House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Justice and Customs, Senator the Honourable Christopher Martin Ellison)

Outline

The purpose of this Bill is to amend the Customs Act 1901 (the Customs Act), to introduce new rules of origin for goods that are imported into Australia from New Zealand to give effect to the amendments to the Australia New Zealand Closer Economic Relations Trade Agreement (the Agreement). The Customs Act amendments will enable goods that satisfy the rules of origin to enter Australia at preferential rates of customs duty.

This Bill also contains complementary amendments to the Customs Tariff Act 1995 (the Customs Tariff Act), and consequential amendments to the Customs Tariff (Anti-Dumping) Act 1975 and the Legislative Instruments Act 2003 (the Legislative Instruments Act).

The Agreement first entered into force on 28 March 1983. The Agreement is a comprehensive and wide-ranging agreement that provides new Zealand and Australia with more liberal access to each other's goods, services and investments markets. The Agreement re-affirms the close relationship between Australia and New Zealand and will contribute to greater growth, prosperity and security in the region.

Formal talks between the Governments of Australia and New Zealand to amend the Agreement between the two countries began in December 2004. These negotiations concluded in February 2006.

The amendments to the Agreement are expected to come into force on 1 January 2007, subject to Australia's treaty process and the exchange of diplomatic letters.

To give effect to the preferential entry of goods under the Agreement, the amendments contained in this Bill provide rules for determining whether goods are New Zealand originating goods. The amendments to the Customs Tariff Act will provide for the preferential entry of goods meeting those rules.

The amendments contained in this Bill will also restate the existing rules of origin in relation to New Zealand, being the wholly manufactured rules and the last process of manufacture rule. However, the last process of manufacture rule will only remain in force for another 5 years after 1 January 2007.

The amendments contained in this Bill also impose obligations on exporters of Australian goods to New Zealand and for which a preferential rate of duty will be claimed, and on people who produce and manufacture such goods.

The amendments contained in this Bill will commence on 1 January 2007.

FINANCIAL IMPACT STATEMENT

The cost to revenue of the new rules of origin arrangements is expected to be negligible.

REGULATION IMPACT STATEMENT

The following regulation impact statement was tabled in the Joint Standing Committee on Treaties on 28 March 2006.

Australia - New Zealand Closer Economic Relations Trade Agreement: Changes to Article 3 (Rules of Origin Provisions)

I. Background

1. The Australia - New Zealand Closer Economic Relations Trade Agreement (ANZCERTA) is now 22 years old. It was signed by the Governments of Australia and New Zealand on 28 March 1983. The objectives of the ANZCERTA are to:

a.

strengthen the broader relationship between Australia and New Zealand;

b.

develop closer economic relations between the Member States through a mutually beneficial expansion of free trade between New Zealand and Australia;

c.

eliminate barriers to trade between Australia and New Zealand in a gradual and progressive manner under an agreed timetable and with a minimum of disruption; and

d.

develop trade between New Zealand and Australia under conditions of fair competition.

2. The Agreement's main method for achieving these goals, at least initially, was through the elimination of tariffs on trade between Australia and New Zealand. Access to the preferential tariff rate is only available to goods that have been substantially transformed in either or both countries. Substantial transformation is defined in the ANZCERTA's Rules of Origin (ROO), and can be summarised as follows:

a.

the last process in the manufacture of the good must take place in Australia or New Zealand; and

b.

at least 50 per cent of the cost of producing the good is incurred in Australia or New Zealand.

3. Since 1990, all goods that meet the ANZCERTA ROO can be traded duty-free between Australia and New Zealand.

4. Over the last 22 years, the context of the ANZCERTA has altered considerably as both the Australian and New Zealand economies have changed and grown. Changes to industry have led some businesses, particularly in New Zealand, to claim that the ANZCERTA ROO act as a barrier to growth and trade.

5. This became more evident in 2002 when Australian apparel manufacturers that outsource their last process of manufacture (for stitching, attachment of labels, zippers, buttons, etc) were failing to meet ANZCERTA's 50 per cent local content threshold as implemented in New Zealand, even though the underlying Australian local content may have exceeded 50 per cent. Such export shipments were subjected to 19 per cent tariff duties.

6. New Zealand rectified the problem through changes to the New Zealand Customs and Excise Regulations 1996 on the basis of a formal Arrangement between the Australian and New Zealand Governments, signed by the Minister for Trade, the Hon. Mark Vaile MP, on 23 December 2003. The Arrangement replaced, in its entirety, a previous Joint Understanding on Article 3 (Rules of Origin) as constituted by an Exchange of Letters of 6 October 1992. The Arrangement extends the concept of a 'Principal Manufacturer' to ANZCERTA - as contained in the Singapore Australia Free Trade Agreement (SAFTA) - so as to ensure that all genuine local content is counted towards the ROO and that there is equity of treatment as between integrated manufacturers and those that outsource production.

7. New Zealand's new regulations entered into force on 15 January 2004. Under the Arrangement, Australia was to make legislative changes to bring Australian legislation (Customs Act 1901) into line with the New Zealand regulations by mid- 2004. This would achieve equal treatment of outsourced manufacture on both sides of the Tasman. Australia has deferred introducing its legislative amendments pending the finalisation of the current negotiations on ANZCERTA ROO.

8. New Zealand only agreed to correct the 'outsourcing' anomaly as part of a broader package of ROO reforms. In response to these and other concerns, Mr Vaile, and the then New Zealand Minister for Trade Negotiations, the Hon. Jim Sutton, agreed at the CER Ministerial Forum held in Sydney on 28 August 2003 that officials from Australia and New Zealand should examine the ANZCERTA ROO with a view to considering whether other improvements which would benefit businesses on both sides of the Tasman should be made. On 28 August 2003, the Parliamentary Secretary to the Treasurer, Senator the Hon. Ian Campbell, also announced a study by the Productivity Commission (PC) into economic and administrative problems with the ANZCERTA ROO.

9. In line with the directions provided by Ministers, Australian and New Zealand officials developed a proposal that would allow imported 'intermediate inputs' to be disregarded from the calculation of the total cost of the finished good for the purpose of determining local content under the ANZCERTA. In response to significant opposition to the 'intermediate inputs' proposal, particularly from the textile, clothing and footwear sector, it was decided that a 33 per cent cap (of the total ex-factory cost of the finished good) would apply to the use of the new provision to ensure there was no abuse of the new arrangements.

10. The Australian Government considered the proposal, and associated amendments to the ROO Provisions of ANZCERTA (Article 3), on 16 February 2004. Ministers agreed to amend Article 3 to provide scope for technical changes to elaborate and improve ANZCERTA ROO but deferred a decision on the 'intermediate inputs' proposal pending the report of the PC study of the ROO.

11. In its final report, released on 11 June 2004, the PC concluded that ANZCERTA ROO were outdated and acted as a constraint on further trade. The current ROO had not kept pace with changes in technology and the organisation of production, which had the effect of reducing efficiency and imposing economic costs on both sides of the Tasman. The PC advocated liberalising the ROO by applying a waiver to provide duty-free entry for CER goods manufactured in Australia and New Zealand which face trans-Tasman tariff differences of five percentage points or less. It also recommended a number of minor amendments to improve operational efficiency.

12. Following the PC report, Australian officials consulted with Australian industry on the Commission's recommendations, which industry generally opposed. There was, however, some agreement that the problems identified by the PC were constraining trade.

13. In light of the PC report and the level of opposition to the 'intermediate inputs' proposal, Australian and New Zealand officials again discussed options for updating ANZCERTA ROO. In particular, officials considered a Change of Tariff Classification (CTC) approach to determine origin and a variation of the Productivity Commission's recommendation for a waiver of the 50 per cent threshold, applying to goods with most-favoured nation (MFN) tariffs of 5 per cent or less in Australia or 7.5 per cent or less in New Zealand. Under a CTC approach, imports are required to undergo a specified change in tariff classification. Substantial transformation is said to have occurred if a good is classified to a different tariff classification than that of its component materials after production. The CTC method is used in Australia's FTAs with the United States (AUSFTA) and Thailand (TAFTA). A secondary requirement, such as a regional value content (RVC) threshold being met, may be included where substantial transformation may not result in a change of tariff classification or where it is agreed that a change of tariff classification is insufficient to confer origin.

14. In July 2004, CER Ministers agreed that it might be possible to achieve the improvements identified by the PC through a CTC model, without the uncertainties associated with adopting a new and untested approach like the PC's waiver proposal. A CTC model could simplify the administration of ROO, improve transparency and reduce compliance costs, and would reflect an increasing global trend towards CTC ROO in bilateral trade agreements, benefiting export-oriented industries in both countries.

15. On 31 August 2004, the Minister for Trade, the Hon. Mark Vaile MP, wrote to the Prime Minister seeking approval to enter negotiations with New Zealand to adopt a CTC approach. On 4 November 2004, the Acting Prime Minister, the Hon. Peter Costello MP, responded agreeing to enter negotiations, subject to appropriate consultation with Australian industry and that the arrangements should be settled in consultation with the Prime Minister and relevant Ministers.

16. At their annual CER Ministerial meeting, on 11 December 2004, Australian and New Zealand Trade, Agriculture and Industry Ministers' announced that agreement had been reached on adopting a CTC approach to ANZCERTA ROO, subject to final agreement on sensitive sectors. Ministers also committed to negotiate a CTC model that would be no-less liberal than the current arrangements and that would liberalise all tariff lines over time.

