House of Representatives

Explanatory Memorandum

(Circulated by authority of the Hon Mark Vaile MP, Minister for Trade)

Schedule 1 - Customs

Part 1 - US Originating Goods

Customs Act 1901

Item 1 After Division 1B of Part VIII

1. This item amends the Customs Act 1901 (the Customs Act) by inserting new Division 1C into Part VIII. New Division 1C is headed US originating goods and sets out the rules for determining whether goods are US originating goods and therefore eligible for a preferential rate of customs duty under the Customs Tariff Act 1995 (the Customs Tariff Act). These rules are being inserted to give effect to the Australia-United States Free Trade Agreement (the Agreement), in particular Chapters 4 and 5 of the Agreement.

2. New Division 1C contains eight subdivisions which are set out below.

Subdivision A - Preliminary

3. Subdivision A contains a simplified outline of Division 1C and contains the interpretation provision for Division 1C.

Section 153Y Simplified outline

4. New section 153Y sets out a simplified outline of each of the subdivisions B to H of new Division 1C.

New section 153YA Interpretation

5. New subsection 153YA(1) sets out several new definitions for the purposes of Division 1C. These definitions are:

•

Agreement which means the Australia-United States Free Trade Agreement done at Washington DC on 18 May 2004, as amended from time to time.;

•

Australian originating goods which means goods that are Australian originating goods under a law of the US that implements the Agreement. In limited circumstances, such goods are also US originating goods (see definition of originating materials);

•

Convention which means the International Convention on the Harmonized Commodity Description and Coding System done at Brussels on 14 June 1983;

•

customs value which, in relation to goods, has the meaning set out in section 159 of the Customs Act. Section 159 sets out the various methods for determining the customs value of goods;

•

fuel which has its ordinary meaning. This ordinary meaning includes electricity which would not otherwise by covered by the definition of "goods" in section 4 of the Customs Act;

•

Harmonized System which means the Harmonized Commodity Description and Coding System (as in force from time to time) that is established by or under the Convention.

The Harmonized System is the worldwide classification system that has been adopted by all countries that are members of the World Customs Organization. In Australia, the Harmonized System has been adopted in the Customs Tariff Act. The Harmonized System organises goods according to the degree of manufacture, and assigns classification numbers to all goods. It is arranged into 97 chapters covering all goods, and each chapter is divided into headings, subheadings, and tariff classifications. Under the Harmonized System, the chapter, heading, and subheading numbers for any good are identical in any country using the Harmonized System. However, the final two digits of the tariff classification are not harmonised - each importing country individually assigns them.

•

Harmonized US Tariff Schedule means the Harmonized Tariff Schedule of the United States (as in force from time to time). This Tariff Schedule is the US equivalent of the Customs Tariff Act;

•

indirect materials which means:

a)

goods used in the production, testing or inspection of other goods, but that are not physically incorporated in the other goods; or

b)

goods used in the operation or maintenance of buildings or equipment associated with the production of other goods;

including:

c)

fuel;

d)

tools, dies and moulds;

e)

lubricants, greases, compounding materials and other similar goods;

f)

gloves, glasses, footwear, clothing, safety equipment and supplies for any of these things;

g)

catalysts and solvents.

Under the definition of originating materials (below), indirect materials are originating materials without having to otherwise satisfy the rules relating to US originating goods;

•

Interpretation Rules which means the General Rules for the Interpretation of the Harmonized System provided for by the Convention;

•

national of the US, which has the meaning given by Annex 1-A to Chapter 1 of the Agreement;

•

non-originating materials which means goods that are not originating materials;

•

originating materials which means;

h)

goods that are used in the production of other goods and that are US originating goods. In some circumstances, in order to determine whether goods that are imported into Australia are US originating goods, and therefore eligible for a preferential rate of customs duty, it may be necessary to have regard to the goods from which the final goods are produced (see Subdivisions C, D and E). These goods which are used to produce other goods can be originating or non-originating.

Originating materials are those goods that are used to produce other goods and that are also US originating goods, which means that in their own right, they satisfy the requirements of new Division 1C. Non-originating materials are goods that are not originating materials because they do not satisfy the requirements on Division 1C in their own right;

i)

goods that are used in the production of other goods and that are Australian originating goods. If goods used in the production of other goods are Australian originating goods under a law of the US that implements the Agreement, they are also originating materials for the purposes of new Division 1C;

j)

indirect materials (as discussed above);

•

produce which means grow, raise, mine, harvest, fish, trap, hunt, manufacture, process, assemble, or disassemble. Producer and production have corresponding meanings;

•

recovered goods which means materials in the form of individual parts that:

k)

have resulted from the complete disassembly of goods which have passed their useful life or which are no longer useable due to defects; and

l)

have been cleaned, inspected or tested (as necessary) to bring them into reliable working condition.

