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New Customs legislation to change the effect of recent Australian cases – However, we still need to learn French

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Over the past few years, Customs has had some major, and at times, surprising losses in Australian Courts and Tribunals (including one case where wheelie bins were classified as vehicles!).  The most high profile loss concerned the classification of vita-gummies where the High Court held that they should be classified as a medicament rather than food.

Legislation has been introduced to parliament to prevent a replication of outcomes like these in respect of future imports.  The outcome will mean that future imports will be taxed as the Government intended.  However, the legislation does not undo the judicial reasoning that resulted in Customs losing those cases.  Most significantly, we are still stuck with the position that the French text of the Harmonised System (HS) Code needs to be considered when interpreting the Customs Tariff Act (which, incidentally, is in English).

Customs Tariff Amendment (Incorporation of Proposals and Other Measures) Bill 2020

The proposed legislation seeks to change the tariff outcome in a number of important cases as set out below:

  • Pharma-Care – Vitamins and other supplements – In this case health products being vitamins and garcinia extracts were held to fit within Chapter 30 as a medicament. Although Customs lost the case at the High Court, the Court did uphold Customs’ argument that when interpreting the Australian HS code, the corresponding provisions of the French text of the code must be considered.  The legislation amends the classification outcome of the case by seeking to add a new note that specifically exclude vitamins and other supplements from Chapter 30.  The goods will be classified to heading 2106 unless another more specific provision applies.  This amendment is consistent with the amendments to the explanatory notes made by the World Customs Organisation (WCO) HS Committee in 2019.
  • Sulo – Wheelie Bins – In this case, the Administrative Appeals Tribunal (AAT) held that wheelie bins should be classified in Chapter 87 as vehicles, as they are essentially designed for the movement of goods, being waste.  Customs had argued for classification to Chapter 39 on the basis of explanatory notes that stated that dustbins fall in Chapter 39.  The AAT criticised this approach, holding that the explanatory notes should not be used to create ambiguity where there is no ambiguity in the terms of the headings.  Since this decision, the WCO has expressly changed the explanatory notes so that wheelie bins are expressly excluded from Chapter 87.  On this basis, Customs has sought that chapter notes be added to Chapter 87 of the Australian legislation stating that the heading does not cover wheelie bins.
  • Smoothflow – Fire Pipes – The classification outcome in this case was driven by an attempt to avoid dumping duties on hollow structural sections (steel pipes and tubes). The importer sought classification to heading 7308 on the basis that the heading applied to pipes used in connection with a structure (as opposed to forming part of the structure).  The AAT agreed with the importer following consideration of the French text of the HS code.  Customs is in the process of appealing this decision.  The outcome for future importers will be decided not by that appeal, but by this legislation which provides that tubes and pipes prepared for the conveyance of fluids (water, oil and gas) are not included in heading 7308.
  • Solu – Goods cut to size after import – This case concerned the tariff classification of various aluminium extrusions to be used as rails and handles. The goods would almost always be cut to size after importation.  The AAT held that the need to cut to size did not alter the classification of the goods.  This was because at the time of import, those goods had the essential character of a complete or finished article.  This case had a significant dumping duty impact as the aluminium extrusions were not classified to Chapter 76 which attract dumping duties.  Rather than appealing the AAT finding regarding parts versus finished goods, Customs has instead sought legislative amendment so that headings 7308 (iron/steel structures), 7610 (aluminium structures), 8302 (mountings/fittings) and 9403 (furniture parts) do not include goods that require further modification before use, including but not limited to, cutting, drilling and bending.

Customs Overreach

The proposed amendment based on “further modification” to plates, rods, angles, shapes, sections, tubes and pipes seems to go much further than was necessary to address the issues arising from the Solu case.  For instance, if cabinetry rails were cut to the precise size at the time of import, but did not have screw holes, the item would require drilling and would now be excluded from heading 9403.

