BILLS DIGEST NO. 35, 2018–19              18 October 2018

Customs Amendment (Collecting Tobacco Duties at the Border) Bill 2018

Phillip Hawkins
Economics Section

Cat Barker
Foreign Affairs, Defence and Security Section

Date introduced: 19 September 2018

House:  House of Representatives

Portfolio: Home Affairs

Commencement: Sections 1 to 3 commence on Royal Assent; Schedule 1 commences on the later of 1 July 2019 or the day after Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at October 2018.

Purpose of the Bill

The purpose of the Customs Amendment (Collecting Tobacco Duties at the Border) Bill 2018 (the Bill) is to change the point of taxation for imported tobacco to combat illicit tobacco entering the black market through leakage from customs warehouses.

Structure of the Bill

This Bill has one Schedule, which is divided into two parts. Part 1 amends the Customs Act 1901 to change the point at which excise-equivalent customs duty applies to imported tobacco products. Part 2 contains application and transitional provisions.

Background

The proposal

In the 2018–19 Budget the Government announced a package of measures that seek to reduce illicit tobacco in Australia through smuggling, leakage from licensed warehouses and domestic production.[1] The Bill seeks to implement one of the measures—changing the point of taxation for tobacco imports.

Currently importers can defer the timing of customs duty applied to imported goods (such as alcohol and tobacco) by transferring them to a warehouse licensed under section 79 of the Customs Act. The customs duty becomes payable once the goods are transferred out of the warehouse and entered for home consumption. Entering goods for ‘home consumption’ means releasing imported goods from customs control. This requires an import declaration to be made in respect of those goods.[2] This is the point at which any customs duties become payable.

The Bill seeks to change the Customs Act to provide that tobacco products will need to be entered for home consumption and customs duties paid as soon as they are imported, removing the ability of tobacco importers to defer taxation using warehousing arrangements.

This approach was recommended by the Black Economy Taskforce in its final report. It argued that this measure would minimise the opportunity for duty to be avoided by distributing tobacco from warehouses illicitly, prior to the imposition of tax.[3]

In addition, customs duty will be applied to tobacco products which have been imported but which are being stored in a licensed warehouse as at 1 July 2019. The importer will be able to enter into an arrangement that allows one year to pay the customs duty amount.[4] This will apply to all imported tobacco products stored in warehouses, including legally imported products.

Customs duty on tobacco products includes ‘excise-equivalent’ customs duty, which is applied on imported tobacco at the same rate as the excise that would apply on tobacco manufactured in Australia. To ensure consistent treatment between imported and domestically manufactured tobacco, the Excise Tariff Amendment (Collecting Tobacco Duties at Manufacture) Bill 2018 and Schedule 3 of the Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018 propose to remove the ability of domestic manufacturers to defer the payment of excise, by changing the taxing point to the time the products are manufactured rather than the point the manufacturer enters them for home consumption.[5] Australia does not currently manufacture tobacco, but these changes would apply to any tobacco manufactured in the future.[6]

Illicit tobacco in Australia

Illicit tobacco includes both unbranded tobacco and branded products on which excise, customs duty and GST have not been paid.[7] The size of Australia’s illicit tobacco market is not known, and estimates of the market vary considerably.[8] The Department of Home Affairs and the Australian Taxation Office have reportedly been working to develop a more accurate estimate of Australia’s illicit tobacco market.[9]

National Drug Strategy Household Survey

Some information on the extent to which illicit tobacco is consumed in Australia is available from the National Drug Strategy Household Survey, undertaken by the Australian Institute of Health and Welfare. The latest data available is from the 2016 survey, which found that:

•       16.5 per cent of smokers had smoked unbranded tobacco (either loose or in cigarette form) in their lifetime, and 3.8 per cent currently used it and

•       13.0 per cent of smokers had seen tobacco products without plain packaging in the last three months, and 5.5 per cent had purchased such a product in that period.[10]

The survey includes different questions asked about unbranded tobacco and tobacco products without plain packaging, meaning these results cannot be combined to provide an estimate of the overall proportion of the total tobacco market that is made up of illicit tobacco.