•

remanufactured goods which means goods that:

m)

are produced entirely in the US; and

n)

are classified to Chapters 84, 85 or 87 (other than headings 8418, 8516 or 8701 to 8706) or to heading 9026, 9031 or 9032 of Chapter 90 of the Harmonized System or any other tariff classification that is prescribed; and

o)

are entirely or partially comprised of recovered goods; and

p)

have a similar useful life and meet the same performance standards as new goods that are so classified and that are not comprised of any recovered goods; and

q)

have a producer's warranty similar to such new goods.

•

Schedule 1 tariff table which means the table in Schedule 1 to the Customs (Australia-United States Free Trade Agreement) Regulations 2004 (the FTA Regulations). The FTA Regulations are being made under the Customs Act and will incorporate in Schedules 1 and 2 the product specific rules relating to change in tariff classification, regional value content and other rules for the purpose of determining whether goods are US originating goods. The table in Schedule 1 to the FTA Regulations will incorporate Annex 5A of the Agreement;

•

Schedule 2 tariff table which means the table in Schedule 2 to the Customs (Australia-United States Free Trade Agreement) Regulations 2004. The table in Schedule 2 to the FTA Regulations will incorporate Annex 4A of the Agreement;

•

US which means the United States of America;

•

used which means used and consumed in the production of goods;

•

US originating goods which means goods that, under this Division (i.e. Division 1C) are US originating goods.

1. New subsection 153YA(2) provides that the value of goods for the purposes of Division 1C is to be worked out in accordance with the regulations and that the regulations may prescribe different valuation rules for different kinds of goods. The value of goods is relevant, for example, in determining whether goods satisfy the de minimis requirement in s.153YE(2) . The value of goods is to be distinguished from the customs value of goods which is to be worked out under section 159 of the Customs Act.

2. New subsection 153YA(3) provides that in specifying tariff classifications for the purposes of Division 1C, the regulations may refer to the Harmonized System or the Harmonized US Tariff Schedule. Most product specific rules in Annexes 4A and 5A of the Agreement refer to tariff classifications of the Harmonized System. However, a small number of the product specific rules in the Agreement refer to tariff classification of the Harmonized US Tariff Schedule. Therefore Schedules 1 and 2 to the FTA Regulations will need refer to these two systems of tariff classifications.

3. New subsection 153YA(4) provides that subsection 4(3A) of the Customs Act does not apply for the purposes of Division 1C. Subsection 4(3A) provides that reference in the Customs Act to the tariff classification of goods is a reference to Schedule 3 of the Customs Tariff Act, which is not the case in new Division 1C.

4. New subsection 153YA(5) provides that for the purposes of Division 1C, the regulations may apply, adopt or incorporate any matter contained in any instrument or other writing in force or existing from time to time. This provision will override section 49A of the Acts Interpretation Act 1901 in order to enable to FTA Regulations to refer to the general accounting principles of the US for the purposes of the regional value content calculations.

Subdivision B - Goods wholly obtained or produced entirely in the US

5. Subdivision B sets out the rules in relation to goods that are wholly obtained or produced entirely in the US.

Section 153YB Goods wholly obtained or produced entirely in the US

6. New subsection 153YB(1) provides that goods are US originating goods if they are wholly obtained or produced entirely in the US.

7. New subsection 153YB(2) provides that goods are wholly obtained or produced entirely in the US, if and only if, the goods are:

a)

minerals extracted in the US; or

b)

plants grown in the US, or in the US and Australia, or products obtained from such plants (for example fruit from fruit trees); or

c)

live animals born and raised in the US, or in the US and Australia, or products obtained from such animals (for example milk or eggs); or

d)

goods obtained from hunting, trapping, fishing or aquaculture conducted in the US; or

e)

fish, shellfish or other marine life taken from the sea by ships registered or recorded in the US and flying the flag of the US; or

f)

goods produced exclusively from goods referred to in paragraph (e) on board factory ships registered or recorded in the US and flying the flag of the US; or

g)

goods taken from the seabed, or beneath the seabed, outside the territorial waters of the US by the US or a national of the US, but only if the US has the right to exploit that part of the seabed; or

h)

goods taken from outer space by the US or a national of the US; or

i)

waste and scrap that has either:

(i)

been derived from production operations in the US; or

(ii)

been derived from used goods that are collected in the US and that are fit only for the recovery of raw materials; or

j)

recovered goods derived in the US and used in the US in the production of remanufactured goods; or

k)

goods produced entirely in the US exclusively from goods referred to in paragraphs (a) to (i) or from their derivatives. For example, a ring that comprises a precious stone and gold that has been extracted entirely in the US will be a US originating good or pork sausages that are made from pigs born and raised in the US and cereals and spices grown in the US will be US originating goods or ice cream that is made from milk from a cow in the US and other US ingredients.

Subdivision C - Goods produced entirely in the US or in the US and Australia exclusively from originating materials

1. Subdivision C sets out the rule in relation to goods that are produced entirely in the US or in the US and Australia exclusively from originating materials.

Section 153YC Goods produced entirely in the US or in the US and Australia exclusively from originating materials

2. New section 153YC provides that goods are US originating goods if they are produced entirely in the US, or entirely in the US and Australia, exclusively from originating materials.

3. This section replicates the effect of paragraph 153YB(2)(k) to the extent that if goods are produced entirely in the US exclusively from goods referred to in paragraphs 153YB(2)(a) to (i), they are also being produced exclusively from goods referred to in paragraph (a) of the definition of originating materials (as goods in paragraphs (a) to (i) are US originating goods).

4. However, section 153YC is broader than paragraph 153YB(2)(k) as it allows production of goods to also occur exclusively in the US and Australia and also allows goods to be produced exclusively from goods that are originating materials. Therefore, US originating goods can be produced from any combination of US originating goods, Australian originating goods and indirect materials.

Subdivision D - Goods (except clothing and textiles) produced entirely in the US or in the US and Australia from non-originating materials

5. Subdivision D sets out the rules in relation to goods (except clothing and textiles) that are produced entirely in the US or in the US and Australia from non-originating materials only, or from non-originating materials and originating materials.

Section 153YD Simplified outline

6. New section 153YD sets out a simplified outline of Subdivision D.

Section 153YE Goods (except clothing and textiles) produced entirely in the US or in the US and Australia from non-originating materials

7. New section 153YE sets out the general rules for determining whether goods (except clothing and textiles) that are produced entirely in the US or in the US and Australia from non-originating materials are US originating goods.

8. New subsection 153YE(1) provides that goods are US originating goods if:

a)

a tariff classification (the final classification) that is specified in column 2 of the Schedule 1 tariff table applies to the goods; and

b)

they are produced entirely in the US, or entirely in the US and Australia, from non-originating materials only or from non-originating materials and originating materials; and

c)

if any of the following 3 requirements apply in relation to the goods - that requirement is satisfied.

1. As referred to previously, the Schedule 1 tariff table will be the table in Schedule 1 to the FTA Regulations which will incorporate the product specific rules relating to change in tariff classification, regional value content and other rules for the purpose of determining whether goods (other than clothing and textiles) are US originating goods. Column 1 of this table will set out the product descriptions, column 2 will set out the tariff classifications and column 3 will set out the product specific rules.

2. New subsection 153YE(2) sets out the first of the requirements. It provides that, subject to subsection (3), the first requirement applies only if a change in tariff classification is specified in column 3 of the Schedule 1 table opposite the final classification for the goods.

3. The concept of the 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. This means 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.

4. For example, frozen pork (HS 0203) is imported into the US from Hungary and combined with spices from the Caribbean (HS 0907 - 0910) and cereals produced in the US to make pork sausages (HS 1601). The applicable change in tariff classification rule for pork sausages is "a change to heading 16.01 to 16.05 from any other chapter". As the frozen meat is classified to Chapter 2 and the spices to Chapter 9, these goods that are non originating meet the change in tariff classification requirement (the cereal is the produce of the US and is therefore an originating material and is not required to change its classification).

5. In order to determine which is the applicable change in tariff classification, the tariff classification of the final goods and each of the goods that are non originating materials used in the production of the goods needs to be known.

