Purpose of the Bill

The purpose of the Customs Amendment (Controlled Trials) Bill 2021 (the Bill) is to amend the Customs Act 1901 to create a controlled regulatory environment for selected businesses to conduct international trade using time-limited customs trials or procedures.

The Bill implements part of the Government’s Simplified Trade System reform agenda that aims to ‘streamline border services to reduce administrative complexity and improve the efficiency of international trade.’[1]

Background

Why is a Simplified Trade System being introduced?

Businesses that engage in cross-border trade can face heavy regulatory burden. Professor David Widdowson explains the complexity of international trade:

Members of the international trading community must deal with multiple regulatory authorities when importing or exporting goods. Remarkably, trade-related regulatory requirements are administered and enforced by more than 30 agencies at the federal level in Australia, as well as some at the state and territory level. There is very little administrative coordination among the various agencies and the linkages between them have not been automated.

For example, to import a motor vehicle you will require approval from the Department of Infrastructure, Transport, Regional Development and Communications. There is also a need to lodge an import declaration with Australian Border Force, pay relevant duties and taxes, and arrange a biosecurity inspection with the Department of Agriculture, Water and the Environment…

If you are importing a luxury vehicle you will also need to be registered with the Australian Tax Office for the GST and the Luxury Car Tax. And if you wish to drive on Australian roads, then state and territory registration and insurance requirements come into play.[2] [emphasis added]

In the 2020-21 Federal Budget, the Government announced the Simplified Trade System (STS) reform agenda as part of its JobMaker Plan.[3] According to a joint media release by the Minister for Foreign Affairs Marise Payne and the Trade Minister Dan Tehan:

The [simplified trade] system will create a simpler, more efficient and digitised trade framework so more Australian businesses can take full advantage of the opportunities offered by international markets.[4]

The Trade Minister also said the STS reform is ‘a key microeconomic reform that the Government is embarking on’ and there is ‘a whole-of-government effort towards it’.[5]

What is a ‘controlled trial’?

When it comes to government reforms, it is often prudent to conduct a controlled trial or experiment first to test the policy’s effect before its widespread implementation. Consequently, the Bill creates a controlled regulatory environment (also known as a regulatory sandbox) to facilitate time-limited trials for selected businesses to conduct cross‑border trade in ways that would not normally be allowed by the Customs Act.

This metaphorical ‘sandbox’ typically allows the participants to test innovative methods and technologies in a controlled environment under a government’s supervision.[6] For example, the Government may temporarily allow selected businesses to follow a new, more streamlined trade procedure at the Australian border to test the effect of this procedure.

According to the World Bank, regulatory sandboxes are a signal to the industry that the regulators are willing to engage with them, and the sandboxes could potentially influence future supervisory methodology or even have implications for the regulatory perimeter.[7]

Regulatory sandboxes are most frequently used in the regulation of the FinTech (financial technology) industry because new FinTech technologies can be highly disruptive and must be carefully monitored.

According to Jason Wood, the Assistant Minister for Customs, Community Safety and Multicultural Affairs, the Bill:

is the first regulatory sandbox mechanism identified within a customs framework, worldwide…

The Controlled Trials Bill is an important step towards simplifying Australia’s trade system, in line with the Government’s simplified trade system and deregulation agendas.[8]

In other words, the Bill creates the framework for a world-first regulatory sandbox and prescribes the terms of its operation.

Figure 1 below is a simplified illustration of how regulatory sandboxes fit into overall policy design and implementation process in the FinTech industry. The experience may also be applicable to the customs and trade industry.

Figure 1: the role of regulatory sandboxes in FinTech technology and regulation

INSERT IMAGE HERE

Source: IASbaba coaching services, Framework for Regulatory Sandbox Introduced, 20 October 2020.

What does the Simplified Trade System reform entail?

In June 2021, the Government announced the establishment of a Simplified Trade System Implementation Taskforce to review Australia’s trade regulation and modernise trade-related Information and Communications Technology (ICT) systems.[9]

Specifically, the STS Implementation Taskforce is working on the following projects:

• development of a Trade Single Window – the Trade Single Window is ‘a simplified and integrated trade approvals program’[10] that allows businesses to submit trade documentation via a single online portal rather than submitting the same information numerous times to different government agencies[11]
• streamlining of trade regulation – existing trade regulation may contain areas of duplication, therefore the STS reform agenda aims to facilitate trade by reducing duplication
• review of ICT systems to support trade – the Taskforce is reviewing the Government’s trade-related ICT systems and processes to ensure they are ‘modern and interrogable both domestically and internationally’.[12]

Randall Brugeaud, the head of the STS Implementation Taskforce, explained the rationale of the STS reform:

The STS is looking at cross-border regulation, legislation, policy processes, data systems, workforce, and funding…

We found more than 200 regulations to support cross-border trade and many of these have not been updated for more than a decade.

