House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Revenue and Financial Services, Minister for Women and Minister Assisting the Prime Minister for the Public Service, the Hon Kelly O'Dwyer MP)

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

General outline and financial impact

Illicit tobacco offences

The amendments made by the Bill:

•

create a new tobacco offence regime that provides a comprehensive set of offences that can be applied to illicit tobacco that:

-

has been domestically manufactured or produced; or

-

for which the origin of production or manufacturing is unknown or uncertain;

•

create new offences for possession of equipment for producing or manufacturing illicit tobacco;

•

set penalties at a level to deter illegal activity;

•

confirm that illicit tobacco for which the origin of production or manufacturing is unknown or uncertain can be seized and forfeited; and

•

define tobacco to align the meaning for excise and excise-equivalent customs duty purposes so that the amount of duty on dutiable products is determined in a consistent manner.

Date of effect: The amendments generally commence on the day after Royal Assent. The amendments concerning offences apply to conduct involving possession, sale, purchase, manufacture or production of tobacco, occurring on or after that day.

Proposal announced: This measure was announced by the Treasurer in the 2016-17 Budget on 3 May 2016 as part of the former Department of Immigration and Border Protection 'Tobacco Excise - measures to improve health outcomes and combat illicit tobacco' package.

Financial impact: The impact is an unquantifiable gain to revenue over the forward estimates period.

* Unquantifiable

Human rights implications: This Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights - paragraphs 1.249 to 1.267.

Compliance cost impact: Nil. There is no compliance cost impact from these amendments.

Chapter 1 - Illicit tobacco offences

Outline of chapter

1.1 The amendments made by the Bill:

•

create a new tobacco offence regime that provides a comprehensive set of offences that can be applied to illicit tobacco that:

-

has been domestically manufactured or produced; or

-

for which the origin of production or manufacturing is unknown or uncertain;

•

create new offences for possession of equipment for producing or manufacturing illicit tobacco;

•

set penalties at a level to deter illegal activity;

•

confirm that illicit tobacco for which the origin of production or manufacturing is unknown or uncertain can be seized and forfeited; and

•

define tobacco to align the meaning for excise and excise-equivalent customs duty purposes to ensure the amount of duty on dutiable products is determined in a consistent manner.

1.2 For the purposes of this Chapter, unless otherwise stated, a reference to:

•

tobacco includes tobacco leaf, tobacco plant and tobacco seed;

•

illicit tobacco is a reference to tobacco in Australia (excluding the external territories):

-

for which excise or excise-equivalent customs duty has not been paid; and

-

which is not kept or stored at premises specified in an excise or customs licence, for which a person does not have a movement permission or a permission to warehouse, which is not held under permission under the Excise Act and which has not been entered for home consumption within the meaning of the Excise Act.

1.3 For the purposes of this Chapter, a penalty unit has been treated as having a value of $210 where required for illustrative purposes. This is the value that applied for penalty units in the 2017-18 financial year under section 4AA of the Crimes Act 1914.

1.4 All legislative references in this Chapter are to the TAA 1953, unless otherwise stated. All references in this Chapter to dollars are to Australian dollars.

Context of amendments

1.5 The Government is committed to reducing the harmful effects of tobacco consumption. This Bill supports the Tobacco Strategy 2012-2018 (endorsed by all Australian Health Ministers) to reduce the affordability of tobacco products, and the World Health Organisation's Framework Convention on Tobacco Control which commits nations to implement policies on tobacco prices and tax increases.

1.6 As part of the 2016-17 Budget, the Government committed to reform the Excise and Customs Acts to provide enforcement agencies with access to tiered offences with appropriate penalties to increase the range of enforcement options available for illicit tobacco offences.

1.7 Tobacco and tobacco duty related offences are currently administered by:

•

the ATO - that administers excise duty on tobacco produced or manufactured in Australia under the Excise Act; and

•

the Department of Home Affairs - that administers excise-equivalent customs duty on imported tobacco under the Customs Act.

1.8 Higher excise and excise-equivalent customs duty rates for tobacco improve the health of Australians by discouraging tobacco consumption and reducing their exposure to tobacco products. However, they significantly increase the risk of illicit tobacco being produced or manufactured domestically, or imported into Australia. This is particularly the case given the increase in tobacco excise and excise-equivalent customs duty rates following the 2016-17 and 2017-18 Budget measures. The current level of penalties for offences, particularly those for excise offences, does not provide a sufficient deterrent to dealing in illicit tobacco. The increasing involvement of serious and organised criminal groups in the illicit tobacco trade demonstrates that this is seen as a low risk, high reward enterprise. In a report on illicit tobacco in Australia, KPMG estimated that illicit tobacco accounted for approximately 14 per cent of total tobacco consumption in Australia in 2016.^[1]

1.9 Illicit tobacco represents a major risk to Australia's tobacco excise tax base by undermining collection of duty on tobacco and reducing tax revenues collected for the benefit of all Australian taxpayers. The amendments address this risk by strengthening the ATO's powers to undertake enforcement action against those involved in the production and distribution of illicit tobacco in Australia. The amendments ensure that tiered offences apply. The highest penalties apply to the most serious illicit tobacco offences that involve large commercial quantities of illicit tobacco.

1.10 Prior to these amendments, enforcement by the ATO has focused on domestic manufacture and production. The ATO has undertaken 16 investigations since 1 July 2016 resulting in the seizure and destruction of almost 120 tonnes of illicit tobacco, with an estimated excise duty forgone of over $90 million. The table below shows a recent spike in the detection of illicit tobacco.

Table 1.1 Number and excise value of illicit tobacco seizures

1.11 Prior to these amendments the origin of tobacco (that is whether it had been produced or manufactured domestically or imported) needed to be proven to successfully prosecute offenders. This was required to determine whether the Excise or Customs Act applied to the goods and therefore whether the ATO or the Department of Home Affairs had administrative responsibility for the offence. This was difficult to prove in cases where illicit tobacco was identified at a later stage in the supply chain by which point it was not clear if the tobacco had originated domestically (that is production or manufacture occurred in Australia) or had been imported or a combination of both.

1.12 Only once the origin of the tobacco had been proven was it possible to know which of those Acts applied to tobacco and only then could any prosecution of an offence be undertaken. Accordingly, the only enforcement option available prior to these amendments where illicit tobacco was detected in Australia but its origin could not be proved was to seize and forfeit the tobacco and arrange for its destruction. This did not provide adequate enforcement options to deter illegal activity and is one reason why ATO seizures of tobacco in Australia have been growing. Even where prosecutions could be undertaken for tobacco that had been identified as being grown in Australia, the level of penalties that applied prior to these amendments have not provided sufficient deterrence.

1.13 Prior to these amendments, there were also inconsistencies between the excise and customs regimes in the penalties for offences and the manner in which they could be applied for similar types of conduct, for example smuggling tobacco into Australia compared to illegally producing or manufacturing tobacco in Australia.

1.14 To prevent the continued large scale increase in illicit tobacco, this Bill addresses impediments to undertaking prosecutions and sets penalties at a level that provides an appropriate deterrent to illegal activity. The Bill also addresses the serious deficiencies in the current excise penalty framework by introducing reasonable suspicion offences that enable criminal offences to apply effectively to the possession, buying or selling of illicit tobacco in Australia despite the origin of the tobacco being unknown.

Summary of new law

1.15 The Bill amends the taxation law to establish a new tobacco offence regime that provides a comprehensive set of offences for illicit tobacco:

•

that has been domestically manufactured or produced; or

•

for which the origin of production or manufacturing is unknown or uncertain.

1.16 Penalties for these offences are set at a level that:

•

deters illegal activity; and

•

takes into account the increasing rates of duty that apply to tobacco following the 2016-17 and 2017-18 Budget measures.

1.17 This measure ensures that the definitions of 'tobacco' for excise purposes and 'tobacco content' for excise-equivalent customs purposes are aligned so that the amount of duty on dutiable products is determined in a consistent manner.

1.18 An amendment is also made to the excise forfeiture provisions to confirm that illicit tobacco for which the origin of production or manufacturing is unknown or uncertain can be seized.

Comparison of key features of new law and current law

Detailed explanation of new law

1.19 The Bill amends the taxation law to provide for a tobacco offence regime with a comprehensive set of offences. The amendments provide for new tobacco duty fault-based offences and reasonable suspicion offences that can apply to tobacco for which the origin is not known. Penalty levels are set taking into account the seriousness of the offence and also to provide a deterrent to illegal activities.

1.20 Amendments are also made to:

•

ensure that 'tobacco' for excise purposes and excise-equivalent customs purposes has the same meaning so that the amount of duty on dutiable products is determined in a consistent manner; and

•

the tobacco forfeiture provisions to ensure that tobacco for which the origin of production or manufacturing is unknown or uncertain can be forfeited.

1.21 A separate measure will seek to amend the Customs Act to:

•

ensure consistency between tobacco offences for imported tobacco and offences for tobacco sourced domestically and for which the source of production or manufacturing is unknown or uncertain; and

•

enable the Department of Home Affairs (through the Australian Border Force) to enforce the tobacco offences for illicit tobacco for which the origin of production or manufacture is unknown or uncertain.

1.22 For the purposes of the illicit tobacco offence provisions, circumstances where excise or excise-equivalent customs duty does not apply, either because a free rate of duty applies or because there is a remission of all duty, are treated in the same way as if an exemption from duty applies. [Schedule 1, item 6, section 308-515 in Schedule 1 to the TAA 1953]

1.23 Provisions establishing criminal offences and civil penalties are expressed in the present tense to be read as applying at the time the relevant conduct or circumstances occur. This is the time when all of the elements of the provision are satisfied unless, at that time, a defence set out in that offence provision also applies.

Reasonable suspicion criminal offences for possessing, buying or selling illicit tobacco

Offences

1.24 There are separate offence provisions for the possession, buying and selling of tobacco. [Schedule 1, item 6, sections 308-10, 308-15, 308-20, 308-25, 308-30, 308-35, 308-40, 308-45 and 308-50 in Schedule 1 to the TAA 1953]

1.25 Firstly, the elements of the offences are discussed followed by the defences that may apply.

The person possesses, buys or sells a thing

1.26 The following words take their ordinary meaning for the purposes of this element;

•

buying;

•

selling; and

•

thing (a further element is that the thing is tobacco).

[Schedule 1, item 6, paragraphs 308-10(1)(a), 308-15(1)(a), 308-20(1)(a), 308-25(1)(a), 308-30(1)(a), 308-35(1)(a), 308-40(1)(a), 308-45(1)(a) and 308-50(1)(a) in Schedule 1 to the TAA 1953]

1.27 Possession also takes its ordinary meaning. However its ordinary meaning is extended to also include the following:

•

receiving or obtaining possession of the thing;

•

having control over the disposition of the thing (whether or not the thing is in the custody of the person); or

•

having joint possession of the thing.

[Schedule 1, item 6, section 305-510 in Schedule 1 to the TAA 1953]

1.28 The fault element for this physical element of conduct is intention as per subsection 5.6(1) of the Criminal Code (as a fault element is not specified in the offence provision itself).

1.29 Intention is the appropriate fault element for this element as it is a physical element involving conduct. This is consistent with the Guide to Framing Commonwealth Offences.^[2]

The thing is tobacco

1.30 For the purposes of Division 308 'tobacco' takes its ordinary meaning, as expanded to include all forms of tobacco seed, plant and leaf. However, the reasonable suspicion offences do not apply to tobacco seed and tobacco plant as they are specifically excluded from these offences. [Schedule 1, item 6, paragraphs 308-10(1)(b), 308-15(1)(b), 308-20(1)(b), 308-25(1)(b), 308-30(1)(b), 308-35(1)(b), 308-40(1)(b), 308-45(1)(b) and 308-50(1)(b) in Schedule 1 to the TAA 1953]

1.31 The fault element for this physical element of circumstance is recklessness as per subsection 5.6(1) of the Criminal Code (as a fault element is not specified in the offence provision itself).