6. Subsection 153YE(2) then provides that the first requirement is that:

a)

each of the non-originating materials satisfies the transformation test. The transformation test is set out in subsection 153YE(8) and includes the requirement that the non-originating material satisfy the change in tariff classification that is specified in column 3 of the Schedule 1 table opposite the final classification for the goods. Special provision is also made for where the non-originating material does not directly satisfy the change in tariff classification requirement and this will be further explained below; or

b)

the following are satisfied:

(ii)

the total value of all non-originating materials does not exceed 10% of the customs value of the goods;

(iii)

if one or more or the non-originating materials are prescribed for the purposes of this paragraph - each of those non-originating materials satisfies the transformation test in subsection (8).

1. The provisions of paragraph (b) incorporate the de minimis provisions that are set out in Article 5.2 of the Agreement. The effect of these provisions is that if the total value of all non-originating materials in a final good does not exceed 10% of the customs value of the final good, the non-originating materials do not have to satisfy the transformation test specified in column 3 of the Schedule 1 table opposite the final classification for the goods.

2. However, the de minimis requirement does not apply to all non-originating materials that are used to produce goods in the Schedule 1 tariff table. If non-originating materials are prescribed for the purposes of paragraph (b), they shall still have to satisfy the transformation test notwithstanding that the total value of non-originating materials does not exceed 10%.

3. The value of non-originating materials for the purposes of this section is to be worked out in accordance with the methods that will be included in the FTA Regulations.

4. New subsection 153YE(3) provides that the first requirement in subsection (2) does not apply if:

a)

an alternative requirement to the change in tariff classification is specified in column 3 of the Schedule 1 tariff table opposite the final classification of the goods; and

b)

the alternative requirement is satisfied.

1. As referred to above, column 3 of the Schedule 1 tariff table will incorporate the product specific rules relating to change in tariff classification, regional value content and other rules for the purpose of determining whether goods (other than clothing and textiles) are US originating goods. In most instances, the requirements will be cumulative - they will all have to be satisfied. However in some instances, they may be expressed as alternative requirements whereby one does not have to be satisfied if the other one is satisfied. Subsection 153YE (3) applies if an alternative requirement to the change is tariff classification is specified - if so, subsection (2) does not apply. See for example column 3 of headings 7420 and 8404.20.

2. Subsection 153YE(4) sets out the second requirement and provides that, subject to subsection (5), the second requirement applies only if a regional value requirement is specified in column 3 of the Schedule 1 tariff table opposite the final classification of the goods. The second requirement is that the goods satisfy the regional value requirement.

3. In respect of goods in the Schedule 1 tariff table, approximately one-sixth of these goods may also be required to satisfy a regional value content requirement. The regional value content is, in most cases, either 35% based on the build-up method or 45% based on the build-down method or, in respect of some automotive goods, 50% based on the net cost method. The calculations for each of these methods will be included in the FTA Regulations. Subsection 153YE(6) provides that the regulations may prescribe different regional value content requirements for different kinds of goods.

4. New subsection 153YE(5) provides that the second requirement in subsection (4) does not apply if:

a)

an alternative requirement to the regional value content is also specified in column 3 of the Schedule 1 tariff table opposite the final classification of the goods; and

b)

the alternative requirement is satisfied.

1. This subsection is required for the same reasons set out above in respect of subsection 153YE(3).

2. Subsection 153YE(7) provides that the third requirement is that the goods satisfy any other requirement that is specified in, or referred to in, column 3 of the Schedule 1 tariff table opposite the final classification of the goods. An example of such a requirement is in heading 2103.20.

3. Subsection 153YE(8) sets out the transformation test for the purposes of subsection 153YE(1) and provides that a non-originating material satisfies the transformation test if:

a)

it satisfies the change in tariff classification that is specified in column 3 of the Schedule 1 tariff table opposite the final classification of the goods (this has been explained above); or

b)

it does not satisfy the change in tariff classification mentioned in paragraph (a), but it was produced entirely in the US, or entirely in the US and Australia, from other non-originating materials, each of which satisfies the transformation test (including by one or more application of this subsection).

1. Paragraph (b) gives effect to the accumulation provisions contained in paragraph 2 of Article 5.3 of the Agreement and applies where the non-originating materials that are used to directly produce the final good do not satisfy the change in tariff classification.

2. In producing the final good, a producer may use goods that are produced in the US by another producer. The components of these goods may be produced by yet another producer in the US or imported into the US. It is possible that the change in tariff classification rule may not be satisfied at each step in the production process from the imported component to the final goods which may mean that the final goods are non-originating.

3. In such circumstances, it may be possible to examine each step in the production process of each non-originating material that occurs in the US or Australia in order to determine whether each step satisfies the change in tariff classification rule for the final goods directly from that step to the final goods. If this does occur, the material will be an originating material and the final goods may be originating goods (subject to satisfying all other requirements of new Division 1C of Part VIII of the Customs Act). This is how paragraph 153YE(8)(b) operates.

