Leah

Customs Compliance – Now is the Time To Be More Vigilant than Ever

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This article was originally published in the Autumn edition of Across Borders, which can be found here

Generally, Australia’s customs duty rates of 0-5% are not sufficient to motivate deliberate evasion of duty. In an environment of low duty rates, most non-compliance tends to be accidental, rather than deliberate. However, the tables are turned when dumping duties are imposed. Dumping duties often exceed 30% and can even be over 100%. Where the rewards for non-compliance are this high, there will undoubtedly be greater motivation to engage in duty avoidance.

Over the past few months we have heard increasing instances of suppliers seeking to work with importers to lower or avoid dumping duties. At the same time, the Australian Border Force is engaging in greater levels of targeted compliance activity. In this environment there is a risk that importers will find themselves on the receiving end of massive fines and the requirement to back pay duty and GST. Purchasers need to be aware of the risks and realise that regardless of the promises made by the exporter, if there is deliberate non-compliance and underpayment of duty, it is the Australian consignee that can be liable, even if the principal architect of the evasion was the foreign exporter.

When is dumping duty payable

Dumping duties are payable where the Anti-Dumping Commission finds that goods are exported from a foreign country at a price that is less than their normal value and that dumping is causing loss to an Australian industry. ‘Normal Value’ is usually a reference to the domestic selling price in the country of export. Countervailing duties are payable where it is found that exporters from a third country are benefiting from specific government subsidies.

It is important to understand that the imposition of dumping duties does not only occur when goods are sold to Australia at a loss. Australia can be a very profitable export market and still dumping duties will be imposed.

What are the problem industries

The Anti-Dumping Commission keeps a record of all goods subject to dumping duties on the importation into Australia. Whether dumping duties are payable depends on the type of goods, the country of export and, to a lesser extent, the identity of the exporter. The most common goods subject to dumping duties are steel and aluminium products out of China. We are seeing a notable amount of compliance activities around aluminium extrusions (solar panel mounting kits, construction material, fencing) and steel hollow structural sections (pipes and construction material).

What are the tactics adopted?

We are receiving reports of some exporters of Chinese steel and aluminium adopting a variety of methods to avoid or lower the dumping duty payable at the Australian border. Here are some tactics for Australian customers to look out for.

The shelf company

Under this tactic, goods subject to dumping duty are deliberately reported as a different kind of good and imported by a $1 shelf company. The tactic isn’t clever, the plan simply being that if the deliberate non-compliance is detected, the liable party will be a shelf company that can be wound up at little cost.

There are some basic problems with this approach. Firstly, the individuals that act to facilitate the non-compliance can be charged with aiding and abetting the shelf-company in its non-compliance. If that person is a director, deliberately engaging in tax avoidance may amount to a breach of his or her directors duties.

If the shelf-company on-sells the goods to a related company, that related company may be deemed to be in possession of the goods and liable to pay the underpaid duty by this reason alone.

Transhipment

Under this approach goods made in China are ordered by an Australian company and rather than being shipped direct from China, the goods are transhipped to a third country and then disguised as the goods of that country. This includes new commercial documents and even Government issued certificates of origin.

The ABF is aware of this tactic and recently notified industry of penalties imposed on an importer who transhipped Chinese goods via Malaysia and made false claims about the origin. Where there are doubts as to the origin of the goods the ABF will investigate whether the supposed third country manufacturer exists. It is not unheard of for investigators to find a vacant block at the location of a supposed factory.

Transhipment does not prevent goods being categorised as having been exported from China to Australia. It just makes the export harder to detect. To facilitate the deception the importer needs to falsely declare the country of origin and the identity of the supplier. In doing so, the importer exposes themselves to strict liability for making a false statement resulting in an underpayment of duty and obtaining a financial advantage by deception.

Again, the underpayment of duty will follow the goods. As the ultimate purchaser of the goods, there is no way to wash your hands of the duty consequences.