17. Australian Government officials consulted extensively with Australian industry associations and most industry groups supported the proposal (see VII: Consultation for details). Several of these industry groups questioned the need for change from the existing arrangements given the success of ANZCERTA but eventually supported the proposal, on the proviso that their concerns were addressed.

18. On 28 November, Australian Ministers agreed on a CTC-based schedule that included secondary regional value content (RVC) requirements on a limited number of tariff lines, including an RVC of 40 per cent on a build-down basis for vehicles and vehicle parts and an RVC of 50 per cent (reducing to 45 per cent from 2010) for men's suits and structured apparel (e.g. trousers, blazers and overcoats). Cognisant of the commitment to ensure that a CTC approach should at least be no-less liberal than the current arrangements, Ministers also agreed to a grandfathering clause which would allow exporters to claim origin under the pre-existing ex-factory/principle place of manufacture approach for a five year period following the adoption of the CTC approach if, for some reason, they were no longer able to claim origin under the CTC ROO, and that a review of the revised ROO be completed within three years after adoption of the CTC approach.

19. Prime Minister Howard wrote to Prime Minister Clark on 12 December 2005 confirming Australia's position on the package of rules. New Zealand Ministers for Economic Development (Mallard) and Trade Negotiations (Sutton) responded on 23 December 2005 confirming their agreement to the package. Australian and New Zealand Ministers simultaneously announced the Governments' agreement to adopt the CTC on 3 February 2006, with an anticipated implementation date of 1 January 2007.

II. The Problem

20. As noted above, the past 22 years have seen considerable changes in the structure and make-up of the Australian and New Zealand economies. Progressive policies of tariff reduction and structural reform have led to changes in the range and types of products manufactured in each country. The current ex-factory/last place of manufacture approach to ANZCERTA ROO is no longer appropriate for most industry sectors, as they can be time-consuming and administratively burdensome, especially when having to take account of shifts in exchange rates and fluctuations in the international prices of materials. The PC study of ANZCERTA ROO identified a number of problems with the current ROO (see V: Impact Analysis, Option 1, Costs).

21. The requirement that goods meet the 'last place of manufacture' test to claim origin also results in apparel manufacturers that outsource their last process of manufacture (including for stitching, attachment of labels, zippers, buttons) failing to meet the ANZCERTA's 50 per cent local content threshold, even though the underlying local content may have exceeded 50 per cent. Changing the 'last place of manufacture' to 'principal manfacturer' resolves this problem. New Zealand has passed legislative amendments to do so. Australia is yet to finalise its legislative requirements and proposes to do so as part of this package of broader reforms.

22. Total trans-Tasman trade was valued at $14.5 billion in 2004-05, and approximately 2 per cent of this trade is still subject to tariffs. Therefore, the upper limit of current trans-Tasman trade that could potentially benefit under a proposal to liberalise the ANZCERTA ROO would be approximately $290 million (i.e. 2 per cent of $14.5 billion).

23. The Australian Government does not have statistics on preference use by Australian exporters. The PC Study notes that around one-third of Australian exports to New Zealand are in goods which would be subject to MFN tariffs if they did not meet the ANZCERTA ROO. The PC also notes that, in 2001, Australian exports into New Zealand liable for duty included chemicals and plastics, paper and paperboard, fabrics, ceramic products, glass and glassware, metals and electrical machinery and equipment. The average tariff rate faced by these goods was 5 per cent.

24. New Zealand's exports to Australia liable for duty are in similar products, including chemicals and plastics, paper and paperboard, fabrics, clothing, jewellery, metals, machinery, electrical machinery and equipment and motor vehicles and parts. The MFN tariffs in these areas were mainly 5 per cent, with tariffs of 10 per cent for fabrics and motor vehicles and parts and 17.5 per cent for clothing.

25. It is difficult, however, to estimate how much trade is foregone by producers who do not export because the tariff differential is significant enough to make their product uncompetitive but they consider the process of seeking preferential tariff treatment too complex. The generally low level of tariffs in Australia and New Zealand therefore acts as an impediment in this case - the tariff may be enough to make products uncompetitive in the other market and the cost of seeking preference outweighs the benefits.

III. Objectives of the Proposed Changes

26. The Government considers that the ROO should not act to constrain the development of innovative and efficient business practices in Australia and New Zealand. Rather, ANZCERTA ROO should recognise changing economic drivers as both economies seek to become more internationally competitive and facilitate trans-Tasman trade in goods manufactured in the Free Trade Area.

27. The objectives of amending ANZCERTA are to:

a.

lower compliance costs for businesses attempting to prove their conformity with the ROO requirements to attain preferential market access;

b.

reduce the incentives for inefficient production processes by business in order to meet the ROO requirements;

c.

improve consistency of treatment and interpretation of the ROO by Customs agencies in Australia and New Zealand;

d.

improve consistency between Australia's free trade agreements.

IV. Options

28. There are several options available for action.

Option 1: No change (status quo)

29. This option simply maintains the status quo. This would have no impact on tariff revenue.

Option 2: Adopt PC study recommendations

30. In its report on the ANZCERTA ROO the Productivity Commission made two recommendations about the form of the ROO:

a.

waive the 50 per cent factory cost requirement where Australian and New Zealand tariffs differ by less than 5 per cent; and

b.

lower the 50 per cent threshold on the remaining goods in the short term, and eliminate the requirement completely in the longer term.

31. The PC's recommendations are intended to increase market access under ANZCERTA by expanding the range of goods that meet the ROO. Thus both recommendations would lead to some loss of tariff revenue for the Government, the extent of which is difficult to calculate.

Option 3: Adopt CTC ROO (preferred approach)

32. The CTC approach is a product-specific approach to rules of origin where non- originating inputs must undergo a specified change of tariff classification (based on the World Customs Organisation's Harmonized System of Tariff Codes - the HS Code) in producing the final good. The method by which this is done is usually not specified although it may be implicit in the required change of classification. In some cases processing is specified such as where a well-accepted transformation takes place (e.g. chemical reactions) or a standard change of tariff classification would allow minor processing to confer origin (e.g. clothing).

V. Impact Analysis

33. Approximately 2 per cent of Australia's exports to New Zealand do not enter duty- free (i.e. enter at free rates of duty or under the tariff preference) and face non- preferential tariff rates ranging from 5 per cent to 19 per cent. The major Australian exports affected include plastics and chemicals, paper and paper products, fabrics, ceramic products, glass and glassware, metals and electrical machinery and equipment. In 2004-05, Australian exports to New Zealand were valued at approximately $9.2 billion. Therefore the upper limit of current trade potentially affected by this proposal would be approximately $183 million (i.e. 2 per cent of $9.2 billion).

34. Approximately 2 per cent of imports from New Zealand fail to enter Australia duty- free. The value of imports from New Zealand that could potentially benefit from the proposed change to the ROO is around $106 million at most.

35. Quantitative data is not available on the level of trans-Tasman trade which would benefit from the proposed changes as it is unlikely that all trans-Tasman trade currently subject to duty would enter duty-free under the proposal. Nor is it possible to estimate how much trade is foregone by producers who do not export because the tariff differential is significant enough to make their product uncompetitive in the other market but the process of seeking preferential tariff treatment is considered too complex or too administratively burdensome.

36. A detailed comparison of the compliance costs for each option has not been prepared as these will vary considerably from industry to industry and company to company. In general, however, the compliance costs for the CTC method are estimated to be far less expensive as the special calculations required to confirm that a product meets the ROO under the ex-factory cost or related approaches are not required under CTC.

Option 1: No change (status quo)

Benefits

37. On the surface, the current ANZCERTA ROO do not serve as a major impediment to trade between Australia and New Zealand. While around 47 per cent of two-way merchandise trade between Australia and New Zealand is in tariff lines which are subject to tariffs and would be subject to duty if the merchandise did not satisfy origin requirements, 98 per cent of these goods satisfy the ANZCERTA ROO requirements for duty-free access. This high level of preference utilisation and generally low tariffs indicate that the scope for further improvements in preferential trade between Australia and New Zealand is limited.

38. The current ANZCERTA ROO have been in place for over 20 years. Industry is comfortable with their operation and has not made any strong calls for the ROO to be changed. Manufacturers on both sides of the Tasman have adopted business practices to take advantage of the ROO, and in some cases this has meant a carefully calibrated production process to ensure they meet its requirements. The Government was informed that some companies have computer software to allow them to monitor, and thereby adjust, their costs according to changing market conditions in order to meet the ROO.

39. Retaining the existing arrangements would also have no impact on Government revenue.

Costs

40. However, Australian industry has expressed a desire for a consistent approach to ROO in Australia's free trade agreements (FTAs) in order to minimise problems in both understanding and applying them. This has been supported by comments from industry in subsequent consultations for FTAs other than ANZCERTA.

41. The PC study also identifies a number of problems with the current ROO which, if resolved, could provide some scope for increased trade. These included the:

a.

potential for inconsistent treatment and/or interpretation of the ROO by Customs agencies in Australia and New Zealand;

b.

restrictiveness of the 'last process of manufacture' test, including problems with the treatment of outsourcing and commission work;

c.

disincentive to improve efficiency/reduce costs;

d.

disincentive to use higher value imported materials;

e.

incentive to incur local costs to achieve the 50 per cent threshold;

f.

treatment of specific material and overhead expenses in the factory cost calculations; and

g.

level of compliance and adequacy of enforcement measures.