1.32 Recklessness is the appropriate fault element for this element as it is a physical element of circumstance. This is consistent with the Guide to Framing Commonwealth Offences.^[3]

The possession, buying or selling occurs in Australia, but not in an external territory

1.33 For the possession offences the possession of the tobacco must occur in Australia, but not in an external territory. For the selling and buying offences the tobacco must be located in Australia, but not in an external territory. This ensures that the illicit tobacco offences apply to the same areas of Australia to which the Excise Act applies. [Schedule 1, item 6, paragraphs 308-10(1)(c), 308-15(1)(c), 308-20(1)(c), 308-25(1)(c), 308-30(1)(c), 308-35(1)(c), 308-40(1)(c), 308-45(1)(c) and 308-50(1)(c) in Schedule 1 to the TAA 1953]

1.34 Australia takes its meaning as defined in section 960-505 of the ITAA 1997.

1.35 The term 'external territory' takes its ordinary meaning, being a reference to Norfolk Island, Christmas Island and Cocos (Keeling) Islands.

1.36 Absolute liability applies to this physical element of circumstance. [Schedule 1, item 6, subsections 308-10(4), 308-15(4), 308-20(4), 308-25(4), 308-30(4), 308-35(4), 308-40(4), 308-45(4) and 308-50(4) in Schedule 1 to the TAA 1953]

1.37 Absolute liability is set out in section 6.2 of the Criminal Code. The effect of applying absolute liability to an element of an offence means that no fault element needs to be proved and the defence of mistake of fact under section 9.2 of the Criminal Code is not available. Accordingly, the prosecution is not required to prove that the defendant knew or was reckless to the fact that they possessed, bought or sold the tobacco in Australia.

1.38 Absolute liability is appropriate for this element of the offence. The circumstance that the possession, buying or selling of the tobacco occurred in Australia is a precondition to the application of the offence and the state of mind of the defendant with respect to this element is not relevant. Furthermore, the location of the offence is a standard jurisdictional feature of many offences.

1.39 If absolute liability were not imposed it would be difficult to prove conclusively (to the extent necessary) where the possession, buying or selling of tobacco took place. In particular, the prosecution may often have access to little or no evidence to dispute claims by the defendant. Applying absolute liability to this element ensures that this does not occur.

1.40 Applying a fault element of absolute liability to a circumstance involving the location of an offence is consistent with the Guide to Framing Commonwealth Offences.^[4]

It is reasonable to suspect that duty has not been paid on the tobacco and that no exemption applied

1.41 It must be reasonable to suspect that none of the following exist:

•

excise duty has been paid on the tobacco;

•

excise-equivalent customs duty has been paid on the tobacco;

•

excise duty is not payable on the tobacco because of an exemption under a law of the Commonwealth; and

•

excise-equivalent customs duty is not payable in respect of the tobacco as it is subject to an exemption from duty (for example it was brought into Australia by a traveller as an import exempt from duty or a diplomatic exemption from duty applied).

[Schedule 1, item 6, paragraphs 308-10(1)(d), 308-15(1)(d), 308-20(1)(d), 308-25(1)(d), 308-30(1)(d), 308-35(1)(d), 308-40(1)(d), 308-45(1)(d) and 308-50(1)(d) in Schedule 1 to the TAA 1953]

1.42 A reasonable suspicion that duty has not been paid on tobacco or that no exemption applies is taken to exist if one or more specified matters apply to the tobacco (see paragraphs 1.52 to 1.79). Tobacco that is sold in Australia on which excise duty or excise-equivalent customs duty has been paid would normally comply with all of the specified matters. [Schedule 1, item 6, subsection 308-55(1) in Schedule 1 to the TAA 1953]

1.43 Absolute liability applies to this element of the offence. For further details on absolute liability, refer to paragraph 1.36. [Schedule 1, item 6, subsections 308-10(5), 308-15(5), 308-20(5), 308-25(5), 308-30(5), 308-35(5), 308-40(5), 308-45(5) and 308-50(5) in Schedule 1 to the TAA 1953]

1.44 It is for the Court to determine whether it is reasonable to suspect that duty has not been paid or an exemption applies. Therefore, it is appropriate that absolute liability applies to this element of the offence.

1.45 The state of mind that the defendant had at the time they possessed, bought or sold the tobacco is not relevant to the objective existence of reasonable suspicion (although it is relevant to the physical element of conduct (possessing, buying or selling) which is contained in a separate element to which the fault element of intention applies (see paragraphs 1.28 to 1.29).

1.46 An offence based on reasonable suspicion that duty has not been paid is justified given the circumstances surrounding the illegal trade in illicit tobacco and in particular the evidentiary issues demonstrating the non-payment of duty. Specifically, under the prior offences, it was necessary to prove that excise or excise-equivalent customs duty had not been paid in relation to the tobacco. Even if it could be conclusively shown that one of these duties must have been unpaid, no penalty could apply unless the origin of the tobacco could be proved and therefore whether excise or excise-equivalent customs duty was payable.

1.47 The reasonable suspicion approach addresses this problem. Without this new offence framework illicit tobacco activities would have continued to expand in Australia. It means that if large quantities of tobacco are held without adequate documentation or in circumstances involving illegal conduct, then it is not necessary to demonstrate that a particular tax has been avoided (refer also to 'Defences' at paragraph 1.89 and also below). Without this requirement the offences would not achieve their intended purpose of deterring illegal dealing in tobacco. This would undermine the integrity of the taxation and regulatory framework for tobacco in Australia, with substantial consequences for Australia's tax revenue base that supports all Australians.

1.48 It is also important to take into account the context of the offence. If a person possesses, buys or sells large quantities of tobacco (for these offences in excess of 5 kg or equating to over 7,000 cigarettes) and they do not have a Customs Act or Excise Act licence or a permission and that tobacco has not been entered for home consumption (see the defences in paragraphs 1.89 to 1.102) and it has not been bought from a licensed entity, or a bona-fide distributor or retailer, then the tobacco will be illicit tobacco. Tobacco has a shelf-life of less than 12 months before it deteriorates - so it is improbable that a person would hold large quantities of tobacco purely for their own personal consumption when also taking into account the significant cost of duty that would have been paid on the tobacco. Because of this short shelf-life and the regulated nature of the tobacco supply chain, it is not feasible for there to be large quantities of tobacco in Australia without a clear history (including documentation) other than illicit tobacco.

1.49 Having this offence apply where a reasonable suspicion exists that duty has not been paid will encourage persons dealing in tobacco to ensure that they comply with legislative requirements that apply to tobacco and tobacco products. A person possessing, buying or selling significant quantities of tobacco products would be expected to only have tobacco products as part of their legitimate wholesale or retail tobacco sales business or themselves comply with the requirements specified (as appropriate) in the reasonable suspicion matters. This would include, for example, paying duty themselves as an importer or manufacturer or only holding tobacco on which duty has not been paid if they have an excise Act or customs Act licence or permission).

1.50 The defences provide protection for defendants. The defendant bears an evidentiary burden of proof in relation to the defences in accordance with section 13 of the Criminal Code. The information defendants require to prove that a particular defence applies, for example information relating to permissions and licences, should be readily available to defendants (to whom the defence is available). The defences are as follows:

•

the tobacco is kept or stored at premises specified in a licence (see paragraphs 1.93 to 1.95);

•

the defendant:

-

was specified in a movement permission under the Excise Act or Customs Act; or

-

has an authority to take the tobacco into warehousing under the Customs Act (see paragraphs 1.96 to 1.98);

•

the defendant has permission (within the Excise Act) to:

-

possess the tobacco;

-

move the tobacco;

-

transfer the tobacco; or

-

deliver the tobacco for home consumption without entering it for that purpose (see paragraph 1.99); or

•

the duty has been paid or the defendant has reasonable grounds to suspect that excise duty or excise-equivalent customs duty has been paid on the tobacco or that excise duty or excise-equivalent customs duty is not payable in respect of the tobacco because of an exemption under a law of the Commonwealth (see paragraphs 1.100 to 1.102).

1.51 The defences to the offences for which reasonable suspicion is an element ensure that a person is not subject to an offence if they have reasonable grounds to suspect that duty has been paid on the tobacco or where they are lawfully entitled to possess, sell or buy the tobacco (that is the tobacco is not illicit tobacco). The defence can be met where, for example, tobacco is purchased from a bona fide tobacco wholesaler or retailer. This strikes an appropriate balance to ensure that a person can be convicted of the offence where it is justifiable without unduly inhibiting their legal rights or placing an undue burden on them to prove their innocence.

1.52 There are a number of circumstances in which the Bill provides that reasonable suspicion is taken to exist and these are explained below. Broadly, these circumstances involve either a failure to comply with an Australian law relating to the tobacco, a lack of basic documentation or holding tobacco in a form that is not legal for sale in Australia.

The tobacco is not in retail packaging complying with the requirements in Chapter 2 of the Tobacco Plain Packaging Act 2011

1.53 Tobacco complies with Australian plain packaging laws if it is in retail packaging that complies with the requirements in Chapter 2 of the Tobacco Plain Packaging Act 2011. This matter focuses on the tobacco packaging, for example the carton or pouch, (as opposed to the next matter which is focused on the tobacco itself, for example the cigarette). [Schedule 1, item 6, paragraph 308-55(1)(a) in Schedule 1 to the TAA 1953]

1.54 The Tobacco Plain Packaging Act 2011 makes it an offence to sell, supply, purchase, package or manufacture tobacco products for retail sale, that are not compliant with plain packaging requirements. The offences apply to manufacturers, packagers, wholesalers, distributors and retailers of tobacco products in Australia, including those dealing with illicit tobacco, if they fail to comply with the plain packaging requirements.

1.55 The plain packaging law also contains packaging appearance requirements specifying that tobacco product, including the packaging, cannot display a trade mark or other mark (unless permitted by regulation).

The tobacco does not comply with the requirements in sections 26 and 27 of the Tobacco Plain Packaging Act 2011

1.56 Tobacco that is supplied in Australia must meet the requirements set out in sections 26 and 27 of the Tobacco Plain Packaging Act 2011. This matter focuses on the tobacco itself (as opposed to the previous matter which is focused on the actual packaging of the tobacco). The Tobacco Plain Packaging Act 2011 makes it an offence to sell, supply, purchase, package or manufacture tobacco products for retail sale, that are not compliant with the appearance requirements set out in sections 26 and 27. This requires that tobacco not contain any trademarks or other images or characters unless specified by regulations. The offences apply to manufacturers, packagers, wholesalers, distributors and retailers of tobacco products in Australia, including those dealing with illicit tobacco, if they fail to comply with these requirements. [Schedule 1, item 6, paragraph 308-55(1)(b) in Schedule 1 to the TAA 1953]

The tobacco does not comply with any information standards made for that tobacco under Australian Consumer Law

1.57 Any person supplying tobacco is required to ensure that the tobacco complies with any information standards made for that tobacco under sections 134 and 135 of Schedule 2 to the Competition and Consumer Act 2010. [Schedule 1, item 6, paragraph 308-55(1)(c) in Schedule 1 to the TAA 1953]

1.58 Currently the information standard that applies to tobacco is the Competition and Consumer (Tobacco) Information Standard 2011. It sets out the health warnings that tobacco products must display on their packaging when they are sold to consumers.

The tobacco does not comply with any product safety standards made for that tobacco under Australian Consumer Law

1.59 Any person supplying tobacco is required to ensure that the tobacco complies with any product safety standards that apply to a product of that type under sections 104 and 105 of Schedule 2 to the Competition and Consumer Act 2010. [Schedule 1, item 6, paragraph 308-55(1)(d) in Schedule 1 to the TAA 1953]

1.60 Currently the product safety standard that applies to tobacco is the standard concerning reduced fire risk for cigarettes as set out in the Trade Practices (Consumer Protect Safety Standard) (Reduced Fire Risk Cigarettes) Regulations 2008.

