Customs Amendment (New Zealand Rules of Origin) Bill 2011

Bills Digest no. 15 2011–12

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WARNING:This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Margaret Harrison-Smith
Law and Bills Digest Section
26 July 2011

Contents
Purpose
Background
Financial implications
Key provisions
Concluding comments


Date introduced:  16 June 2011
House:  House of Representatives
Portfolio:  Home Affairs 
Commencement:  Sections 1 to 3: the day the Bill receives the Royal Assent. Schedule 1: the later day of the day on which the Act receives the Royal Assent and the day on which the amendments to Article 3 (Rules of Origin) (ROO) of the Australia New Zealand Closer Economic Relations Trade Agreement (ANZCERTA), agreed to by Australia and New Zealand in 2010, enter into force.[1] The responsible Minister must announce by notice in the Gazette the day on which those amendments enter into force.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bills page, which is at http://www.aph.gov.au/bills/. When Bills have been passed they can be found at ComLaw, which is at http://www.comlaw.gov.au/.

Purpose

The purpose of the Customs Amendment (New Zealand Rules of Origin) Bill 2011 (the Bill) is to amend the Customs Act 1901 (Customs Act) to give effect to proposed amendments to the ROO requirements in Article 3 of ANZCERTA.[2]

Background

Australia New Zealand Closer Economic Trade Relations Agreement

ANZCERTA was signed on 28 March 1983 and has become the cornerstone of the trade and economic relationship of Australia and New Zealand. The objectives of ANZCERTA are to:

  • strengthen the broader relationship between Australia and New Zealand
  • develop closer economic relations between the Member States through a mutually beneficial expansion of free trade between New Zealand and Australia
  • eliminate barriers to trade between Australia and New Zealand in a gradual and progressive manner under an agreed timetable and with a minimum of disruption, and
  • develop trade between New Zealand and Australia under conditions of fair competition.
Rules of Origin

Under ANZCERTA, goods considered to originate in the Australia-New Zealand Free Trade Area are exempt from tariffs or quantitative restrictions. The rules required to determine the origin of particular goods within this area are the ROO rules set out in Article 3.

Amendments to ANZCERTA ROO requirements, which came into effect on 1 January 2007 (2007 ROO), changed the method by which Australia and New Zealand determine whether goods imported from the other country meet the ROO requirements.[3]

Prior to the 2007 ROO amendments, assessments for originating product value were calculated on the factory cost of producing particular goods, known as the Regional Value Content (RVC). The 2007 amendments supplanted this system with the Change-in-Tariff-Classification (CTC) system which applies benefits (duty free access) consistently to products qualifying as originating goods in all tariff lines.

Under the CTC approach, a product will generally be covered by ANZCERTA as long as the manufacturing process in Australia or New Zealand involves a specified change in its classification under the global Harmonised Commodity Description and Coding System.[4] The CTC system only applies to non-originating materials. Non-originating materials are:

Goods that have been sourced outside New Zealand or Australia that are used in the production of other goods are non-originating materials.  Goods sourced from within Australia or New Zealand that have not fulfilled the requirements of Division 1E (New Zealand Originating Goods) of Part VIII of the Customs Act and that are used in the production of other goods are also non-originating materials. All non-originating materials used to produce other goods may not have the same classification … as the final goods into which they are produced. This means that the goods must be classified under one tariff classification before the production process and under a different tariff classification after the production process. This approach ensures that sufficient transformation of materials has occurred within New Zealand, or New Zealand and Australia, to justify the claim that the goods originate in New Zealand.[5]

The factory cost RVC was retained for a number of items as an additional requirement to be met, effectively meaning that the rule for those products was unchanged.[6] This element of the 2007 ROO was implemented by the insertion of a provision in the Customs Act providing for the continuing operation of the RVC for a further five years from 1 January 2007, until 1 January 2012.[7]

In negotiating the 2007 ROO, Australia and New Zealand agreed to include a provision in ANZCERTA requiring the ROO to be reviewed within three years of the new rules taking effect. Accordingly, Article 3.27 of ANZCERTA contains the following paragraph:

The Member States shall complete a review within three years of entry into force of this Article to address any differences between the Member States arising from the operation of this Article.