Invoice splitting

Often it is only one part of the consignment that attracts dumping duty. For instance, where the goods are used to mount solar panels on roofs, the component that attracts dumping duty may be the rails, but associated clamps may be duty free. A supplier will be tempted to produce invoices for customs purposes that greatly inflate the value of the clamps and has a corresponding reduction in the value of the rails.

The ABF audits many legitimate importers and has a lot of intelligence as to the value of common imports. Income splitting will be easy to detect if the relevant imports are the subject of an audit. Where the invoices have been manipulated, the ABF can disregard the invoice value in determining the customs value of the goods. The ABF can determine the value by reference to the price of similar goods, or by the Australian sale price of the goods (less certain post importation costs).

Test imports

We have heard reports of exporters offering to sell the goods on the basis that liability for dumping duty will not be declared and if the import is detected by the ABF, the import will be abandoned with the exporter paying the costs of export to a third country.

There is nothing illegal in agreeing that a supplier will pay the costs of re-exporting goods if the importer no longer wants to import them. The problem exists from what happens if the goods are not detected at the time of import. In this scenario the goods will be imported with dumping duty being deliberately underpaid. The underpayment will have resulted from falsely describing the goods or incorrectly claiming that they are subject to an exemption.

Unless the importer is upfront about the potential dumping duty (such as via an amber line entry), this approach is no different than simply making false statements. Agreeing to not import the goods if you are caught will not be much of a defence if you appear before a Court.

Supplier as the importer

Under this approach, the supply of the goods occurs as a domestic sale in Australia. The overseas supplier is both the exporter and the importer. It the overseas supplier that makes the relevant declarations to the ABF it will be the entity that would be subject to any fines that are payable.

The overseas supplier will also be first in the ABF’s firing line if there is any underpayment of duty. However, first in line is not the same as being the only one in line. Australian case law shows that if there is an underpayment of duty, the ABF can pursue that duty from the Australian customer, even if that customer had no involvement in the import and was unaware of the duty avoidance.

When the choices are between an Australian resident company and a foreign supplier, it’s easy to guess who the ABF debt collection team would prefer to pursue.

What are the risks?

The risks start at liability for the underpaid duty and GST and go up from there. In respect of underpaid duty, the ABF can base its demand on the past four years of imports. It can go back further if there is evidence of deliberate avoidance of duty. We have seen multi-million dollar demands made by the ABF.

Where the ABF can prove deliberate duty avoidance, the minimum penalty a Court can hand down is two times the underpaid duty, the maximum is five times the underpaid duty.

Even if the offence is merely a non-deliberate false statement, the maximum penalty is an amount equal to the underpaid duty.

However, the ABF does not have to trouble the Director of Public Prosecutions and take the importer to Court. Rather, the ABF can issue infringement notices of an amount equal to 75% of the underpaid duty without needing to prove a single allegation.

Put simply, if caught, you can expect to pay the underpaid duty plus at least 75% extra.

This is just the financial penalties, it does not take into account the impact on your supply chain of increased levels of compliance activity.

While all of the above is scary, if there is deliberate avoidance of a large amount of duty, the Commonwealth may choose a criminal, rather than customs, prosecution. This means that a penalty option is a jail sentence.

What to do

This issue is not going away, if anything, we can expect both ABF compliance activity and dumping duty rates to increase. Where the action is deliberate avoidance of dumping duty, there is no way to pass the risk onto a third party. If nothing else, the duty liability will follow the goods.

There are ways to legitimately manage increasing dumping duties. This can include dealing with suppliers who have secured individual favourable rates or legitimately gaining exemptions from the duty. In some cases, it will also be possible to have the duty rate reassessed.

While these options can involve an investment of resources, these options should all be investigated. What importers shouldn’t do is believe in an offer that is too good to be true. These offers all rely on non-compliance not being detected and leave the importer greatly exposed when the inevitable happens.