42. In addition, the current ROO can also be time-consuming and administratively burdensome and industry must make special calculations to confirm a product meets the ROO. As noted by the PC, the factory cost basis for the ROO has lead to a strict delineation of 'factory costs': what may be included and how they are apportioned to production of the goods. Although businesses would have information on these costs, the calculation of qualifying and total expenditure on a good's production are not the same as the cost accounting approach to these goods. Small inconsistencies in the treatment of these costs by either Government can also lead to significant differences in whether a good qualifies or not. The PC notes the impact of different treatment by Australia and New Zealand of goods provided at less than normal market value (including free of charge) and materials of mixed origin.

43. It is also possible for the ex-factory approach to produce "unfair" outcomes in that the same good produced according to the same process (and using the same imported materials) may qualify as originating in one party to an agreement but not in another party because of differences in the relative costs of production in the two countries.

44. Shifts in exchange rates and fluctuations in international prices of materials can significantly affect an exporter's final cost structure, creating uncertainty as to whether the ROO will be met. For example, the Australian exchange rate has appreciated by more than 40 per cent against the US dollar since the beginning of 2002 - which affects the capacity for exported goods to meet the single costs threshold ratio used in the value added approach to ROO. Another example is the dramatic impact that fluctuating world oil prices has on the costs and price ratios for products with high hydrocarbon content. These factors can mean that a good that qualifies under the value added approach at a particular time may not qualify in the future even though the same production process is used.

Option 2: Adopt PC study recommendations

45. In its study, the PC made two recommendations about the form of the ROO:

a.

waive the 50 per cent factory cost requirement where Australian and New Zealand tariffs differ by less than 5 per cent; and

b.

lower the 50 per cent threshold on the remaining goods in the short term, and eliminate the requirement completely in the longer term.

46. As part of the recommendations the PC also proposed expanding the 'last place of manufacture' concept used in the ROO to a 'principal manufacturer' concept and adopting a standard definition of manufacture from the Singapore Australia Free Trade Agreement (SAFTA). The inclusion of the 'principal manufacturer' concept has already been agreed by the Australian and New Zealand Governments.

47. The PC's recommendations are intended to increase market access under ANZCERTA by expanding the range of goods that meet the ROO. To the extent that they make it easier to claim preference on goods which currently fail to meet the ROO and pay the MFN tariff there will be an impact on Government revenue. This would affect a maximum of around $2.9 million of duty collected by the Government, based on 2004-05 figures. Any trade created by the changes will also increase revenue foregone however, since this trade is not currently taking place, it should not impact directly on the Budget.

Waiver of 50 per cent factory cost requirement

Benefits

48. By removing the ex-factory cost test, the waiver would resolve most of the problems identified by the PC with the current ROO arrangements. The PC notes that the waiver would:

a.

significantly reduce compliance and administration costs for industry and the Government. Detailed costings and the attendant paperwork would no longer be needed to claim and verify the origin of imports;

b.

remove impediments to efficient sourcing of inputs and technology, increasing productivity, business efficiency and market choice; and

c.

increase trade opportunities and market access across the Tasman.

49. The PC's argument in favour of the waiver rests, in part, on the assumption that ROO are not important when the most-favoured nation (MFN) tariffs in Australia and New Zealand are either identical or nearly identical. In this situation, the PC argues that there is no incentive to tranship goods due to transport costs and the need to satisfy the manufacture criteria. This is due to the (approximately) equal protection afforded to each market, ignoring the presence of duty drawback under ANZCERTA. Duty drawback means that New Zealand exporters do not face a tariff on the imported components of their goods that are exported to Australia (likewise for goods exported to New Zealand), providing a cost advantage.

50. In the study, the PC notes that some submissions argued that the waiver would cut across established industry adjustment plans. By making it easier to gain origin, the proposal creates additional competition for industries going through adjustment, beyond what was expected during the discussions for the future assistance packages.

51. Waiving the threshold also places a greater burden on the last process of manufacture requirement. The PC proposes adopting a standard definition of manufacture to strengthen this element of the ROO. However, the standard definition still does not provide clear delineation of what constitutes manufacture under the ROO. Hence litigation could still occur, although probably less than under the current arrangements.1 However, the PC also notes that the SAFTA definition reflects the general principles derived from the tests of the current ROO in the Courts. The net impact, therefore, may be minor.^[F1]

Costs

52. In the consultations by the Government with Australian industry about possible changes to the ROO, industry groups expressed strong reservations about the waiver proposal in the PC report. Industry saw the waiver as undermining the operation of the ANZCERTA ROO, particularly in the presence of duty drawback which allowed New Zealand industry to escape tariffs on their inputs for goods exported to Australia. Industry argued that this would provide an unfair advantage to New Zealand industry and create additional competitive pressures in the domestic market, particularly for the textile, clothing and footwear (TCF) sector.

Reduce and eliminate the 50 per cent factory cost requirement

53. The benefits and costs of (eventual) elimination of the ex-factory cost threshold are the same as for the waiver, outlined above. The key difference is that elimination of the threshold will ensure that all goods are covered while the waiver would leave some goods outside the coverage of the new arrangements, at least until the tariff arrangements had sufficiently changed.

54. As for the waiver, eliminating the threshold places a greater burden on the last process of manufacture requirement.

Benefits

55. The Productivity Commission notes that reducing (and eventually eliminating) the local content threshold would provide the following advantages:

a.

allow greater choice in the selection of, and origin of, inputs;

b.

lower the barriers to trade posed by the ROO;

c.

allow a greater margin for future technological and organisational changes, productivity gains and currency fluctuations; and

d.

be simple to implement and involve negligible transition costs.

Costs

56. The PC identifies the following disadvantages from reductions in the threshold:

a.

it would not address the compliance and administration costs associated with the factory cost methodology; and

b.

it does not provide a long term solution to threshold-related problems.

57. The PC notes a number of submissions that commented that reducing the threshold merely moves the problems associated with the threshold to a new level. Correspondingly, lowering the threshold to, say, 40 per cent ex-factory cost, creates new marginal exporters at that level or allows industry to adjust their production to allow them to meet the new threshold.

58. The Government's consultations following the PC report revealed strong opposition to reducing the 50 per cent threshold among industry. Industry views the current ROO arrangements as a whole, and is opposed to weakening any element of it. Some industries indicated that while they may have been more disposed to a lower threshold, due to the history of the single threshold in ANZCERTA, they did not wish to move "ahead of the pack".

Option 3: Adopt CTC ROO (preferred approach)

Benefits

59. The advantages of CTC ROO are that it:

a.

is objective - there is a single, clear rule for each tariff line, providing certainty as to what constitutes 'substantial transformation', regardless of the method used to produce the transformation;

b.

dispenses with the regional value content threshold for the vast majority of products;

c.

improves efficiency by allowing greater use of inputs not produced in Australia or New Zealand without an adverse impact on the ability to claim origin;

d.

is consistent with Australia's more recent free trade agreements;

e.

does not apply ROO on a "one-size fits-all" approach; and

f.

reduces compliance and administrative costs, removing issues relating to exchange rates, fluctuating world commodity prices or the need to enter into debates over allowable and non-allowable costs, etc.

60. The HS Code is an internationally agreed system for classifying goods, used by most Customs agencies worldwide, including Australia and New Zealand. The HS Code is used to classify both imports and exports by the Australian and New Zealand Customs Services. The system is a hierarchical, numerical classification system of headings and subheadings based on six digits that uniquely identify all traded goods and commodities. Australia and New Zealand provide further disaggregation by the use of extra digits although these are not commonly used in CTC ROO since they are not internationally agreed.

61. The HS Code classifies goods according to specificity of description (i.e. where they are best described) and the essential character of the goods. The method for classifying goods is contained in the Commonwealth Customs Act 1995 and the Australian Customs Service provides an advisory service on the classification of goods.

62. As noted above, the ROO are transparent in terms of what transformations are allowed. This enables exporters to clearly identify if they have met the ROO based on their inputs and final product without the uncertainty of whether what they have done constitutes 'manufacture,'

63. During Government consultations following the PC report, and for subsequent FTAs, industry has expressed strong support for CTC ROO. The consultations for the Thai and United States Free Trade Agreements have familiarised industry associations and individual businesses with this approach.

64. The CTC ROO also enables the Government to address the concerns of particular industries without impacting on other sectors. The product-specific nature of the CTC ROO encourages industry to think in terms of particular products rather than the ROO as a whole. This has fostered greater liberalisation than might otherwise be possible.

65. The majority of the CTC ROO therefore have no regional value content requirement. The transformation described by the tariff change is sufficient to ensure 'substantial transformation'. Given the economic integration and close trading relationship between Australia and New Zealand, the ANZCERTA CTC ROO are generally more liberal than those with the United States and Thailand.

66. The CTC proposal will significantly decrease the compliance costs for exporters across most tariff lines. Where RVCs have been retained, current exporters already have systems in place to record costs to determine content and no additional costs will be incurred. The impact of the proposal would be similar for both Australia and New Zealand. The elimination of RVCs will also make assessments of origin claims by the Australian and New Zealand Customs Services simpler.

67. Implementation of a CTC approach to ANZCERTA ROO would potentially allow a greater number of Australian and New Zealand manufacturers to claim origin, and thus receive preferential entry into the other country. It is difficult to estimate how much trade would benefit from the proposed changes as it is unlikely that all trans- Tasman trade currently subject to duty would enter duty-free under the proposal.

68. In recent years, the major Australian exports subject to duty in New Zealand have included plastics and chemicals, paper and paper products, fabrics, ceramic products, glass and glassware, metals and electrical machinery and equipment. While all groups will benefit from the increased transparency and simplicity of the revised ROO, exporters of plastics and chemicals and electrical machinery and equipment that make use of inputs that are not produced in Australia or New Zealand and for which there are no local substitutes available are likely to benefit from the adoption of a CTC approach. This resolves, for most sectors, the problems the earlier 'intermediate inputs' proposal attempted to address.