Review and the proposed amendments to ANZCERTA ROO

To meet the review obligation imposed by Article 3.27, a joint Australian and New Zealand review was commenced in November 2008 and completed in March 2010 (the Review).  The Review recommended amendments to Article 3 of ANZCERTA.

The National Information Analysis (NIA) prepared by the Government in relation to the proposed amendments to Article 3 indicates the amendments to Article 3 recommended by the Review included:

  • the addition of minimal operations and processes provisions
  • the addition of ‘restoring’ and ‘renovation’ to the definition of ‘production’
  • the addition of definitions of aquaculture and product specific rules, and
  • some reordering of the text, and other minor amendments of wording to simplify the textual presentation.[8]

The Review also recommended amendments to the Product Specific Rules (PSR) Schedule in Annex G of ANZCERTA for around 700 tariff lines.[9] These tariff lines are currently still subject to the operation of the pre-2007 ROO factory cost RVC regime.[10]

The aim of the recommendations made by the Review was to simplify the rules determining the eligibility for preferential treatment, thereby reducing ‘the administrative burden for both Australian and New Zealand exporters’ and making the rules more ‘user friendly’.[11]

In this, the amendments would bring ANZCERTA ROO into line with a number of bilateral and plurilateral Free Trade Agreements concluded by Australia and New Zealand since 1 January 2007.[12] Both countries have agreed that, where appropriate, ANZCERTA ROO should be brought into line with ROO negotiated under these other agreements.[13]

The NIA for the proposed amendments to Article 3 says that those amendments would ‘complement [the] proposed amendments to the PSR’[14], and that they would ‘not give rise to new substantive obligations, but instead involve technical amendments to Australia’s existing obligations with regard to ANZCERTA ROO’.[15]

To give effect to the proposed treaty action with respect to Article 3, amendments to the Customs Act are required.  As mentioned, the purpose of this Bill is to amend the Customs Act to achieve this.

Implementation of the proposed treaty action with respect to Schedule G would require amendments to the Customs (New Zealand Rules of Origin) Regulations 2006 (Customs Regulations).  It is anticipated that owing to Parliamentary timetables, the amendments to the Customs Regulations will be made before the proposed amendments to the Customs Act.[16] For this reason, separate treaty actions are proposed for the two sets of amendments.[17]

Following amendment to the Customs Act and the Customs Regulations, the proposed amendments to Article 3 and Schedule G of ANZCERTA would be brought into force by separate exchanges of notes between Australia and New Zealand.

Consultation

The NIA indicates that the proposed amendments to ANZCERTA have been the subject of extensive discussion both within Government[18] and with Australian business and industry
bodies.[19] The states and territories are also said to have been consulted through the Commonwealth-State/Territory Standing Committee on Treaties.[20]

Treaties Committee report

Drafts of the Exchange of Letters Constituting an Agreement between the Government of Australia and the Government of New Zealand to amend Article 3 of the Australia New Zealand Closer Economic Relations Trade Agreement were referred to the Joint Standing Committee on Treaties (JSCOT) on 16 November 2010. JSCOT’s report was tabled on 11 May 2011.[21]

Industry concerns

JSCOT’s report indicates that industry concerns have centred around ‘Australian Structured Men’s Apparel’, which includes men’s suits.  This tariff line was among those subject to the transitional provisions retained by the 2007 ROOS.  The report indicates that these provisions had effectively required New Zealand suit manufacturers to continue to meet the pre-2007 50% regional value requirement.  Industry representatives:

…saw this as an appropriate offset to New Zealand’s competitive advantages, such as the capacity to access better quality cloth at lower price points, the high Australian dollar and lower operating costs.[22]

In evidence before JSCOT, a spokesperson for the Department of Foreign Affairs and Trade (DFAT) indicated that during the Review:

Australian industry bodies were consulted extensively in the development of the proposal, initially in February 2009 and then throughout the review process. In the main, no opposition was expressed to the changes. However, the major manufacturers of men’s suits in Australia opposed the removal of ex-factory regional value content from the product specific rules of origin that is proposed to apply to men’s suits from 1 January 2012.[23]

DFAT also indicated that the impact of the removal of the exemption would be ‘that some items going into New Zealand [would be] duty free’, and that:

Some intermediate items that come into Australia [would be] subject to tariffs that may affect some of the production of some items, in particular men’s suits, where fine quality woollen cloth goes into New Zealand free, but we [would] still have a tariff on certain textile lines.[24]

Consistent with this evidence, JSCOT received evidence from industry representatives that the proposed removal of the exemption would disproportionately benefit the New Zealand suit manufacturers.[25]

Specifically, JSCOT received evidence that while Australian suits exported to New Zealand attract the same ‘duty drawback’ benefits under ANZCERTA, Australian made products sold in the domestic market are at a disadvantage:

What we cannot understand is why this structure should be set up in such a way that it disadvantages Australian manufacturers…If there is going to be duty on our inputs, then there should be some constraint on what is coming out of New Zealand on a duty free basis so that at least the playing field is relatively level.[26]

Although acknowledging that:

…the issue constitutes an anomaly under the agreement: Australian manufacturers would continue to pay five per cent tariffs on fabrics without offsets, while New Zealand importers would be reimbursed under the ‘duty drawback’.[27]

DFAT advised JSCOT that this would be rectified on implementation of ANZCERTA changes planned for 2012.[28] JSCOT noted however, that the Government’s intention had not been communicated to industry representatives.[29]

JSCOT also sought supplementary advice on the potential economic impact on the structured apparel sector under the proposed ROO amendments from the Department of Innovation, Industry, Science and Research.  The Department indicated that after considering the situation, it ‘had concluded that New Zealand suit imports were in decline, suggesting minor revenue impacts’.[30]

JSCOT recommendations

Ultimately, JSCOT supported the proposed amendments to Article 3 and Annex G and recommended ‘the taking of binding treaty action’.[31]

However, the Committee also recommended that the Minister of Innovation, Industry, Science and Research report to the Committee ‘on the measures implemented to address the impact of duty drawback on Australia’s Structured Apparel sector under the proposed amendments to Article 3 and Annex G’.[32]

Financial implications

The Explanatory Memorandum states that the Bill has no financial implications.

Key provisions

The Explanatory Memorandum lists the proposed amendments to be made to Division 1E of Part VIII of the Customs Act.[33]  Division 1E relates to New Zealand originating goods.

Part 1— New Zealand originating goods

Item 1 amends section 153ZIA which is the simplified outline to Division 1E of Part VIII which sets out the rules for determining whether the goods are New Zealand originating goods or not. The wording is amended to include not only wholly obtained goods but also goods produced in New Zealand or in New Zealand and Australia.

Item 2 amends section 153ZIA by inserting a new simplified description of new Subdivision GA of Division 1E which provides that goods are not New Zealand originating goods merely because of certain operations. New section 153ZIIA sets out these operations.

Item 3 inserts a proposed definition of aquaculture in subsection (1) of 153ZIB (Interpretation). The Explanatory Memorandum states that:

‘Aquaculture’ is defined as having the same meaning given by Article 3 to the Agreement. One of the agreed amendments to the [sic] Article 3 to the Agreement is the inclusion of a definition of ‘aquaculture’. While aquaculture has been an eligible activity under the Agreement from 1 July 2007, the previous version of the Agreement did not include a specific definition of the term. This new definition will provide clarity and certainty as to the scope of this activity.[34]

Item 4 repeals and replaces the current definition of manufacture in subsection 153ZIB(1) with a proposed definition defining manufacture as ‘the creation of an article essentially different from the matters or substances that go into that creation’.