4. The following examples illustrates the above concept:

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A producer imports non-originating carded cotton, of heading 5203, for use in the production of cotton yarn of heading 5205. Because the change in tariff classification from carded cotton to cotton yarn is a change within the same chapter, the carded cotton does not satisfy the applicable change in tariff classification rule for cotton yarn. Therefore, the cotton yarn is also classed as non-originating.

•

The cotton yarn is then sold to another producer within the US or Australia, who uses the cotton yarn in the production of woven fabric of heading 5208. The change in tariff classification from cotton yarn to woven fabric does not satisfy the applicable change in tariff classification rule for woven fabric. Therefore, the woven fabric is also classed as non-originating.

•

However the producer of the woven fabric can accumulate the production of the cotton yarn, and the cotton yarn would then be considered to have been produced by the producer of the woven fabric. This is allowed because both the yarn and the fabric were both produced within the US.

•

Therefore the direct change in tariff classification from carded cotton of heading 5203 to woven fabric of 5208 would satisfy the applicable change of tariff classification for heading 5208. The woven fabric of cotton would be considered as an originating good.

5. The following example, with diagram and explanation, also clearly demonstrates the operation of paragraph 153YE(8)(b).

•

Example: The following diagram relates to the production of particular goods that occurred entirely in the US. The diagram and the accompanying text illustrate the application of subsection(8).

•

The goods are produced from non-originating materials 1 and 2.

•

First application of subsection (8)

Non-originating materials 1 and 2 must satisfy the transformation test. Under paragraph (8)(a), non-originating material 1 does satisfy the relevant change in tariff classification. Under paragraph (8)(b), non-originating material 2 does not satisfy the relevant change in tariff classification, but it has been produced by non-originating materials 3 and 4.

•

Second application of subsection (8)

Non-originating materials 3 and 4 must satisfy the transformation test. Under paragraph (8)(a), non-originating material 3 does satisfy the relevant change in tariff classification. Under paragraph (8)(b), non-originating material 4 does not satisfy the relevant change in tariff classification, but it has been produced by non-originating material 5.

•

Third application of subsection (8)

Non-originating material 5 must satisfy the transformation test. Under paragraph (8)(a), non-originating material 5 does satisfy the relevant change in tariff classification.

•

Final result

The result of the 3 applications of subsection(8) is that non-originating material 2 does satisfy the transformation test.

Section 153YF Goods that are chemicals, plastics or rubber

6. New section 153YF sets outs a special rule that will apply only in respect of goods that are classified to Chapters 28 to 40 of the Harmonized System, being chemicals, plastics and rubber. This section provides that these goods are US originating goods if:

a)

they are produced entirely in the US, or entirely in the US and Australia, from non-originating materials only, or from non-originating and originating materials; and

b)

they are goods that are classified to any of Chapters 28 to 40 of the Harmonized System; and

c)

a tariff classification (the final classification) that is specified in column 2 of the Schedule 1 tariff table applies to the goods; and

d)

before the tariff classification in column 2 of that table in relation to Chapter 28 or 39 of the Harmonized System, the regulations specify particular rules in column 3 of that table; and

e)

those rules apply in relation to the final classification of the goods; and

f)

the goods satisfy those rules.

1. The rules that are referred to in paragraph (d) are to be distinguished from the requirements referred to in subsection 153YE(7). Under this section, the rules will appear before the tariff classifications in Chapter 28 or 39 and may have application across Chapters 28 to 40 of the Harmonized System.

2. If goods satisfy all of the requirements of this section, they will be US originating goods and will not have to satisfy the requirements of section 153YE.

Subdivision E - Goods that are clothing and textiles produced entirely in the US or in the US and Australia from non-originating materials

3. Subdivision E sets out the rules in relation to goods that are clothing and textiles that are produced entirely in the US or in the US and Australia from originating materials only, or from non-originating materials and originating materials.

Section 153YG Simplified outline

4. New section 153YG sets out a simplified outline of Subdivision E.

Section 153YH Goods that are clothing and textiles produced entirely in the US or in the US and Australia from non-originating materials

5. New section 153YH sets out the general rules for determining whether goods that are clothing and textiles that are produced entirely in the US or in the US and Australia from non-originating materials are US originating goods.