Industry-sponsored estimates

For several years, the tobacco industry has commissioned annual reports on illicit tobacco in Australia. The latest of these reports, produced by KPMG for the 2017 calendar year, estimated that illicit tobacco comprised 15.0 per cent of the total consumption of tobacco in Australia that year.[11] Government departments have assessed the industry-funded estimates as unreliable ‘due to a number of methodological shortcomings’, including ‘unrepresentative sample sizes, restrictive survey measures and drawing upon unreliable secondary sources to validate the results’.[12]

Other estimates

Other recent estimates also differ substantially. A 2015 Australian study based on national cross-sectional surveys conducted between April 2012 and March 2014 estimated the current prevalence of use of illicit tobacco of any kind to be around three per cent.[13]

In a submission to a parliamentary committee, Rohan Pike Consulting estimated that in revenue terms, illicit tobacco would represent 28.2 per cent of the total tobacco market in Australia as at September 2016.[14]

Proportion of illicit tobacco originating from warehouse leakage

In its final report, the Black Economy Taskforce stated that during consultations, it was told of ‘several bonded warehouses which have been used to distribute illicit tobacco’.[15] According to Rohan Pike Consulting, the Tobacco Strike Team found:

… many millions of cigarettes are being imported into ATO-regulated warehouses on a “duty delayed” basis and are then diverted into home consumption without the duty being paid. These warehouses are being exploited by organised crime groups with relative ease …

… cigarettes are not being stolen from these warehouses, they are being smuggled out of them via a variety of methods involving poor, false or non-existent record keeping …[16]

While the total size of the illicit tobacco market in Australia remains unknown, in his second reading speech for the Bill, the Minister for Immigration, Citizenship and Multicultural Affairs stated that leakage from licensed warehouses to the black market ‘contributes to around a quarter of illicit tobacco in Australia’.[17]

Other legislation

The measure in this Bill complements a number of other legislative changes that are intended to combat illicit tobacco. These include:

•       the Customs Amendment (Illicit Tobacco Offences) Bill 2018 which received Royal Assent on 31 August 2018 and the Treasury Laws Amendment (Illicit Tobacco Offences) Bill 2018, which received Royal Assent on 24 August 2018. Together these Bills created new offences and increased penalties and enforcement powers for tobacco offences[18] and

•       the Excise Tariff Amendment (Collecting Tobacco Duties at Manufacture) Bill 2018 and Schedule 3 of Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018, which as discussed above, propose to change the point of taxation for domestically manufactured tobacco.

Committee consideration

Senate Standing Committee for the Scrutiny of Bills

At the time of writing the Senate Standing Committee for the Scrutiny of Bills had not considered this Bill.

Policy position of non-government parties/independents

The Shadow Minister for Immigration and Border Protection, Shayne Neumann, expressed support for these changes in his second reading speech on the Customs Amendment (Illicit Tobacco Offences) Bill 2018. However, he criticised the Government for relying on a one-off increase in customs duty, from the taxation of tobacco products in warehouses at 1 July 2019, to return the Budget to surplus in 2019–20 (see discussion below).[19]

Position of major interest groups

The Department of Home Affairs consulted on a draft of the Bill and explanatory materials in August 2018.[20] At the time of writing no submissions have been published.

Financial implications

The proposed changes in the Bill are expected to lead to an increase in revenue of $3.73 billion This revenue component consists of two elements:

•       applying customs duties to tobacco products already stored within warehouses. This has the effect of bringing forward tobacco tax revenue that would have otherwise been paid in future years. This component is expected to have a one-off financial impact in 2019–20 and

•       additional revenue from reducing tax avoidance through the illicit trade in tobacco. This component is expected to have an ongoing financial impact.[21]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[22]

Parliamentary Joint Committee on Human Rights

In its report dated 17 October 2018, the Parliamentary Joint Committee on Human Rights stated that the Bill does not raise human rights concerns.[23]

Key issues and provisions

Item 1 of the Bill adds a new definition of tobacco products to existing subsection 4(1) of the Customs Act to allow for consistent referencing of such products in the Act. Tobacco products are defined with reference to Schedule 3 of the Customs Tariff Act 1995 and include cigarettes, cigars, cheroots, cigarillos, loose tobacco (manufactured and unmanufactured), tobacco extracts and essences. The definition does not include tobacco substitutes which are non-dutiable.[24]

Part 1—Amendments

Warehousing of tobacco products

Customs duties (including excise-equivalent customs duties) are applied when the owner of those goods enters them into Australia for home consumption.[25] The owner of the goods may store them in a licensed customs warehouse indefinitely without paying customs duties until they are entered for home consumption.[26] Warehoused goods are held in customs control until they are entered for home consumption, or the goods are exported.[27]

Items 2 and 3 amend existing subsection 68(2) of the Customs Act to remove the ability of owners of tobacco products to warehouse those goods without entering them for home consumption and paying customs duties. Item 4 amends subsection 68(3) to provide that tobacco products must be entered for home consumption when a ship or aircraft carrying the goods first arrives at the port or airport where the goods are to be discharged. These changes have the effect of removing the ability of importers of tobacco products to defer the payment of customs duties by warehousing the goods.