The term “further modification” is too wide and goes beyond established identification principles.  Some modification will be so minor that the good should rightly be classified to heading 7308, 7610, 8302 or 9403 as applicable.  The proposed amendments could prevent this outcome.

The answer may be for importers to argue that a particular good has such features at the time of import that it is correctly identified as a furniture or building part, rather than a mere “plate, rod, angles, shape, section, tube or pipe”.  If this is the case, the new notes would not exclude the good, despite the need for further modification, as the new notes only apply to goods identified as mere ” plates, rods, angles, shapes, sections, tubes or pipes”.  These arguments will be strongest where the required modification is very minor.

Commencement of New Classifications

The new classification rules will only apply to goods imported after the date that the legislation commences, which is the 28th day after the Act receives Royal Assent.  At this stage the bill has not passed the Senate.  The changes will take effect from some time in 2021.

Implications

Importers need to consider the following:

  • tariff concessions orders that rely on a classification that will change after the bill is passed
  • duty free vitamin and health supplements that will in the future be classified as a food that attracts duty
  • dumping duty payable on steel pipes and aluminium extrusions that are currently classed as parts of a building or furniture
  • steel and aluminium products that require some minor further modification before use that may in the future (perhaps inadvertently) be classified to a different heading
  • the HS code on certificates of origin for affected goods
  • tariff advices applying to affected products – legislative amendment is a ground on which Customs can revoke a tariff advice

Please feel free to contact us if you would like to discuss how the proposed amendments will affect your products.

 

Australia’s highest court rules on tariff classification – wins and losses for industry

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The High Court has found against the Comptroller-General of Customs and handed down a decision that vita-gummies are classified as a duty free medicament and not as food.  However, in reaching its decision it made a number of findings that could have a wide impact on future classification decision.  These findings include that when interpreting the tariff it is appropriate to have reference to the French version of the harmonised code.

The key issue

Comptroller-General of Customs and Pharm-A-Care Laboratories Pty Ltd involves the tariff classification of certain vitamins and a plant extract design to assist with weight loss.  Both products are sold as gummies, meaning the active ingredient is delivered by a lolly type product.

The issue was whether the gummies should be classified to heading 3004 (medicaments for therapeutic or prophylactic uses), 2106 (food preparations) or 1704 (sugar confectionary).  The AAT found that the gummies had health benefits so therefore fit within heading 3004 unless note 1(a) to chapter 30 applied.  Heading 1(a) provides that the chapter does not cover:

“Foods or beverages (such as dietetic, diabetic or fortified foods, food supplements, tonic beverages and mineral waters), other than nutritional preparation for intravenous administration (Section IV).”

The AAT and Full Federal Court both held that the wording of note 1(a) meant that the examples in brackets are only excluded if they are “foods or beverages”.  In particular, it was held that for a food supplement to be covered by the note, the food supplement must first be a “food”.

The High Court held that although the AAT and the Federal Court incorrectly interpreted note 1(a) (see discussion below), this did not produce the wrong result.  This was because the AAT had correctly found that the vita-gummies were not a “food supplement” and had found that that the vita-gummies were correctly described as having a therapeutic or prophylactic use.  As such, classified to heading 3004 was appropriate.

French vs English Text

Customs had argued that the clear introductory words of note 1(a) “Food or beverages (such as…” should be read in a different way as those same words are completely absent from the French version of the harmonised code. 

The High Court accepted this argument and said that the note should be interpreted as only excluding the words in brackets, being “dietetic, diabetic or fortified foods, food supplements, tonic beverages and mineral waters”.  This had the outcome that note 1(a) does not exclude food or beverages generally, but rather only the specific examples provided.  Further, a good must only meet this description and need not also be categorised as a food or beverage.

This is a dramatic change in the meaning of the note and one that is not open on a fair reading of the English words alone.  This shows the impact of adopting an interpretation consistent with the French wording.  It raising the following implications:

  • When should customs brokers and ABF officers refer to the French version of the tariff over the version adopted by the Australian parliament?
  • How would those administering the tariff even know when there is a material difference between the French and the English versions.
  • If the English version is required to be tested against the French version, could any ABF officer or Customs Broker properly do their job without being able to read French?
  • Even if you find a difference between the English and French versions, what guidance is there to which version should be preferred?