69. In addition, textiles, clothing and footwear and leather exporters on both sides of the Tasman may be affected by the proposal due to the relatively high levels of tariff protection afforded these sectors in each country. As a result, these products are less likely to be traded if the ROO requirement is not met. The more liberal ROO created by the proposal is therefore likely to increase trade in these goods, although the extent of this is difficult to gauge.

Costs

70. General criticism of the CTC ROO has rested on the concern that secondary criteria, such as regional value content requirements, will be introduced to minimise potential liberalisation and act as a form of hidden protectionism. This criticism is based on the experience of the ROO used by the European Union and United States of America in their trade arrangements, such as the United States' 'yarn forward' requirements, and the use of the technical language of the HS Code as the basis. However, protectionism is not inherent in CTC ROO.

71. Existing ROO arrangements, and the direction of Ministers, meant that any CTC ROO had to offer the potential for gains. The Government took AUSFTA and TAFTA ROO as the basis for discussions both with New Zealand and with Australian industry. The core change of tariff classification requirement of the ROO was checked to ensure industry thought it represented a fair description of "substantial transformation". This also provided consistency with Australia's other FTA arrangements. Where necessary changes were made, and liberalisation then focussed on secondary requirements such as regional value content. The negotiated ROO provide for significant liberalisation by reducing or eliminating RVC requirements for most products. The basic approach to the remaining RVCs uses the AUSFTA 35 per cent build-down/45 per cent build-up criteria. These criteria are based around the prices paid for materials and received for the finished goods and are much less arbitrary in terms of what is included or excluded from the calculation. Furthermore, they expand the range of originating content and lower the threshold compared to the ex-factory cost approach, therefore making them easier to meet.

72. The only exceptions to these RVC criteria, where they are used, are for passenger motor vehicles and some clothing and finished textiles goods. The RVC for passenger motor vehicles is the lower 40 per cent build-down. The RVC for men's suits will be 50 per cent ex-factory cost requirement (reducing to 45 per cent in 2010). Most finished textile products have an alternative rule to allow a more liberal change of tariff classification with an RVC of 55 per cent build-down. The change of tariff classification in these cases would allow, for example, the production of blankets and sheeting from dyed and finished fabrics which would not normally be considered manufacture.

73. Accordingly, the ROO liberalise where possible, and maintain current arrangements for the most sensitive areas. Consistency is maintained by ensuring that the most elementary part of the ROO is consistent with Australia's other FTAs.

74. The technical nature of the HS Code can limit the transparency of the arrangements, particularly for newcomers. However, as noted, the HS Code is used extensively in international trade. It is also unlikely that a business will need to know large parts of the CTC ROO, instead business can concentrate on the ROO that directly affect them.

75. The PC also notes that a change in the model for ROO for an established trade agreement will result in large transition costs. The Government is cognisant of this fact, but is also aware that consistent ROO across Australia's trade agreements can lower costs for industry that trade in many countries. Consistent ROO allow business to enter other markets without having to comply with different ROO arrangements. To minimise the impact in the short-run, the existing ROO are grandfathered for five years to allow industry to become familiar with the new arrangements.

76. To the extent that they make it easier to claim preference on goods which currently fail to meet the ROO and pay the MFN tariff, CTC ROO will impact on Government revenues. This would affect a maximum of around $2.9 million of duty collected by the Government, based on 2004-05 figures. Any trade created by the changes will also increase revenue foregone however, since this trade is not currently taking place, it should not impact directly on the Budget.

Impact on Small Business

77. Any increased trade resulting from the implementation of this proposal is likely to have some competitive impact on the domestic industry of the importing party. For example, the Australian clothing industry is likely to see some additional competition from New Zealand clothing imports.

78. There may be scope for small business that makes use of the regime to increase exports. For example, a small Australian manufacturer of fire-trucks has indicated that due to the need to use several key imported components that were unavailable in Australia, it failed to meet the ROO and was therefore unable to secure contracts in New Zealand by virtue of the duty impost.

VI. Current Policy and Legislative Arrangements

79. Government policy regarding the ANZCERTA ROO is administered jointly by the Department of Foreign Affairs and Trade and the Departments of Industry, Tourism and Resources (for industrial and mineral products) and Agriculture, Fisheries and Forestry (for agricultural and food products).

80. ANZCERTA ROO are described in ANZCERTA and side instruments. The Customs Act 1901 and the Customs Regulations 1926 implement the ANZCERTA ROO in Australian legislation. Changes to rules for determining origin would necessitate amendment of these Acts.

81. The Australian Customs Service has advised that there are no staffing or resource implications arising from the change.

VII. Consultation

82. Following the PC report, Australian officials consulted with Australian industry on the Commission's recommendations, which industry opposed (see V. Impact Analysis, Option 2). There was, however, some agreement that the problems identified by the PC were constraining trade.

83. Consistent with the direction provided by the respective CER Ministers of Australia and New Zealand, officials from the Department of Foreign Affairs and Trade (DFAT), the Department of Industry, Tourism and Resources (DITR), Department of Agriculture, Forestry and Fisheries (DAFF) and the Australian Customs Service (ACS) then discussed the proposal to adopt a change of tariff classification approach and the associated schedule with New Zealand officials. Australian Government officials also discussed the proposal with key industry associations. The proposal has also been promoted on the DFAT and DAFF websites and advertisements run in The Australian and The Australian Financial Review newspapers on 16 and 22 July 2005 respectively.

84. Australian industry groups were consulted extensively in the development of the proposal, which most supported, subject to final consideration of the schedule. These included the Distilled Spirits Industry Council of Australia (DSICA), Confectionary Manufacturers of Australasia (CMA); Dairy Australia, Wine and Brandy Corporation and Wine Makers Federation, Australian Industry Group, Australian Seafood Industry Council, National Association for Forest Industries, Australian Plantation Products and Paper Industry Council (A3P), Australian Pork, Queensland Sugar, Horticulture Australia, National Farmers Federation, the Australian Food and Grocery Council (AFGC), the Plastics and Chemicals Industry Association (PACIA), Australian Electrical and Electronic Manufacturers Association (AEEMA) and the Federation of Australian Parts Manufacturers (FAPM). Indeed, some saw the proposal resolving a number of outstanding issues whereby preferential duty was obtained without substantial transformation. For example, DSICA argued that the current ANZCERTA ROO allowed bulk spirits to be transhipped through New Zealand. No significant changes were required to the draft schedules to finalise negotiations with these groups.

85. The Federal Chamber of Automotive Industries (FCAI) initially argued that there was no strong case for change as its industry it had no difficulty with current ANZCERTA ROO and it would not really provide additional consistency as the AUSFTA and TAFTA origin rules were not harmonized. However, FCAI argued that, should the CTC approach be adopted, a 50 per cent RVC should be required. After careful reflection and further consultation, Ministers agreed that, consistent with TAFTA, an RVC of 40 per cent should apply to vehicle and vehicle parts under ANZCERTA. New Zealand has no vehicle manufacturing industry and its parts manufacturers are well integrated with the Australian industry.

86. The TCF sector as a whole was initially strongly opposed to the proposal to adopt a CTC approach. However, after further consideration of the potential impact of adopting a CTC approach for trans-Tasman trade, the footwear and women's wear sectors, represented by the Council of Textile and Fashion Industries (TFIA) and the Footwear Manufacturers' Association of Australia (FMAA), agreed to the proposal, requesting in addition that any RVC requirements be removed. The Government also consulted with the Australian Carpet Institute, which accepted the position. The manufacturers of men's suits were most opposed to adoption of a CTC approach, and argued for the sector to be quarantined from any proposal. However, after further consideration, they also found there were benefits in the proposal and agreed to a CTC approach, subject to a secondary RVC requirement being imposed.

VIII. Conclusion

87. While the current ANZCERTA ROO do not serve as a major impediment to trade between Australia and New Zealand and 98 per cent of trans-Tasman trade gains preferential tariff treatment, changes in the structure and make-up of the Australian and New Zealand economies have resulted in them no longer being appropriate for most industry sectors. A key problem is the high administrative cost incurred as industry calculates whether a product meets the ROO, particularly taking into account shifts in exchange rates and fluctuations in international prices of materials which can significantly affect an exporter's final cost structures. The current ROO also provide a disincentive to improve efficiency and reduce costs or use higher value imported materials if this is likely to adversely affect their ability to achieve the 50 per cent threshold.

88. The Government's objective in amending ANZCERTA ROO is to ensure that they recognise changing economic drivers as both economies seek to become more internationally competitive and that they do not act as a disincentive to trans-Tasman trade in goods. In particular, the Government's objectives in amending ANZCERTA are to lower compliance costs for businesses attempting to meet the ROO requirements to attain preferential market access and improve consistency between Australia's Free Trade Agreements.

89. Three options have been considered:

a.

no change;

b.

adoption of the Productivity Commission's recommendations to waive the 50 per cent factory cost requirement where Australian and New Zealand tariffs differ by less than 5 per cent and/or lower the 50 per cent threshold on the remaining goods in the short term and eliminate the requirement completely in the longer term; and

c.

adoption of the change of tariff classification approach.

90. Retaining the current ROO is not desired due to its inherent problems.

91. While the Productivity Commission study notes some advantages with the proposal to reduce, eliminate or waive the 50 per cent factory cost requirement, including reducing compliance and administration costs for industry and removing impediments to efficient sourcing of inputs, Australian industry expressed strong reservations about it. Industry saw the waiver as undermining the operation of the ANZCERTA ROO, particularly in the presence of duty drawback which allowed New Zealand industry to escape tariffs on their inputs for goods exported to Australia. Reductions in the threshold would not address the compliance and administration costs associated with the factory cost methodology nor provide a long term solution to threshold-related problems.

