Explanatory Memorandum
(Circulated by authority of the Minister for Justice and Customs, Senator the Honourable Christopher Martin Ellison)Schedule 3 - us originating goods
Customs Act 1901
39. Division 1C of Part VIII of the Customs Act contains the rules for determining whether goods imported into Australia from the United States are "US originating goods" and thereby eligible for preferential rates of customs duty. Division 1C was inserted into the Customs Act by Schedule 1 to the US Free Trade Agreement Implementation Act 2004 and implements, for Australia, the Australia-United States Free Trade Agreement (the Agreement). Division 1C commenced on 1 January 2005.
40. However, Division 1C contains a small number of minor errors which mean that Division 1C does not accurately reflect the terms of the Agreement. The amendments set out in this Schedule will correct these errors.
Items 1 and 2 Subsection 153YA(1)
41. These items will amend subsection 153YA(1) of the Customs Act by repealing the current definition of "national" and inserting a new definition of "person of the US" which is defined as a person of a Party within the meaning, in so far as it relates to the US, of Article 1.2 of the Agreement. This new definition is being inserted for the purposes of items 3 and 4 of Schedule 3.
Item 3 and 4 Paragraphs 153YB(2)(g) and (h)
42. These items omit the references to "national of the US" and substitute references to "person of the US" in paragraphs 153YB(2)(g) and (h) of the Customs Act.
43. Paragraphs 153YB(2)(g) and (h) set out the circumstances in which goods are wholly obtained or produced entirely in the US and are therefore US originating goods. In general terms, they apply to goods taken from the seabed by a national of the US or taken from outer space by national of the US. "National of the US" has the meaning given by Annex 1-A to Chapter 1 of the Agreement.
44. The reference to a "national of the US" is considered too narrow because Annex 1-A defines this term to be only a natural person. It was not proposed to restrict eligibility under these paragraphs to natural persons only.
45. Article 1.2 of the Agreement defines "person of a Party' as a national or an enterprise of a Party and an "enterprise" is defined as any entity constituted or organized under applicable law, whether or not for profit, and whether privately or governmentally-owned, including any corporation, trust, partnership, sole proprietorship, joint venture or other association. Therefore, eligibility under paragraphs153YB(2)(g) and (h) will be extended beyond a natural person to all those associations, in so far as they relate to the US.
Item 5 Subparagraph 153YE(2)(b)(i)
46. This item amends subparagraph 153YE(2)(b)(i) of the Customs Act by inserting the phrase "that do not satisfy the transformation test (see subsection (8))" after "materials".
47. Section 153YE sets out the circumstances in which manufactured goods, other than textiles and clothing, are US originating goods. Subsection 153YE(2) sets out the first requirement that applies if a change in tariff classification is specified in column 3 of the Schedule 1 tariff table opposite the final classification of the goods. The first requirement relates to the change in tariff classification provisions set out in paragraph (b) of Article 5.1 and paragraph 1(a) of Article 5.2 of the Agreement.
48. The principle of change in tariff classification only applies to non-originating materials and means that goods that are sourced from outside or within the US or Australia and that are used to produce other goods may not have the same classification under the Harmonized System or the Harmonized US Tariff Schedule as the final goods into which they are produced.
49. A change in tariff classification requires that the goods must be classified under one tariff classification before the production process and under a different tariff classification after the production process. This approach ensures that sufficient transformation of materials has occurred within the US, or the US and Australia, to justify the claim that the goods are the produce of the US. The change in tariff classification concept is implemented in subsection 153YE(8) by the transformation test in relation to goods other than textiles or clothing.
50. Under paragraph (b) of Article 5.1 of the Agreement, all the non-originating materials used to produce a good must satisfy the change in tariff classification applicable to that good for the good to be an US originating good. Paragraph 1(a) of Article 5.2 of the Agreement provides a qualification to paragraph (b) of Article 5.1 known as the de minimis rule applicable to Annex 5-A, which covers goods that are not textiles or clothing. The effect of this rule is that, if the total value of all non-originating materials used to produce a good that do not undergo the required change in tariff classification does not exceed 10% of the customs value of the good, the good does not have to meet the change in tariff classification requirement set out in paragraph (b) of Article 5.1.
51. Subparagraph 153YE(2)(b)(i) is intended to give effect to the de minimis rule set out in paragraph 1(a) of Article 5.2 of the Agreement. However, current subparagraph 153YE(2)(b)(i) applies the de minimis rule in respect of all non-originating materials, as opposed to all non-originating materials that do not undergo the required change in tariff classification (i.e. that do not satisfy the transformation test). Therefore, the phrase "that do not satisfy the transformation test" is inserted into this provision to ensure that section 153YE more accurately reflects the terms of paragraph 1(a) of Article 5.2 of the Agreement.
Item 6 After paragraph 153YH(1)(b)
52. This item amends subsection 153YH(1) of the Customs Act by inserting a new paragraph (ba).
53. Section 153YH sets out the circumstances in which manufactured goods that are textiles or clothing are US originating goods. Subsection 153YH(1) sets out the requirements that must be met in order for the textiles or clothing to be US originating goods, pursuant to Chapter 4 of the Agreement. However, subsection 153YH(1) does not include the requirement set out in paragraph 7 of Article 4.2 of Chapter 4 of the Agreement.