The first part of the current definition in subsection 153ZIB(1) is cast in identical terms to those of the proposed new provision.  However, the existing definition also sets out three activities to which the new definition does not apply:

  • restoration or renovation processes such as repairing, reconditioning, overhauling or refurbishing
  • minimal operations of pressing, labelling, ticketing, packaging and preparation for sale, whether conducted alone or in combination with each other, and
  • quality control inspections.

The Explanatory Memorandum explains that ‘for ease of reading’, the exclusions from the definition of manufacture are replicated in proposed section 153ZIIA (see Item 9).

This proposed amendment to the definition of manufacture gives effect to the same proposed amendments to this definition in Article 3 of ANZCERTA.

Item 5 amends the definition of produce in subsection 153ZIB(1) by adding the proposed words ‘or produced’ after the word ‘obtained’.

The proposed amendment to the definition of produce in the Customs Act would give effect to the same proposed amendments to this definition in Article 3 of ANZCERTA.

Proposed amendments — Subdivision B (Goods wholly obtained in New Zealand or New Zealand and Australia), Division 1E, Part VIII

Subdivision B sets out the circumstances in which goods are wholly obtained in New Zealand or in New Zealand and Australia. These circumstances include mining, primary production and fishing.  They also include production activities related to these activities.  For example, the catch of a New Zealand-registered fishing boat would constitute wholly obtained goods, as would goods produced from the catch.

Item 6 repeals and replaces the heading to Subdivision B to include the proposed words ‘or produced’ in the heading after the word ‘obtained’.

Items 7 and 8 amend subsections 153ZIC(1) and (2) by inserting in each subsection the proposed words ‘or produced’ after the word ‘obtained’.

The Explanatory Memorandum states that the purpose of amendments proposed by items 6, 7
and 8 ‘is merely to ensure the use of consistent language across Subdivision B of Division 1E’.[35]

The amendments proposed by items 6, 7 and 8 would give effect to the same proposed amendments to Article 3 of ANZCERTA.

Proposed amendments — Subdivision G (Goods last processed in New Zealand) of Division 1E, Part VIII

Subdivision G restates the rules that determined whether goods were the manufacture of New Zealand.  These rules were moved to Subdivision G by the Customs Legislation Amendment (New Zealand Rules of Origin) Act 2006 so that all of the rules that determine whether goods are New Zealand originating goods are located in the same Division.

Consistent with Article 3 (1) (c) (iii) of the Agreement, as implemented by section 153ZIJ, these rules will cease to operate on 1 January 2012.

Subsection 153ZII (1) currently provides that goods are of New Zealand origin if the last process of their manufacture was performed in New Zealand and the qualifying expenditure on the goods is at least 50 per cent of the factory cost of the goods.

Item 9 inserts proposed paragraph 153ZII(1)(aa), which provides that the last process of manufacture cannot be a restoration or renovation process, for example, repairing, reconditioning, overhauling or refurbishing.

As noted above, this limitation is currently included in the definition of ‘manufacture’ in subsection 153ZIB(1).  However, item 4 proposes its removal from that definition.  The effect of proposed paragraph 153ZII(1)(aa) would therefore be simply to relocate the limitation from the definition of manufacture in subsection 153ZIB(1) to subsection 153ZII(1).

These proposed amendments to the Customs Act would give effect to the same proposed amendments to Article 3 of ANZCERTA.

Proposed Subdivision GA—Non-qualifying operations

Item 10 inserts the proposed heading ‘Subdivision GA—Non-qualifying operations’, and proposed section 153ZIIA which provides that goods would not be New Zealand originating goods under Division 1E merely because any of the operations specified in proposed subparagraphs 153ZIIA(1)(a)–(f) took place in New Zealand.