92. The third, and preferred approach, is a CTC method. It has many advantages, including that it reduces compliance and administrative costs; it enables the use of inputs not produced in Australia or New Zealand without adverse impact on the ability to claim origin; and is consistent with Australia's more recent trade agreements. Australian industry has generally expressed strong support for CTC ROO.

Notes On Clauses

Clause 1 Short title

1. This clause provides for the Bill, when enacted, to be cited as the Customs Legislation Amendment (New Zealand Rules of Origin) Act 2006.

Clause 2 Commencement

2. Clause 2 provides that this Act commences on 1 January 2007.

Clause 3 Schedule(s)

3. This clause is the formal enabling provision for the Schedule to the Bill, providing that each Act specified in a Schedule is amended in accordance with the applicable items of the Schedule. In this Bill the Customs Act, the Customs Tariff Act, the Customs Tariff (Anti-Dumping) Act and the Legislative Instruments Act are being amended.

4. The clause also provides that the other items of the Schedule have effect according to their terms. This is a standard enabling clause for transitional, savings and application items in amending legislation.

SCHEDULE 1 - Amendments

Part 1 - New Zealand originating goods

Customs Act 1901

Item 1 After Division 1D of Part VIII

1. This item amends the Customs Act 1901 (the Customs Act) by inserting new Division 1E into Part VIII. New Division 1E is headed New Zealand originating goods and sets out the rules for determining whether goods are New Zealand 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 New Zealand Closer Economic Relations Trade Agreement (the Agreement), in particular Article 3 of the Agreement.

2. New Division 1E contains six subdivisions which are set out below.

Subdivision A - Preliminary

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

Section 153ZIA Simplified outline

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

New section 153ZIB Interpretation

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

Agreement which means the Australia New Zealand Closer Economic Relations Trade Agreement done at Canberra on 28 March 1983, as amended from time to time. The Note to this definition indicates that in 2006, the text of the Agreement was accessible through the Australian Treaties Library on the AustLII Internet site;

Australian originating goods which means goods that are Australian originating goods under a law of New Zealand that implements the Agreement;

continental shelf which has the same meaning as in the Seas and Submerged Lands Act 1973. This definition is taken from Paragraph 1 of Article 76 of the United Nations Convention on the Law of the Sea (UNCLOS) which provides as follows:

The continental shelf of a coastal State comprises the sea-bed and subsoil of the submarine areas that extend beyond its territorial sea throughout the natural prolongation of its land territory to the outer edge of the continental margin, or to a distance of 200 nautical miles from the baselines from which the breadth of the territorial sea is measured where the outer edge of the continental margin does not extend up to that distance;

Convention which means the International Convention on the Harmonized Commodity Description and Coding System done at Brussels on 14 June 1983. The Note to this definition indicates that in 2006, the text of the Agreement was accessible through the Australian Treaties Library on the AustLII Internet site;

customs value , of goods, which has the meaning given by section 159. In most cases it will be the transaction value but there are other methods if this value cannot be ascertained;

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 HS has been adopted in the Customs Tariff Act. The HS organises goods according to the degree of manufacture, and assigns classification numbers to all goods. It is arranged into 96 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 (6 digits) for any good are adopted in any country using the HS. The Australian Customs Tariff is an 8 digit classification, with the 4 and 6 digit international classification supplemented for the domestic imposition of Customs duties.

indirect materials which means;

a.

goods or energy used or consumed in the production, testing or inspection of goods, but not physically incorporated in the goods; or

b.

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

including:

c.

fuel (within its ordinary meaning); and

d.

tools, dies and moulds; and

e.

spare parts; and

f.

lubricants, greases, compounding materials and other similar goods; and

g.

gloves, glasses, footwear, clothing, safety equipment and supplies; and

h.

catalysts and solvents.

manufacture which means the creation of an article essentially different from the matters or substances that go into that creation, but does not include the following activities (whether performed alone or in combination with each other);

a.

restoration or renovation processes such as repairing, reconditioning, overhauling or refurbishing;

b.

minimal operations of pressing, labelling, ticketing, packaging and preparation for sale, whether conducted alone or in combination with each other;

c.

quality control inspections.

New Zealand originating goods which means goods that, under this Division, are New Zealand originating goods;

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

originating materials which means;

a.

goods that are used or consumed in the production of other goods and that are New Zealand originating goods. In some circumstances, in order to determine whether goods that are imported into Australia are New Zealand 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 and D). 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 New Zealand originating goods, which means that in their own right, they satisfy the requirements of new Division 1E. Non-originating materials are goods that are not originating materials because they do not satisfy the requirements of Division 1E in their own right. For example, where frozen crumbed fish fillets are made in New Zealand from fish caught in New Zealand, coated with herbs and spices imported from Thailand and South America, the fish would be originating materials and the herbs and spices would be non-originating materials; or

b.

goods that are used or consumed 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 New Zealand that implements the Agreement, they are also originating materials for the purposes of new Division 1E; or

c.

indirect materials.

produce which means grow, farm, raise, breed, mine, harvest, fish, trap, hunt, capture, gather, collect, extract, manufacture, process, assemble or disassemble;

territorial sea which has the same meaning as in the Seas and Submerged Lands Act 1973. This definition is taken from Articles 3 and 4 of UNCLOS which provides as follows:

Every State has the right to establish the breadth of its territorial sea up to a limit not exceeding 12 nautical miles, measured from baselines determined in accordance with this Convention.

The outer limit of the territorial sea is the line every point of which is at a distance from the nearest point of the baseline equal to the breadth of the territorial sea.

6. New subsection ZIB(2) provides that the regional value content of goods for then purposes of Division 1E is to be worked out in accordance with the regulations. The regulations may prescribe different regional value content rules for different kinds of goods;

7. New subsection 153ZIB(3) provides that the value of goods for the purposes of Division 1E 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.153ZIE(4). 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.

8. New subsection 153ZIB(4) provides that in specifying tariff classifications for the purposes of Division 1E, the regulations may refer to the Harmonized System. The product specific rules in Annex G of the Agreement refer to tariff classifications of the Harmonized System.

9. New subsection 153ZIB(5) provides that subsection 4(3A) of the Customs Act does not apply for the purposes of Division 1E. 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 1E.

10. New subsection 153ZIB(6) provides that for the purposes of Division 1E, the regulations may apply, adopt or incorporate any matter contained in any instrument or other writing as in force or existing from time to time. This provision will override section 49A of the Acts Interpretation Act 1901 in order to enable the Customs New Zealand Rules of Origin) Regulations 2006 (New Zealand Regulations) to refer to the general accounting principles of New Zealand for the purposes of the regional value content calculations.

Subdivision B - Goods wholly obtained in New Zealand or New Zealand and Australia

11. Subdivision B sets out the rules in relation to goods that are wholly obtained in New Zealand or in New Zealand and Australia.

Section 153ZIC Goods wholly obtained in New Zealand or New Zealand and Australia

12. New subsection 153ZIC(1) provides that goods are New Zealand originating goods if they are wholly obtained in New Zealand or in New Zealand and Australia.

13. New subsection 153ZIC(2) provides that goods are wholly obtained in New Zealand or in New Zealand and Australia if, and only if, the goods are:

a.

minerals extracted in New Zealand; or

b.

plants grown in New Zealand, or in New Zealand and Australia, or products obtained in New Zealand from such plants; or

c.

live animals born and raised in New Zealand, or in New Zealand and Australia; or

d.

products obtained from live animals in New Zealand; or

e.

goods obtained from hunting, trapping, fishing, capturing or aquaculture conducted in New Zealand; or

f.

fish, shellfish or other marine life taken from the sea by ships that are registered or recorded in New Zealand and are flying, or are entitled to fly, the flag of New Zealand; or

g.

goods produced or obtained exclusively from goods referred to in paragraph (f) on board factory ships that are registered or recorded in New Zealand and are flying the flag of New Zealand; or

h.

goods taken from the seabed, or the subsoil beneath the seabed, of the territorial sea of New Zealand or of the continental shelf of New Zealand:

i)

by New Zealand; or

ii)

by a New Zealand citizen; or

iii)

by a body corporate incorporated in New Zealand; but only if New Zealand has the right to exploit that part of the seabed; or

i.

waste and scrap that has been derived from production operations in New Zealand, or from used goods collected in New Zealand, and that is fit only for the recovery of raw materials; or

j.

goods produced entirely in New Zealand, or in New Zealand and Australia, exclusively from goods referred to in paragraphs (a) to (i) or from their derivatives. For example, pork sausages that are made from pigs born and raised in New Zealand and cereals and spices harvested in New Zealand will be New Zealand originating goods.

Subdivision C - Goods produced in New Zealand or New Zealand and Australia from originating materials

14. Subdivision C sets out the rule in relation to goods that are produced entirely in New Zealand, or entirely in New Zealand and Australia from originating materials only under section 153ZID. Such goods are New Zealand originating goods.

Subdivision D - Goods produced in New Zealand or New Zealand and Australia from non-originating materials

15. Subdivision D sets out the rules for determining whether goods that are produced entirely in New Zealand, or entirely in New Zealand and Australia, from non- originating materials only, or from non-originating materials and originating materials are New Zealand originating goods.