The tobacco is subject to a permanent ban or interim ban on consumer goods

1.61 The tobacco should not be, or be part of, a product that is the subject of an interim or permanent product ban under sections 109 or 114 of Schedule 2 to the Competition and Consumer Act 2010. [Schedule 1, item 6, paragraph 308-55(1)(e) in Schedule 1 to the TAA 1953]

1.62 There is currently a permanent ban on smokeless tobacco, being tobacco products that are consumed in a manner that does not generate smoke. This is typically chewing tobacco and snuffs intended for oral use as set out in the Consumer Protection Notice No 10 of 1991.

The tobacco was advertised, offered for sale or sold for a price that was less than the amount of duty and GST that applies to the tobacco

1.63 In the case of buying or selling, the tobacco would be expected to have been advertised, offered for sale or sold for a price that was less than the sum of the amount of duty (assuming that no exemption or reduction of duty was applicable) and GST that applies to the tobacco (assuming that GST applied to the sale of the tobacco). For the purposes of this matter a reference to duty is a reference to the lower of excise duty or excise-equivalent customs duty that applies to that tobacco at the time of advertising, offer or sale respectively. [Schedule 1, item 6, paragraph 308-55(1)(f) in Schedule 1 to the TAA 1953]

1.64 Generally entities selling tobacco products in a regulated environment would seek to recover their costs for those products. These costs may include:

•

the costs of acquiring, producing or manufacturing the tobacco;

•

the duty paid on those products (for manufacturers or importers); and

•

any applicable taxes and charges, for example GST.

1.65 Entities selling products, including tobacco products, would also generally seek to make a profit, as a reward for their activities that is commensurate with the costs of operating their business. The selling of products for a price that does not recover all input costs and taxes and charges is unsustainable, over an extended period of time.

1.66 Duty and GST combined make up significantly more than half of the selling price of tobacco in Australia.

1.67 Generally tobacco would only be sold for a price less than the applicable duty and GST combined in situations where the vendor is selling that tobacco outside of the regulated marketplace and they do not have any intention of paying these duties and taxes or where they have acquired the tobacco from another party who has not paid the duty. It is reasonable to expect that a person would seek to recover their product input costs, as well as making a profit.

1.68 An entity in possession of tobacco on which duty has been paid would also not generally sell the tobacco for a price that is less than the duty paid, even if the product was close to or had passed its expiry date. This is because when cigarettes held by businesses for resale reach their expiry date they are generally returned to licensed premises for destruction to enable a refund of the duty that has been paid to be made.

The sale or purchase of the tobacco does not comply with an Australian law that applies in the state or territory in which the tobacco is bought or sold

1.69 In some states and territories there are additional laws that apply to the buying and selling of tobacco. For example:

•

Victoria - the Tobacco Act 1987 (Vic) regulates the sale of tobacco in Victoria and restricts the premises and outlets tobacco can be sold from; and

•

South Australia - the Tobacco Regulation Act 1997 (SA) regulates the sale of tobacco products in South Australia including the licensing of retailers.

[Schedule 1, item 6, paragraph 308-55(1)(g) in Schedule 1 to the TAA 1953]

The person has not provided a tax invoice, bill of lading or customs declaration providing evidence of how they acquired the tobacco

1.70 Businesses selling tobacco in a regulated environment would typically have:

•

tax invoices providing evidence of transactions in which they acquired tobacco products because this documentary evidence is required in order to claim GST input tax credits and evidence income tax deductions for purchases of trading stock;

•

customs declarations that evidence the importation of the tobacco; or

•

bills of lading evidencing how they obtained the tobacco.

[Schedule 1, item 6, paragraph 308-55(1)(h) in Schedule 1 to the TAA 1953]

1.71 This is documentation that a person possessing large quantities of tobacco would ordinarily retain in order to comply with their other regulatory obligations. Therefore it is appropriate that the reasonable suspicion determination is satisfied where no such documentation exists.

1.72 An entity trading in tobacco outside of the regulated environment, especially if significant quantities of tobacco are involved, would typically not have such records.

1.73 The reasonable suspicion offences do not apply to quantities of tobacco of less than 5 kg. Therefore this matter does not apply to possession of small amounts of tobacco, where it might not always be reasonable to expect entities to have such documentation.

The person has stated that the possession, selling or buying was engaged in on behalf of or at the request of another unidentified person

1.74 A reasonable suspicion is taken to be satisfied if a person:

•

has stated that the possession, buying or selling was engaged in on behalf of, or at the request of, another person; and

•

has not provided information enabling the other person to be identified and located.

[Schedule 1, item 6, paragraph 308-55(1)(i) in Schedule 1 to the TAA 1953]

1.75 This matter can only apply if the person has in some way claimed or stated that the possession, buying or selling of tobacco was engaged in on behalf of, or at the request of, another person.

In the case of selling - the GST law requires the person to give the buyer a tax invoice in respect of the sale and the person fails to do so

1.76 Entities operating businesses selling tobacco in the regulated environment would typically provide tax invoices to purchasers of their tobacco products; retailers typically provide, or offer to provide tax invoices to their customers even if they are not legally obliged to do so. [Schedule 1, item 6, paragraph 308-55(1)(j) in Schedule 1 to the TAA 1953]

1.77 A person trading in tobacco outside of the regulated environment, especially if significant quantities of tobacco are involved, may, to avoid detection of their trading in illicit tobacco, not provide tax invoices to purchasers of their product even where they are legally obliged to comply with a request to do so.

The tobacco is tobacco leaf

1.78 The tobacco is tobacco leaf that:

•

has not been subject to any processing; or

•

has been subjected only to the process of curing the leaf as stripped from the plant.

[Schedule 1, item 6, paragraph 308-50(1)(k) in Schedule 1 to the TAA 1953]

1.79 The reasonable suspicion offences apply to tobacco leaf, even if the tobacco leaf is not excisable, such as tobacco leaf that has been stripped from a plant but not cured. This ensures that the offences apply to both dutiable tobacco and also precursor tobacco products that can be manufactured to make dutiable tobacco. It is appropriate that the reasonable suspicion offence is satisfied in this situation because:

•

a person should not legally possess unmanufactured tobacco leaf for any purpose other than for manufacturing as a licensed manufacturer or as part of a properly licenced supply chain to provide the tobacco leaf to the manufacturer. If they are a manufacturer then they will have a manufacturer's licence or otherwise a producer, storage or dealer's licence. They should be able to readily produce evidence of any licence;

•

tobacco leaf is a bulk product that is required for the manufacture of tobacco products. There are no permitted uses for tobacco leaf other than to manufacture tobacco products (the most common of these being cigarettes, cigars and pouch tobacco used for smoking roll your own cigarettes and used in pipes); and

•

it would be impracticable to have different offences apply to tobacco leaf upon which duty is payable and tobacco leaf upon which duty is not payable. It would effectively require a laboratory examination of any tobacco leaf to prove its state (excisable cured leaf or uncured or partly cured leaf) before it could be determined which offence provision applied to a circumstance, despite there being no substantive difference in culpability or outcomes.

The weight of the tobacco

1.80 The weight of the tobacco must be equal to or greater than the amount specified in the offence provision for the particular offence to apply - the weight tiers are 5, 100 and 500 kg. This is a physical element of circumstance. [Schedule 1, item 6, paragraphs 308-10(1)(e), 308-15(1)(e), 308-20(1)(e), 308-25(1)(e), 308-30(1)(e), 308-35(1)(e), 308-40(1)(e), 308-45(1)(e) and 308-50(1)(e) in Schedule 1 to the TAA 1953]

1.81 Absolute liability applies to this element concerning weight as per section 6.2 of the Criminal Code. For further details on absolute liability, refer to paragraphs 1.36 to 1.40. [Schedule 1, item 6, subsections 308-10(6), 308-15(6), 308-20(6), 308-25(6), 308-30(6), 308-35(6), 308-40(6), 308-45(6) and 308-50(6) in Schedule 1 to the TAA 1953]

1.82 Absolute liability is appropriate for this physical element of circumstance as it is essentially a precondition of an offence and the state of mind of the defendant is not relevant to that element. There would be inherent difficulties of establishing a mental element in relation to the weight of the thing that would otherwise undermine deterrence. The prosecution must still prove the weight of the tobacco at the time of the offence.

1.83 It is not appropriate to apply strict liability to this element as this would permit a defence of a mistake of fact providing a significant risk that offenders may escape conviction solely on the basis of a mistaken belief about weight. This would be the case, for example, if the weight of the tobacco was just over 100 kg but the defendant was able to bring evidence before the court that they believed that the weight was less than 100 kg. If the court was to accept the defence of a mistake of fact then the person has successfully defended the charge and would not be found to be guilty of committing the offence. It would not be possible to bring a new charge at a lower level tier offence.

1.84 To negate a defence of a mistake of fact the prosecution would have to provide evidence to rebut this belief which is especially difficult where the actual weight of the tobacco is relatively close to the weight specified in the offence. Despite the offences having a wide spectrum of weights, the uncertainty involved in assessing weights is great which amplifies this situation.

1.85 Tobacco is of itself a light-weight material. The offences apply to quantities of tobacco of 5 kg or more, 100 kg or more and 500 kg or more. These thresholds are significant, both in terms of weight and volume.

1.86 Further, generally an individual would not possess these quantities of tobacco unless they are licensed importers, producers or manufacturers of tobacco products or distributors or retailers of tobacco products on which duty has been paid. This is because the shelf-life of tobacco is less than 12 months and a person would not incur the significant expense to purchase this quantity of tobacco to stockpile it, given the waste involved.

1.87 Sufficient protection for defendants is available, as the fault element of intention applies to the physical element of possessing, selling or buying of the tobacco (the conduct) and there are available defences including the reasonable grounds defence (see paragraphs 1.89 to 1.102).

1.88 As per the Guide to Framing Commonwealth Offences, a fault element of absolute liability may be acceptable for an element of an offence that is essentially a precondition of an offence and the state of mind of the defendant is not relevant to that element.^[5]

Defences

1.89 The defendant bears an evidential burden in relation to the available defences in accordance with section 13.3 of the Criminal Code. The defendant bears the burden of presenting or pointing to evidence that suggests a reasonable possibility that the matter exists or does not exist. If the defendant discharges an evidential burden, the prosecution must then prove those matters beyond reasonable doubt. [Schedule 1, item 6, notes in sections 308-10, 308-15, 308-20, 308-25, 308-30, 308-35, 308-40, 308-45 and 308-50 in Schedule 1 to the TAA 1953]

1.90 This is appropriate given the knowledge and information that the defendant has concerning the possession, buying or selling of the tobacco, the capacity of defendants to provide that information, the difficulty of law enforcement agencies obtaining the information and the seriousness of the offence.

1.91 Without undermining the offence framework by requiring the prosecution to prove the origin of tobacco, defendants will not be penalised if they can show there is a reasonable possibility that the tobacco is not illicit tobacco (or they reasonably believed that to be the case).

1.92 Having defences with an evidential burden of proof for the reasonable suspicion offences is appropriate and is consistent with the Guide to Framing Commonwealth Offences.^[6]

Defence - The tobacco is kept or stored at premises specified in a licence

1.93 A person has a defence to the reasonable suspicion offences if they can prove that the tobacco is kept or stored at premises specified in a licence, as defined in the Excise Act, or a relevant licence under the Customs Act that pertains to tobacco. [Schedule 1, item 6, subsections 308-10(7), 308-15(7), 308-20(7), 308-25(7), 308-30(7), 308-35(7), 308-40(7), 308-45(7) and 308-50(7) in Schedule 1 to the TAA 1953]

1.94 The following are the licences defined in the Excise Act:

•

a dealer licence;

•

a manufacturer licence;

•

a producer licence; and

•

storage licence.