If you believe that you may have been involved in past non-compliance, there are significant benefits associated with voluntary disclosure. For a start, the ABF will not be able to issue infringement notices. More importantly, the ABF mindset is very different for importers who are voluntarily seeking to improve compliance. If non-compliance is detected in an audit, it is very hard to have the ABF, or a Court, see you in a positive light.

Please contact Russell Wiese for assistance with managing customs compliance and rising rates of dumping duty.

Four Key Areas to Look Out For in Your Customer’s Transport Services Agreement

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Increasingly, customers are insisting that transport companies use their Transport Services Agreement, rather than the transport operator’s own terms and conditions. These customers will have undoubtedly allocated significant risks away from them to you, their service provider. Some key areas to check are:

  1. Rates: If your bid for the work assumes a minimum volume, ensure that your customer commits to that, or else give yourself a right to increase rates or to terminate. If you don’t have those rights, you’ll be taking the risk!  It’s important to stipulate that rates are regularly reviewed, including if the transport services change (eg. new routes) and that there is an objective process (preferably, a formula) that covers off on cost increases you are exposed to. If new charges or taxes are introduced, the contract should allow you to pass these through to your customer. Finally, beware of ‘most favoured nation’ clauses – these work in the customer’s favour and can be very difficult to manage with a range of customers once the contract is on foot.
  2. Exclusivity/minimum purchases/early termination: If you are not the exclusive provider (or don’t have a minimum purchase commitment), or your customer can terminate without cause, how will you recoup the capital expenditure (new trucks, trailers and depot works) that you have bought or leased to service the contract? If you are incurring significant capex, aim to secure from the customer a mixture of exclusivity, minimum volumes or a committed contract period. There is a similar issue for employees taken on to service a new contract.
  3. Liability management: We recommend a holistic approach to assessing your overall exposure and liability management. Some ‘tools’ available include:
    • contractual protections to ensure you have a reasonable opportunity to rectify
    • appropriate liability limitations and exclusions (e.g. of consequential loss)
    • insurance – a specialist insurance broker who understands your business and the industry can add value
    • contribution – ensure the contract only makes you liable for the losses you have caused.
  4. KPIs: These are increasingly common, with greater detail and more serious consequences if not met, including termination. KPIs should be objective and properly measurable. An appropriate cure regime should apply before triggering serious consequences.

Update | Banking and Finance | March 2019

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In this issue

  1. Implementation of reforms recommended by the Banking Royal Commission
  2. Spotlight on Internal Dispute Resolution processes and procedures
  3. Government announces review of financial counselling sector and funding arrangements
  4. ASIC consults on updating its responsible Lending Guidance
  5. New laws introduce harsher penalties for breach of corporate laws
  6. Senate Economics References Committee releases report on Credit and Financial Products

 

1.         Implementation of reforms recommended by the Banking Royal Commission.

The Final Report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry made 76 recommendations.

There has been a scramble by both the Government and the Labor opposition to announce what they propose doing in relation to implementing the reforms and their timing. Labour released its full response on 22 February 2019 – the Government’s response has been staggered.

In addition, Australian Securities and Investments Commission (ASIC) and the Australian Prudential and Regulation Authority (APRA) have put out a number of media and other releases on changes in their approach to supervision and enforcement.

We are currently finding two sources particularly useful in finding out exactly what is going on. These are the websites of –

These matters are being fully canvassed elsewhere and we don’t propose to comment further at this time until concrete steps are taken to put the recommendations into effect.

 

2.         Spotlight on Internal Dispute Resolution processes and procedures

In December 2018, ASIC released a report (Report 603) on the results of its research on customer experiences of Internal Dispute Resolution processes and procedures across the financial services sector: Report 603, The consumer journey through the Internal Dispute Resolution process of financial service providers.

ASIC states that in conducting the research, it sought to  better understand the experience of people thinking about or making a complaint to a financial services firm.