6. New subsection 153YH(1) provides that, subject to subsection (5), goods are US originating goods if:

a)

a tariff classification (the final classification) that is specified in column 2 of the Schedule 2 tariff table applies to the goods; and

b)

they are produced entirely in the US, or entirely in the US and Australia, from non-originating materials only or from non-originating materials and originating materials; and

c)

if any of the following two requirements apply in relation to the goods - that requirement is satisfied.

1. As previously referred to, the Schedule 2 tariff table will be the table in Schedule 2 to the FTA Regulations which will incorporate the product specific rules relating to change in tariff classification and other rules for the purpose of determining whether goods that are clothing and textiles are US originating goods (there are no regional value content requirements for clothing and textiles). Column 1 of this table will set out the product descriptions, column 2 will set out the tariff classifications, and column 3 will set out the product specific rules.

2. New subsection 153YH(2) sets out the first of the requirements in similar terms to subsection 153YE(2). It provides that the first requirement applies only if a change in tariff classification is specified in column 3 of the Schedule 2 table opposite the final classification for the goods. Subsection 153YE(2) then provides that the first requirement is that:

a)

subject to subsection (3), each of the non-originating materials satisfies the transformation test. The transformation test is set out in subsection 153YH(7) and includes the requirement that the non-originating material satisfy the change in tariff classification that is specified in column 3 of the Schedule 2 table opposite the final classification for the goods. Special provision is also made for where the non-originating material does not directly satisfy the change in tariff classification requirement and this will be further explained below; or

b)

the following are satisfied:

(i)

the total weight of all the non-originating materials does not exceed 7% of the total weight of the goods;

(ii)

if one or more or the non-originating materials are prescribed for the purposes of this paragraph - each of those non-originating materials satisfies the transformation test in subsection (7).

1. The provisions of paragraph (b) incorporate the de minimis provisions for clothing and textiles that are set out in Article 4.2 of the Agreement. The effect of these provisions is that if the total weight of all non-originating materials in a final good does not exceed 7% of the total weight of the final good, the non-originating materials do not have to satisfy the transformation test specified in column 3 of the Schedule 2 table opposite the final classification for the goods.

2. However, the de minimis requirement does not apply to all non-originating materials that are used to produce goods in the Schedule 2 tariff table. If non-originating materials are prescribed for the purposes of paragraph (b), they shall still have to satisfy the transformation test notwithstanding that the total weight of non-originating materials does not exceed 7%.

3. Subsection 153YH(3) sets out qualifications on the application of the first requirement. This section provides that in relation to goods classified to Chapter 61, 62 or 63 of the Harmonized System, paragraph 2(a) is to be applied by applying:

a)

for goods covered by Chapter 61 of the Harmonized System - Chapter Rule 2 for Chapter 61 that is set out in the Schedule 2 tariff table; and

b)

for goods covered by Chapter 62 of the Harmonized System - Chapter Rule 3 for Chapter 62 that is set out in the Schedule 2 tariff table; and

c)

for goods covered by Chapter 63 of the Harmonized System - Chapter Rule 1 for Chapter 63 that is set out in the Schedule 2 tariff table; and

1. Each of these Chapter Rules will set out the particular components of the goods that are required to satisfy the transformation test.

2. Subsection 153YH(4) provides that the second requirement is that the goods satisfy any other requirement that is specified in, or referred to in, column 3 of the Schedule 2 tariff table opposite the final classification of the goods. An example of such a requirement is in column 3 of headings 6102.90 and 6103.31

3. Subsection 153YH(5) sets out particular provisions that apply in relation to clothing and textiles that are put up for retail sale as part of a set and classified as a set because they comply with Rule 3 of the Interpretation Rules. Such goods are US originating goods only if:

a)

all of the goods in the set are US originating goods under Division 1C; or

b)

the total value of the goods in the set that are not US originating goods under Division 1C does not exceed 10% of the customs value of the set of goods.

1. Subsection 153YH(6) then provides that in applying subsection (5), assume the goods were not part of a set. This means, for example, that in determining whether goods in a set are US originating goods, each component of the set is assessed individually.

2. The example set out after subsection (6) demonstrates the operation of subsections (5) and (6).

3. Subsection 153YH(7) sets out, in similar terms to subsection 153YE(8), the transformation test for the purposes of subsection 153YH(1) and provides that a non-originating material satisfies the transformation test if:

a)

it satisfies the change in tariff classification that is specified in column 3 of the Schedule 2 tariff table opposite the final classification of the goods (this has been explained above); or

b)

it does not satisfy the change in tariff classification mentioned in paragraph (a), but it was produced entirely in the US, or entirely in the US and Australia, from other non-originating materials, each of which satisfies the transformation test (including by one or more application of this subsection).