54. Under paragraph 7 of Article 4.2 of the Agreement, goods that are textiles or clothing containing elastomeric yarns in the component of the goods that determines the final classification of the goods shall be considered to be US originating goods only if the elastomeric yarns are produced entirely in the US or Australia.
55. Elastomeric yarns are threads that are made using fibres formed from elastic, rubber-like substances occurring naturally (natural rubber) or produced synthetically (butyl rubber, neoprene). An example of an elastomeric yarn is the synthetic fibre elastane (known in the US as spandex, a commercial brand of which is Lycra).
56. New paragraph 153YH(1)(ba) gives effect to the requirement set out in paragraph 7 of Article 4.2 of the Agreement.
Item 7 Subsection 153YH(1)(note)
57. This item is a technical amendment to the note at the end of subsection 153YH(1) as a consequence of the insertion of a new note by item 8 of this Schedule.
Item 8 At the end of subsection 153YH(1)
58. This item amends subsection 153YH(1) of the Customs Act by inserting a new note. This note provides that new paragraph (1)(ba) relates to paragraph 7 of Article 4.2 of the Agreement.
Item 9 Subparagraph 153YH(2)(b)(i)
59. This item amends subsection 153YH(2) of the Customs Act by repealing and substituting subparagraph (b)(i).
60. Section 153YH sets out the circumstances in which manufactured goods that are textiles or clothing are US originating goods. Subsection 153YH(2)(b) sets out the first requirement that applies if a change in tariff classification is specified in column 3 of the Schedule 2 tariff table opposite the final classification of the goods. The first requirement relates to the change in tariff classification provisions set out in paragraph (c) of Article 5.1 of the Agreement and paragraph 6 of Article 4.2 of the Agreement. The change in tariff classification principle is implemented in subsection 153YH(7) by the transformation test in relation to goods that are textiles or clothing.
61. Under paragraph (c) of Article 5.1 of the Agreement, all the non-originating materials used to produce a textile or clothing good must satisfy the change in tariff classification specified in Annex 4-A. Paragraph 6 of Article 4.2 of the Agreement sets out the de minimis rule applicable to Annex 4-A (which covers goods that are textiles or clothing) that provides a qualification to paragraph (c) of Article 5.1. The effect of this rule is that, if the total weight of all non-originating materials that:
- 61.1.
- are used to produce the component of the good that determines the tariff classification of the good; and
- 61.2.
- do not undergo the required change in tariff classification,
does not exceed 7% of the total weight of that component, the good does not have to meet the change in tariff classification requirement set out in paragraph (c) of Article 5.1.
62. Subparagraph 153YH(2)(b)(i) is intended to give effect to the de minimis rule set out in paragraph 6 of Article 4.2 of the Agreement. Current subparagraph 153YH(2)(b)(i) does not accurately implement paragraph 6 of Article 4.2 because the subparagraph covers the weight of all non-originating materials rather than the weight of the non-originating materials of the component that determines the tariff classification of the good.
63. New subparagraph 153YH(2)(b)(i) sets out the circumstance that enlivens the de minimis rule as when the total weight of all the relevant non-originating materials does not exceed 7% of the total weight of the component that determines the final classification of the goods. The term "relevant non-originating materials" is defined by new subsection 153YH(8) (inserted by item 10A to this Schedule) and means, in relation to goods, non-originating materials that:
- 63.1.
- are used to produce the component of the good that determines the final classification of the goods; and
- 63.2.
- do not satisfy the transformation test.
64. The substituted wording in new subparagraph (b)(i), read together with new subsection 153YH(8), more accurately reflects the terms of paragraph 6 of Article 4.2 of the Agreement.
Item 10 Subsection 153YH(2)(note)
65. This item amends the note to subsection 153YH(2) of the Customs Act to correct the reference to the relevant provision of the Agreement.
Item 10A At the end of section 153YH
66. This item inserts new subsection 153YH(8) of the Customs Act which defines the term "relevant non-originating materials" for the purposes of section 153YH(8). This term is used in new substituted subparagraph 153YH(2)(b)(i).
Item 11 Paragraph 153YL(1)(b)
67. This item amends paragraph 153YL(1)(b) of the Customs Act by inserting the phrase "or any other operation" after "production".
68. Section 153YL sets out the consignment rule for goods imported from the US. If goods fail to comply with the consignment requirements, they will not be US originating goods. Currently paragraph 153YL(1)(b) applies where goods undergo any process of production in a country or place (other than unloading, reloading, any operation to preserve them in good condition or any operation that is necessary for them to be transported to Australia).
69. However, goods should also not be US originating goods if they undergo any other operation, other than a process of production, in a country or place that is not the US or Australia (other than the specified operations). Some examples of other operations include the labelling of goods, the packaging of goods, and the breaking and repacking of bulk goods into sets.
70. Current paragraph 153YL(1)(b) may not have the required effect. The amendment to paragraph 153YL(1)(b) will ensure that section 153YL more accurately reflects the terms of Article 5.11 of the Agreement.