House of Representatives

Explanatory Memorandum

Circulated By Authority of the Minister For Home Affairs, the Honourable Bob Debus MP

SCHEDULE 3 - DUTY RECOVERY

Part 1 - Amendments

Customs Act 1901

Background

Duty recovery

46. The current position of Customs in relation to the time available to recover customs duty is guided by the decision of the High Court in Malika Holdings Pty Ltd v Stretton (2001 )
204 CLR 290 (Malika). Prior to Malika, it was considered that the authority to recover customs duty under section 153 of the Customs Act was restricted by section 165 of the Customs Act, such that Customs must demand payment within 1 year of the short payment, or overpayment of a refund, rebate or drawback, of customs duty. If the demand was not made within that timeframe, the debt ceased to be recoverable.

47. However, in Malika, the High Court found that the time limit in section 165 only limited the recovery power under section 153 where the short payment of duty and the overpayment of refund, rebate or drawback are the result of a Customs' error. Therefore, if the short payment of duty, or the overpayment of a refund, rebate or drawback, is not the result of a Customs' error, there is no time limit on recovery of the short payment or overpayment.

48. In 2005, the time limit in section 165 of the Customs Act was extended to 4 years by the Customs Legislation Amendment and Repeal (International Trade Modernisation) Act 2001 (the ITM Act). The basis for this extension of time was that 1 year was not sufficient to undertake post-transaction audits and to follow up on any necessary duty recovery. In addition, as a matter of policy, Customs applies a 4-year time limit to all duty recovery other than in cases of fraud, notwithstanding the open-ended recovery period under section 153.

49. The main purpose of the amendments to the Customs Act in items 1 to 4 of Schedule 3 to the Bill is to consolidate current sections 153 and 165 of the Customs Act into a new section 165, and to place a 4-year statutory time limit on all duty recovery, other than in cases of fraud or evasion, thereby formalising Customs' current policy. This time frame, and its exceptions, are the same regime that applies to the recovery of indirect tax under section 150-50 of Schedule 1 to the Taxation Administration Act 1935 .

Item 1 - Section 153

50. This item repeals section 153 as a consequence of new section 165. The new section, which is being inserted by item 4 of Schedule 3, will, amongst other things, incorporate the concepts set out in current section 153.

Item 2 - Subsection 161L(2 )

51. This item amends subsection 161L(2) of the Customs Act to delete the wording of current section 165 of the Customs Act that is included in that subsection and substitute the new wording of section 165.

52. Section 161L deals with the review of determinations and other decisions in relation to the valuation of goods. If, as a result of such a review, the amount of duty that was levied is less than the amount that should have been levied, or the amount of duty that was refunded is greater than the amount that should have been refunded, section 165 of the Customs Act applies to the demand for the short levy or overpayment. This amendment will merely substitute the new wording of section 165 (which will remove any reference to Customs or client error) for the current wording of section 165 (which refers to duty short levied and duty erroneously refunded).

Item 3 - Division 3 of Part VIII (heading )

53. This item repeals and substitutes the heading of Division 3 of Part VIII of the Customs Act to more accurately reflect the content of Division 3. The new heading will refer to the "Payment and recovery of deposits, refunds, unpaid duty etc.".

Item 4 - Section 165

54. This item, amongst other things, repeals current section 165 of the Customs Act and substitutes new section 165.

55. New subsection 165(1) provides that an amount of duty that is due and payable in respect of goods is:

a)

a debt due to the Commonwealth; and

b)

is payable by the owner of the goods.

This new subsection is a restatement of the principles set out in current section 153.

56. New subsection 165(2) provides that an amount of drawback, refund or rebate of duty that is overpaid to a person:

a)

is a debt due to the Commonwealth; and

b)

is payable by the person.

Therefore, by contrast with new subsection 165(1), the debt created by the overpayment of a drawback, refund or rebate is payable only by the person to whom the overpayment was made.

57. Both of these new subsections remove any connotation that the debt due to the Commonwealth is the result of any error by either Customs or its clients. This eliminates any uncertainty as to the existence of the debt and the complexities that currently exist in determining how the debt arises.