1. Paragraph (b) also gives effect to the accumulation provisions contained in paragraph 2 of Article 5.3 of the Agreement and applies where the non-originating materials that are used to directly produce the final good do not satisfy the change in tariff classification. The application of this provision is explained above under subsection 153YE(8).

Section 153YI Goods that are clothing and textiles classified to Chapter 62 of the Harmonized System

2. New section 153YI sets outs a special rule that will apply only in respect of clothing and textiles that are classified to Chapter 62 of the Harmonized System. This section provides that goods of US originating goods if:

a)

they are produced entirely in the US, or entirely in the US and Australia, from non-originating materials only, or from non-originating and originating materials; and

b)

they are goods that are classified to Chapters 62 of the Harmonized System; and

c)

either:

(i)

in any case - the goods satisfy Chapter Rule 2 for Chapter 62 that is set out in the Schedule 2 tariff table; or

(ii)

in the case of goods classified to subheading 6205.20 or 6205.30 of Chapter 62 of the Harmonized System - the goods satisfy the subheading rule for that subheading that is set out in the Schedule 2 tariff table.

1. The Chapter and subheading rules referred to in paragraph (c) are different from the Chapter Rules that are referred to in 153YH(3).

2. Similar to section 153YF, if goods satisfy all of the requirements of this section, they will be US originating goods and will not have to satisfy the requirements of section 153YH.

Subdivision F - Other US originating goods

3. Subdivision F sets out a specific rule that applies to goods that are standard accessories, spare parts or tools.

Section 153YJ Standard accessories, spare parts and tools

4. New section 153YJ provides that if goods (the underlying goods) are imported into Australia with standard accessories, standard spare parts or standard tools, then the accessories, spare parts or tools are US originating goods if:

a)

the underlying goods are US originating goods; and

b)

the accessories, spare parts or tools are not invoiced separately from the underlying goods; and

c)

the quantities and value of the accessories, spare parts or tools are the usual quantities and value in relation to the underlying goods.

1. However, subsection 153YJ(2) provides that in working out if the underlying goods are US originating goods, if the goods must satisfy a regional value content requirement under Subdivision D, the regulations must require the value of the accessories, spare parts or tools be taken into account for the purposes of that requirement. Without this provision, the value of accessories, spare parts and tools would not normally form part of the value of materials that are used in the production of the underlying goods.

Subdivision G - Packaging materials and containers

2. Subdivision G sets out a specific rule that applies to goods that are packaging materials and containers.

Section 153YK Packaging materials and containers

3. New subsection 153YK(1) provides that if:

a)

goods are packaged for retail sale in packaging material or a container; and

b)

the packaging material or container is classified with the goods in accordance with Rule 5 of the Interpretation Rules;

1. then the packaging material or container is to be disregarded for the purposes of this Division except for the purposes of the exception detailed below. This means that the packaging material or container does not need to satisfy the transformation test that applies to the goods.

2. However, similar to section 153YJ, subsection 153YK(2) provides that the exception is that in working out if the goods are US originating goods, if the goods must satisfy a regional value content requirement under Subdivision D, the regulations must require the value of the packaging material or container to be taken into account for the purposes of that requirement. Without this provision, the value of packaging materials and containers would not normally form part of the value of materials that are used in the production of the goods.

Subdivision H - Consignment

3. Subdivision H sets out the consignment requirements that must be satisfied in transporting US originating goods to Australia.

Section 153YL Consignment

4. New subsection 153YL(1) provides that goods are not US originating goods under Division 1C if:

a)

they are transported through a country or place other than the US or Australia; and

b)

they undergo any process of production in that 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.

1. Subsection 153YL(2) provides that this section applies despite any other provisions on this Division. This means that even if goods are US originating goods in accordance with any other provisions of Division 1C, if they do not comply with section 153YL they will not be US originating goods.

Part 2 Verification powers

2. Chapter 4 of the Agreement relates to textile and apparel goods. Under Article 4.3, the United States of America (the US) will be able to request that Australia conduct a verification to enable the US to determine:

a)

that a claim of origin for a textile or apparel good is accurate; or

b)

that an Australian exporter or producer of textile or apparel goods is complying with applicable customs laws, regulations and procedures regarding trade in textile and apparel goods, including laws, regulations and procedures that Australia adopts and maintains pursuant to the Agreement and laws, regulations and procedures of either Party implementing other international agreements regarding trade in textile and apparel goods, and that claims of origin regarding textile and apparel goods exported or produced by that person are accurate.