1.95 The following are the relevant licences under the Customs Act:

•

a depot licence; and

•

a warehouse licence.

Defence - The person is specified in a movement permission for the tobacco

1.96 A person has a defence to the reasonable suspicion offences if they can prove that the tobacco is specified in a movement permission under section 44 of the Excise Act or section 71E of the Customs Act. A person has also not committed an offence if the person can prove that they have the authority to warehouse the tobacco under subsection 71DJ(4) of the Customs Act. [Schedule 1, item 6, subsections 308-10(8), 308-15(8), 308-20(8), 308-25(8), 308-30(8), 308-35(8), 308-40(8), 308-45(8) and 308-50(8) in Schedule 1 to the TAA 1953]

1.97 Movement of tobacco must be made with the permission of the Collector (being the Commissioner or an authorised officer for that purpose) or the Comptroller-General of Customs.

1.98 A person also has a defence if they can prove that they have the authority to warehouse the tobacco under subsection 71DJ(4) of the Customs Act.

Defence - The person has permission to possess, move or transfer the tobacco without entering the tobacco for home consumption, or the tobacco has been taken to have been entered for home consumption

1.99 A person has a defence to the reasonable suspicion offences if they are dealing with tobacco under the regulated supply chain, even if excise or excise-equivalent customs duty has not yet been paid on that tobacco. A person dealing with tobacco in such circumstances will have permission to do so or transfer the tobacco under the Excise Act. A person also has a defence if the tobacco has been taken to be entered for home consumption under section 61C of the Excise Act, even if the excise has not yet actually been paid. [Schedule 1, item 6, subsections 308-10(9), 308-15(9), 308-20(9), 308-25(9), 308-30(9), 308-35(9), 308-40(9), 308-45(9) and 308-50(9) in Schedule 1 to the TAA 1953]

Defence - The person establishes that either excise or excise-equivalent customs duty had been paid on the tobacco, that they had reasonable grounds to suspect that duty had been paid, or that duty was not payable because an exemption applied

1.100 A person has a defence to the reasonable suspicion offences if any of the following circumstances exist or the person has reasonable grounds to suspect that any of them exist:

•

excise duty has been paid on the tobacco;

•

excise-equivalent customs duty has been paid on the tobacco;

•

excise duty is not payable in respect of the tobacco because of an exemption under a Commonwealth law;

•

excise-equivalent customs duty is not payable in respect of the tobacco because of an exemption under a law of the Commonwealth (for example duty-free allowances for incoming travellers and diplomats).

[Schedule 1, item 6, subsections 308-10(10), 308-15(10), 308-20(10), 308-25(10), 308-30(10), 308-35(10), 308-40(10), 308-45(10), 308-50(10) and 308-55(2) in Schedule 1 to the TAA 1953]

1.101 This affords any person that has tobacco on which duty has been paid or who had reasonable grounds to suspect that duty has been paid on tobacco a defence.

1.102 This defence, in combination with the other defences provides an appropriate balance to the application of absolute liability to the reasonable suspicion element.

Penalty

1.103 A person convicted of an illicit tobacco offence may be subject to imprisonment (for quantities of tobacco of 100 kg or more) or required to pay a penalty, or both. In most cases there is no requirement to pay an amount of duty (either excise duty or excise-equivalent customs duty) that was evaded. Therefore, for there to be a disincentive, the amount of the penalty must exceed the amount of duty that was not paid by a significant amount. This is particularly the case for the 5 kg and greater offence, which is not subject to imprisonment.

Penalty levels

1.104 The penalty levels for reasonable suspicion offences for possessing, buying or selling illicit tobacco are as follows:

Table 1.2 - Penalties for reasonable suspicion offences

^value of penalty units based on current penalty unit value of $210.

*or 5 times the excise duty payable (for this purpose assuming that the tobacco is an excisable product), whichever is greater. The method for working out the duty will be provided for in the Taxation Administration Regulations 2017 after enactment of this Bill.

[Schedule 1, item 6, subsections 308-10(1), 308-15(1), 308-20(1), 308-25(1), 308-30(1), 308-35(1), 308-40(1), 308-45(1) and 308-50(1) in Schedule 1 to the TAA 1953]

1.105 The penalties for the offences are tiered according to the quantity of tobacco that is possessed:

•

500 kg or more - high range, that is a commercial quantity of tobacco;

•

100 kg or more - mid range, that is a marketable quantity of tobacco; and

•

5 kg or more - smaller quantity of tobacco.

1.106 Section 8ZF of the TAA 1953 and subsection 4B(3) of the Crimes Act 1914 apply to corporations convicted of these offences to permit a court to impose a fine on them of up to five times the amount of the maximum penalty that could be imposed on a natural person convicted of the same offence.

Justification for the penalty levels and comparison of penalty levels for these offences to penalty levels for similar offences

1.107 The justification for the penalty levels and their comparison to penalty levels for similar offences (see paragraphs 1.152 to 1.158) for the fault-element offences for possessing, producing or manufacturing tobacco also applies for the reasonable suspicion offences.

1.108 The key difference between the reasonable suspicion illicit tobacco offences and the fault-based illicit tobacco offences concerns the payment of duty. For the reasonable suspicion offences, it must only be proved that it is reasonable to suspect that duty has not been paid on the tobacco and that no exemption applies - the mental state of the defendant and the actual circumstances are relevant only as defences. For the fault-based offences (and their counterparts in the Customs Act), the failure to pay duty must be proved and the fault element for this physical element of circumstance is recklessness. It should be noted that, for both the reasonable suspicion offences and the fault-based offences, that a fault element of:

•

intention applies to the physical element that is the conduct element of the offence (that is the possessing, selling, buying, production or manufacturing); and

•

recklessness applies to the physical element of circumstance that is the thing being tobacco.

1.109 The penalty levels that apply to the reasonable suspicion offences have been set at lower levels than those for the fault-based offences. This is in line with the money laundering offences in Division 400 of the Criminal Code where the main offence of money laundering proven beyond reasonable doubt (see section 400.4 of the Criminal Code) has a greater penalty level than that applying to the reasonable suspicion offence (section 400.9 of the Criminal Code).

Fine or imprisonment ratios for fault-based element offences

1.110 The fine and imprisonment ratio for the fault-based illicit tobacco offences differs from the standard ratio of one year imprisonment or 60 penalty units (or five penalty units or one month imprisonment), which is the ratio generally recommended in the Guide to Framing Commonwealth Offences.^[7] This departure is necessary because:

•

the maximum term of imprisonment for the offences need to be set, taking into account the maximum term of imprisonment that applies to the fault-based possession and production or manufacturing offences of 10 years and the imprisonment term for the most serious smuggling offence that can apply to imported illicit tobacco;

•

the maximum fine that can be imposed for the most serious contraventions must be sufficient to counter the potential large financial gain that may be obtained by a person who commits the offence - that is to compensate for excise foregone and impose a significant deterrent to this conduct.

Criminal fault-based offences for possessing and manufacturing or producing illicit tobacco

Offences

1.111 There are separate fault-based offence provisions that apply to the possession and manufacture or production of illicit tobacco. [Schedule 1, item 6, sections 308-110, 308-115, 308-120, 308-125, 308-130 and 308-135 in Schedule 1 to the TAA 1953]

1.112 Firstly, the elements to consider in determining whether an offence has been committed are set out below, which is then followed by the defences that may apply.

The person possesses, manufactures or produces a thing

1.113 The following words (where they appear) take their ordinary meaning for the purposes of this physical element:

•

produce;

•

manufacture; and

•

thing (a further element is that the thing is tobacco).

[Schedule 1, item 6, paragraphs 308-110(1)(a), 308-115(1)(a), 308-120(1)(a), 308-125(1)(a), 308-130(1)(a) and 308-135(1)(a) in Schedule 1 to the TAA 1953]

1.114 The meaning of possession for the fault-based offences is the same as for the reasonable suspicion offences as outlined in paragraph 1.27.

1.115 The fault element for this physical element is intention (as is the case for the reasonable suspicion offences).

1.116 Intention is the appropriate fault element for this element as it is a physical element involving conduct. This is consistent with the Guide to Framing Commonwealth Offences.^[8]

The thing is tobacco

1.117 For the purposes of this element tobacco takes its ordinary meaning, as expanded to include tobacco leaf, tobacco plant (whether in the ground or not) and tobacco seed. [Schedule 1, item 6, paragraphs 308-110(1)(b), 308-115(1)(b), 308-120(1)(b), 308-125(1)(b), 308-130(1)(b) and 308-135(1)(b) in Schedule 1 to the TAA 1953]

1.118 The fault element for this physical element of circumstance is recklessness as per subsection 5.6(1) of the Criminal Code (as a fault element is not specified in the offence provision itself).

1.119 Recklessness is the appropriate fault element for this element as it is a physical element involving a circumstance or result consistent with the Guide to Framing Commonwealth Offences.^[9]

The possession, manufacture or production occurs in Australia, but not in an external territory

1.120 For the possession offences, the possession of the tobacco must occur in Australia, but not in an external territory. For the production or manufacturing offences the place in which the person manufactures or produces the tobacco must be in Australia, but not in an external territory. This ensures that the illicit tobacco offences apply to the same areas of Australia to which the Excise Act applies. [Schedule 1, item 6, paragraphs 308-110(1)(c), 308-115(1)(c), 308-120(1)(c), 308-125(1)(c), 308-130(1)(c) and 308-135(1)(c) in Schedule 1 to the TAA 1953]

1.121 This element is equivalent to the element for the reasonable suspicion offences, and as provided there, the fault element of absolute liability applies to it. For further details refer to paragraphs 1.36 to 1.40. [Schedule 1, item 6, subsections 308-110(4), 308-115(4), 308-120(4), 308-125(4), 308-130(4) and 308-135(4) in Schedule 1 to the TAA 1953]

1.122 Applying a fault element of absolute liability to a circumstance involving the location of an offence is consistent with the Guide to Framing Commonwealth Offences.^[10]

The tobacco is excisable goods or is tobacco seed, tobacco plant or certain tobacco leaf

1.123 This element requires the prosecution to prove that the tobacco is:

•

excisable tobacco (this includes tobacco leaf that has been subject to any process other than curing the leaf as stripped from the plant);

•

tobacco seed;

•

tobacco plant; or

•

tobacco leaf that has not been subjected to any other process other than curing the leaf as stripped from the plant.

[Schedule 1, item 6, paragraphs 308-110(1)(d), 308-115(1)(d), 308-120(1)(d), 308-125(1)(d), 308-130(1)(d) and 308-135(1)(d) in Schedule 1 to the TAA 1953]

1.124 The fault element for this physical element of circumstance is recklessness as per subsection 5.6(2) of the Criminal Code (as a fault element is not specified in the offence provision itself).

1.125 Recklessness is the appropriate fault element for this element as it is a physical element of circumstance. This is consistent with the Guide to Framing Commonwealth Offences.^[11]

If the tobacco is excisable goods for which excise duty is payable, that excise duty has not yet been paid

1.126 In working out if the tobacco is an excisable good for which excise duty is payable, and excise duty has not yet been paid, the term excisable goods takes its meaning from the Excise Act. [Schedule 1, item 6, paragraphs 308-110(1)(e), 308-115(1)(e), 308-120(1)(e), 308-125(1)(e), 308-130(1)(e) and 308-135(1)(e) in Schedule 1 to the TAA 1953]

1.127 The fault element for this physical element of circumstance is recklessness as per subsection 5.6(2) of the Criminal Code (as a fault element is not specified in the offence provision itself).