In the Media Release accompanying release of Report 603, ASIC stated the Key Findings of its research  were:

  • 17% of Australians considered making a complaint to a financial firm in the preceding 12 months (‘the considerers’)
  • 8% went on to make a complaint (‘the complainants’)
  • almost half of those who did not make a complaint reported that they did not think it would make a difference or it was not worth their time, and
  • 18% of complainants dropped out or withdrew their complaint before it was concluded.

ASIC states that common obstacles encountered by complainants include:

  • difficulty in finding the firm’s contact details to make a complaint
  • IDR process not explained well at first contact,
  • feeling that they had not been listened to or heard, and
  • passed around to too many people or strung along.

Only 45% of complainants who received an unfavourable outcome received an explanation of the decision.

Regulatory requirements for Internal Dispute Resolution processes and procedures

The requirements for Internal Dispute Resolution processes and procedures are set out in Regulatory Guide 165, Licensing: Internal and external dispute resolution.

Part B of RG 165 covers the requirements for IDR processes and procedures. See paragraphs RG 165.56 to RG 165.137, which cover 19 pages of the Regulatory Guide.

In addition, in designing and implementing IDR processes and procedures, Financial Firms must have to have regard to the Australian/New Zealand  Standard AS/NZS 10002:2014 “Guidelines for complaint management in organizations”, – another 61 page document.

What are financial firms doing wrong in relation to IDR?

We suspect that not enough attention has been given by Financial Firms to their IDR processes and procedures and the regulatory requirements.

IDR policies are required to be developed as part of the licence application process. We suspect that for many Financial Firms once the IDR policy has been prepared it might escape being regularly reviewed and updated.

We commonly encounter situations where Financial Firms do not fully understand what is classed as a complaint and what is not. ASIC takes the view that the definition of the expression “complaint” in Standard AS/NZS 10002:2014 is the appropriate definition.

Effective IDR processes are critical for Financial Firms, especially to avoid issues being referred by customers to the Australian Financial Complaints Authority with all the attendant costs and expenses.

 

What is ASIC proposing to do in relation to IDR processes and procedures?

Initially, ASIC is:

  • requesting that each financial firm assess whether its processes and procedures need to be reformed, and
  • proposing to conduct onsite visits.

 

ASIC is also proposing to conduct a review of Regulatory Guide 165. This review will consider, amongst other matters:

  • the definition of ‘complaint’ i.e. what triggers the IDR process;
  • requirements for complaints that are resolved immediately or within 5 business days
  • maximum IDR timeframes across all complaints including superannuation related complaints, and
  • giving of written reasons for decisions made.

 

Finally, ASIC will be looking at requiring financial firms to report IDR performance data to ASIC on an ongoing basis. ASIC notes in its media release that it has new powers to publish the IDR data on a firm-by-firm basis.

 

3.         Government announces review of financial counselling sector and funding arrangements

As if the government doesn’t have enough on its plate currently, the Treasurer, the Hon Josh Frydenberg MP, announced on the 7th February 2019 a review of the financial counselling sector with particular emphasis on adequacy of funding arrangements.

The announcement draws on observations made in the  Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry by Commissioner Hayne that “The desirability of predictable and stable funding for the legal assistance sector and financial counselling services is clear and how this may best be delivered is worthy of careful consideration.”

The review will be led by the Department of Social Services in consultation with Treasury and the Department of the Prime Minister and Cabinet.

The Labor opposition has also announced plans to enhance the financial counselling sectors including funding the appointment of additional lawyers.

Further details will be provided when available.

 

4.         ASIC consults on updating its responsible Lending Guidance

On 14 February 2019 ASIC released a consultation paper on whether the responsible lending guidance contained in Regulatory Guide 209 should be updated.

ASIC notes that although the responsible lending laws have not changed since 2010, it is nonetheless timely to review and update the guidance in light of its regulatory and enforcement work since 2011, changes in technology, and the recent final report of the Royal Commission.

