Customs Legislation Amendment and Repeal (International Trade Modernisation) Bill 2001

Explanatory Memorandum

(Circulated by authority of the Minister for Justice and Customs, Senator the Hon Christopher Martin Ellison)
This memorandum takes account of amendments made by the House of Representatives to the bill as introduced.

Schedule 2 - Commercial Compliance Measures

Proposed amendment of Customs legislation to provide for common and consistent document retention obligations, audit powers and deterrent penalty provisions to cover the entire range of Customs commercial activities.

1. Problem or issue identification

1.1 Document Retention

Section 240 of the Customs Act 1901 contains provisions in relation to document retention which apply to goods that are the subject of an import or export entry or an import return. In its current format this provision provides the majority of the obligations and powers considered necessary to enable a self-assessment regime based on post transaction audits to be effective. It does not however cover some sectors of Customs client base nor does it reflect technological change. It is proposed to change the way in which documents might be kept, the copying of such documents or the translation of documents into electronic format to reflect the changes made to technology and to recognise current commercial business practice.

The Section also needs to be expanded to cover other import related activities not presently caught (ie. refund, rebate or drawback applications), without however altering the current policy intent that it should represent that broad class of persons involved in the communication of import or export information to Customs. This amendment is particularly necessary given that the importing and exporting industry consists of a large number of people, all of which perform different functions at different stages of importation or exportation. This will mean that the entire range of Customs commercial activities will be covered under a single document retention and production obligation, thereby addressing previous anomalies within the legislation.

It is proposed that owners will be required to retain and produce documents for 5 years; those who communicate information will be required to retain and produce documents for 12 months. The different time periods reflect different purposes and time frames for auditing owners compared with communicators. The document retention and production requirements are necessary to assess whether the person is complying with a Customs related Act or the correctness of information communicated by, or on behalf of, the person to Customs.

1.2 Audit Powers

Audit powers are the lynch-pin of a self-assessment program, because they enable the administrator to monitor compliance after the conclusion of a particular transaction to which the relevant self-assessment scheme relates. This post transaction audit ability is a necessary pre-condition to a self-assessment regime where information supplied is treated,at first instance, as true and correct.

The current non-warrant commercial audit power in s.214AA of the Act is limited to only a few import and export functions. Refunds, drawbacks, elements of the offset-schemes, non-entry export goods, to name but a few, are not covered. In addition, for those limited areas which are covered, the powers need to be modernised to enable the auditing of computer operating, accounting and internal control systems which might be employed to generate the various documents provided or communicated to Customs.

The current monitoring powers also need to be modernised to reflect Government policy. The powers will continue to be consent based, that is consent is sought from the occupier of the premises to enter and that consent may be refused or subsequently withdrawn. Although the preferred means of entry to premises is through consent (the consent of the occupier is needed) a warrant may be sought initially or where consent is refused or later withdrawn.

Finally, several general examination and inspection powers are needed for the audit process. These powers will cover activities to assess the accuracy of information provided to Customs.

1.3 Deterrent Penalties

The final pre-requisite for an effective self-assessment regime is an appropriate penalty system. That system should provide appropriate penalty options to ensure that the regime operates expeditiously and encourages compliance by means of pecuniary penalties that are not only perceived as a sufficient deterrent, but are in fact capable of achieving that end result. An administrative penalty option is frequently included in a self-assessment model, and is an appropriate sanction to ensure the accuracy of information.

The current administrative penalty option in sections 243T and 243U of the Act, introduced in 1989, is limited to revenue errors resulting in duty short payment appearing on import entries only (errors on export entries, refund or drawback applications, movement permissions, or Cargo reports, to name but a few, are not covered). Another glaring problem is that the model involves an almost automatic remission facility, because the quantum of the initial administrative penalty is set at 200% of the value of the underpaid duty, which in many circumstances exceeds the level of penalty a Court might consider for an offence which requires a guilty mind on the part of the offender. This is an onerous and administratively inefficient method of monitoring compliance.

It is proposed to replace the existing administrative penalty regime with a model more closely aligned with the Diesel Fuel Rebate Scheme (s.164A to s.164AC of the Act), which was introduced as part of the Diesel Fuel Modernisation Project (Act No. 97 of 1997). The imposition of sanctions in the model starts with a simple recovery option for the duty shortpaid, or unrepaid refund or drawback of duty and then introduces three levels of sanctions, in descending order of severity, namely;

prosecutable offences where a mental element must be proved;
strict liability offences where only the physical elements need be proved;
administrative penalties imposed by means of an infringement notice

The administrative penalty option is a reasonable alternative for any person who makes an error that would result in a strict liability offence and the facts surrounding the error are not in dispute. Rather than face the prospect of an offence punishable in Court with a penalty up to five times the administrative penalty, such person might well be inclined to pay the administrative penalty if presented with that option.