16. New subsection 153ZIE(1) provides that, goods are New Zealand originating goods if:

a.

they are classified to a heading or subheading of the Harmonized System specified in column 1 or 2 of the table in Schedule 1 to the Customs (New Zealand Rules of Origin) Regulations 2006 (the New Zealand Regulations); and

b.

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

c.

each requirement that is specified in the regulations to apply in relation to the goods is satisfied.

17. The table in Schedule 1 to the New Zealand Regulations 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 are New Zealand originating goods. Columns 1 and 2 of this table will set out the tariff classifications, column 3 will set out the description of the goods and column 4 will set out the product specific rules.

18. New subsection 153ZIE(2) refers to the first of the requirements that may be specified in Schedule 1 to the ANZCERTA Regulations. It provides that the regulations may specify that each non-originating material used or consumed in the production of the goods is required to satisfy a specified change in tariff classification. New subsection 153ZIE(3) provides that the regulations may also specify set out when a non-originating material used or consumed in the production of the goods is taken to satisfy the change in tariff classification. Regulations made under these heads of power would include provisions to give effect to the accumulation provision contained in Article 3 (2) of the Agreement, and would apply where the non-originating materials that are used or consumed in the production of the good do not satisfy the change in tariff classification.

19. The concept of the change in tariff classification only applies to non-originating materials. Goods that have been sourced from outside New Zealand or Australia and that are used in the production of other goods are non-originating materials. Goods sourced from within New Zealand or Australia that have not fulfilled the requirements of Division 1E and that are used in the production of other goods are also non- originating materials. All non-originating materials used to produce other goods may not have the same classification under the Harmonized System as the final good 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 New Zealand, or New Zealand and Australia, to justify the claim that the goods originate in New Zealand.

20. For example, frozen fish (HS 0304) is derived from fish caught in New Zealand and combined with herbs and spices from Thailand and South America (HS 0907 - 0910) to make crumbed fish fillets (HS 1604). The applicable tariff change for crumbed fish is "a change to heading 1604 from any other chapter". As the herbs and spices are classified to Chapter 9, these non-originating materials meet the tariff change requirement (the frozen fish is the produce of New Zealand and is therefore an originating material and is not required to change its classification).

21. 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.

22. New subsection 153ZIE(4) provides that the change in tariff classification is also taken to be satisfied if the total value of all the non-originating materials used or consumed in the production of the goods that do not satisfy the particular change in tariff classification of the goods does not exceed 10% of the customs value of the goods.

23. The provisions of subsection 153ZIE(4) incorporate the de minimis provisions that are set out in Article 3 (4) of the Agreement. Therefore, even if all the non- originating goods used to produce a final good do not satisfy a particular change in tariff classification, the final goods may still be New Zealand originating goods because the change in tariff classification will be taken to be satisfied.

24. The value of non-originating materials for the purposes of this section is to be worked out in accordance with the method that will be included in the New Zealand Regulations.

25. New subsection 153ZIE(5) provides that the regulations may specify that the goods are required to have a regional value content of at least a specified percentage

26. In respect of goods in the table in Schedule 1 to the New Zealand Regulations, approximately 15% of these goods may also be required to satisfy a regional value content requirement. The regional value content varies between 40% and 55%. The method of calculation to determine the regional value content will be included in the New Zealand Regulations.

27. New subsection 153ZIE(6) provides that if:

a.

the goods are required to have a regional value content of at least a particular percentage; and

b.

the goods are imported into Australia with standard accessories, standard spare parts or standard tools; and

c.

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

d.

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

then the regulations must require the value of the accessories, spare parts or tools to be taken into account, as originating materials or non-originating materials, as the case may be, for the purposes of working out the regional value content of the goods. 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.

28. The Note to this section indicates that the value of the accessories, spare parts or tools is to be worked out in accordance with the regulations.

29. New subsection 153ZIE(7) provides that for the purposes of subsection 153ZIE(6), section 153ZIG is to be disregarded in working out whether the accessories, spare parts or tools are originating materials or non-originating materials.

30. However, subsection 153ZIB(8) provides that subsection 153ZIE(6) does not apply if the accessories, spare parts or tools are imported solely for the purpose of artificially raising the regional value content of the goods. Subsections 153ZIE(8) and 153ZIG (see below) are required to ensure that accessories, spare parts or tools that are of a kind normally provided with other goods are not simply added to ensure one or both of the goods are originating by artificially raising the regional value content of the other goods.

For example, trousers are made in New Zealand, and are to be sold to a buyer in Australia for $100 each. Amongst other requirements, trousers must have a regional value content of 55% to be originating goods under the Agreement. Because these trousers include Italian fabric worth $48 per pair, the regional value content would be worked out as follows:

$100 - $48 = 52% / $100


The trousers are non-originating, and ineligible for importation into Australia at preferential rates of duty under the Agreement.

To get around this dilemma, the producer arranges for each pair of trousers to be sold with a belt and agrees to buy the belt back later to ensure the buyer ultimately pays no more than originally intended. On return of the belts to the producer, they could then be used for subsequent shipments under similar arrangements.

The belt is complete with a buckle, is classified to subheading 4203.30 and is sold to the producer for $12. It is made from a pre-made belt without a buckle imported from another country. The pre-made belt is classified to the same subheading as the complete belt, and is valued at $2. The belt is non-originating because it did not undergo an appropriate tariff change requirement.

Without subsection 153ZIE(8) and paragraph 153ZIG(c), the addition of the belt to the trousers would mean that the regional value content of the trousers would be worked out as follows:

$112 (trousers + belt) - $50 (imported fabric + belt without buckle) / $112 = 55.35%


Therefore, the artificial inclusion of the belt would raise the price of the goods (and to a lesser extent, the value of the imported content) to enable both goods to become originating. Subsection 153ZIE(8) and paragraph 153ZIG(c) are required to deter traders from resorting to artificial arrangements to meet the required regional value content.

31. The value of the accessories, spare parts and tools for the purposes of this section is to be worked out in accordance with the method that will be included in the New Zealand Regulations.

32. New subsection 153ZIE(9) provides that subsections (2) and (5) do not limit paragraph (1)(c). It is proposed that the regulations will include other requirements in addition to change in tariff classification and regional value content requirements.

33. For example, in addition to meeting a tariff change requirement and a regional value content requirement, clothing classified in the headings of Chapters 61 and 62 must be cut (or knit to shape) and sewn (or otherwise assembled) in New Zealand or Australia.

Section 153ZIF Packaging materials and containers

34. New subsection 153ZIF(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 General Rules for the Interpretation of the Harmonized System provided for by the Convention;

then the packaging material or container is to be disregarded for the purposes of this Subdivision except for the purposes of the exception detailed below. For example, this means that the packaging material or container does not need to satisfy the change in tariff classification test that might apply to the goods under the New Zealand Regulations.

35. However, subsection 153ZIF(2) provides that the exception is that if the goods are required to have a regional value content of at least a particular percentage, the regulations must require the value of the packaging material or container to be taken into account, as originating materials or non-originating materials, as the case may be, 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.

36. The value of packaging materials and container for the purposes of this section is to be worked out in accordance with the method that will be included in the New Zealand Regulations.

Subdivision E - Goods that are standard accessories, spare parts or tools

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

Section 153ZIG Standard accessories, spare parts and tools

38. New section 153ZIG provides that goods are New Zealand originating goods if:

a.

they are standard accessories, standard spare parts or standard tools in relation to other goods; and

b.

the other goods are imported into Australia with the accessories, spare parts or tools; and

c.

the accessories, spare parts or tools are not imported solely for the purpose of artificially raising the regional value content of the other goods; and

d.

the other goods are New Zealand originating goods; and

e.

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

f.

the quantities and value of the accessories, spare parts or tools are customary for the goods.

Subdivision F - Goods wholly manufactured in New Zealand

39. Subdivision F sets out the rules in relation to goods that are wholly manufactured in New Zealand.

Section 153ZIH Goods wholly manufactured in New Zealand

40. New subsection 153ZIH (1) provides that goods are New Zealand originating goods if they are wholly manufactured in New Zealand from one or more of the following:

a.

unmanufactured raw products;

b.

materials wholly manufactured in Australia or New Zealand or Australia and New Zealand;

c.

materials covered by subsection (2).

41. Subsection 153ZIH (2) provides that the CEO may, by legislative instrument, determine specified materials imported into New Zealand to be manufactured raw materials of New Zealand.

42. This Subdivision restates the current rules that determine whether goods are wholly manufactured in New Zealand. These rules are being moved to Subdivision F of new Division 1E of Part VIII of the Customs Act so that all of the rules that determine whether goods are New Zealand originating goods are located in the same Division.

Subdivision G-Goods last processed in New Zealand

43. Subdivision G sets out the rules in relation to goods that are last processed in New Zealand.

Section 153ZII Goods last processed in New Zealand

44. New subsection 153ZII (1) provides that goods are New Zealand originating goods if:

a.

the last process in their manufacture was performed in New Zealand; and

b.

the qualifying expenditure on the goods is at least 50% ( the standard percentage ) of the factory cost of the goods.

Lower percentage in unforeseen circumstances

45. New subsection 153ZII (2) provides that if the CEO is satisfied that:

a.

a shipment of goods would be New Zealand originating goods under this section if the standard percentage were 48%; and

b.

the qualifying expenditure on the goods would have been at least 50% of the factory cost of the goods if an unforeseen circumstance had not occurred; and

c.

the unforeseen circumstance is unlikely to continue;

the CEO may determine in writing that the standard percentage is taken to be 48%:

d.

for the purpose of that shipment of goods; and

e.

for the purpose of any later shipment of similar goods that is affected by that unforeseen circumstance during a period specified in the determination.