58. New subsection 165(3) provides that the CEO may make, in writing, a demand for payment of an amount that is a debt due to the Commonwealth under new subsection (1) or (2). This new subsection is a restatement of the CEO's power to make a demand under current subsections 165(1) and (3).

59. New subsection 165(4) provides that a demand under new subsection 165(3) must specify the amount and include an explanation of how the amount has been calculated. Therefore, the demand must include an actual dollar amount of the duty or overpayment that is being demanded. There is some concern in the importing community that the current provisions allow the time limit to be met by simply demanding that the duty or overpayment be paid or repaid, without including a dollar amount in the demand. This new subsection will put that matter beyond doubt. If the demand does not include the amount and the required explanation, it will not be a valid demand.

60. New subsection 165(5) provides that a demand under new subsection 165(3) must be made within 4 years from:

a)

if the amount is a debt due to the Commonwealth under new subsection 165(1) - the time the amount was to be paid by under the Customs Act; or

b)

if the amount is a debt due to the Commonwealth under new subsection 165(2) - the time the amount was paid,

unless the CEO is satisfied that the debt arose as the result of fraud or evasion.

Under paragraph (a), an example of the time an amount of duty was to be paid under the Customs Act is where goods are entered for home consumption under section 71A of the Customs Act. Under section 132AA of the Customs Act, duty is payable at the time of the entry of goods for home consumption. Therefore, a demand in respect of goods entered for home consumption must be made within 4 years of the time at which they were so entered.

61. This provision brings the recovery of customs duty in line with the recovery of GST and other indirect taxes under the Taxation Administration Act 1953 .

62. New subsection 165(6) provides that an amount that is a debt due to the Commonwealth under subsection 165(1) or (2) may be sued for and recovered in a court of competent jurisdiction by proceedings in the name of the Collector if:

a)

the CEO has made a demand for payment of the amount in accordance with this section: or

b)

the CEO is satisfied that the debt arose as a result of fraud or evasion.

This means that if a valid demand is not made with 4 years from the relevant time, the debt will not be able to be recovered. The exception to this is where the CEO is satisfied that the debt arose as a result of fraud or evasion, in which case there will be no time limit on the recovery of the debt.

Item 4 - Section 165

63. This item also inserts new section 165A into the Customs Act.

Background

Limited application of drawback, refund or rebate against duty

64. Sections 163 and 168 of the Customs Act allow for regulations to be made prescribing the circumstances in which a refund or rebate (under section 163) or drawback (under section 168) of duty can be made. The regimes currently require that the duty be paid before a refund, rebate or drawback can be paid.

65. In some circumstances, it is possible that Customs, in conducting an audit of an importer's affairs, may determine that the importer owes customs duty on goods that have already gone into home consumption. It may also be possible that the importer may be entitled to a refund or drawback in respect of the goods had the duty been paid.

66. For example, an owner may use a Tradex order to import goods without the payment of duty. A Tradex order allows for the duty free importation of eligible goods on the understanding that the goods will be subsequently exported. The goods may, as a result of a Customs audit, be found to be not eligible goods for which a Tradex order may be used and hence subject to customs duty. If the goods have been exported, it is possible that the owner of the goods is eligible for a drawback of duty on the goods. However, under the present provisions of the Customs Act, the duty would have to be paid to Customs before the drawback can be paid. This may cause significant cash flow problems for owners, especially if large amounts of duty are involved.

67. New section 165A of the Customs Act addresses this and other similar circumstances by inserting a new regime whereby the CEO may apply the notional amount of refund, rebate or drawback in respect of goods against the duty payable on the same goods.

68. New subsection 165A(1) provides that if:

a)

an amount of duty is payable by a person in respect of goods that have been delivered into home consumption; and

b)

the person would be entitled to an amount of drawback, refund or rebate in respect of the goods if the amount of duty payable were paid;

then

c)

the CEO may apply the amount of the drawback, refund or rebate against the amount of duty payable; and

d)

the person is taken to have paid, in respect of the goods, an amount of duty equal to the amount of drawback, refund or rebate applied; and

e)

the amount of drawback, refund or rebate applied is taken to have been paid to the person.