The proposed model is expected to offer a more effective and expeditious process of monitoring and facilitating compliance than the current scheme.

Until the introduction of the GST there were no revenue liability considerations in relation to exports, which are currently valued at approximately $100 billion. Under the Governments new tax system supplies of goods are GST free if exported within 60 days from the date of supply. The extended application of penalties for false or misleading statements in export communications will provide greater incentive to provide correct information to Customs, thereby enhancing Customs capacity to ensure compliance with the export requirements of the GST legislation.

In addition to ensuring compliance with the GST legislation, Customs needs to improve export data integrity. The current reporting regime for exports (that is, export entries) relies on the information provided in those entries to determine the nature and extent of the control which Customs is expected to administer over the movement of goods from Australia. The volume of export information communicated to Customs, coupled with the time sensitive nature of export trade, provides little opportunity for pre-export checks of export entries. Increasingly, the reality is post-export audit examination.

Customs and the Australian Bureau of Statistics (the ABS) have recognised that the integrity of data in export entries needs to be improved. The Jet Fresh "Paddock to Plate" Report (1996) of the House of Representatives Standing Committee on Communications, Transport and Microeconomic Reform, included the result of a survey conducted in respect of export entries lodged in Melbourne over a three month period. The survey indicated a relatively high number of errors. While it was limited to a relatively small number of transactions, it may be indicative of more widespread inaccurate reporting in export entries generally. Customs is proposing the introduction of penalty sanctions to help improve the accuracy of export information. Accurate export data is necessary to ensure proper reporting of Australias balance of payments and statistics.

2. Policy objective

2.1 The policy objective is to modernise the regulatory regime administered by Customs in relation to document retention, audit powers and deterrent penalties to enhance compliance with government requirements.

The objective is to align the compliance regime with Government and criminal law policy relating to auditing/monitoring powers and commercial penalty regimes. The proposals reflect, inter alia, the Senate Standing Committee for the Scrutiny of Bills Fourth Report into Entry and Search Provisions into Commonwealth Legislation. The proposals also have been developed in consultation with the Attorney-Generals Department to ensure that they are in accordance with current criminal law policy.

The broader objective is to ensure through the above regulatory mechanism that the correct amount of Customs duty is calculated and collected, and that refunds of Customs duty, which might subsequently be made, are correctly claimed and paid. Similarly, it is imperative that accurate information is provided to Customs to ensure that Customs may fulfil the broader objective. This includes ensuring the correct amount of duty is calculated and collected, but extends to ensuring that the information provided to Customs is accurate - the information is used by the ABS for trade data purposes. It is therefore imperative that Customs has an ability to monitor compliance with its requirements and those of other agencies.

3. Options

Option 1 - Maintain Current Practice

By maintaining the current practice, the powers, penalties and commercial requirements do not reflect current Government and criminal law policy and current commercial practice.

Option 2 - Extend the compliance improvement model

As highlighted in paragraphs 1.1, 1.2 and 1.3, there are problems with the current compliance improvement model. The regulatory mechanisms (as discussed especially throughout paragraphs 1.1, 1.2 and 1.3) propose to extend the compliance improvement model introduced for the Diesel Fuel Rebate Scheme (via Act No. 97 of 1997), to the other areas of Customs commercial activities which either operate in a self-assessment environment, or are moving to that position. The objective is to modernise the existing audit powers, penalty regime and commercial requirements those provisions of the Customs Act will reflect current Government and criminal law policy and will offer a more expeditious and efficient penalty regime.

4. Assessment of impact (cost and benefits) of options

4.1 Impact group identification

Exporters (including owners, freight forwarders, customs agents, air couriers, slot charterers, export consolidators, shipping companies, airline companies, etc.)
Importers (including owners, freight forwarders, customs agents, air couriers, slot charterers, shipping companies, airline companies, etc.)
Government agencies

It is not expected that the proposed legislative provisions will impact greatly on the Industry groups identified as the changes are designed to modernise the existing provisions, particularly in the area of computing systems, as well as make consistent the requirements under the Act with other statutory and common law requirements. Administrative penalties will, however, be extended to industry groups not currently subject to them.