Consultation will take place over a three month period, with comments due by Monday 20 May 2019. Public hearings are contemplated in addition to the usual written submissions.

It is clear from the consultation paper that there will be a major overhaul of Regulatory Guide 209.

ASIC notes in the consultation paper that is proposing to update or clarify current guidance in relation to the following matters:

  • forms of verification to clarify what kinds of information may be used
  • provide a list of forms of verification readily available and make it clear that what are reasonable steps will change overtime
  • what are reasonable steps to verify the financial information of a consumer
  • use of benchmarks
  • what constitutes making reasonable enquiries about a consumer’s requirements and objectives.

ASIC also notes that it considers it is appropriate to have Regulatory Guide 209 address the following new areas:

  • clarify where the responsible lending obligations do not apply, e.g. small business lending
  • clarify the role that compliance with responsible lending obligations has in mitigating the risk of loan fraud
  • how negative repayment history information may be used and the effect this may have on the types of enquiries that should be made
  • requirements for record maintenance as a means to demonstrate compliance with responsible lending obligations
  • clarifying the purpose and the matters to be included in the written credit assessments – provide a model template.

5.         New laws introduce harsher penalties for breach of corporate laws

The Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018  has now passed the Senate and will eventually become law. The legislation when enacted will introduce a significantly strengthened penalty regime for breaches of the  Corporations Act 2001, ASIC Act 2001 as well as the National Consumer Credit Protection Act 2009 and Insurance Contracts Act 1994. 

This follows significant increases made in 2018 to financial penalties under the Australian Consumer Law which took effect from 1 September 2018. Our earlier article on this topic

What this new legislation will do is not only increase both civil and criminal penalties but also expand the range of breaches of the law that attract civil and criminal penalties.

The changes are prospective, not retrospective.

Below we extract a summary of the changes to both criminal and civil penalties which was set out in the media release by the Treasurer, The Hon Josh Frydenberg MP.

 

Maximum Criminal Penalties
Old New
Individuals
5 years imprisonment and/or $42,000 15 years imprisonment and/or the greater of $945,000 or three times the benefit gained/loss avoided
Corporations
$210,000 The greater of $9.45 million or three times the benefit gained/loss avoided or 10 per cent of annual turnover

 

 

Maximum Civil Penalties
Old New
Individuals
$200,000 The greater of $1.05 million or three times the benefit gained/loss avoided
Corporations
$1 million $10.5 million or three times the benefit gained/loss avoided or 10 per cent of annual turnover
(capped at $525 million)

 

 

6.            Senate Economics References Committee releases report on Credit and Financial Products

On Friday 22 February 2019 the Senate Economics References Committee released its report into its enquiry into credit and financial products targeted at Australians at risk of financial hardship.

The first that many Australians would have known about the issue of this report would have been when they noticed that shares in Afterpay went up 19.9% on Monday 25 February – obviously indicating that the “Buy now, pay later” sector was relieved that the recommendations of the Senate Committee were not as bad as had been expected for that sector.

The Committee made 20 recommendations, many of which were predictable, including a call for the Government to pass the National Consumer Credit Protection Amendment (Small Amount Credit Contract and Consumer Lease Referral Forms) Bill 2017 – previously released as an exposure draft by Treasury. That Bill has not progressed in the last 2 years.

The Committee also called for a review to identify necessary reforms to regulatory arrangements for medium amount credit contract products (MACCs) (being loans for amounts between $2,000 and $5,000, made by the non ADI sector).