1.128 Recklessness is the appropriate fault element for this element as it is a physical element involving a circumstance. This is consistent with the Guide to Framing Commonwealth Offences.^[12]

The weight of the tobacco

1.129 The weight of the tobacco must be equal to or greater than the amount specified in the offence provision for the particular offence to apply - the weight tiers are 5, 100 and 500 kg. This is a physical element of circumstance. [Schedule 1, item 6, paragraphs 308-110(1)(f), 308-115(1)(f), 308-120(1)(f), 308-125(1)(f), 308-130(1)(f) and 308-135(1)(f) in Schedule 1 to the TAA 1953]

1.130 Absolute liability applies to this element concerning weight as per section 6.2 of the Criminal Code (as it does for the reasonable suspicion offences - for further details see paragraphs 1.81 to 1.88). [Schedule 1, item 6, subsections 308-110(5), 308-115(5), 308-120(5), 308-125(5), 308-130(5) and 308-135(5) in Schedule 1 to the TAA 1953]

1.131 In accordance with the Guide to Framing Commonwealth Offences a fault element of absolute liability may be acceptable for an element of an offence that is essentially a precondition of an offence and the state of mind of the defendant is not relevant to that element.^[13]

Defences

1.132 As is the case for the reasonable suspicion offences in paragraphs 1.89 to 1.92, the defendant bears an evidential burden of proof in relation to the defences. [Schedule 1, item 6, notes in sections 308-110, 308-115, 308-120, 308-125, 308-130 and 308-135 in Schedule 1 to the TAA 1953]

1.133 Having defences with an evidential burden of proof for the fault-based offences is appropriate and consistent with the Guide to Framing Commonwealth Offences.^[14]

Defence - The tobacco is kept or stored at premises specified in a licence

1.134 A person has a defence to the fault-based offences if they can prove that the tobacco is kept or stored at premises specified in a licence. [Schedule 1, item 6, subsections 308-110(6), 308-115(6), 308-120(6), 308-125(6), 308-130(6) and 308-135(6) in Schedule 1 to the TAA 1953]

1.135 This defence is the equivalent to the defence that applies for the reasonable suspicion offence - refer to paragraphs 1.93 to 1.95 for further information.

1.136 The fault-based offences can apply to tobacco that is not excisable (see paragraph 1.123), for example certain tobacco leaf. It is therefore necessary to provide for customs licences in this defence to ensure that it applies in cases where the entity that imported the leaf had been issued with a customs licence permitting it to hold that tobacco prior to it being subject to manufacturing in Australia.

Defence - The person is specified in a movement permission for the tobacco

1.137 A person has a defence to the fault-based offences if they can prove that the person is specified in a movement permission or in a permission to warehouse the tobacco under either the Excise Act or the Customs Act. [Schedule 1, item 6, subsections 308-110(7), 308-115(7), 308-120(7), 308-125(7), 308-130(7) and 308-135(7) in Schedule 1 to the TAA 1953]

1.138 This defence is the equivalent of the defence that applies for the reasonable suspicion offence - refer to paragraphs 1.96 to 1.98 for further information.

1.139 As noted above, the fault-based offences can apply to tobacco that is not excisable (see paragraph 1.123), for example certain tobacco leaf. It is therefore necessary to provide for customs permissions in this defence to ensure that it applies in cases where the entity that imported the leaf had been issued with a customs permission to hold or move that tobacco.

Defence - Possession offence only - The person has permission to possess, move or transfer the tobacco without entering the tobacco for home consumption or the tobacco has been taken to have been entered for home consumption

1.140 A person has a defence to the fault-based offences if the offence is a possession offence and they are handling the tobacco under the regulated supply chain, even if excise or excise-equivalent customs duty has not yet been paid on that tobacco (as it has not yet been entered for home consumption). A person handling legal tobacco in such circumstances will have permission to do so or to move it under the Excise Act. [Schedule 1, item 6, subsections 308-110(8), 308-115(8) and 308-120(8) in Schedule 1 to the TAA 1953]

1.141 This defence is also equivalent to the defence that applies for the reasonable suspicion approach - refer to paragraph 1.99.

Penalty

1.142 In determining penalty levels for illicit tobacco fault-based offences it is important to note that a person convicted of an offence is generally only required to pay the penalty that is imposed. In most cases there is no requirement to then also pay an amount of duty (either excise duty or excise-equivalent customs duty) that was foregone. Therefore, for there to be a disincentive, the amount of the penalty must significantly exceed the amount of duty that was foregone.

Penalty levels

1.143 The penalty levels for the fault element offences for possessing, producing or manufacturing illicit tobacco are as follows:

Table 1.3 - Criminal penalties for fault element offences: intentional possession, production or manufacturing

^ value of penalty units based on current penalty unit value of $210.

* or 5 times the excise duty payable (for this purpose assuming that the tobacco is an excisable product), whichever is greater. The method for working out the duty will be provided for in the Taxation Administration Regulations 2017 after enactment.

[Schedule 1, item 6, subsections 308-110(1), 308-115(1), 308-120(1), 308-125(1), 308-130(1) and 308-135(1) in Schedule 1 to the TAA 1953]

1.144 The penalties for fault element offences are tiered according to the quantity of tobacco that is possessed:

•

500 kg and above - large scale, that is a commercial quantity of tobacco;

•

100 kg and above - mid range, that is a marketable quantity of tobacco; and

•

5 kg and above - smaller quantity of tobacco.

1.145 Section 8ZF of the TAA 1953 and subsection 4B(3) of the Crimes Act 1914 apply to corporations to permit a court to impose a fine on them of up to five times the amount of the maximum penalty that could be imposed on a natural person convicted of the same offence.

Justification for penalty levels

1.146 The penalties for the fault-based offences of possessing, producing or manufacturing (and those for the reasonable suspicion offences of possessing, buying or selling) illicit tobacco exceed the penalty levels that would ordinarily be applied to offences as set out in the Guide to Framing Commonwealth Offences.^[15] However, as explained below, this is justified, both given the context of the offences and the penalties imposed for comparable offences. For example, currently the maximum penalty for smuggling tobacco into Australia is 10 years imprisonment and a fine of five times the amount of the duty that would have been payable (see section 233BABAD of the Customs Act).

1.147 Table 1.4 below sets out the amounts of penalty that would apply to illicit tobacco under the fault-based element offences at the specified quantities of tobacco as follows:

Table 1.4 - Monetary penalty amounts for fault-based element tobacco offences

# as at 1 September 2017 the rate of excise was $901.39 per kg of tobacco.

*5 times the excise duty payable (for this purpose assuming that the tobacco is an excisable product). The method for working out the duty will be provided for in the Taxation Administration Regulations 2017 after enactment.

^value of penalty units based on current penalty unit value of $210.

1.148 The penalties for the fault-based offences for possessing, producing or manufacturing illicit tobacco are set having regard to the seriousness of the offence. This takes into account:

•

the legitimate objective of ensuring offenders receive sentences that reflect the seriousness of their illegal activities taking into account the serious social and systemic harms associated with illicit tobacco;

•

the current level of excise and excise-equivalent customs duty which has not been paid;

•

increases in those duty rates resulting from:

-

2016-17 Budget Tobacco Excise - measures to improve health outcomes; and

-

2017-18 Budget - aligning the tax treatment of roll your own tobacco and cigarettes;

•

the increasing involvement of organised criminal groups in the illicit tobacco trade which suggests that existing penalty levels ranging from 500 penalty units for a strict liability offence up to 1,000 penalty units are on their own not providing sufficient deterrent effect; and

•

that the non-payment of excise and excise-equivalent customs duty defrauds the Commonwealth of large amounts of revenue (as shown in table 1.4 above).

1.149 As previously noted, the threshold weights of tobacco which result in different penalties applying have been set taking into account the fact that a person convicted of an offence will, in most circumstances, only pay the penalty for that offence (as there is often no separate requirement to pay duty evaded). Further the fault element of intention applies to the physical element of conduct (that is the possessing, producing or manufacturing for the fault-based offences). These offences apply where neither excise nor excise-equivalent customs duty has been paid. The penalties take into account the quantity of tobacco that was possessed, produced or manufactured and the fact that as the quantity (in weight) increases, the conduct involved is likely to be more sophisticated, deliberate, and organised, and that this warrants a higher penalty.

1.150 The maximum penalty that can apply is a term of imprisonment, or the greater of a fixed number of penalty units or five times the excise duty otherwise payable, or both. This follows the existing framework under which excise penalties are imposed and takes into account:

•

for offences of possessing larger quantities of tobacco, within each of the tiers, a penalty based solely on a quantity of penalty units would not be sufficient deterrent given the amount of excise or excise-equivalent customs duty evaded - this applies equally to other excisable goods, hence the reason why this approach is incorporated into the current excise offence provisions which apply to all other excisable goods; and

•

the rate of increase in excise and excise-equivalent customs duty, under indexation arrangements that applies to excise and excise-equivalent customs duty rates (that is indexation by Average Weekly Ordinary Times Earnings) and current legislated changes, are significantly greater than the increase in the dollar amount of penalty units (subject to indexation by the Consumer Price Index).

Fine or imprisonment ratios for fault-based element offences

1.151 The fine or imprisonment ratio for these offences differs from the standard ratio of one year imprisonment or 60 penalty units (or five penalty units or one month imprisonment), which is the ratio generally recommended in the Guide to Framing Commonwealth Offences.^[16] This departure is necessary because the maximum fine that can be imposed for the most serious contraventions must be sufficient to counter the potential large financial gain that may be obtained by a person who commits the offence. The Commonwealth should also be compensated for the unpaid excise and impose a significant disincentive to undertaking conduct involving illicit tobacco. However, if the ratio were maintained the maximum term of imprisonment that could be imposed for these offences at the 500 kg (1,500 penalty units), 100 kg (1,000 penalty units) and 5 kg (500 penalty units) tiers would be significantly above the imprisonment terms of 10 years and 5 years respectively for these fault-based offences. Instead the maximum imprisonment term is aligned with the existing maximum smuggling offence for tobacco under section 233BABAD of the Customs Act.

Comparison of penalty levels for these offences to penalty levels for similar offences

1.152 Tobacco is a controlled substance, whether in its manufactured form, or as seed, plant or leaf. The primary reasons for this control are to protect excise and excise-equivalent customs duty revenue and to prevent its illegal use - including the use by individuals and groups for their own illegal gain. There is also the additional purpose of using the control mechanisms to reduce the health impacts of smoking to the community. The primary reasons for controlling illicit drugs are to prevent health, social and systemic harms that their consumption would give rise to as opposed to tobacco where it is to protect excise and excise-equivalent customs duty revenue at levels set to try and reduce the health impacts of smoking. Subject to very few exceptions, illicit drugs and the precursors to making them cannot be possessed, produced, manufactured, bought or sold legally.

1.153 Tobacco can be possessed, produced, manufactured, bought or sold legally if it is either held under licence or excise or excise-equivalent customs duty has been paid on it. This sets the context for determining penalty levels that should be applied to offences involving the possession, production or manufacture of illicit tobacco.

1.154 Offences concerning the importation, exportation and possession of drugs are contained in Divisions 307 and 308 of the Criminal Code. The penalties that apply are as follows:

Table 1.5 - Penalties for comparative drug offences

1.155 As tobacco can be consumed legally in Australia (if excise or excise-equivalent customs duty is paid), lower penalty levels are appropriate for tobacco offences compared to offences involving illicit drugs. However, possession, producing, manufacturing (and for the reasonable suspicion offences of buying and selling) of illicit tobacco have significant adverse impacts on Commonwealth revenue in the form of reductions in excise and excise-equivalent customs duty revenue. It also has significant impacts on the public, as smokers of cheaper illicit tobacco are not subject to the deterrent effect of higher prices applying to tobacco to which duty applies, which is aimed at reducing tobacco consumption in Australia. The consumer and the community may also not benefit from other safety mechanisms that apply to legal tobacco, for example fire retardant butts and filters and health warnings.