A similar provision exists in the Customs Act for goods that are the produce and manufacture of Papua New Guinea and the Forum Island Countries.

46. Subsection 153ZII (3) provides that a determination made under subsection (2) is not a legislative instrument. Such a determination is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act.

CEO may revoke determination

47. New subsection 153ZII (4) provides that if:

a.

the CEO makes a determination under subsection (2); and

b.

the CEO becomes satisfied that the unforeseen circumstance no longer exists;

the CEO may, by writing, revoke the determination even though the period specified in it has not ended.

Definitions

48. New subsection 153ZII (5) provides the following definitions for the purposes of this section:

factory cost of goods which has the meaning given by the regulations.

qualifying expenditure on goods which has the meaning given by the regulations.

similar goods , in relation to goods in a particular shipment (the first shipment), which means goods:

a.

that are contained in another shipment that is imported by the same importer; and

b.

that undergo the same process or processes of manufacture as the goods in the first shipment.

49. These definitions are required to give effect to the methods set out in the New Zealand Regulations for calculating the costs of goods. The New Zealand Regulations will also incorporate the concept of a 'principal manufacturer' to ensure that all genuine local content is counted towards the rule of origin and that there is equity of treatment as between integrated manufacturers and those that outsource production.

Section ZIJ Repeal of this Subdivision

50. New section ZIJ provides that this Subdivision is to be repealed on 1 January 2012. This gives effect to Article 3 (1)(c)(iii), such that the rules set out in Subdivision G will only continue in force for 5 years after the commencement of this Amending Act.

51. This Subdivision restates the current rules that determine whether goods are the manufacture of New Zealand. These rules are being moved to Subdivision G of new Division 1E of Part VIII of the Customs Act so that all of the rules that determine whether goods are New Zealand originating goods are located in the same Division. The rules have also been amended to include the updated nomenclature as set out in the Agreement, substituting 'qualifying expenditure' and 'factory cost' for 'allowable factory cost' and 'total factory cost' respectively.

Subdivision H - Consignment

52. Subdivision H sets out the consignment requirements that must be satisfied in transporting New Zealand originating goods to Australia, including transit and production in other countries.

Section 153ZIK Consignment

53. New subsection 153ZIK(1) provides that goods are not New Zealand originating goods under Division 1E if:

a.

they are transported through a country or place other than New Zealand or Australia; and

b.

they undergo subsequent production or any other operation in that country or place (other than unloading, reloading, storing, repacking, relabelling, or any operation that is necessary to preserve them in good condition or to transport them to Australia).

54. Subsection 153ZIK(2) provides that this section applies despite any other provisions of this Division. This means that even if goods are New Zealand originating goods in accordance with any other provisions of Division 1E, if they do not comply with section 153ZIK(1), they will not be New Zealand originating goods.

Part 2 Verification powers

Customs Act 1901

Item 2 After Division 4C of Part VI

55. This item amends the Customs Act by inserting new Division 4D into Part VI. New Division 4D is headed Exportation of goods to New Zealand and will impose obligations on people who export goods to New Zealand and who wish to obtain preferential treatment in respect of the goods in New Zealand, and on people who produce and manufacture such goods.

New section 126AJA Definitions

56. New section 126AJA inserts four new definitions for the purposes of new Division 4D as follows:

manufacture which means the creation of an article essentially different from the matters or substances that go into that creation, but does not include the following activities (whether performed alone or in combination with each other):

a.

restoration or renovation processes such as repairing, reconditioning, overhauling or refurbishing;

b.

pressing, labelling, ticketing, packaging and preparation for sale, or any similar process, whether conducted alone or in combination with each other;

c.

quality control inspections.

New Zealand customs official which means a person representing the customs administration of New Zealand.

principal manufacturer , in relation to goods, which means the person in Australia who performs, or has had performed on the person's behalf, the last process of manufacture of the goods. The concept of a 'principal manufacturer' has been incorporated to ensure that all genuine local content is counted towards the rule of origin and that there is equity of treatment as between integrated manufacturers and those that outsource production.

producer which means a person who grows, farms, raises, breeds, mines, harvests, fishes, traps, hunts, captures, gathers, collects, extracts, manufactures, processes, assembles or disassembles goods.

New section 126AJB Record keeping obligations

57. New section 126AJB inserts record keeping obligations that will apply only in respect of goods that are exported from Australia to New Zealand and that are claimed to be Australian originating goods for the purpose of obtaining a preferential tariff in New Zealand. While there are record keeping obligations in the Customs Act at present, these are not broad enough to cover the record keeping obligations under the Agreement.

58. New subsection 126AJB(1) provides that the regulations may prescribe record keeping obligations that apply in relation to goods that:

a.

are exported to New Zealand; and

b.

are claimed to be Australian originating goods for the purpose of obtaining a preferential tariff in New Zealand.

59. It is intended that the method of keeping the documents, such as the length of time for which they must kept and the manner in which they must be kept, will be similar to current record keeping obligations. However, the type of documents that will be required to be kept will be much broader than current requirements. The requirements will extend to all records relating to the origin of the goods for which preferential tariff treatment is claimed in New Zealand and may include, amongst other things, records associated with the classification, origin or value of the materials used to produce the goods.

60. New subsection 126AJB(2) provides that the obligations under subsection (1) may be imposed on an exporter, principal manufacturer or producer of goods.

New section 126AJC Power to require records

61. New subsection 126AJC(1) provides that an authorised officer (which is defined in section 4 of the Customs Act) may require a person who is subject to record keeping obligations under regulations made for the purposes of section 126AJB to produce to the officer such of those records as the officer requires.

62. Under Article 3(22) of the Agreement, Australia or New Zealand may take action to verify the eligibility of goods for preferential treatment, including requesting the supply of records relating to the production, manufacture or export of the goods. New section 126AJC gives effect to this Article in respect of goods exported to New Zealand and that are claimed to be Australian originating goods for the purpose of obtaining a preferential tariff in New Zealand.

63. New subsection 126AJC(2) provides that an authorised officer may disclose any records so produced to a New Zealand customs official for the purpose of verifying a claim for a preferential tariff in New Zealand. Section 16 of the Customs Administration Act 1985 prohibits the disclosure of protected information except:

a.

as authorised by section 16; or

b.

as required or authorised by any other law; or

c.

in the course of performing the person's duties.

64. Records obtained by an authorised officer under new section 126AJC would be protected information within the meaning of section 16 and therefore cannot be disclosed to New Zealand except as allowed by section 16. By including an express provision in the Customs Act allowing for this information to be disclosed to a New Zealand customs official, the disclosure is required or authorised by any other law for the purposes of paragraph 16(2)(d) of the Customs Administration Act 1985.

65. Under existing section 243SB of the Customs Act, it shall be an offence to fail to produce a record in accordance with new section 126AJC. This offence is not a strict liability offence.

New section 126AJD Power to ask questions

66. New subsection 126AJD(1) provides that an authorised officer (which is defined in section 4 of the Customs Act) may require a person who is an exporter, principal manufacturer or producer of goods that:

a.

are exported to New Zealand; and

b.

are claimed to be Australian originating goods for the purpose of obtaining a preferential tariff in New Zealand;

to answer questions in order to verify the origin of the goods.

67. It is considered that the power to ask questions in the circumstances set out in this section is a necessary adjunct to the power to require records in new section 126AJC.

68. Subsection 126AJD(2) provides that an authorised officer may disclose any answers to such questions to a New Zealand customs official for the purpose of verifying a claim for a preferential tariff in New Zealand.

69. Answers to questions obtained by an authorised officer under new section 126AJD would also be protected information within the meaning of section 16 of the Customs Administration Act 1985 (the Customs Administration Act) and therefore cannot not be disclosed to New Zealand except as allowed by section 16. By including an express provision in the Customs Act allowing for this information to be disclosed to a New Zealand customs official, the disclosure is required or authorised by any other law for the purposes of paragraph 16(2)(d) of the Customs Administration Act 1985.

70. Under existing section 243SA of the Customs Act, it shall be an offence to fail to answer a question accordance with new section 126AJD. This offence is not a strict liability offence.

Part 3 Other amendments

Customs Act 1901

Item 3 Subsection 153A(3)

71. This item amends the Customs Act by repealing subsection 153A(3) This subsection sets out the details of the Diagrams currently contained in Schedule VII to the Customs Act. These diagrams illustrate the operation of the current rules of origin in relation to New Zealand set out in sections 153J and 153K of the Customs Act. As these sections are being repealed, and the rules of origin are being extended by new Division 1E of Part VIII of the Customs Act, these diagrams are being repealed and, as a consequence, subsection 153A(3) is being repealed.

Item 4 Section 153B (paragraph (a) of the definition of qualifying area)

72. This item amends the Customs Act by repealing paragraph (a) of the definition of qualifying area in section 153B. This paragraph refers to goods that are claimed to be the manufacture of New Zealand. Goods can presently be claimed to be the manufacture of New Zealand under section 153J of the Customs Act. However, section 153J is to be repealed by item 6 of Part 3 (below) and its provisions moved to new Division 1E of Part VIII of the Customs Act. In addition, goods previously claimed to be the "manufacture of New Zealand" will now be claimed to be "New Zealand originating goods" as this wording reflects the wording in Article 3 of the Agreement. As a consequence, paragraph (a) of the definition of qualifying area in section 153B is to be repealed.