Two of the recommendations that bear further mention are:

  • Recommendation 8

That Government implement a new regulatory framework for all credit and debt management, credit repair and negotiation activities not currently licensed by the Australian Financial Security Authority.  The regulation contemplated includes:

  • – giving clients access to an external dispute resolution scheme;
  • – licensing or authorising operators;
  • – prohibiting upfront fees for service;
  • – prescribing a scale of costs;
  • – obliging providers to act in the best interests of clients at all times; and
  • – banning unsolicited sales.
  • Recommendation 9

This recommendation deals with the “buy now, pay later” sector. The recommendations are to:

–        require providers to consider customers’ personal financial situation before extending credit;

–        permit customers to have access to both internal and external dispute resolution schemes;

–        make hardship provisions available;

–        ensure that the products being financed are affordable and offer value for money; and

–        ensure that there is proper disclosure of terms and conditions.

While it is important clients are aware of the release of this report, the report itself does not really advance matters much further. Most of the recommended reforms have either already been undertaken or are in progress. An example of this is the comprehensive report released by ASIC in late November 2018 on the rapidly growing buy now pay later industry.

 

 

Indonesia and Australia Finally Ink a Free Trade Agreement

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On 4 March Australian and Indonesia signed a free trade agreement that has been a long time in the making.  Australia and Indonesia are both parties to the ASEAN-Australia-New Zealand FTA limiting the additional benefit of this bilateral FTA.  The major benefits will be for Australian exporters to Indonesia and service providers.

When will it commence

The FTA only commences when each country passes and implements its relevant domestic legislation.  Australia will undertake one or more parliamentary reviews of the FTA before a vote is taken on whether it should become law.  This process could be delayed by the expected mid-year Federal election.  As a guide to timing, the TPP was signed in early March 2018 and became law in late December 2018.

What are the benefits for Australian importers – duty rates

Almost all Indonesian imports are current duty free under the ASEAN FTA.  The remaining duties will become duty free on entry into force of the Indonesian FTA.  However, the benefit of this has been reduced due to the time that it has taken to finalise the agreement.  All goods from Indonesia would have been duty free on 1 January 2020 in any event under the ASEAN FTA.

What are the benefits for Australian exporters – duty rates

Duty rates on many Australian exports were not cut to zero under the ASEAN FTA.  The new bilateral FTA does not drop all duty rates to zero, but there are significant improvements.  Here is the DFAT summary of the outcomes in respect of goods.  Key winners are exporters of live cattle, frozen beef, sheep and goat meat, certain dairy products, honey, potatoes, carrots, mandarins, oranges, lemons and bananas.

In respect of manufactured goods, Indonesia had already provided strong commitments under the ASEAN FTA.  However, there are some improvements in respect of steel, copper cathodes, plastics, machinery, textiles, electronics and textiles.

Its not just about the rate of duty – check the rule of origin

The duty rates under the ASEAN FTA and the Indonesian FTA will often be the same.  However, an importer or exporter may find it easier to qualify for one FTA than the other.  The ASEAN FTA has the benefit that it allows content from NZ and other ASEAN countries to count as qualifying content.  However, it may be that for a particular tariff line there is a different rule of origin under each FTA.  For traders of goods that have any non-Indonesian or Australian content, the rules of origin should be closely reviewed.  You may find that a good that did not qualify under the ASEAN FTA will now qualify under the Indonesian FTA.

Certificate/declarations of origin

The biggest win for importers is the possibility of using declarations of origin, rather than certificates of origin under the ASEAN FTA.  A registration scheme will be in place in respect of declarations of origin.  Exporters will need to be registered or certified by the exporting country before they can use declarations of origin.  This will be better than the situation under ChAFTA but it is not as user friendly at the TPP.

Certificates of origin under the Indonesian FTA are not particularly exciting.  It is one COO per shipment, valid for 12 months from the date of issue and there is scope for certificates to be retrospectively issued within 12 months of export.

Declarations of origin will take no set form and can be electronic.  There are key data fields which those registering to use declarations of origin will need to ensure they meet.