Recurring payment of customs duties

Section 69 of the Customs Act allows for permission to be granted to importers to pay customs duties on certain goods, including tobacco products, on a recurring seven day basis (or for a small business, a recurring monthly basis). During the seven day period (or monthly period) the goods can be entered into home consumption before the duty is paid at the end of the period. This effectively allows deferral of customs duties.

Item 6 inserts proposed subsection 69(1A) to provide that such arrangements can no longer be approved for tobacco products. This is consistent with applying customs duties to these products as soon as they are imported.

Warehouse Declarations

Subdivision D of Division 4 of Part IV of the Customs Act requires importers to declare certain information to the Department of Home Affairs in respect of goods that are intended to be entered for warehousing and makes importers liable to pay certain warehousing charges (among other requirements).

Item 7 inserts proposed section 71DG which provides that this Subdivision does not apply to tobacco products as they cannot be warehoused.

Warehouse licensing

Section 79 of the Customs Act provides for the granting of warehouse licences. The requirements for applying for a warehouse licence are specified at section 80 and the conditions placed on warehouse licences are specified at section 82.

Item 9 inserts proposed subsection 80(2) to provide that an application for a warehouse licence cannot be made for the use of storing tobacco products.

Item 10 inserts proposed subsection 82(2) to make it a condition of a warehouse licence that the warehouse not be used to store tobacco products unless customs duties have been paid.

Part 2—Application and transitional provisions

Application provisions

Schedule 1 of the Bill is intended to commence on 1 July 2019 (unless the Bill has not passed Parliament by this date, in which case it will commence on the day after Royal Assent).[28]

Item 12 includes the application provisions for the amendments in Part 1 of Schedule 1.

Subitem 12(1) provides that the proposed amendments made by items 2, 3, 4, 5 and 7, which prevent customs duty being deferred on tobacco products through warehousing arrangements, apply in relation to:

•       tobacco imported into Australia on or after the commencement of these items or

•       tobacco products that have been imported into Australia before commencement of the items but which have not been entered for home consumption or into a warehouse before the commencement of these items.

Subitem 12(2) provides that the proposed changes at items 6, 8 and 9, which prevent applications for new warehouses arrangements for tobacco products, apply in relation to applications:

•       made on or after the commencement date or

•       which are pending at the time the items commence.

Subitem 12(3) provides that the proposed amendment at item 10, which amends the conditions for warehouse licences to preclude tobacco products being stored in a warehouse with no customs duty paid, applies seven days after the commencement of the item. This allows tobacco products to be stored in the warehouse without customs duty being paid for seven days after the Act’s commencement without the licence holder breaching their licence obligations.

For a warehouse that is a duty free shop, or a warehouse that only warehouses ship’s stores and/or aircraft’s stores, then the tobacco products can be stored for six months from commencement before breaching licence obligations.[29]

Transitional provisions

The transitional provision at item 13 deals with tobacco that is warehoused at the time the Bill commences. The provision allows seven days for the importer of the tobacco products to:

•       enter the goods for home consumption and pay all outstanding customs duties or

•       enter into an arrangement with the Comptroller-General of Customs to pay any outstanding customs duties over the following twelve months.[30]

This transitional provision results in a one-off bring forward of customs duties to 2019–20, that would have otherwise been paid as the goods were released from the warehouse to be entered for home consumption. The transitional provisions at item 13 do not apply to products that are warehoused in duty free stores or in ship’s stores or aircraft’s stores.

The transitional provisions at item 14 provide that any permission in force under section 69 of the Customs Act for a recurring (weekly or monthly) payment of customs duties on tobacco products entered for home consumption, ceases to be in effect after the commencement of the Bill.

The transitional provision at item 15 provides that any permission to move tobacco products into a warehouse that was granted prior to the commencement of the Bill ceases to have effect following commencement.

The transitional provision at item 16 provides that a warehousing licence in force immediately before commencement, for the purpose of solely storing tobacco products, cannot be renewed following commencement of the Bill.

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[1].              Australian Government, Budget measures: budget paper no. 2: 2018–19, p. 12.

[2].              Customs Act 1901, section 68(3A).

[3].              Black Economy Taskforce, Final report, The Treasury, October 2017, p. 311.

[4].              Explanatory Memorandum, Customs Amendment (Collecting Tobacco Duties at the Border) Bill 2018, p. 2.