We found there are more than 130 government ICT systems supporting cross-border trade. Again, many of these systems are very old with quite a number having passed their 20th anniversaries. There are also high levels of duplication.[13] [emphasis added]

Andrew Hudson, a lawyer who specialises in trade law, commented on the complexity of trade regulation:

… one of my professional dreams is for the Customs Act 1901 to be replaced with a new version written to modern regulatory standards…

The Act has been regularly amended and expanded to the point that it seems to be ready to burst, and its form certainly does not aid ready comprehension, which is one of the aims of legislation. Complexity of legislation can be considered as a “non-tariff barrier”, especially for small and medium-sized enterprises…[14] [emphasis added]

Committee consideration

Senate Standing Committee for the Scrutiny of Bills

Concerns raised

The Senate Standing Committee for the Scrutiny of Bills raised concerns that there are significant matters pertaining to the Bill that will be specified in delegated legislation (for example, legislative instrument) rather than the primary legislation.[15]

As mentioned, the purpose of the Bill is to facilitate time-limited trials for selected businesses (known as approved entities) to conduct cross-border trade in ways that would not normally be allowed by the Customs Act. Proposed section 179K of the Customs Act, at item 4 of the Bill, provides that the Comptroller-General of Customs (a position held by the Australian Border Force Commissioner) may, by legislative instrument, determine the qualification criteria that entities must meet in order to participate in the trials.

The Committee view was that significant matters, such as the qualification criteria for participation in controlled trials, should be included in the primary legislation unless a sound justification is provided for the use of delegated legislation.[16] At the time of writing this Digest, the Government has not released any proposed delegated legislation.

The Committee considered that the Explanatory Memorandum did not provide a sufficiently clear reason as to why these significant matters could not be included in the primary legislation.[17]

Consequently, the Committee requested the Minister’s more detailed advice regarding:

• why it is considered necessary and appropriate to leave the qualification criteria for participation in controlled trials to delegated legislation and
• whether the Bill can be amended to include at least high-level guidance regarding these matters on the face of the primary legislation.[18]

Ministerial response

The Assistant Minister for Customs, Community Safety and Multicultural Affairs provided a response to the Committee to address its concerns.[19] The Assistant Minister justified the use of delegated legislation:

Administering the controlled trials framework in delegated legislation enables controlled trials to be undertaken with a greater degree of certainty and administered in a timely manner. Due to the short timeframes for each of the trials, it is critical to the success of the program that there is flexibility to refine those elements in a timely manner before the next phase commences.

While qualification criteria apply generically, the Australian Border Force (ABF) will also require the flexibility to update the qualification criteria as the types of trials conducted and customs practices evolve. While initial trials may be small and the qualification criteria would be basic, as the types of trials conducted evolve and become more complex, so would the base requirements for participants to ensure as much consistency as possible across the suitability of participants. Placing qualification criteria in delegated legislation provides a degree of consistency across all participants in any trial, while allowing for the fact that appropriate qualification criteria at one point would not necessarily be sufficient in later trials. If the Customs Act 1901 (Customs Act) needed to be amended each time the qualification criteria for trials needed to change, this could delay new trials relying on the amended criteria to potentially lengthy legislative change processes. This would frustrate the ABF’s ability to conduct future controlled trials, which may require revised base level requirements for participation to meet emerging risks in international supply chain security…

I note that as the qualification criteria are determined in a legislative instrument, they will be subject to parliamentary scrutiny and disallowance. The Comptroller-General of Customs’ powers to make rules with respect to controlled trials, including qualification criteria, cannot be delegated.[20] [emphasis added]

The Committee’s comment regarding the ministerial response

The Committee noted the ministerial response and said:

The committee has generally not accepted a desire for administrative flexibility or a reliance on non‑legislative policy guidance to be sufficient justifications for leaving significant matters to delegated legislation. As such, it remains unclear to the committee why at least high-level guidance in relation to these matters could not be included on the face of the primary legislation.[21]

As such, the Committee:

• drew this matter to the attention of senators and left to the Senate as a whole the appropriateness of leaving the qualification criteria for participation in controlled trials to delegated legislation and
• drew the matter to the attention of the Senate Standing Committee for the Scrutiny of Delegated Legislation.[22]

Senate Legal and Constitutional Affairs Legislation Committee

The Bill has been referred to the Senate Legal and Constitutional Affairs Legislation Committee for inquiry and report by 22 March 2022. Details of the inquiry are at the inquiry webpage.