Other points

  • The consignment provisions are as restrictive as those in the ASEAN FTA, including the requirement that the transhipment be justified by geographical, economical or logistical reasons.
  • The FTA will apply to goods entered for home consumption after the FTA commences.
  • The FTA requires the origin hardcopy COO to be forwarded to the importer for presentation to their customs authority. We assume this will not be enforced in respect of Australian imports.
  • The FTA contains a chapter on non-tariff measures, a first for an Australian FTA. This is targeted at import/export restrictions or licensing requirements.  Its main practical effect is expected to be a mechanism for raising and resolving concerns regarding non-tariff barriers.

The Australian Border Force has made no secret that compliance with FTA requirements is a focus area.  It is crucial with the multitude of overlapping FTAs that traders pay careful attention to which FTA is being used what are the particular requirements of that FTA.

Clean Up Australia – 29 Years of Caring for Our Environment

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Thirty years ago Clean Up Sydney Harbour was conceived by yachtsman Ian Kiernan. After its inaugural success, Clean Up Australia began its operations in 1990. Fast forward to 2019 and Clean Up Australia is Australia’s largest community event with a range of activities held around the country that serve to bring communities together to care for, and conserve our environment. Communities, youth groups, businesses and schools all pitch in to clear the landscape of rubbish and make Australia a healthier and more pristine environment in which to live. Hunt & Hunt has been proudly providing ongoing pro bono advice to Clean Up Australia for 12 years.

For Hunt & Hunt Partner Brett Hearnden, it has been an impressive 30 year journey:

“We never cease to be amazed at the hard work that goes on behind the scenes to make this event a success year after year. We wish the team at Clean Up Australia Day all the best for another productive weekend making our communities a cleaner and safer place to live. Hunt & Hunt is honoured to once again be the pro bono legal provider for this event.”

Clean Up Australia Day takes place this Sunday 3 March 2019. There are still opportunities to get involved if you think you might be able to spare some time to help in your local area.

Australian Tariff Classification Update

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Classification of common household products is not as straightforward as it seems

 What do baby wipes, vitamins, weight loss tablets and apple cider have in common? They have all been the subject of Australian legal decisions regarding their tariff classification. The relevance of the decisions goes beyond just the goods the subject of the decision, but extends to all importers for goods into Australia. The classification principles set out in the below cases need to be kept in mind no matter what the product.

Why is tariff classification important

Many would know that the tariff classification of goods drives the customs duty rate. However, the importance of classification goes beyond this and can be important for duty free goods.  Classification also impacts:

  • the application of free trade agreements
  • whether dumping duty applies
  • import and export restrictions applying to the goods
  • the use of tariff concession orders and by-laws.

Equally as important, the Australian Border Force expects importers to provide the correct information.  Penalties can apply for incorrect classifications, even if it does not have a duty impact.

Classification of vitamins

The Full Federal Court of Australia considered in Comptroller General of Customs v Pharm-A-Care Laboratories Pty Ltd [2018] whether vita-gummies should be classified to heading 3004 as a medicament, heading 1704 as sugar confectionary or 2106 as a food preparation.  A vita-gummy is a chewable gummy item that contains vitamins.

The vita-gummies should be classified to 3004 if they have a therapeutic or prophylactic use and are not a food (including a food supplement).  The Court readily accepted that vitamins have therapeutic or prophylactic uses – they prevent diseases that result from a vitamin deficiency.

The key issue was whether vitamins fit within the definition of food. The Court took a very simply approach to this question. The judges did not rely on experts or dictionary definitions.  Rather, the judges felt that when a word in issue is an everyday word, the Court can define that word based on its own experience. The Court found that a vitamin preparation would not ordinarily be described as food in the sense in which the word is ordinarily used. The Court did not define the term food, feeling that it is a word that does not have any absolute definition.

Lesson – if the term in dispute is an everyday item, the decision maker should not apply technical or strained meanings. The decision maker should apply their everyday understanding of the word.

