambogia, not glucose syrup.[55] As such, the products could not be classified as sugar confectionary. Further, the AAT held that vitamins or garcinia cambogia are not considered foods in the ordinary way in which the term would be used. In other words, vitamins or garcinia cambogia do not meet the definition of foods or food supplements.[56]

Figure 1: a visual representation of the vitamin gummies and weight loss gummies in question

Source: Hunt & Hunt Lawyers, Pharma-A-Care and goods compliance update, 2019

The High Court did not express an opinion on whether the products actually have a health benefit or not because this was not a point of contention raised by Customs.[57] The case is about the tariff classification of imported products, not whether the products have a health benefit or not. The result of the Pharm-A case is that it sets a legal precedent for Australian businesses to import vitamin gummies and weight loss gummies duty-free as medicaments.

The Government relied on the Harmonized System Explanatory Notes (HSEN) to support interpretation of the HS codes. The WCO periodically publishes Explanatory Notes to provide guidance to interpret the HS codes.[58]

The Government believes international tariff classification practice used by other countries and the WCO requires medicaments to be medicines that treat or prevent particular diseases.[59] Vitamin gummies and weight loss gummies do not meet the WCO’s definition of medicaments presumably because they do not treat a particular disease. Further, the Government argues that the WCO has consistently classified goods that contain low doses of vitamins as food supplements rather than medicaments. Consequently, the Government believes:

The ruling of the AAT and the High Court has resulted in Australia’s classification of these goods being inconsistent with international classification used by other countries and by the WCO.[60]

Items 15 to 17 of the Bill seek to amend the Act by adding a new note that specifically excludes vitamin and food supplement products from being classified as medicaments in the HS codes unless they are included in Schedule 2, 3, 4 or 8 to the Poisons Standard,[61] and to state that they must be included under heading 2106 (food preparations not elsewhere specified or included) unless another classification applies. If passed, the Bill will ensure:

• vitamin gummies, weight loss gummies and similar products will be classified as food preparations or food supplements rather than medicaments, unless another more specific classification applies
• a customs duty of four per cent or higher will apply to imported vitamin gummies and weight loss gummies (unless they are imported from a free trade partner, and eligible for free trade agreement preferential duty rates). This will impose additional costs for Australian businesses that import those goods.

Part 6 – Wheelie bins

Item 19 of the Bill amends the Act to exclude wheeled garbage bins (commonly known as wheelie bins) and their parts from being classified as vehicles, not mechanically propelled. The rationale behind this change is that the Australian Government considers the outcome of Sulo MGB Australia Pty Ltd and Comptroller-General of Customs to be inconsistent with international tariff classification practice developed by the WCO.[62]

The Sulo case concerned the tariff classification of wheels for wheelie bins. Sulo MGB Australia Pty Ltd had imported plastic wheels as parts of wheeled garbage bins. The plastic wheels have a solid rubber tire moulded to the wheel. The Comptroller-General of Customs (Customs) initially classified the imported wheels as solid or cushion tyres of rubber (HS code 4012.90.00).[63] The importing company disagreed and argued that the imported wheels are designed for wheelie bins and should be classified as vehicles, not mechanically propelled (HS code 8716.90).[64] Products classified as vehicles, not mechanically propelled are eligible for a tariff concession.

In 2016, the AAT ruled against Customs and determined that wheelie bins can be classified as vehicles, not mechanically propelled under the HS code 8716.90 in Chapter 87.[65] This is because the agreed definition of the word ‘vehicles’ refers to something constructed for the primary purpose of transporting goods or people.[66]

The AAT found that Sulo’s wheelie bins are constructed for the transport of goods (namely, waste and garbage), therefore the wheelie bins met the definition of ‘vehicles’.[67] In other words, garbage is accumulated in wheelie bins for the purpose of transporting that garbage to a different location to be disposed of. This meant that wheelie bins are vehicles.

The imported wheels are developed specifically to fit with the wheelie bins.[68] The wheels are integral to the overall product and the bins would be useless without the wheels. Accordingly, the imported wheels are part of a vehicle. The importer was able to rely on a tariff concession to import the wheels free of customs duty.

Customs disagreed with the AAT’s decision and appealed to the Federal Court, arguing that the AAT made an error of law because it had not considered other potential HS codes that could be applied to the imported wheels.[69] Customs argued that classification heading 3924 or 3926 should be considered.[70] Headings 3924 and 3926 in Chapter 39 refer to other household articles of plastics and other articles of plastics respectively.