[5].              Explanatory Memorandum, Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018 [and] Excise Tariff Amendment (Collecting Tobacco Duties at Manufacture) Bill 2018, p. 21.

[6].              Ibid., pp. 20–25.

[7].              Australian Institute of Health and Welfare (AIHW), National Drug Strategy Household Survey 2016: detailed findings, AIHW, 2017, p. 29.

[8].              Department of Immigration and Border Protection, Submission to Parliamentary Joint Committee on Law Enforcement (PJCLE), Inquiry into illicit tobacco, [Submission no. 77], n.d., p. 3; Department of Health, Submission to PJCLE, Inquiry into illicit tobacco, [Submission no. 157], February 2016, p. 3.

[9].              Department of Immigration and Border Protection, Submission to PJCLE, op. cit., p. 3; Department of Health, Submission to Australian Competition and Consumer Commission (ACCC), British American Tobacco Australia Limited & Ors Application for Authorisation A91550, November 2016, p. 4.

[10].              AIHW, National Drug Strategy Household Survey 2016: detailed findings, op. cit., pp. 29–30; AIHW, 2016 National Drug Strategy Household Survey (sample only), AIHW, 2016, questions D31 and D32.

[11].              KPMG, Illicit tobacco in Australia: 2017 full year report, KPMG, 20 April 2018, p. 48.

[12].              Department of Immigration and Border Protection, Submission to PJCLE, op. cit., p. 3. See also Department of Health and Ageing, Submission to Senate Standing Committee on Legal and Constitutional Affairs, Inquiry into the Customs Amendment (Smuggled Tobacco) Bill 2012, [Submission no. 7], July 2012, p. 2; Department of Health, Submission to ACCC, op. cit., pp. 3–4. The KPMG reports (for the years 2012 onwards) rely on the same methodology employed by PricewaterhouseCoopers and Deloitte in earlier years.

[13].              M Scollo, M Zacher, K Coomber and M Wakefield, ‘Use of illicit tobacco following introduction of standardised packaging of tobacco products in Australia: results from a national cross-sectional survey’, Tobacco Control, 24, 19 March 2015,
pp. 1176–81.

[14].              Rohan Pike Consulting, Submission to PJCLE, Inquiry into illicit tobacco, [Submission no. 166], 12 January 2017, pp. 21–22. Mr Pike previously worked for the Australian Federal Police and the Australian Border Protection and Customs Service/Australian Border Force (in the case of the latter, in the Tobacco Strike Team).

[15].              Black Economy Taskforce, op. cit., p. 311.

[16].              Rohan Pike Consulting, Submission, op. cit., p. 13.

[17].              D Coleman, ‘Second reading speech: Customs Amendment (Collecting Tobacco Duties at the Border) Bill 2018’, House of Representatives, Debates, (proof), 19 September 2018, p. 11.

[18].              M Biddington, Customs Amendment (Illicit Tobacco Offences) Bill 2018, Bills digest, 9, 2018–19, Parliamentary Library, Canberra, 2018, p. 2.

[19].              S Neumann, ‘Second reading speech: Customs Amendment (Illicit Tobacco Offences) Bill 2018’, House of Representatives, Debates, (proof), 14 August 2018, p. 1.

[20].              Department of Home Affairs, Exposure Draft of the Customs Amendment (Collecting Tobacco Duties at the Border) Bill 2018 for public consultation, August 2018.

[21].              Explanatory Memorandum, Customs Amendment (Collecting Tobacco Duties at the Border) Bill 2018, op. cit., p. 3.

[22].              The Statement of Compatibility with Human Rights can be found at page 11 of the Explanatory Memorandum to the Bill.

[23].              Parliamentary Joint Committee on Human Rights, Human rights scrutiny report, 11, 16 October 2018, Canberra, p. 72.

[24].              Explanatory Memorandum, Customs Amendment (Collecting Tobacco Duties at the Border) Bill 2018, op. cit., p. 5.

[25].              Customs Tariff Act 1995, section 15(b)(i).

[26].              Department of Home Affairs, ‘Warehouses and depots’, Department of Home Affairs website.

[27].              Ibid.

[28].              Customs Amendment (Collecting Tobacco Duties at the Border) Bill 2018, subclause 2(1).

[29].              Subitems 12(3) and 12(4). Aircraft’s stores and ship’s stores are defined under section 130C of the Customs Act as ‘stores for the use of the passengers or crew of an aircraft [or ship], or for the service of an aircraft [or ship]’.

[30].              Explanatory Memorandum, Customs Amendment (Collecting Tobacco Duties at the Border) Bill 2018, op. cit., p. 8.