Policy position of non-government parties/independents

At the time of writing of this Digest, non-government parties and independents have not made official comments on the Bill.

Position of major interest groups

Business sector

The Australian business sector appears to be cautiously optimistic about the changes to be introduced in the Bill.

In October 2021, the Department of Home Affairs invited public submissions from interested parties on the Exposure Draft of the Bill. Although the Department has not released public submissions to the Exposure Draft, some stakeholders have published their opinions on their websites.

Industry representative bodies such as the Freight & Trade Alliance (FTA) and the Australian Peak Shippers’ Association (APSA) said:

The Controlled Trials Billcreates a regulatory framework that seeks to encourage innovation in developing best practice regulation through testing new business practices and technologies before committing to legislative change. Results from Regulatory Sandbox trials will build the evidence base to inform longer term deregulatory reform. The ABF is separately developing the Regulatory Sandbox Guidelines which will contain specific details of how to propose and manage trials.

FTA/APSA are seeking member feedback on what we see as a positive initiative.[23] [emphasis added]

In a similar vein, trade law specialist Andrew Hudson said:

The exciting aspect for industry is to see what proposals are intended to be tested in the “controlled trials” conducted through the Regulatory Sandbox.[24]

Law Council of Australia

The Law Council of Australia (LCA) said it supports the proposed legislative framework as a means to facilitate the trial of new practices under the Customs Act.[25]

However, the LCA also expressed concern that the scope of the Bill is unnecessarily narrow. The Bill prescribes that only certain Parts of the Customs Act are within the scope of ‘controlled trials’ of the proposed regulatory sandbox. In other words, only certain trade practices and processes in the Act are intended to be tested in controlled trials.[26] Details of the LCA’s concerns are discussed further below in the ‘Key issues and provisions’ section of this Digest.

Financial implications

According to the Explanatory Memorandum, the Bill is part of a broader regulatory and data reform program under the STS reform agenda. There are no specific financial implications resulting from the Bill.[27]

In the 2020-21 Federal Budget, the Government allocated $28.6 million to the STS reform.[28] In the 2021‑22 Federal Budget, an additional $37.4 million was announced for the STS reform.[29]

Additionally, the Government noted in the Explanatory Memorandum that individual controlled trials may have financial and other implications, which will be dependent on the specific trial and assessed at the time the trial is proposed.[30]

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.[31]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights had no comment on the Bill.[32]

Structure of the Bill

The Bill has one Schedule. Schedule 1 amends the Customs Act to insert Part XB–Controlled trials into the Act. Part XB consists of four Divisions:

• Division 1 is titled preliminary and provides a simplified outline of Part XB
• Division 2 is titled obligations and benefits under controlled trials and deals with obligations for approved entities under the controlled trials
• Division 3 is titled participation in controlled trials and sets out the processes with respect to participation in controlled trials
• Division 4 is titled instruments and sets out the power of the Comptroller-General to make legislative instruments with respect to controlled trials.

Key issues and provisions

The Bill outlines the framework of the regulatory sandbox but leaves some details to be set out in the delegated legislation. The issues addressed in the Bill include:

• definition and scope of a ‘controlled trial’
• a framework of administrative processes to deal with obligations and benefits under controlled trials
• participation processes with respect to controlled trials
• power to make legislative instruments with respect to controlled trials.
• Details that may be set out in the delegated legislation include:
• specific obligations and benefits under controlled trials
• qualification criteria to participate in controlled trials.

Definition and scope of ‘controlled trial’ and ‘controlled trial provision’

Item 2 of the Bill inserts definitions of ‘controlled trial’ and ‘controlled trial provision’ into the Customs Act. ‘Controlled trial provision’ is defined as the following:

1. Part IV (importation of goods); other than Division 1 of that Part (which deals with prohibited imports)
2. Part IVA (depots)
3. Part V (warehouses)
4. Part VI (exportation of goods), other than Division 1 of that Part (which deals with prohibited exports)
5. Part VIA (electronic communications)
6. Part XI (agents and customs brokers)
7. Part XVA (tariff concession orders)
8. Regulations made for the purposes of a provision covered by paragraph (a), (b), (c), (d), (e), (f) or (g).

According to the Explanatory Memorandum (EM), the effect of these amendments is to limit the scope of controlled trials to these listed Parts of the Customs Act. Controlled trials are intended to be used to explore better regulatory administration of processes associated with imports, exports and licensing.[33]

In other words, controlled trials are not intended to be used to explore better regulatory processes associated with other parts of the Customs Act, in particular the absence of Part VIII and Part IX was noted by stakeholders (see stakeholders’ commentary below). Provisions in Part VIII and Part IX relate to customs duties and could affect the ways customs duties are to be collected.