If the amount of drawback, refund or rebate of duty on the goods is less than the amount of duty payable on the goods, the balance of the duty payable, once that amount of drawback etc is applied under this new section, will still be a debt due to the Commonwealth. It is possible that the amount of drawback etc will be equal to the amount of duty payable and, in that case, no further payments by either the person or Customs will need to be made.

New subsection 165A(2) provides that if the CEO applies an amount of drawback, refund or rebate against an amount of duty payable, the CEO must give to the person who would have been entitled to receive the amount of drawback, refund or rebate written notice of:

a)

the amount of the drawback, refund or rebate applied; and

b)

if the amount of drawback, refund or rebate applied is less than the amount of duty payable - the amount of duty that is still payable by the person.

This notification requirement will ensure that a person is made fully aware of any outstanding duty liability they may still have in respect of the goods after the application of a drawback, refund or rebate.

Item 5 - Subsections 167(3) and (3A )

Background

Payments under protest

69. Under section 167 of the Customs Act, if there is a dispute as to the amount or rate of duty payable on goods, the owner of the goods may pay under protest the sum demanded by a Collector as the duty payable in respect of the goods. If the duty is paid under protest, the sum paid is deemed to be the proper duty payable unless the contrary is determined in an action brought in accordance with section 167.

70. Under subsection 167(4), no action lies for the recovery of any sum paid to the Customs as the duty payable on goods unless the duty is paid under protest in accordance with section 167 and the action is commenced within the time frames set out in that subsection. In addition, under section 273GA of the Customs Act, an application to the Administrative Appeals Tribunal for the review of a decision of a Collector to demand an amount of duty can only be made if the duty has been paid under protest and the application is made within the time frames as set out in subsection 167(4).

71. Section 167 also sets out how an owner makes a payment under protest, for both documentary and electronic entries. Both of these processes only allow payments under protest to be made at the time goods are originally entered for home consumption. However, if Customs conducts an audit on an owner's transactions after goods have been entered into home consumption and determines that duty, or additional duty, is payable on goods, there are currently no statutory provisions specially allowing such post-entry payments under protest to be made. It should be noted, however, that on numerous occasions post-entry demands have been paid under protest and been reviewed by the Administrative Appeals Tribunal. Customs has not challenged the jurisdiction of the Tribunal on these occasions, allowing the dispute to be heard by a relatively low cost forum with technical expertise in Customs matters.

72. In addition, the Integrated Cargo System (the ICS) replaced the COMPILE system in October 2005 as the system for communicating with Customs electronically. However, when the ITM Act made the necessary amendments to the Customs Act to accommodate the ICS, the provisions relating to payments under protest with respect to import entries made under COMPILE were saved and require such payments to still be made by a registered COMPILE user using COMPILE. However, as COMPILE can no longer be used and people cannot be registered COMPILE users, an owner of goods cannot strictly comply with this requirement. As Customs generally conducts post-transaction audits and recovers duty up to 4 years after goods have entered into home consumption, this will be an ongoing problem for the next few years.

73. It is therefore proposed to repeal the existing requirements relating to payments under protest, including the saved COMPILE requirements, and replace them with requirements that are general in nature and are easier to comply with.

74. Item 5 of Schedule 3 to the Bill repeals and substitutes subsections 167(3) and (3A) of the Customs Act.

75. New subsection 167(3) provides that for the purposes of section 167, a payment is taken to be made under protest if, and only if:

a)

the owner of the goods or the agent of the owner gives Customs notice in accordance with subsection (3A), by document or electronically, that the payment is being made under protest; and

b)

Customs receives the notice no later than 7 days after the day on which the payment is made.

This new subsection removes the requirement that the payment under protest has to be done in the same medium as the original import entry. Therefore, a documentary payment under protest can be made in relation to an electronic import entry and vice versa. In addition, the current limitation as to when the payment under protest can be made has been removed. Payments can be made when duty is assessed at the time an import entry is lodged with Customs, or at a later time when Customs undertakes an audit of an owner's activities and demands additional duty. Finally, the notification that a payment is being made under protest does not have to be communicated to Customs at the same time as the payment is actually made. The notification only has to be received by Customs within 7 days of the payment being made.