The approach put by Customs and accepted by the High Court has the potential to turn tariff classification into a linguistic nightmare.

 Are “food and beverages” no longer excluded by the note to Chapter 30?

This may be a case of being careful for what you wish for.  Prior to this decision it was a given that a food or beverage was excluded from Chapter 30 by reason of note 1(a) stating that the chapter does not cover “food or beverages…”.  However, the High Court has held that the note only applies to “dietetic, diabetic or fortified foods, food supplements, tonic beverages and mineral waters” and not food and beverages more generally.

Of course the food or beverage must still be fit within the term “medicament” and have a therapeutic or prophylactic benefit to fall within heading 3004.  However, if this hurdle is reached, it may not be a case of the Court having to consider two competing headings (heading 3004 and a food chapter) as some of the food chapters have notes saying that the chapter does not cover goods of 3004.  The potential for unexpected outcomes seems high.

Reference to bracketed tariff headings in notes

At the end of note 1(a) were the bracketed word “(Section IV)“.  Then Full Court held that the words in brackets meant that note 1(a) only excluded food or beverages falling within section IV of the tariff.

Customs argued, and the High Court agreed, that the words “(Section IV)” are merely a guide to the reader, indicating where the items listed in note 1(a) might be classified if excluded from chapter 30.

Reference to section, chapters and headings in brackets should only be taken as a guidance note and do not have the force of including or excluding particular goods.  This should be contrasted to a note that specifically states “excluding goods of …”.

Again, this is a problematic outcome as bracketed chapter/heading references have acted as a good aid to tariff classification.  These words will now be taken as having no legal influence over the correct classification of goods.

There was some good news…

Conventional tariff classification has followed an approach of objective identification of goods followed by a separate step of classifying the goods as identified.  The correctness of this approach was strongly upheld by the High Court.

This was a rejection of a confused approach to classification argued by Customs which seemed to involved firstly breaking complete goods down into their ingredients and classifying according to the various ingredients by reference to terminology in tariff headings.  The High Court expressly reject classifying a good as if it is a mixture, if it can in fact be classified under interpretative rule 1 (according to headings and notes).

The Court highlighted that in classifying the goods, the Tribunal had correctly asked the basic questions “what really are the goods, and what really is it that they do”.  This seems like a common sense starting point when classifying goods.

What next? – Refunds, legislative change and testing the limits of the judgement

This case represents the end of the judicial process – there will be no further appeals.

Refunds – Importers of heath and cosmetic products (including vitamins) need to review the past and future classification of their goods.  There may be refund opportunities for products previously classified as food.  This will be of particular importance for goods from Europe where there is no Free Trade Agreement.

Legislative change – Clearly the Government did not want the outcome that vitamins were duty free.  The taxation of imported vitamins is a policy decision.  However, Australia will not be able to raise tariffs for heading 3004 above its WTO commitments.  An alternative may be for Australia to amend the legislation to specifically list vitamins as subheadings in its desired chapter

Where does it end – Importers are likely to review their range of products to identify goods that have either a therapeutic, preventative or cosmetic purpose and form a view as to which should fall to chapter 30.  The primary area of focus is likely to be foods sold for a specific health benefit rather than to be consumed for general nourishment.

Re-test the issue – In its closing paragraph, the High Court noted that it had not expressed an opinion on whether vitamins actually have a health benefit as it was not a point of appeal raised by Customs.  This may have been a suggestion that the issue is still open.  Customs may consider one option is to tackle future attempts to classify edibles to heading 3004 by arguing a lack of health benefits.  If it does so, it should remember that the garcinia extract was classified to heading 3004 despite it having only cosmetic benefits.

Please contact us if you would like to discuss how this case applies to your imports.