The EM provides a specific example of controlled trials:

a controlled trial could be established for 12 months with approved participants to investigate whether it would be more expedient that outturn reports for cargo be provided once a month instead of within certain timeframes that the cargo is unloaded as set out in section 64ABAB of the Customs Act.[34]

Part XB–Controlled trials

Item 4 inserts proposed Part XB–Controlled trials into the Customs Act. As mentioned, proposed Part XB consists of four Divisions.

Division 1–preliminary

Proposed section 179A of the Customs Act gives a simplified outline of Part XB.

Proposed section 179B specifies that Part XB applies to individuals, bodies corporate, and partnerships.

Division 2–Obligations and benefits under controlled trials

Obligations under controlled trials

Proposed section 179C deals with obligations under controlled trials and it is divided into three subheadings:

Entities released from obligations

Proposed subsection 179C(1) provides that if an entity holds an approval, that is in force, to participate in a controlled trial, the entity is released from an obligation that the entity would otherwise be required to satisfy under a controlled trial provision if the obligation is specified in the rules as an obligation in relation to that trial that entities are released from.

Put simply, an entity is released from certain obligations under the Customs Act when that entity holds an approval (that is in force and not expired or revoked) to participate in a controlled trial where the rules of that trial provide that the obligation does not apply to trial participants.

In other words, participants in the regulatory sandbox are released from certain obligations under the Customs Act for the purpose of testing new customs procedures or trials. As mentioned, the purpose of the Bill is to create a regulatory sandbox for approved entities to experiment or conduct new trade practices in ways that would not normally be allowed by the Customs Act.

According to the EM, the effect of proposed subsection 179C(1) is to clearly specify when a participating entity is not required to comply with a requirement under the Customs Act that it may otherwise be required to comply with (a controlled trial provision).[37]

In other words, it will be the rules of controlled trials (to be set out by Comptroller-General) that specify which obligations are not required to be satisfied by the entities participating in controlled trials.

Entities must satisfy obligations in a different way

Proposed subsections 179C(2) and 179C(3) provide when an entity participates in a controlled trial and it cannot satisfy certain obligations under the Customs Act in the way required by the Act, the entity must instead comply with the requirements set out in the rules for the controlled trial. This means the entity must ‘satisfy obligations in a different way’, as provided by the rules of controlled trials.[38]

Entity must comply with additional obligations

Proposed subsection 179C(4) provides that an entity with an approval to participate in a controlled trial must comply with each obligation specified in the rules for that controlled trial, even if these obligations are additional to those imposed under the Customs Act.

Note 1 under proposed subsection 179C(4) notes that entities are only required to comply with an additional obligation if it relates to a controlled trial provision. Note 2 under proposed subsection 179C(4) notes that the failure to comply with a new obligation in a controlled trial is a ground for varying, suspending or revoking an entity’s approval to participate in a controlled trial.

Benefits under the controlled trials

Proposed section 179D provides that when an entity holds an approval to participate in a controlled trial and that approval is in force, that entity may receive benefits as outlined in the rule for the controlled trial.

According to the EM, the purpose of this proposed section is to enable an entity to receive benefits during that entity’s participation in a controlled trial. The Government recognises that entities may incur financial costs in participating.[39]

For example, an entity may need to change its administrative systems to comply with new obligations under a controlled trial. To facilitate this, the Comptroller-General of Customs may specify in the rule for that controlled trial that participating entities will receive extra administrative support from the Government.[40]

Division 3—Participation in controlled trials

This Division outlines the processes with respect to participation in a controlled trial. Once the Comptroller-General of Customs makes the rules outlining the scope of a controlled trial and the associated requirements, entities then consider whether they wish to participate in the trial and must be approved by the Comptroller-General to participate.[41]

Proposed subsection 179E(1) provides that an entity may:

• apply to participate in a controlled trial (in accordance with the application requirements set out under proposed section 179F) or
• elect to participate following a written invitation from the Comptroller-General.

In either case, the Comptroller-General may approve an entity to participate where the Comptroller-General is satisfied the entity meets both:

• the general qualification criteria to participate in controlled trials, as determined in a legislative instrument, and[42]
• the eligibility criteria as outlined in the rules establishing a particular controlled trial.

Proposed subsection 179E(2) provides that in deciding whether to approve an entity’s participation, the Comptroller-General must consider any matter specified in the rules for the controlled trial under proposed paragraph 179L(3)(b) (discussed below) and any other matter the Comptroller-General considers relevant.