1.156 Another consideration is that tobacco has a relatively short lifespan before deteriorating - generally less than 12 months. Therefore, unless it can be sold in a reasonable time period for the purpose of making profit, there is no practical purpose for holding any significant quantity of it. It therefore is reasonable to presume that people holding, in particular significant quantities of tobacco do so for their own material gain rather than for their personal consumption.

1.157 The Customs Act also contains offences for smuggling of illicit tobacco. Currently the maximum penalty under section 233BABAD is 10 years imprisonment, a monetary penalty of 5 times the duty payable or both. However, the Government's announcement to increase penalties on illegal tobacco is likely to result in changes to the penalties for that offence consistent with the penalties set for the fault-based offences for this measure through separate legislative amendments to the Customs Act.

1.158 Accordingly, the penalties set for the fault-based offences for the possession, manufacture or production of illicit tobacco are set at a lower level than those for similar offences concerning illicit drugs, but at a level that is appropriate to reflect the serious nature of the offences and their impacts on community health and safety and Government revenue.

Civil penalty - lack of documentary evidence for possessing of tobacco

Civil penalty

1.159 The Bill creates a liability to a civil penalty determined by reference to penalty units where there is a lack of documentary evidence explaining why a person has possession of 2 kg or more of tobacco. A threshold of 2 kg ensures that the penalty applies broadly to tobacco held for commercial gain as this quality exceeds the amount of tobacco a person would hold for personal use. [Schedule 1, items 4 and 5, section 295-75 and paragraph 298-80(aa) in Schedule 1 to the TAA 1953]

1.160 Given the nature of this offence, it is considered more appropriate to apply a civil penalty rather than a criminal offence. It is not considered to be appropriate to apply criminal penalties to this lower-level illicit tobacco offence.

1.161 However, a lower-level offence is considered a requirement for a comprehensive offence framework addressing illicit tobacco as it provides a mechanism to deter the possession of illicit tobacco even if the requirements for criminal offences are not satisfied. It is important to penalise persons in such situations, where a fault-based criminal offence is unavailable. This is on the basis that:

•

there are serious consequences for possessing illegal tobacco;

•

control can be maintained over tobacco, especially tobacco seeds, plant and leaf which unlicensed entities should not possess in any circumstances;

•

it assists in protecting excise and excise-equivalent customs duty revenue;

•

having a civil penalty of this kind provides an additional enforcement option for illicit tobacco; and

•

the application of the civil penalty to 2 kg or more of tobacco (2,800 or more cigarettes) and the personal consumption (see paragraphs 1.179 to 1.180), and reasonable grounds that duty has been paid (see paragraphs 1.187 to 1.188) defences provide an appropriate protection to ensure that end consumers of tobacco products or those who genuinely believe that they have purchased a product on which duty has been paid are not liable to a criminal or civil penalty.

1.162 The civil penalty for reasonable suspicion of unpaid duty where there is a lack of documentary evidence also enables an infringement notice regime to apply to lower-level tobacco possession offences. It is in the public interest for an infringement notice regime to operate, taking into account the high cost of undertaking prosecutions, and to ensure that the courts are not overburdened with lower-level tobacco possession offences. Accordingly, allowing such penalties to be dealt with through an infringement notice regime, where appropriate, provides flexibility and addresses these issues. For details of the infringement notice regime refer to paragraphs 1.193 to 1.198.

1.163 In addition, this civil penalty will enable the effective operation of the proposed change to the excise forfeiture provision. For details of the forfeiture provision refer to paragraphs 1.199 to 1.201.

1.164 Consideration is now given in this Explanatory Memorandum to the elements to determine whether the civil penalty for possessing tobacco without adequate documentary evidence applies and also the available defences.

The person possesses a thing

1.165 One of the elements for the civil offence of possessing tobacco without adequate documentary evidence is that the person must possess a thing (a further element is that the thing is tobacco - see below). The meaning of possession is the same as for the reasonable suspicion offences as outlined in paragraph 1.27. [Schedule 1, item 4, paragraph 295-75(1)(a) and subsection 295-75(4) in Schedule 1 to the TAA 1953]

1.166 The defences provide protection for defendants, in particular they ensure that people who may otherwise be subject to a liability for a civil penalty (those who are merely consumers of the tobacco and those who have a genuine belief that the duty has been paid) are specifically excluded. The defendant bears an evidential burden in relation to the defences. However, the information defendants require to prove that a particular defence applies to them would be readily available to them. The defences are:

•

the tobacco is only possessed for personal use (see paragraphs 1.179 to 1.180);

•

the tobacco is kept or stored at premises specified in a licence (see paragraphs 1.181 to 1.182);

•

the defendant:

-

was specified in a movement permission under the Excise Act or Customs Act; or

-

has an authority to take the tobacco into warehousing under the Customs Act (see paragraphs 1.183 to 1.184);

•

the defendant has permission (within the Excise Act) to:

-

possess the tobacco;

-

move the tobacco; or

-

transfer the tobacco; or

•

the tobacco has been deemed to have been entered for home consumption (see paragraphs 1.185 to 1.186); and

•

the person has reasonable grounds to suspect that excise duty or excise-equivalent customs duty has been paid on the tobacco (that is, they bought the tobacco from a legitimate tobacco seller) or that excise duty or excise-equivalent customs duty is not payable in respect of the tobacco because of an exemption under a law of the Commonwealth (see paragraphs 1.187 to 1.188).

1.167 The defences to a person becoming subject to a civil penalty for possessing tobacco without adequate documentary evidence ensure that a person is not liable to the penalty in situations in which they are merely a consumer of tobacco or where they are unlikely to have known that duty was not paid on tobacco.

1.168 This strikes an appropriate balance to ensure that a person can be subject to a civil penalty where it is justifiable without unduly inhibiting their legal rights or placing an undue burden on them to prove their innocence.

The thing is tobacco

1.169 The civil offence for possessing tobacco without documentary evidence requires that the thing possessed is tobacco. For this purpose tobacco takes its ordinary meaning. [Schedule 1, item 4, paragraph 295-75(1)(b) in Schedule 1 to the TAA 1953]

1.170 Applying this element in this way is necessary for the same reasons as outlined in paragraphs 1.165 to 1.168 for the 'person possesses a thing' element for this offence.

The possession occurs in Australia, but not in an external territory

1.171 The civil offence for possessing tobacco without documentary evidence requires that possession occur in Australia (but not in an external territory). An equivalent requirement exists under the reasonable suspicion offences. For further details refer to paragraphs 1.33 to 1.35. [Schedule 1, item 4, paragraph 295-75(1)(c) in Schedule 1 to the TAA 1953]

The person has not provided a tax invoice, bill of lading or customs declaration providing evidence of how they acquired the tobacco

1.172 The civil offence for possessing tobacco without documentary evidence requires that a person fails to provide a tax invoice, customs declaration or bill of lading. For further information refer to paragraphs 1.70 to 1.73. [Schedule 1, item 4, paragraph 295-75(1)(d) in Schedule 1 to the TAA 1953]

1.173 A person may provide documentation at any time up until a Court has made its final decision.

1.174 Persons legitimately holding tobacco, or holding tobacco on which excise or excise-equivalent customs duty has been paid or an excise or excise-equivalent customs duty exemption applies, would readily have the information on hand to discharge the evidentiary burden of proof.

The weight of the tobacco

1.175 The civil penalty for possessing tobacco without documentary evidence requires that the weight of the tobacco must be 2 kg or more. [Schedule 1, item 4, paragraph 295-75(1)(e) in Schedule 1 to the TAA 1953]

1.176 This requirement applies to ensure that the offence would not apply to tobacco consumers as only licensed importers, producers or manufacturers or legitimate tobacco distributors or retailers are likely to possess tobacco of this quantity. However, given the lower quantity of tobacco to which this offence applies, a defence is also included for end consumers (see paragraphs 1.179 and 1.180).

Defences

1.177 The defendant bears an evidentiary burden in relation to the defences. This is appropriate given the knowledge and information that the defendant has concerning the possession of the tobacco and the capacity of defendants to provide that information.

1.178 A defendant bears an evidential burden of proof in relation to the defences for situations where a person would otherwise become subject to a civil penalty for possessing tobacco without adequate documentary evidence. In the case of an evidential burden defence, the defendant bears the burden of presenting or pointing to evidence that suggests a reasonable possibility that the matter exists or does not exist. If the defendant discharges an evidential burden, the prosecution must then prove those matters beyond reasonable doubt. [Schedule 1, item 4, subsection 295-75(10) in Schedule 1 to the TAA 1953]

Defence -possession of tobacco for personal use

1.179 A person is not subject to the civil penalty if they are an individual and they can prove that they possess the tobacco for their personal use.

1.180 A consumer of tobacco is unlikely to hold 2 kg or more of tobacco at any time. However, given the lower quantity of tobacco to which this offence applies, the end consumer defence is included in this offence to provide an additional safeguard for tobacco that is genuinely for personal use. [Schedule 1, item 4, subsection 295-75(5) in Schedule 1 to the TAA 1953]

Defence - the tobacco is kept or stored at premises specified in a licence

1.181 A person is not subject to the civil penalty if they can prove that the tobacco is kept or stored at premises specified in a licence. [Schedule 1, item 4, subsection 295-75(6) in Schedule 1 to the TAA 1953]

1.182 This defence is the equivalent to the defence that applies for the reasonable suspicion offences - refer to paragraphs 1.93 to 1.95 for further information.

Defence - the person is specified in a movement permission for the tobacco

1.183 A person is not subject to the civil penalty if the person can prove that the tobacco is specified in a movement permission under the Excise Act or Customs Act. [Schedule 1, item 4, subsection 295-75(7) in Schedule 1 to the TAA 1953]

1.184 This defence is the equivalent to the defence that applies for the reasonable suspicion offences - refer to paragraphs 1.96 to 1.98 for further information.

Defence - permission to possess, move or transfer the tobacco without entering the tobacco for home consumption or the tobacco has been taken to have been entered for home consumption

1.185 A person is not subject to the civil penalty if the penalty relates to possession and they are handling tobacco under the regulated supply chain, even if excise or excise-equivalent customs duty has not yet been paid on that tobacco (as it has not yet been entered for home consumption). A person handling legal tobacco in such circumstances will have permission to do so or to move it under the Excise Act. [Schedule 1, item 4, subsection 295-75(8) in Schedule 1 to the TAA 1953]

1.186 This defence is equivalent to the defence that applies for the reasonable suspicion offences - refer to paragraph 1.99.

Defence - excise or excise-equivalent customs duty has been paid on the tobacco, or reasonable grounds to suspect that payment was made, or an exemption applied

1.187 A person is not subject to the civil penalty if they either establish or have reasonable grounds to suspect that excise or excise-equivalent customs duty had been paid on the tobacco or that neither was payable because an exemption applied. [Schedule 1, item 4, subsection 295-75(9) in Schedule 1 to the TAA 1953]

1.188 This defence is the equivalent to the defence that applies for the reasonable suspicion offences - refer to paragraphs 1.100 to 1.102 for further information.

Penalty

1.189 As previously noted, in determining penalty levels for illicit tobacco offences and situations, where a person is subject to a civil penalty, a person that is convicted is only required to pay the penalty that is imposed. In most cases there is no requirement to also pay the amount of duty (either excise duty or excise-equivalent customs duty) that was evaded. Therefore, for there to be a disincentive, the amount of the penalty must significantly exceed the amount of duty that was evaded.

1.190 A monetary penalty of up to 100 penalty units (equating to $21,000 in 2017-18) applies where a person is subject to a civil penalty for possessing tobacco without adequate documentary evidence. A penalty of imprisonment does not apply as this is not a criminal offence. [Schedule 1, item 4, subsection 295-75(3) in Schedule 1 to the TAA 1953]

1.191 It is expected that this civil penalty will be applied in lieu of a criminal offence in situations concerning smaller quantities of tobacco (greater than 2 kg and up to 5 kg) and there is an option to apply it in lieu of a criminal offence for quantities of illicit tobacco of 5 kg and over. The penalty level of 100 penalty units has been set with this in mind.