Proposed paragraphs 153ZIIA(1)(d) and (e) relocate exemptions for ‘minimal operations of pressing, labelling, ticketing, packaging and preparation for sale etc.’, and ‘quality control inspections’ which item 4 proposes to delete from the definition of manufacture in subsection 153ZIB(1).

Proposed paragraph 153ZIIA(1)(b) reflects the proposed removal by item 5 of the word ‘disassembly’ from the definition of produce.

Proposed subsection 153ZIIA(2) provides that the proposed new section applies despite any other provision of Division 1E.

The inclusion in the Customs Act of proposed section 153ZIIA would give effect to the same proposed amendments to Article 3 of ANZCERTA.

Application of proposed Part 1 amendments

Item 11 provides that the amendments apply in relation to goods imported into Australia:

  • on or after the commencement of Part 1[36], and
  • before the commencement of Part 1, where the time for working out the rate of import duty on the goods had not occurred before the commencement of Part 1.  This means that if goods imported from New Zealand before the commencement date are still in a Customs licensed warehouse before that date, the proposed new rules would apply to them.
Part 2—Verification powers
Proposed amendments to Division 4D (Exportation of Goods to New Zealand) of Part VI of the Customs Act (The exportation of goods)

Division 4D of Part VI of the Customs Act sets out obligations, including record keeping obligations, that apply to people in Australia who export goods to New Zealand and who wish to obtain preferential treatment for those goods in that country.  There are also obligations imposed by the Division on people who produce or manufacture such goods.

The following amendments are made to section 126AJA (Definitions) by items 12, 13 and 14:

  • the proposed repeal and replacement of the definition of manufacture with the following definition ‘manufacture means the creation of an article essentially different from the matters or substances that go into that creation’
  • the proposed addition of the phrase ‘where the last process was not a restoration or renovation process such as repairing, reconditioning, overhauling or refurbishing’ to the definition of principal manufacturer, and
  • the proposed addition of the phrase ‘restores or renovates’ to the definition of producer.

The proposed amendments are consequential in nature.  They would bring the definitions into line with those proposed by items 4, 5 and 9.

Application of proposed Part 2 amendments

Item 15 provides that the amendment proposed in Part 2 of the Bill would apply to goods exported to New Zealand on or after the commencement of Part 2 whether or not the goods were produced or manufactured before, on or after that day.[37]

Concluding comments

The Bill appears to achieve its objective-the implementation of the proposed amendments to Article 3 of ANZCERTA.  However, the report of the Joint Standing Committee on Treaties illustrates the importance of ongoing analysis and liaison with industry bodies.

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.


[1].      The text of the proposed amendments to Article 3 is available on the Department of Foreign Affairs Australian Treaty Series database, [2010] ATNIF 31, viewed 4 July 2011 http://203.6.168.90/fta/anzcerta/downloads/Proposed_amended_ANZCERTA_Article_3_June_2010.pdf

[2].      Australia New Zealand Closer Economic Relations Trade Agreement [1983] ATS 2, viewed 4 July 2011, http://www.info.dfat.gov.au/Info/Treaties/treaties.nsf/AllDocIDs/F02DA0C25D898BADCA256B910016BF67

[3].      The 2007 Roo was implemented by the Customs Legislation Amendment (New Zealand Rules of Origin) Act 2006, viewed 4 July 2011, http://www.comlaw.gov.au/Details/C2006A00166

[4].      United Nations International Trade Statistics Knowledgebase, viewed 4 July 2011, http://unstats.un.org/unsd/tradekb/Knowledgebase/Harmonized-Commodity-Description-and-Coding-Systems-HS

[5].      Explanatory Memorandum, Customs Legislation Amendment (New Zealand Rules of Origin) Bill 2006, p. 25, viewed 4 July 2011, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillhome%2Fr2648%22 .