Weight loss gummies

In the Pharm-A-Care case the Court also considered the classification of weight loss gummies. These were gummies that contained a garcinia cambogia extract. Again, the competing classifications were 3004 (medicament), 1704 (confectionary) and 2106 (food preparation). The Court found that the goods did not have a therapeutic or prophylactic use (there was no evidence the goods actually caused weight loss). However, the Court considered that a gummy consumed for cosmetic reasons could not be described as food. The Court upheld the earlier Tribunal’s decision that the goods should be classified according to the heading to which they were most akin. This was held to be medicaments.

Given that the product had no proven health benefits, this outcome is very surprising. The product was not classified as a food as it was taken for cosmetic reasons.  There are many foods that are consumed for reasons unrelated to nutrition. Given the weight loss gummies were dusted with sugar and contained sucrose, glucose syrup, gelatine and flavours (together with a plant extract) there is a very good argument that the goods are most akin to confectionary or a food preparation. Alternatively, if the defining feature of the product is the plant extract, perhaps the product was most akin to a plant extract.

Lesson – A product not clearly identifiable as food and consumed for a reason other than nutrition, may not be classified as a food.  This has significant impact for the health food industry.

Baby wipes

In Church & Dwight (Australia) Pty Ltd and Comptroller General of Customs [2019] the Administrative Appeals Tribunal (AAT) had to consider whether certain baby wipes were classified under heading 3401 as non-woven impregnated, coated or covered with soap or detergent or under heading 3004 (medicaments). The notes to 3004 set out that if the goods fit within both heading 3401 and 3004, the goods were to be classified to heading 3401.

One product was described as a water wipe and was impregnated with a solution that was 99% water. The solution used in the water wipes also included polysorbate 20 in a concentration of 0.125%. Polysorbate 20 can be used as a detergent, or as an emulsifier. The AAT received evidence from two experts. One expert argued that polysorbate 20 is a detergent regardless of how it is used in a particular product, the other argued that when used in the baby wipes, the polysorbate 20 has limited cleaning properties and should be identified by its use as an emulsifier.

The Tribunal preferred the more scientific approach which identified polysorbate by its objective properties (cleaning) and not the use to which they were put in the baby wipe. The Tribunal found that polysorbate 20 had cleaning properties and was therefore a detergent, even if it was also an emulsifier.

Lesson – A decision maker will focus on the objective properties of a good over the particular use to which the good is put by the importer. 

Fun fact – the detergent polysorbate 20 is sometimes used as an ingredient in ice-cream.

Apple cider

In Australia there are certain limited circumstances under which apple cider will not attract large excise equivalent duties. To be an excise free apple cider it must not have had added to it, at any time, any liquor or substance (other than water or the juice or must of apples or pears) that gives colour or flavour. In Woolworths Group Ltd v Comptroller-General of Customs [2019] the AAT had to consider whether apple cider that contained caramelised apple juice concentrate fit this definition.

The caramelised apple juice concentrate was added to enhance the colour and taste of the cider. Custom argued that through caramelisation, the additive could no longer be identified as “apple juice”. Rather, it has been transformed into something else.

The importer produced expert evidence that the caramelised concentrate was  still apple juice, just more concentrated. It was argued that only water needed to be added to produce apple juice which could be consumed or sold as apple juice.

The Tribunal held that the caramelised concentrate was still apple juice, it had not been made into something else. Rather, it has just been made more delicious.

Apple juice is a word of ordinary meaning. It is surprising that the Tribunal needed the evidence of an expert to define this term.

Lesson – Cases are inconsistent. Despite the approach advocated by the Full Federal Court, even with words of everyday use, decision makers will still refer to expert evidence to make decisions. If you are unhappy with an outcome by the Australian Border Force, it is worth engaging a lawyer to present your case to the AAT.

Classification can be difficult and it is an area where reasonable people can come to different conclusions. We are happy to review your case and provide you with an honest opinion as to the chances of a successful appeal. Given the complexities of tariff classification and the impact of getting it wrong, this is an area where importers and their customs brokers need to proactively manage the risk and not simply hope that there is never an audit.