1.192 The penalty of 100 penalty units (currently equating to $21,000) for this civil penalty is justifiable given the high levels of unpaid duty (as illustrated in Table 1.6 below) and also because a person liable to a civil penalty will generally not also be otherwise liable for the unpaid duty. Without the higher penalty level there is a strong likelihood that the penalty would be less than the duty that had been evaded, which would encourage illicit tobacco possession in smaller quantities rather than deter it.

Table 1.6 - Applicable duty for specified quantities of tobacco

# as at 1 September 2017 the rate of excise was $901.39 per kg of tobacco.

Penalty instead of prosecution - infringement notices

1.193 An amendment is made to the Excise Act infringement notice regime to also allow for penalties to be imposed and discharged for possessing 2 kg or more of tobacco without documentary evidence without the time, expense and need for court proceedings.

1.194 This will allow for a person who possesses illicit tobacco to be issued with an infringement notice instead of being prosecuted for the offence. [Schedule 1, items 1 and 2, subsection 129A(1) and section 129B of the Excise Act]

1.195 The excise infringement notice regime is contained in sections 129A to 129F of the Excise Act. It provides for:

•

when an infringement notice may be issued;

•

matters to be included in an infringement notice;

•

the due date for payment of the penalty;

•

the effect of payment of the penalty; and

•

when an infringement notice may be withdrawn.

1.196 Under subsection 129A(2) of the Excise Act, a person remains liable to prosecution if they do not pay the penalty in accordance with the notice.

1.197 An infringement notice is expected to be issued in circumstances where there is a high degree of certainty that the physical element of the offence exists, but the seriousness of the infraction or degree of culpability of the offender is relatively low. Therefore it is appropriate and consistent with the Guide to Framing Commonwealth Offences to provide for the issue of infringement notices.^[17]

1.198 It is also in the public interest, especially taking into account the higher cost of prosecution action, and the impact on the courts of dealing with numerous lower-level tobacco possession situations, that such matters be dealt with through infringement notices, where appropriate for lower range offences.

Forfeiture provisions

1.199 Section 116 of the Excise Act currently provides for the forfeiture of:

•

tobacco that is manufactured or partly manufactured by a person who is not a licenced manufacturer; and

•

all tobacco seed, tobacco plant or tobacco leaf that:

-

is found on any premises where the manufacture of excisable goods is unlawfully carried on;

-

has been moved without permission under section 44 of the Excise Act;

-

is found in the possession, custody or control of a person (other than a licenced producer, licensed dealer or licenced manufacturer) without permission; or

-

is kept or stored at a place that is not specified in a producer licence, dealer licence or manufacturer's licence.

1.200 The circumstances in which tobacco or related equipment is forfeited are extended to apply if a person:

•

becomes liable for a civil penalty for possession of tobacco without relevant documentation; or

•

commits an offence under Division 308 in Schedule 1 to the TAA - reasonable suspicion and fault-based criminal offences for possessing, buying, selling, or manufacturing or producing illicit tobacco or possession of tobacco production or manufacturing equipment.

[Schedule 1, items 9 and 10, paragraphs 116(1)(aa) and (ca) of the Excise Act]

1.201 The amendments ensure that the existing Excise Act forfeiture provision applies to tobacco where the origin of production or manufacturing is unknown, but only where a person becomes liable for a civil penalty for possession of tobacco without relevant documentation or has committed a criminal offence for possessing, buying, selling, or manufacturing or producing of tobacco under Division 308 in Schedule 1 to the TAA. This ensures that a person cannot retain illicit tobacco where they have committed one of these offences.

Related amendments to Excise Act search and seizure provisions

1.202 Related amendments are made to the Excise Act search and seizure provisions to enable tobacco that is forfeited that comes within the situations described in paragraph 1.200 (liable to an offence for possession of tobacco without documentation or reasonable suspicion or fault-based offences for tobacco or possession of tobacco production or manufacturing equipment) to also be seized. [Schedule 1, items 7 and 8, definition of offence in section 107AA and section 107AAA of the Excise Act]

1.203 The amendments ensure that the existing Excise Act powers apply to this tobacco and tobacco production and manufacturing equipment to enable search and seizure to occur. They are required because the offence provisions for illicit tobacco are contained in Schedule 1 to the TAA 1953 rather than the Excise Act. This is consistent with the practice of including administrative and offence provisions for the tax law in the TAA 1953 - if they had been placed into the Excise Act then none of these consequential amendments would be required as they would have applied to the new Excise Act offences without further consequential amendments.

Definition of tobacco

1.204 The term 'tobacco' is defined to include 'any thing (including moisture) added to the tobacco leaf during manufacturing or processing'. This includes sugar, molasses, flavour, additives or anything else added to the tobacco leaf during manufacturing or processing. [Schedule 1, items 4, 6, 23 and 24, subsections 295-80(1) and 308-505(1) in Schedule 1 to the TAA 1953 and the definition of tobacco in subsection 4(1) and subsection 4(6) of Excise Act]

1.205 The term 'tobacco' is defined for excise purposes and for the illicit tobacco offences contained in the Bill to remove any doubt that things added to tobacco during manufacturing or processing are treated as tobacco. Making these amendments also ensures consistency with the definition of 'tobacco content' in subsection 3(1) of the Customs Tariff Act 1995.

1.206 The Bill also confirms that for the purposes of removing any doubt in the new offences in the TAA 1953 that tobacco seed, tobacco plant (whether or not in the ground) and tobacco leaf and cigars, cigarettes and snuff are treated as tobacco. This confirms that the offences apply to all stages of tobacco production and manufacture, including precursor products and plants prior to the existence of the final manufactured tobacco product. [Schedule 1, items 4 and 6, subsections 295-80(2) and 308-505(2) in Schedule 1 to the TAA 1953]

Possession of equipment for manufacturing or producing tobacco

1.207 The amendments also create two new offences for possessing equipment for manufacturing or producing tobacco for which a penalty of up to one year's imprisonment, 120 penalty units or both applies to each offence. [Schedule 1, item 6, sections 308-205 and 308-210 in Schedule 1 to the TAA 1953]

1.208 The extended definition of possession discussed in paragraph 1.27 also applies for the purpose of these offences.

Recklessness about the potential use of equipment

1.209 The first offence applies if a person possesses equipment in Australia (but not an external territory) at a time and is reckless about the potential use of the equipment while it is in their possession by a person to manufacture or produce tobacco where that manufacture or production would be an offence either as a result of these amendments or under section 25 or 28 of the Excise Act. [Schedule 1, item 6, section 308-205 in Schedule 1 to the TAA 1953]

1.210 In this context, equipment has its ordinary meaning, encompassing tools, machinery and similar goods used in the process of manufacturing or production. It does not include real property or intangible rights.

1.211 The potential use of equipment for manufacturing or producing tobacco may be either use by the person or by another person. However, as this is an offence of possession, it does not apply to later potential use by another party once they cease to possess the equipment (including ceasing to control the disposition of the equipment for which they may not have custody). Existing offences are likely to apply to a person who knowingly or recklessly assists in the commission of criminal offences, such as by supplying equipment.

1.212 This offence applies if a person possesses equipment intending or knowing there is a substantial risk that it will be used to commit an offence relating to the manufacture or production of illicit tobacco. It is not necessary that the equipment be used to actually commit such an offence - if a person deliberately or recklessly permits potentially criminal use, it is appropriate a penalty apply.

1.213 Consistent with the Guide to Framing Commonwealth Offences, the required fault element for this offence is generally recklessness.

1.214 However, absolute liability applies in relation to whether possession occurs in Australia (but not an external territory). [Schedule 1, item 6, subsection 308-205(2) in Schedule 1 to the TAA 1953]

1.215 This is appropriate and consistent with the Guide to Framing Commonwealth Offences, as this is a precondition for the application of the offence to establish the location and jurisdiction. For a more detailed discussion of absolute liability and jurisdiction provisions see paragraphs 1.36 to 1.40.

1.216 Absolute liability also applies to the question of whether potential manufacture or production of tobacco would constitute an offence. This is appropriate as this is both a precondition to the offence and a question of law. A person must intend or be aware of and reckless about the potential use. Ignorance of how the law applies to that use should not be a defence. [Schedule 1, item 6, subsection 308-205(3) in Schedule 1 to the TAA 1953]

1.217 A defence is available to this offence if a person had no reasonable grounds to believe that the use by the other person would be an offence as a result of these amendments or under section 25 or 28 of the Excise Act. [Schedule 1, item 6, subsection 308-205(4) in Schedule 1 to the TAA 1953]

1.218 This defence protects a person who is misled about matters of fact such as the existence of a licence. It does not apply if a person has an incorrect understanding of the law. It is also unlikely to apply outside of a person being actively misled. The ATO has publicly advised that licences are rarely granted and there is no licenced manufacture or production occurring in Australia. Given this, it is unlikely to be reasonable to believe a person has or can obtain a licence without specific evidence to the contrary.

1.219 As a defence, the defendant bears an evidential burden to prove the defence. What a person knew at a time is uniquely within the knowledge of the person. The person is also best placed to identify objective evidence about this knowledge of facts or circumstances. Given this, it is appropriate that the defendant should need to demonstrate this lack of any reasonable grounds.

Specifically designed or adapted equipment

1.220 The second offence applies if:

•

a person possesses equipment in Australia (but not an external territory) at a time;

•

a reasonable person with a full understanding of the equipment would conclude that it is specifically designed or adapted for producing or manufacturing tobacco; and

•

had the person manufactured or produced tobacco at that time, the person would commit an offence as a result of these amendments or under sections 25 or 28 of the Excise Act.

[Schedule 1, item 6, section 308-210 in Schedule 1 to the TAA 1953]

1.221 In this context, equipment has its ordinary meaning, encompassing tools, machinery and similar goods used in the process of manufacturing or production. It does not include real property or intangible rights.

1.222 Equipment is specifically adapted or designed in the eyes of a reasonable person if it has features that are specifically made or adapted to improve its usefulness specifically in manufacturing or producing tobacco, such as for example, cigarette tube filling machines.

1.223 Generally, equipment is not specifically designed or adapted if it can be used for a variety of purposes that may include manufacturing or producing tobacco. For example, agricultural equipment such as a tractor may be designed for use in producing a number of crops, which could include tobacco. However, a reasonable person would not consider that a tractor is designed or adapted specifically for the production of tobacco without other features that are specifically relevant to the production of tobacco.

1.224 The requirement is based not on the intention of the designer or adapter but on what a reasonable person, with a full understanding of the operation of the equipment would consider as a result of the features of the equipment. Further, the reasonable person is taken to have full knowledge and understanding of the equipment. This ensures that the test is based on an objective assessment of the equipment itself rather than of the subjective intention of the designer or adapter (that might well not be known to the person in possession of the equipment).

1.225 Even if a person possesses such equipment, a further element of the offence requires that the person must not be legally entitled to manufacture or produce tobacco.

1.226 Consistent with the Guide to Framing Commonwealth Offences, the required fault element for this offence is generally recklessness.

1.227 In the context of the requirement that a reasonable person must consider that the equipment is designed or adapted specifically for manufacturing or producing tobacco, the standard of recklessness means that the person must be aware there is a substantial risk that this would be the case and unreasonably disregard this risk.

1.228 Generally, this would require that the person is both aware of the design features or adaptions and has an understanding of the relevance to tobacco. In cases in which a person, for example, inherits specifically adapted equipment with no knowledge or understanding of the equipment, they would not satisfy this fault element.