Proposed subsection 179E(3) provides that an entity’s approval to participate in a controlled trial must specify the period for which the approval is in force. The Note under this subsection notes that proposed section 179J provides for the variation, suspension or revocation of an approval.

Proposed subsection 179E(6) specifies that an approval given by the Comptroller-General under proposed subsection 179E(1) is not a legislative instrument. The EM states:

The effect of subsection 179E(6) is to clarify that an approval to participate in a controlled trial is not a legislative instrument. This recognises the administrative nature of approvals and recognises that participating entities may wish to retain anonymity.[43]

Proposed section 179J provides that the Comptroller-General may vary, suspend or revoke an entity’s approval to participate in a controlled trial if satisfied that:

• the entity no longer meets the qualification criteria (if any) determined in an instrument under proposed section 179K
• the entity no longer meets the eligibility criteria (if any) specified in the rules for a controlled trial
• the entity has not complied, or is not complying, with a condition specified in the rules for a controlled trial
• the entity has not complied with an obligation that has been created or varied for a controlled trial.

The EM explains:

The need for these powers derives from the consideration that controlled trials involve a deviation from the Customs Act. Failure to comply with requirements in a controlled trial does not involve the penalty or sanction that would usually apply for failure to comply with the corresponding requirements under the Customs Act.[44] [emphasis added]

Merits review

The decision of the Comptroller-General to refuse, vary, suspend or revoke an entity’s participation in a controlled trial is not subject to merits review.[45] The EM said:

Controlled trials are strictly time limited. This means that any requirements or benefits conferred are not enduring in nature. This can be distinguished from the Australian Trusted Trader Programme, whereby entities receive enduring benefits. On this basis, it seems inappropriate to subject the decision of the Comptroller-General of Customs to refuse to approve an entity’s participation in a controlled trial to merits review which typically would take many months or over a year to conduct.[46] [emphasis added]

Division 4–Instruments

Division 4 sets out the power of the Comptroller-General to make legislative instruments with respect to controlled trials. The Comptroller-General is empowered to make two kinds of legislative instruments under this Division.

Proposed section 179K provides that the Comptroller-General may, by legislative instrument, determine qualification criteria that entities must meet in order to participate in any controlled trial.

Proposed section 179L empowers the Comptroller-General to make, by legislative instrument, rules that outline the operation and administration of each specific controlled trial, such as rules relating to the purpose of the trial and its duration.

As noted above, the Senate Standing Committee for the Scrutiny of Bills raised the concern that significant matters, such as the qualification criteria for participation in controlled trials, should be included in the primary legislation unless a sound justification is provided for the use of legislative instruments.

The EM explains:

The purpose of this regulatory framework is to test different approaches to operating at the border before widespread implementation and substantive legislative change is pursued. Administering the controlled trials framework in delegated legislation enables controlled trials to be undertaken with a greater degree of certainty and administered in a timely manner. If the Customs Act needed to be amended each time a trial was proposed, this would be subject to the potentially lengthy parliamentary processes which would make the process difficult to administer. The element of each trial that would modify the operation of the Customs Act would be set out in the rules and would still be subject to parliamentary oversight and potential disallowance.[47] [emphasis added]

The EM also provides examples of qualification criteria:

Examples of qualification criteria could be that an entity is able to pay all of its debts as they become liable, the entity satisfactorily complies with Customs-related laws, or that corporate entities have a registered ABN. This provision has effect of ensuring a degree of consistency and transparency in the expectations common for all trials.[48]

Rules that establish a controlled trial must specify the purpose of that controlled trial (proposed paragraph 179L(2)(a)). This requirement facilitates entities having the opportunity to be appraised on what the trial is about before they consider whether to participate in that trial. ^[49] In addition, the original period of operation of a controlled trial must not be more than 12 months (proposed paragraph 179L(2)(b)), but this period may be extended once, for up to six months (proposed paragraphs 179L(2)(d) and (e)).

Concluding comments

Businesses that engage in international trade need to deal with the administrative complexity of trade regulation. The Bill creates the framework for a regulatory sandbox to enable the Government to conduct controlled tests of trade practices with the aim of reducing regulatory burden for businesses.

However, as with most government policies, the devil is in the details. The effectiveness of a regulatory sandbox will depend on details such as:

• who will be allowed to participate
• what trade processes are intended to be tested in controlled trials and
• what are the boundaries of this sandbox.

As noted by the Senate Standing Committee for the Scrutiny of Bills, there are significant matters, such as the qualification criteria for participation in controlled trials, that will be specified in delegated legislation rather than the Bill. Industry observers expressed excitement to see what proposals are intended to be tested in the controlled trials conducted through the regulatory sandbox.[50]