[6].      National Interest Analysis [2010] ATNIA 34, Exchange of Letters Constituting an Agreement between the Government of Australia and the Government of New Zealand to amend Article 3 of the ANZCERTA done at Canberra on 28 March 1983 [2010], ATNIF 31, [6], viewed 4 July 2011, http://www.aph.gov.au/house/committee/jsct/21june2010/treaties/anzcerta_article_3_nia.pdf .

[7].       This provision is referred to further in the Main Provisions section of this Bills Digest.

[8].       National Interest Analysis, op. cit. [4].

[9].      Mr Roy Clogstoun, Department of Foreign Affairs and Trade, Official Committee Hansard, Joint Standing Committee on Treaties, Reference: Treaties referred on 16 November 2010, 22 November 2010, p. 2, viewed 8 July 2011, http://parlinfo.aph.gov.au/parlInfo/download/committees/commjnt/13382/toc_pdf/7854-2.pdf;fileType=application%2Fpdf#search=%22customs%20rules%20of%20origin%22

[10].     Ibid.

[11].     Ibid.

[12].    National Interest Analysis, op. cit., [9]. The agreements include the Agreement Establishing the ASEAN-Australia-New Zealand Free Trade Area (AANZFTA), the Australia-Chile Free Trade Agreement and the New Zealand-China Free Trade Agreement.

[13].     Ibid.

[14].     Ibid., [4].

[15].     Ibid., [11].

[16].     Ibid.

[17].     Ibid.

[18].    Ibid., Attachment on Consultation.Departments and agencies consulted were the Departments of Foreign Affairs and Trade; Innovation, Industry, Science and Research; Agriculture, Forestry and Fisheries; Prime Minister and Cabinet; and the Australian Customs and Border Protection Service.

[19] .   Ibid. For example, the Australian Chamber of Commerce and Industry and the Australian Industry Group, are also said to have been consulted extensively in the development of the proposal.

[20].     Ibid.In all, thirteen Australian business and industry bodies were consulted.

[21].    Joint Standing Committee on Treaties, Review into Treaties tabled on 24 and 25 November 2010 and 1 March 2011 and Treaties referred on 16 November 2010 (Part 2), Report No. 116, Chapter 6, ‘Exchange of Letters Constituting an Agreement between the Government of Australia and the Government of New Zealand to amend Article 3 of the Australia New Zealand Closer Economic Relations Trade Agreement’, p. 31, viewed 4 July 2011. http://www.aph.gov.au/house/committee/jsct/1march2011/report.htm

[22].     Ibid., [6.15], p. 34.

[23].     Mr Clogstoun, op. cit., p.2.

[24].     Joint Standing Committee on Treaties Report, op. cit.

[25].    Council of Textile and Fashion Industries Australia, Joint Standing Committee on Treaties Report, op. cit., [6.16], p. 35.

[26].     Stafford Group, ibid., [6.16], p. 36.

[27].     Ibid., [6.19], p. 35.

[28].     Ibid.

[29].     Ibid., [6.20], p.35

[30].     Ibid., p. 36.

[31].     Ibid., Recommendation 4, p. 39.

[32].    Ibid., Recommendation 5, p. 40. It was a condition of the 2007 ROO amendments that this arrangement be subject to review.

[33] .    Explanatory Memorandum (Customs Amendment (New Zealand Rules of Origin) Bill 2011, p. 2.

[34].     Explanatory Memorandum, Customs Amendment (New Zealand Rules of Origin) Bill 2011, p. 5.

[35].     Ibid., p. 6.

[36].    Part 1 would commence in accordance with the proposed commencement of Schedule 1: see proposed clause 2 of the Bill and the ‘Commencement’ section of this Digest.

[37].    Part 2 would commence in accordance with the proposed commencement of Schedule 1: see proposed clause 2 of the Bill and the ‘Commencement’ section of this Digest.

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