Explanatory Memorandum
(Circulated by authority of the Minister for Immigration and Border Protection, the Hon. Peter Dutton MP)Schedule 5 - Tariff concession orders
Customs Act 1901
Background
66. Sections 269D and 269E are contained in Part XVA of the Customs Act, which is concerned with the making of tariff concession orders (TCOs). Goods that are the subject of a TCO are dutiable at a free rate of customs duty. An application for a TCO will be approved if, on the day the application was made, no substitutable goods were produced in Australia in the ordinary course of business.
Item 1 - Subsection 269D(1)
67. This item repeals and substitutes subsection 269D(1).
68. Subsection 269D(1) of the Customs Act sets out when goods are taken to have been manufactured in Australia. Subsection 269D(1) currently provides that goods (other than unmanufactured raw products) are taken to have been produced in Australia if, in addition to the goods being wholly or partly manufactured in Australia, not less than one quarter of the factory works or costs of the goods is comprised of the value of Australian labour, materials or overhead expenses incurred in Australia.
69. This criterion requires Australian businesses to provide detailed and confidential accounting evidence in order to demonstrate compliance with the provision. This evidence is unnecessary because manufacturers who can demonstrate a substantial process of manufacture always easily exceed the 25 per cent factory or works costs test. The requirement to produce such evidence therefore places an unnecessary burden on Australian businesses.
70. Consistent with the Government's deregulation agenda, new subsection 269D(1) of the Customs Act simplifies the test under which goods are taken to have been produced in Australia, such that goods (other than unmanufactured raw products) are taken to be produced in Australia if they are wholly or partly manufactured in Australia.
Item 2 - Subsections 269D(4) and (5)
71. This item repeals subsections 269D(4) and (5) of the Customs Act. These provisions are for the purposes of the factory or works costs criteria in current subsection 269D(1). As a consequence of these criteria being removed from subsection 269D(1), these provisions are no longer required.
Item 3 - Subsection 269E(2)
72. This item repeals and substitutes current subsection 269E(2).
73. Section 269E of the Customs Act sets out the circumstances in which substitutable goods are taken to be produced in Australia in the ordinary course of business. Subsection 269E(2) deals with substitutable goods that are made-to-order capital equipment. Such equipment is taken to be produced in Australia in the ordinary course of business if an Australian producer has made goods requiring the same labour skills, technology and design expertise as the substitutable goods in the 2 years before the application was lodged, could produce the substitutable goods with existing facilities, and is prepared to accept an order to supply the goods.
74. There have been difficulties in construing subsection 269E(2). In Vestas Australian Wind Technology Pty Ltd v Chief Executive Officer of Customs [2015] AATA 348 (Vestas) the Administrative Appeals Tribunal (AAT) decided that in order for an item of made-to-order capital equipment to be considered a substitutable good in relation to goods the subject of the TCO application, it must have been previously produced in Australia. That is, the AAT considered that it is not sufficient for an Australian manufacturer to have the capacity to produce the goods in order to be able to object to the making of a TCO or to seek revocation of a TCO.
75. The decision of the AAT in Vestas was set aside on appeal by the Full Federal Court (Comptroller-General of Customs v Vestas - Australian Wind Technology Pty Ltd [2015] FCAFC 185). The decision of the Full Federal Court is consistent with the Department's administration of subsection 269E(2). That is, Australian manufacturers can object to the making of a TCO or seek revocation of a TCO where the application relates to the goods that are made-to-order capital equipment if they can demonstrate that they have the capacity to produce substitutable goods in respect of goods that are the subject of the TCO application.
76. An application was made to the High Court for special leave to appeal that Full Federal Court decision. The High Court dismissed the application as the Court could see no reason to doubt the correctness of the Full Court's reasoning and, accordingly, none of the applicant's proposed grounds of appeal had sufficient prospects to warrant the grant of special leave to appeal (Vestas-Australian Wind Technology Pty Limited v Comptroller-General of Customs [2016] HCASL 85 (5 May 2016)).
77. New subsection 269E(2) of the Customs Act more accurately reflects the policy intention of the provision and clarifies it. The new provision emphasises the capacity of the Australian manufacturer to produce goods the subject of the TCO application with existing facilities and that the substitutable goods that could be produced would be made-to-order capital equipment.
78. New subsection 269E(2) also reflects the Government's position that the Australian producer should be required to have made goods requiring the same labour skills, technology and design expertise as the substitutable goods in the 5 years before the TCO application was lodged (rather than the current period of 2 years). This is because a period of 2 years is often insufficient to give a fair indication of the producer's capabilities in relation to made-to-order capital equipment, especially given the amount of time and labour necessarily involved in producing such equipment. This amendment will benefit local manufacturers.
79. This amendment to subsection 269E(2) of the Customs Act is also consistent with paragraph 269E(1), which provides that goods (other than made-to-order capital equipment) that are substitutable goods in relation to the goods the subject of a TCO application are taken to have been produced in Australia in the ordinary course of business if they are produced in Australia on an intermittent basis and have been so produced in the 5 years before the application was lodged.
Item 4 - Application provision
80. This item provides that the amendments to the Customs Act made by this Schedule apply to an application for a TCO under section 269F of the Customs Act, and to a request for the revocation of a TCO under section 269SB of the Customs Act, made on or after commencement.