76. New subsection 167(3A) sets out the requirements for the purposes of a notice given under subsection 167(3). The notice must:

a)

contain the words paid under protest ;

b)

identify the import declaration that covers the goods to which the protest relates;

c)

if the protest does not relate to all goods covered by an import declaration - describe the goods to which the protest relates;

d)

include a statement of the grounds on which the protest is made; and

e)

be signed by the owner or the agent of the owner.

These requirements do not substantially differ from existing requirements. As this new provision does not make specific reference to either COMPILE or the ICS computer system, the provisions of the Electronic Transactions Act 1999 will operate to allow payment under protest notices to be given to Customs electronically.

Extension to Accredited Client Programme

77. Item 5 also amends section 167 to extend the ability to make a payment of duty under protest to the Accredited Client Programme (the ACP). The ACP is implemented by Subdivision C of Division 4 of Part IV of the Customs Act, which was inserted by the ITM Act.

78. Under the ACP, a person who has met certain audit requirements may enter into an import information contract with Customs. Such a person ("an accredited client") is then able to enter goods that are covered by the contract for home consumption by making a request for cargo release (RCR) in respect of the goods.

79. An accredited client will only need to provide minimum information about the goods in the RCR. The accredited client is then required to provide, for a particular month, one or more periodic declarations containing more detailed but less time-sensitive information on all of the goods entered for home consumption on RCRs during that month.

80. Similar to the import processing charge imposed on the making of a normal import declaration, an RCR processing charge and periodic declaration processing charge are imposed on the making of an RCR and periodic declaration respectively.

81. The payment of duty and processing charges in relation to the ACP is governed by sections 71DG, 71DGA and 71DGB of the Customs Act. In general terms, in any month an accredited client will pay an amount of monthly duty estimate in respect of goods imported in that month. In the following month, the actual duty on goods imported in the previous month will be calculated and reconciled with the monthly duty estimate paid for the previous month. The amount of duty payable (emphasis added) will then be reduced by the amount of monthly duty estimate paid. If the monthly duty estimate is equal to, or more than, the actual duty on the goods, no duty will be required to be paid.

82. Therefore, without specific provision, it would not be possible to pay duty under protest under the ACP in the circumstances where no duty is required to be paid. New subsection 167(3B) contains provisions whereby duty will be taken to be paid under protest in these circumstances.

83. New subsection 167(3B) provides that if, under section 71DGA, an accredited client pays an amount of accredited client monthly duty estimate in respect of goods, then for the purposes of section 167, the amount of duty that would be payable (emphasis added) in respect of the goods if the amount of accredited client monthly duty estimate were not paid (emphasis added) is taken to be paid under protest by the accredited client if, and only if:

a)

the accredited client or the agent of the accredited client gives Customs notice in accordance with subsection 167(3C), by document or electronically, that the payment is made under protest; and

b)

Customs receives the notice no later than 7 days after the accredited client payment day on which the amount of duty would be payable on the goods under subsection 71DGB(1) if the amount of accredited client monthly duty estimate were not paid.

The accredited client payment day is the 15th day of the month in which the amount of duty would otherwise be payable.

Therefore, under this provision, an amount of duty that is not actually paid (because the liability has been reduced by the payment of an amount of monthly duty estimate) can still be taken to be paid under protest.

84. New subsection 167(3C) sets out the requirements for the purposes of subsection (3B). These requirements are basically the same as those set out in new subsection 167(3A).

Item 6 - After subsection 167(4 )

85. This item inserts new subsection 167(4A) into the Customs Act.

86. As previously mentioned, under subsection 167(4) of the Customs Act, no action lies for the recovery of any sum paid to the Customs as the duty payable on goods unless the duty is paid under protest in accordance with section 167 and the action is commenced within the time frames set out in that subsection.