4.2 Assessment of costs and benefits

4.2.1 Document Retention

a) Importers/Exporters

The owner of goods is defined to include any person being or holding himself out to be the owner, importer, exporter, consignee, agent or person possessed of, or beneficially interested in, or having any control of, or power of disposition over the goods. The existing document retention provision is currently imposed on the majority of people who will be affected by the proposed legislative change to impose an obligation to retain and produce documents containing information relating to a communication made to Customs, namely those involved in the import/export chain.

It is anticipated that these provisions will, in the main, have a minimal impact on the importing and exporting community because the proposed legislative amendments are intended to allow importers and exporters to take advantage of technology to retain documents or records, whether in Australia or overseas. The impact of permitting the retention of documentation in an electronic format is likely to be beneficial to many large scale importers, as data stored electronically does not provide the same storage problems as hard copy. Most importers already maintain documents in electronic format as this is the preferred means of communication with Customs for lodgement of entries.

While there may be a cost to industry, particularly exporters, associated with the proposed modernisation of document retention provisions in the area of storage facilities for data, in the majority of cases, it is considered the costs will be minimal as those persons are currently caught by the Acts antiquated obligation which makes no provision for the translation or copying of hard copy documents into electronic format.

It is envisaged that some costs could be incurred as a result of the changes, whereby it is proposed that any person who communicates information to Customs in relation to import/export entries will be obliged to produce documents in relation to that communication, when requested by Customs to do so. Some people in the import/export chain (not expressly covered by the broad definition of owner) who previously have not kept documents will now be required to do so. Consequently, such people may incur storage and administrative costs, as a result of these obligations.

b) Government

It is not envisaged that there will be any costs to Government associated with the proposed document retention and production provisions. The benefits will include improved ability for Customs and the Australian Taxation Office to conduct post-transaction audits. It will also prove useful in further validating data integrity for the purposes of ABS trade figures.

4.2.2 Audit Powers

a) Importers/Exporters

It is considered the modernisation of the non-warrant commercial audit powers, especially in regard to the legislative ability to audit computer operating, accounting and internal control systems which might be employed to generate the various documents provided or communicated to Customs, will have minimal impact in terms of costs on the importing and exporting community to which the audit provisions currently apply.

b) Government

The new audit provisions will improve Customs ability to check the veracity of information submitted to it. It will enable Customs to monitor compliance with the Customs Act 1901 and Customs related laws.

4.2.3 Deterrent Penalties

a) Importers/Exporters

The evaluation of the EXIT (Customs Export Integration) System in 1997 identified areas of concern to industry such as inconsistent practices and procedures and the necessity for enforcement of penalties. The perceived benefit to Industry from the modernisation of the penalty sanction provisions ensures an improved level of compliance with the proposed legislation within the import and export sectors, therefore achieving a level playing field for all potential competitors.

b) Government

The extension of an appropriate and consistent deterrent penalty sanction to the entire range of Customs commercial activities should assist the effective management of Customs compliance responsibilities.

5. Consultation

The Customs EXIT Evaluation Team in 1997 established an Export Industry Consultative Group (EICG) to provide clients and stakeholders with the opportunity for direct involvement and influence on the developments within EXIT and the export process. The EICG consisted of representatives from export groups which in the main, are also representatives of the importing industry. It enabled the members to obtain a broad understanding of the nature of the problems Industry had in respect of the export process, but also provided an excellent mechanism for conveying Government requirements and concerns to Industry.

The Jet Fresh Report recommended that Customs in consultation with the Australian Quarantine Inspection Service and ABS initiate action to improve exporter knowledge of export clearance regulations and procedures. Additionally, the Committee recommended Customs and ABS review the accuracy and completeness of export data supplied to the ABS with a view to improving it via common and consistent enforcement powers.

Customs has more recently discussed the proposed issues with industry, in a series of detailed seminars that were held throughout the country during July and August 2000. There were representatives from across all sectors of industry in attendance.

The seminars provided detailed information on the proposed legislation and how the penalty regime might be administered. Industry generally supported the proposals. Following the industry consultation seminars, Customs revisited the document retention and production proposal - the current policy position addresses industrys concerns with the previous proposal.

6. Conclusion and recommended option

In conclusion, it is recommended that Option 2, which proposes to extend the compliance improvement model introduced for the Diesel Fuel Rebate Scheme in 1997 to other areas of Customs commercial activities, be considered as the primary means of achieving the desired policy objectives. This option is simply an extension of the current Customs commercial compliance provisions which have already received endorsement both from the Parliament and Industry.

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