1.229 However, absolute liability applies in relation to whether possession occurs in Australia (but not an external territory). [Schedule 1, item 6, subsection 308-210(2) in Schedule 1 to the TAA 1953]

1.230 This is appropriate and consistent with the Guide to Framing Commonwealth Offences, as this is a precondition to the application of the offence going to location and jurisdiction. For a more detailed discussion of absolute liability and jurisdiction provisions see paragraphs 1.36 to 1.40.

1.231 Absolute liability also applies to the question of whether the manufacture or production of tobacco would constitute an offence. This is appropriate as this is both a precondition to the offence and a question of law. A person must intend or be aware of and reckless about the potential use. Ignorance of how the law applies to that use should not be a defence. [Schedule 1, item 6, subsection 308-210(3) in Schedule 1 to the TAA 1953]

1.232 A defence is available to this offence if the person holds the equipment for the sole purpose of disposal, destruction or export. In these situations, a person may hold the equipment with no intention of using it for any purpose contrary to Australian law and it would be inappropriate to impose a penalty. [Schedule 1, item 6, subsection 308-210(4) in Schedule 1 to the TAA 1953]

1.233 As a defence, the defendant bears an evidential burden to prove the defence. The purpose for which a person holds equipment is uniquely within the knowledge of the person. Not only are they the only person who knows conclusively what their own intention is, but they are best placed to identify objective evidence of this intention. Given this, it is appropriate that the defendant should need to demonstrate it is reasonable that this is their purpose.

1.234 A defence is also available if a person possesses equipment on behalf of another person and the other person would not commit an offence if the other person used the equipment to manufacture tobacco at that time. [Schedule 1, item 6, subsection 308-210(5) in Schedule 1 to the TAA 1953]

1.235 The defence protects people such as employees or transporters that may be in possession of equipment on behalf of another person.

1.236 As a defence, the defendant bears an evidential burden to prove the defence. The existence of an arrangement between the person and a third party, and the person's knowledge about the third party are both matters that are readily within the knowledge of the person, but may be challenging for anyone else to prove. Given this, it is appropriate that the defendant needs to satisfy the evidential burden.

Consequential amendments

1.237 The following consequential amendments are made to the Excise Act.

Repeal provisions providing for specific illicit tobacco offences which are no longer required

1.238 Amendments are made to the Excise Act to repeal provisions providing for specific illicit tobacco offences which are no longer required following the enactment of the new offences provisions. They are:

•

paragraph 39K(4)(e) of the Excise Act - to correct a technical error where a reference to storage licence should be included in a provision governing activities that can be done during a suspension of a licence;

•

subsection 39M(2) of the Excise Act - removal of goods on cancellation of a licence - a person will commit a possession offence if they retain possession of tobacco after a licence is cancelled;

•

sections 117C, 117E, 117F, 117G and 117H of the Excise Act - these are specific offences concerning the possession, buying or selling of tobacco leaf, tobacco plants and tobacco leaf - a person possessing, buying or selling tobacco leaf commits an offence under the new illicit tobacco offences; and

•

subparagraph 127A(a)(ii) of the Excise Act - a technical amendment is required to remove references to the offence provisions listed in the second dot point as they are referenced in this provision.

[Schedule 1, items 11 to 12, 21 and 22, paragraph 39K(4)(e), subsection 39M(2), sections 117C, 117E, 117F, 117G and 117H and subparagraph 127A(a)(ii) of the Excise Act]

Amendments to Excise Act investigative powers

1.239 Consequential amendments are made to the Excise Act investigative powers to enable examinations of tobacco to take place where the origin of production or manufacturing is unknown. This is done by treating all tobacco as excisable for the purposes of the search of vehicles and other conveyances, power to examine goods and taking and purchasing samples. [Schedule 1, items 14 to 20, paragraph 87AA(b) and sections 91, 106 and 107 of the Excise Act]

1.240 The amendments ensure that the existing Excise Act investigative powers apply to tobacco where the origin of production or manufacturing is unknown. They do not change the operation of these provisions in any way.

Other consequential amendments

1.241 Other consequential amendments are made to:

•

ensure that Part 2.5 of the Criminal Code concerning corporate criminal responsibility applies to the new illicit tobacco offences involving corporations as is normal practice for new offence provisions;

•

provide for definitions and guidance material relating to the illicit tobacco offences; and

•

amend the heading to section 68 of the Excise Act to remove the reference to the word exemption. This is done to ensure there is no confusion with the use of the term exemption for the purposes of this measure where it differs from how it was used in this provision (which was to outline a situation where a manufacturing licence was not required as opposed to an exemption from excise duty applying).

[Schedule 1, items 3, 4, 6 and 13, the definitions of customs duty and excisable goods in subsection 995-1(1) of the ITAA 1997, sections 295-70, 308-1, 308-5, 308-105, 308-200, 308-500 and 308-520 in Schedule 1 to the TAA 1953 and the heading to section 68 of the Excise Act]

Application and transitional provisions

1.242 This Bill commences on the day after Royal Assent. [Clause 2]

1.243 The amendments made by Part 1 of Schedule 1 to the Bill apply to conduct (that is possessing, sale, buying, manufacturing or producing of tobacco) occurring on and after the day of commencement. Therefore these amendments do not have any retrospective application. [Schedule 1, subitems 25(1), (2), (3) and (4)]

1.244 It is possible for a person to be charged with an offence for possession of tobacco where they possessed that tobacco, both before and after the day of commencement of this Bill. However, for those cases what is relevant is the actions that occurred on and after the commencement of this Bill. Actions occurring before commencement of the Bill are not able to be taken into account (except if they help demonstrate something that occurred on or after the commencement of this Bill).

1.245 The amendments made by Part 2 of this Schedule concerning forfeiture apply to tobacco found on or after the commencement of this item. [Schedule 1, subitem 25(5)]

1.246 The amendments made by Part 3 of this Schedule, the amendments to the investigative powers and consequential amendments, apply on and after the date of commencement of this item. [Schedule 1, subitem 25(6)]

1.247 To avoid doubt the repeal of the Excise Act offence provisions by Part 3 of this Schedule does not, after the commencement of the repeal:

•

affect liability for an offence committed under any of those sections before the commencement of this item; and

•

prevent or otherwise affect a prosecution for an offence committed under any of those sections before the commencement of that item.

[Schedule 1, subitem 25(7)]

1.248 The amendments made by Part 4 of this Schedule to define tobacco apply in relation to goods entered for home consumption after its commencement unless the term is used in a provision inserted by another Part of this Schedule - in which case it applies in the same way as that other provision applies as a result of this item. [Schedule 1, subitem 25(8)]

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Illicit tobacco offences

1.249 This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

1.250 This Bill:

•

creates a new tobacco offence regime that provides a comprehensive set of offences that can be applied to illicit tobacco that:

-

has been domestically manufactured or produced; or

-

for which the origin of production or manufacturing is unknown or uncertain;

•

creates new offences for possession of equipment for producing or manufacturing illicit tobacco;

•

set penalties under this regime at a level that deters illegal activity;

•

confirms that tobacco for which the origin of production or manufacturing is unknown or uncertain can be seized; and

•

defines tobacco to align the meaning for excise and excise-equivalent customs duty purposes so that the amount of duty on dutiable products is determined in a consistent manner.

Human rights implications

1.251 The Government is committed to reducing the harmful effects of tobacco consumption. This Bill is in line with the Tobacco Strategy 2012-2018 (endorsed by all Australian Health Ministers) to reduce the affordability of tobacco products, and with the World Health Organisation's Framework Convention on Tobacco Control which commits nations to implement policies on tobacco prices and tax increases.

1.252 This Bill engages the following human rights:

•

the right to security of the person and freedom from arbitrary detention; and

•

fair trial and fair hearing rights.

Right to security of the person and freedom from arbitrary detention

1.253 Article 9 of the International Covenant on Civil and Political Rights (ICCPR) requires that in the determination of any criminal charge that no person shall be subjected to arbitrary arrest or detention. Article 9(1) of the ICCPR states that:

Everyone has the right to liberty and security of person. No one shall be subjected to arbitrary arrest or detention. No one shall be deprived of his liberty except on such grounds and in accordance with such procedure as are established by law.

1.254 This right requires that persons not be subject to arrest and detention except as provided for by law, and provided that the law itself and the manner of its execution are not arbitrary. In all circumstances, the detention of the particular individual must be justified as reasonable, necessary and proportionate to the end that is sought.

1.255 This right is engaged by the application of possible prison sentences that may be imposed by a court under the new sections 308-10, 308-15, 308-20, 308-25, 308-30, 308-35, 308-40, 308-45 308-50, 308-110, 308-115, 308-120, 308-125, 308-130, 308-135, 308-205 and 308-210 in Schedule 1 to the TAA 1953. The penalties imposed by this Bill, and determined by a court, can include prison sentences or fines or both. This promotes freedom from arbitrary detention through encouraging proportionate sentencing by preserving judicial discretion in sentencing to take into account offenders' particular circumstances. In this way, any risk that the sentencing of lower culpability offenders could amount to arbitrary detention is removed.

1.256 Moreover, the penalties do not impose a minimum non-parole period on offenders. This will preserve a court's discretion in sentencing, and will help ensure that custodial sentences imposed by courts are proportionate and able to take into account the particular circumstances of the offence and the offender.

1.257 The inclusion of prison sentences is aimed at the legitimate objective of ensuring offenders receive sentences that reflect the seriousness of their offending.

1.258 This measure does not seek to impact on the treatment of people in detention. It merely prescribes penalties which may include prison sentences.

1.259 There are clear and serious social and systemic harms associated with illicit tobacco. There have been excise laws and customs laws for some time designed to deal with these offences which carried penalties with them. However, they were difficult to apply and could not be applied in all cases. This Bill provides for new offences which overcome these shortcomings.

1.260 The possible penalties for dealing with illicit tobacco are compatible with the human rights and freedoms recognised or declared in the international instruments listed in the definition of human rights in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. To the extent that these measures may limit those rights and freedoms, such limitations are reasonable, necessary and proportionate to achieving reductions in the illicit tobacco trade.

Fair trial and fair hearing rights

1.261 Article 14(1) of the ICCPR requires that in the determination of any criminal charge, everyone shall be entitled to a fair and public hearing by a competent, independent and impartial tribunal established by law.

1.262 The determination of any charges brought against a person under these provisions will be heard by Australian courts, which are competent, independent, and impartial tribunals that will ensure that defendants receive a fair hearing.

1.263 The right to a fair and public criminal trial or a fair and public hearing in civil proceedings is one of the guarantees in relation to legal proceedings. Fair trial and fair hearing rights include:

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that all persons are equal before courts and tribunals; and

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the right to a fair and public hearing before a competent, independent and impartial court or tribunal established by law.

1.264 Articles 14(2) to 14(7) of the ICCPR establish a series of minimum guarantees, including that a person is informed promptly of the charge, has adequate time and facilities to prepare a defence and communicate with counsel, be tried without undue delay, be tried in person, receives legal assistance, is able to cross-examine witnesses and have the assistance of an interpreter and is able to have a conviction and sentence reviewed by a higher court. These protections will apply to all prosecutions under illicit tobacco offences.

1.265 The offences in the Bill are subject to double jeopardy safeguards as required by Article 14(7) of the ICCPR. This Bill ensures that conduct occurring before the start date of the Bill cannot be subject to penalties under this Bill. Also, where conviction or acquittal has been secured in another jurisdiction for the conduct constituting the offence, that person cannot be convicted of an offence against the sections as amended in respect of that conduct.

1.266 On this basis, these offences are consistent with the rights to minimum guarantees in criminal proceedings.

Conclusion

1.267 Schedule 1 to the Bill is compatible with applicable rights and freedoms recognised or declared in the international instruments listed in the definition of human rights in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. To the extent that these measures may limit those rights and freedoms, such limitations are reasonable, necessary and proportionate to improve the operability of illicit tobacco offences and promote the intention of the Criminal Code.