87. New subsection 167(4A) will apply the same restrictions in relation to the recovery of any sum paid to Customs under section 71DGA as an amount of accredited client monthly duty estimate in respect of goods. This subsection will provide that no action lies for the recovery of such a sum unless:

a)

the amount of duty that would be payable in respect of the goods if the amount of accredited client monthly duty estimate were not paid has been taken under subsection (3B) to have been paid under protest; and

b)

the action is commenced within the following times:

(i)

if the sum is paid as an estimate of duty payable under any Customs Tariff-within 6 months after the accredited client payment day on which the amount of duty would be payable on the goods under subsection 71DGB(1) if the amount of accredited client monthly duty estimate were not paid; or

(ii)

if the sum is paid as an estimate of duty payable under a Customs Tariff or Customs Tariff alteration proposed in the Parliament-within 6 months after the Act, by which the Customs Tariff or Customs Tariff alteration proposed in the Parliament is made law, is assented to.

Item 7 - At the end of section 167

88. This item amends section 167 by inserting a new subsection (6) which contains the definitions of import declaration and unamended Customs Act for the purposes of section 167.

89. Import declaration includes an import entry, within the meaning of the unamended Customs Act, that was made under that Act. Unamended Customs Act has the meaning given by section 4 of the Customs Legislation Amendment (Application of International Trade Modernisation and Other Measures) Act 2004 .

90. The purpose of these two definitions is to ensure that the new payment under protest requirements described above will also apply, for the next few years, to import entries made under the COMPILE computer system. The unamended Customs Act, in this context, is the Customs Act before it was amended by the ITM Act in relation to imports. An import entry made under the unamended Customs Act was made using the COMPILE computer system and the reference to an import declaration in new subsection 167(3A) will include such import entries.

Item 8 - Paragraph 273GA(1 )( ja )

91. This item repeals and substitutes paragraph 273GA(1)(ja).

92. Subsection 273GA(1) of the Customs Act sets out the decisions made under the Customs Act in respect of which an application for review may be made to the Administrative Appeals Tribunal. Paragraph 274GA(1)(ja) relates to a decision of the CEO under subsection 165(3). This item substitutes a new paragraph (ja) to take account of the new wording in new section 165.

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

Item 9 - Item 45 of Schedule 3

93. This item repeals item 45 of Schedule 3 to the ITM Act.

94. Item 45 of Schedule 3 to the ITM Act sets out the savings provisions for the provisions of the Customs Act relating to the payment under protest on import entries made under COMPILE. These provisions require such payments to still be made by a registered COMPILE user using COMPILE. However, as import entries made using COMPILE will now be covered by the new provisions relating to making payments under protest, this savings provision in no longer required and is being repealed.

Part 2 - Application and transitional provisions

Item 10 - Transitional - item 1

95. This item provides that the repeal of section 153 of the Customs Act made by item 1 of this Schedule does not affect any proceedings brought under that section before the commencement of this item. Therefore, any recovery proceedings brought under section 153 that have been completed, or that have commenced but not been completed, will be unaffected by its repeal.

Item 11 - Transitional - item 4

96. This item applies to a demand made under section 165 of the old law, which is section 165 that was in force before item 4 of Schedule 3 repealed and substituted section 165. This item provides that section 165 of the new law (which is the new version of section 165) has effect, on and after item 4 commences, as if the demand made under the old law were a demand made under, and in accordance with, that section.

97. This means that even though a demand was made under old section 165, proceedings in respect of that demand can be commenced in accordance with new section 165 (now that section 153 will no longer exist). In addition, if a demand under the old section 165 does not include the matters required to be included under the new section 165 (such as the method of calculation of the sum demanded), it will be taken to include such requirements and be a valid demand.

Item 12 - Application - items 5 to 7

98. This item provides that the amendments made by items 5 to 7 of Schedule 3 apply in relation to payments made on or after the commencement of those items. These items relate to the new payment under protest provisions as they apply to import declarations and to the ACP. These new provisions cannot apply to payments under protest made in relation to import declarations or COMPILE-related import entries that have been made before the provisions commence.