If the decision to classify wheelie bins as vehicles were overturned, then the importing company would be required to pay additional customs duty because the products would not be eligible for a tariff concession. The Federal Court was swayed by Customs’ argument and held that the AAT had erred in its construction of the words ‘other vehicles, not mechanically propelled’ in heading 8716, as it should have considered ‘not just the text and explanatory materials for Chapter 87, but other headings and subheadings in Sch 3 likely to apply to wheelie bins’.[71] The Federal Court referred the matter back to the AAT for it to reclassify the imported wheels according to law, taking into account other potential classification headings.[72]

In 2018, the AAT reconsidered the case and once again classified the imported wheels as vehicles, not mechanically propelled, after taking into account other potentially relevant headings.[73]

The outcome of the Sulo case is that it sets a legal precedent for Australian businesses to import wheelie bins and their parts free of duty as vehicles, not mechanically propelled. The Explanatory Memorandum to the Bill argues that the AAT’s decision in the Sulo case has caused a misalignment with international tariff classification practice.[74]

Consequently, item 19 of the Bill adds a new note to Schedule 3 of the Act that specifically prevents wheeled garbage bins (and their parts) from being classified as vehicles, not mechanically propelled. Rather the note suggests that such items should be classified under Chapter 39 (plastics and articles thereof) or Section XV (base metals and articles of base metal).

If the Bill is passed, a customs duty may apply to imported wheeled garbage bins and their parts. This may impose additional costs for Australian businesses that wish to import those goods.

Part 7 – Metal profiles and pipes

Part 7 (items 21 to 26) of the Bill amends the Act to clarify the tariff classification of plates, rods, angles, shapes, sections, tubes, pipes, and similar goods that require further modification. The rationale behind this change is that the Australian Government considers the outcome of Smoothflow Australia Pty Ltd and Comptroller-General of Customs to be inconsistent with international tariff classification developed by the WCO.[75]

In the Smoothflow case, Smoothflow Australia Pty Ltd imported steel pipes that could be used for fire sprinkler systems in buildings. The pipes had information printed on them showing that they met the relevant safety standards and could be used in fire protection systems.[76] There was no dispute that the pipes are designed to be used in buildings.[77]

Customs argued that the imported steel pipes should be classified under the more generic classification heading 7306 titled other tubes, pipes and hollow profiles. The importing company disagreed and argued that the pipes are structures and parts of structures under the heading 7308. The distinction is significant because different tariff treatment applied to imported goods, depending on how the goods were classified.[78]

The AAT decided that heading 7308 is more specific as it applies to pipes prepared for a particular purpose, not merely pipes in a broader, more generic sense.[79] Choosing a more specific classification over a less specific one is consistent with the interpretation rules set out in Schedule 2 of the Customs Tariff Act, which state that when goods are classifiable under two or more headings, ‘the heading which provides the most specific description shall be preferred’.[80]

The AAT’s decision in Smoothflow case was guided by the High Court’s decision in Pharm-A-Care case (see above). The High Court had decided in the Pharm-A-Care case that when interpreting the Australian HS code to determine the tariff classification of an imported product, an interpretation that ‘gives simultaneous effect to all of the terms of the English text and of the French text must be preferred to a meaning that does not’.[81] The WCO, being an international organisation, publishes its work on the HS codes in both English and French. The English and French versions are not intended to be different; however, because of linguistic variations in the two languages, the two versions are in fact complementary in establishing a single meaning.[82]

The AAT determined that neither the French text nor the English text required the pipes to form part of the relevant structure to come under heading 7308, but instead could fall under this heading if they were ‘prepared for use in connection with the construction of structures’.[83] The imported steel pipes are designed to be used in fire sprinkler systems within buildings, and therefore they are structures and parts of structures. The outcome of the Smoothflow case is that the importer did not need to pay an anti-dumping customs duty due to the tariff classification of the pipes.

Part 7 of the Bill adds a new note to Schedule 3 of the Act which states that heading 7308 and 7610 (titled structures and parts of structures and aluminium structures respectively) do not include ‘plates, roads, angles, shapes, sections, tubes, pipes and the like, requiring further modification before use in structures, including, but not limited to, cutting, drilling and bending’. In addition, heading 7308 does not include ‘tubes, pipes and the like prepared for the conveyance of fluids (including water, oil and gas)’.

If passed, the amendments will ensure that tubes and pipes and the like will not be classified under heading 7308 and 7610 in the future. This may impose additional costs for Australian businesses that import those goods.

Timing

Parts 2 to 7 of the Bill inclusive contain provisions that specify when the amendments will apply. In each case they will only apply to items imported on or after the date of commencement; or to items imported before the commencement to which the period for calculating duty under the Act had not yet expired.[84]

Part 8 – Technical amendments

Part 8 of the Bill sets out some technical amendments to repeal redundant provisions specifying phasing rates of customs duty under Australia’s free trade agreements with Chile, the United States of America, the Association of South-East Asian Nations and New Zealand, Malaysia, Korea, Japan and China. The provisions regarding phasing rates of customs duty have already been fully implemented, therefore are no longer required in the Act.[85]

Concluding comments

The Bill contains one schedule consists of eight parts to amend the Customs Tariff Act 1995. Most of these amendments are technical and non-controversial.

The amendments proposed in Parts 5, 6 and 7 of the Bill respond to interpretations of the current legislation by the AAT and the High Court in relevant legal cases concerning the tariff classification of imported goods such as vitamin gummies, wheeled garbage bins, and metal pipes. The Government considers that these interpretations are not consistent with the policy intent of the legislation and have caused a misalignment between Australia’s tariff classification practice and the international classification practice developed by the WCO.[86] As a result, the Government proposes amendments to the Act to ensure that future classification of similar products will align with its intended interpretation. [87]