1. Article 4.3 of the Agreement also permits competent authorities of the US to assist in a verification, including by conducting visits, along with Customs officers, to the premises of an exporter, producers, or any person involved in the movement of a textile or apparel good from Australia to the US.

2. Part 2 implements Article 4.3 by inserting two sets of powers into the Customs Act 1901 (the Customs Act). They will be contained in Division 4B of Part VI and Subdivision JA of Division 1 of Part XII.

3. 'Textile and clothing goods' will be defined in both Divisions by reference to relevant headings, subheadings and Chapters of the Harmonized System (new subsection 126AE(4) and section 214BAB refer).

Request documents and ask questions

4. New Division 4B of Part VI will allow authorised customs officers to request an exporter or a producer of textile and clothing goods that are exported to the US or a person involved in the movement of textile and apparel goods from Australia to the US to produce records, or to answer questions in relation to the export, production or transportation of the goods (new subsection 126AE(1) refers).

5. The person will not be required to produce the documents or answer the questions (new subsection 126AE(2) refers). Hence the person will not be subject to the offences in section 243SA or 243SB of the Customs Act.

6. An authorised officer may then disclose those records and answers to a US customs official for the purpose of a matter covered by Article 4.3 of the Agreement (new subsection 126AE(3) refers).

7. The collection, use and disclosure of records or answers under these provisions will be in accordance with the Privacy Act 1988 and in particular Information Privacy Principal 11.3. Customs will take reasonable steps to ensure that the US customs official does not disclose the record or answer for a purpose other than the purpose for which the record or answer was given to the US customs official.

Monitor and audit

8. New Subdivision JA of Division 1 of Part XII will allow certain authorised customs officers (verification officers) to enter premises and exercise certain powers (AUSFTA verification powers) in that premises for the purpose of verifying information relating to the export, production or transport of textile and clothing goods that are exported to the US. New section 214BAC sets out what are AUSFTA verification powers.

9. The provisions relating to AUSFTA verification powers have been modelled on existing provisions in Subdivision J of Division 1 of Part XII of the Customs Act that provide general monitoring powers for verifying compliance with Australian Customs-related laws ("Subdivision J powers"). The AUSFTA verification powers differ from the general monitoring powers in a number of ways as detailed below.

10. The existing Subdivision J powers allow monitoring officers to enter premises and exercise monitoring powers with the consent of the occupier or under a warrant. However, verification officers will only be able to enter premises and exercise AUSFTA verification powers with the consent of the occupier of the premises (new section 214BAE refers).

11. New Subdivision JA will allow US customs officials to accompany a verification officer (new section 214BAF refers). Again the occupier of the premises must consent to the US customs official entering the premises. The US customs official will have no powers in the premises and, in particular, will not be able to exercise verification powers.

12. Since the powers will only be able to be exercised with consent, a verification officer must, before obtaining an occupier's consent, give the occupier a written notice stating that the officer wishes to enter the premises and exercise AUSFTA verification powers in or on the premises and the period during which the officer wishes to exercise the powers (new paragraphs 214BAE(3)(a) and (b) refer). Under existing Subdivision J powers, the giving of this notice is not mandatory, especially where the powers are being exercised pursuant to a warrant.

13. The notice must also include the name of any US customs official who the verification officer proposes will accompany the officer (new paragraph 214BAE(3)(c) refers).

14. New subsections 214BAE(8) and 214BAF(4) make it clear that consent does not have effect unless it is voluntary.

15. Further a verification officer cannot use reasonable force in exercising AUSFTA verification powers.

16. New section 214BAJ allows a verification officer to disclose any information obtained in exercising AUSFTA verification powers to a US customs official for the purpose of a matter covered by Article 4.3 of the Agreement. Again the collection, use and disclosure of information under these provisions will be in accordance with the Privacy Act 1988 and in particular Information Privacy Principal 11.3. Customs will take reasonable steps to ensure that the US customs official does not disclose information for a purpose other than the purpose for which the record or answer was given to the US customs official.

17. New section 214BAK makes it clear that a person may operate electronic equipment at premises in order to exercise a power under Subdivision JA only if he or she believes on reasonable grounds that the operation of the equipment can be carried out without damage to the equipment.