Item 5 Subsection 153D(6)

73. This item amends the Customs Act by repealing subsection 153D(6). This subsection also refers to goods that are claimed to be the manufacture of New Zealand. However, due to the repeal of section 153J and the consequence that goods will be claimed to be New Zealand originating goods under new Division 1E of Part VIII, and not the manufacture of New Zealand, subsection 153D(6) is to be repealed. This subsection sets out a special rule for determining allowable expenditure on materials for the purposes of determining whether goods were the manufacture of New Zealand. This rule is no longer consistent with the Agreement.

Item 6 Sections 153J and 153K

74. This item amends the Customs Act by repealing sections 153J and 153K.

75. These sections set out the current rules that determine whether goods are the manufacture of New Zealand. These rules are being moved to Subdivisions F and G of new Division 1E of Part VIII of the Customs Act (new sections 153ZIH and 153ZII respectively), so that all of the rules that determine whether goods are New Zealand originating goods are located in the same Division. Therefore, sections153J and 153K are being repealed.

Item 7 Section 153T

76. This item amends the Customs Act by repealing section 153T.

77. The effect of section 153T provides that regulations and determinations made for the purposes of determining whether or not goods are the produce or manufacture of New Zealand may make different provision for the purposes of the Part XVB of the Customs Act that deals with the anti-dumping regime.

78. This provision is no longer consistent with the Agreement and is being repealed. In any case, the anti-dumping regime currently does not apply to goods that are the produce or manufacture of New Zealand.

Item 8 Section 269TAAA

79. This item amends the Customs Act by repealing and substituting section 269TAAA.

80. Current section 269TAAA provides that Part XVB of the Customs Act, so far as it relates to dumping or third country dumping duty that may be come payable does not apply to goods that are the produce or manufacture of New Zealand. This section gives effect to Article 15 of the Agreement.

81. As set out previously, under the wording of new Article 3 of the Agreement, goods will no longer be claimed to be the produce or manufacture of New Zealand but will be claimed to be "New Zealand originating goods". The terms of new section 269TAAA will therefore reflect this new terminology and will provide as follows:

"This Part, so far as it relates to duty that may become payable under section 8 or 9 of the Dumping Duty Act, does not apply to goods that are New Zealand originating goods under Division 1E of Part VIII of this Act. "

The Dumping Duty Act is the Customs Tariff (Anti-Dumping) Act 1975.

Item 9 Schedule VII

82. This item amends the Customs Act by repealing Schedule 7.

83. As outlined in item 3 above, Schedule 7 to the Customs Act contains diagrams that illustrate the operation of the current rules of origin in relation to New Zealand set out in sections 153J and 153K of the Customs Act. As these sections are being repealed, and the rules of origin and being extended by new Division 1E of Part VIII of the Customs Act, these diagrams are being repealed.

Customs Tariff Act 1995

Item 10 Subsection 3(1) (paragraph (a) of the definition of Preference Country)

84. This item amends the Customs Tariff Act by repealing the reference to New Zealand in the definition of Preference Country. This amendment is a consequence of the change in terminology under the Agreement in relation to goods from New Zealand, from "goods the produce or manufacture of New Zealand" to "New Zealand originating goods". The term "Preference Country" is used in sections 16 and 18 of the Customs Tariff Act to determine the rates of duty on goods that are not the produce or manufacture of a Preference Country. However, due to the above- mentioned change in terminology, New Zealand will no longer need to be a Preference Country and its reference is being removed from the definition.

Item 11 After section 13B

85. This item amends the Customs Tariff Act by inserting new section 13C. New section provides that, for the purposes of the Customs Tariff Act, goods are New Zealand originating goods if, and only if, they are New Zealand originating goods under Division 1E of Part VIII of the Customs Act. As explained above, new Division 1E of Part VIII of the Customs Act sets out the rules for determining whether goods are New Zealand originating goods.

86. Amendments to sections 16 and 18 of the Customs Tariff Act (see below) insert new provisions to determine the rate of customs duty that applies to goods that are Zealand originating goods. The purpose of new section 13C is to ensure that those rates will only apply to goods that satisfy the new rules set out in new Division 1E of Part VIII of the Customs Act.

Items 12 and 14 After subparagraphs 16(1)(a)(iii) and 18(2)(a)(iii)

87. These items amend the Customs Tariff Act by inserting new subparagraphs 16(1)(a)(iv) and 18(2)(a)(iv). Sections 16 and 18 of the Customs Tariff Act set out how customs duty is calculated, in particular for goods the produce or manufacture of particular countries and classes of countries for preference purposes. Paragraph 16(1)(a) and 18(2)(a) provide that if the goods are not the produce or manufacture of a Preference Country, the duty must be worked out by reference to the general rate set out in the third column of the tariff classification in Schedule 3 under which the goods are classified. New subparagraphs 16(1)(a)(iv) and 18(2)(a)(iv) ensure that the general rate of duty set out in Schedule 3 also does not apply to New Zealand originating goods.

Items 13 and 15 Paragraphs 16(1)(b) and 18(2)(b)

88. These items amend the Customs Tariff Act by omitting the phrase "produce or manufacture of New Zealand" and substituting "New Zealand originating goods" in paragraphs 16(1)(b) and 18(2)(b). As referred to above, section 16 and 18 set out how customs duty is calculated, including in respect of goods that are the produce or manufacture of New Zealand under current paragraphs 16(1)(b) and 18(2)(b). However, as a consequence of the change in terminology under the Agreement in relation to goods from New Zealand, from "goods the produce or manufacture of New Zealand" to "New Zealand originating goods", these paragraphs are to be amended to refer to the new terminology. Therefore, sections 16 and 18 will now refer to calculating customs duty in respect of New Zealand originating goods.

Customs Tariff (Anti-Dumping) Act 1975

Items 16 and 17 Subsections 8(1) and 9(1)

89. These items amend the Dumping Duty Act by repealing and substituting subsections 8(1) and 9(1).

90. Sections 8 and 9 of the Dumping Duty Act impose dumping duty and third country dumping duty respectively on goods imported into Australia in certain circumstances. Similar to section 269TAAA of the Customs Act, subsections 8(1) and 9(1) of the Dumping Duty Act currently provide that these sections do not apply to goods that are the produce or manufacture of New Zealand. As set out previously, under the wording of new Article 3 of the Agreement, goods will no longer be claimed to be the produce or manufacture of New Zealand but will be claimed to be "New Zealand originating goods".

91. The terms of new subsections 8(1) and 9(1) will therefore reflect this new terminology and each subsection will provide as follows:

"This section does not apply to goods that are New Zealand originating goods under Division 1E of Part VIII of the Customs Act 1901."

Legislative Instruments Act 2003

Items 18 and 20 Subsection 44(2) (table item 10) and subsection 54(2) (table item 12)

92. Table item 10 and table item 12 are amended by omitting "paragraph 153J(1)(c), 153L(1)(c), 153P(2)(c) or 153Q(1)(c),", and substituting "paragraph 153L(1)(c), 153P(2)(c), 153Q(1)(c) or section 153ZIH(2)".

93. The table in subsection 44(2) of the Legislative Instruments Act 2003 (the LI Act) sets out those legislative instruments that are exempt from the disallowance procedures set out in the LI Act. The table in subsection 54(2) of the Legislative Instruments Act 2003 (the LI Act) sets out those legislative instruments that are exempt from the sunsetting procedures set out in the LI Act. These amendments will update the reference to paragraph 153J(1)(c) (which is being repealed by item 6 of Part 3 of this Bill) in these table items with new section 153ZIH (2) (which replaces paragraph 153J(1)(c)).

Item 19 and 21 Subsection 44(2) (table item 11) and subsection 54(2) (table item 13)

94. Table item 11 and table item 13 are repealed.

95. As previously mentioned, the tables in subsection 44(2) and 54(2) of the LI Act set out those legislative instruments that are exempt from disallowance and sunsetting. Table item 11 in subsection 44(2) and table item 13 in subsection 54(2) currently refer to the revocations of determinations made under section 153K and 153LA of the Customs Act.

96. However, these determinations are not legislative instruments because they only apply to particular manufactured goods in particular circumstances. Current section 153K is being remade by this Bill in new section 153ZII and new subsection 153ZII(3) will expressly state that such a determination is not a legislative instrument. Therefore, the revocation of these determinations is also not a legislative instrument so the continuing reference to their revocation in the tables in subsection 44(2) and 54(2) of the LI Act is superfluous and is being removed.

Part 4-Application and transitional provisions

Item 22 Application

97. Item 22(1) provides that the amendments made by items 1 and 3 to 17 apply in relation to goods imported into Australia on or after 1 January 2007. If goods are imported before 1 January 2007 and are still in a warehouse on that date, the new rules set out in items 1 and 3 to 17 will not apply to them.

98. Item 22(2) provides that the amendment made by item 2 applies in relation to goods exported to New Zealand on or after 1 January 2007 (whether the goods were produced or manufactured before, on or after that day).

99. Item 22(3) provides that the repeal of Subdivision G of Division 1E of Part VIII of the Customs Act 1901 on 1 January 2012 applies in relation to:

a.

goods imported into Australia on or after 1 January 2012; and

b.

goods imported into Australia before 1 January 2012, where the time for working out the rate of import duty on the goods had not occurred before 1 January 2012.

Therefore, even if goods were imported into Australia before 1 January 2012 and were still in a warehouse on that date, the rules set out in Subdivision G will not apply to those goods when they are entered into home consumption on or after 1 January 2012.

Item 23 Transitional-manufactured raw materials

100. Item 23 provides that despite the repeal of section 153J of the Customs Act 1901 made by this Schedule, a determination in force under paragraph 153J(1)(c) of that Act immediately before the commencement of this item continues in force after that commencement as if it were a determination made under subsection 153ZIH(2) of that Act.