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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.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer and Copyright Details

Passage History

ACIS Administration Bill 1999

Date Introduced: 13 May 1999

House: House of Representatives

Portfolio: Industry, Science and Resources

Commencement: On commencement of the proposed Customs Tariff Amendment (ACIS Implementation) Act 1999, that is, on a day fixed by proclamation or if no such day is fixed within 6 months of the Bill receiving Royal Assent, at the end of that period.

Purpose

The purpose of this package of Bills is to implement the key elements of the Government's policy arrangements for the automobile industry post-2000:

• the ACIS Administration Bill 1999 and the ACIS (Unearned Credit Liability) Bill 1999 will establish the Automotive Competitiveness and Investment Scheme (ACIS) to commence from 1 January 2001, and
• the Customs Tariff Amendment (ACIS Implementation) Bill 1999 will reduce the tariff on passenger motor vehicles and certain parts from 15 per cent to 10 per cent from 1 January 2005.

Background

Overview

In June 1997, following an Industry Commission review, the Government announced a framework for post-2000 automotive policy. The main elements are a pause in the tariff at 15 per cent from 2000 to 2004 followed by a reduction to 10 per cent in 2005, and a commitment to introduce a new assistance scheme upon expiry of the Export Facilitation Scheme in 2000. This action is consistent with a the Government's long term commitment to trade liberalisation and Australia's international obligations to move to free trade by 2010.

In April 1998, the Government released details of ACIS to run from 2001 to 2005. The new scheme is intended to provide assistance to producers of motor vehicles, components and automotive services for both the domestic and export markets.

The Explanatory Memorandum to the Bill states:

The cost of ACIS, in terms of customs revenue foregone, will be capped at $2 billion over five years. It may be noted that this is far above the assistance provided to any other single industry - the corresponding Strategic Investment Program for textiles, clothing and footwear is capped at $700 million over five years.

The proposed ACIS program raises two key issues. The first is the question of how 'transitional' this assistance is likely to be - will it be required beyond end 2005? Secondly, will the benefits in terms of 'sustainable growth' in this industry justify the cost of up to $2 billion in revenue foregone plus the substantial administrative costs for Government and compliance costs for industry?

The Australian automotive industry

The Australian automotive industry has four passenger motor vehicle (PMV) manufacturers(2) who are supplied by approximately 200 component, tooling, and design and engineering firms.(3)

The 1995=96 Australian Bureau of Statistics (ABS) figures reveals the industry:

• employed 54 817
• had a gross turnover of $14.5 billion, which accounted for 7.4 per cent of total manufacturing turnover
• is the second largest consumer of basic iron and steel products, and
• is the third largest consumer of paints.(4)

In 1997 around 325 000 cars were produced and both cars and components worth $2.7 billion were exported. Sales figures for July 1998 eclipsed the previous highest July sales (in 1985) by 7 471 vehicles - a rise of 11.7 per cent.(5)

Fully built cars are exported to North America, Asia, the Middle East, South Africa and Oceania. Components and design and engineering services are exported to most major world automotive markets.(6)

There has been a strong increase in both imports and exports of automotive products associated with trade liberalisation and the rationalisation of domestic production. Between 1988 and 1997, exports recorded a cumulative growth of 302 per cent or $2 billion. The value of imports is much larger than exports and their 149 per cent growth over the same period was valued at $6.2 billion. The resulting automotive trade deficit amount to $7.8 billion in 1997.

The global automotive industry

Global production is mainly concentrated within the OECD group of countries. Twenty large firms, most with multi-national operations, account for over 90 per cent of the global market outsiders, such as South Korea, are beginning to increase their share of exports of PMV's and production is also growing rapidly in other developing countries.(7) Australia's production of PMV's accounts for less than one per cent of global production, which is currently headed towards 50 per cent over capacity.(8)

The Automotive Competitiveness and Investment Scheme (ACIS)

ACIS will replace the EFS and is scheduled to commence on January 2001 and run for five years, ending on 31 December 2005.

In a joint ministerial statement released last year, the Government believes ACIS will encourage firms to make competitive, long-term commitments to Australia's automotive industry, based on production, investment and research and development (R&D) activity. Mr Moore said:

ACIS will provide incentives in the form of duty credit, which may be used to pay customs duty on eligible imports, or may be transferred. One part of the scheme will provide benefits to motor vehicle producers (MVP's) and the second part will assist automotive component producers (ACP's), automotive machine tool and tooling producers (AMTP) and automotive service providers. (ASPs).

The MVP component

The current EFS allows vehicle and component producers to earn export credits in return for automotive exports and to use these credits to offset the duty on their imports. These export credits will cease under the new arrangements. The ACIS will extend the existing duty free entitlements which are set at 15 per cent but currently apply only to production for the Australian and New Zealand markets. Under the proposed arrangements, ACIS will

• increase the duty free concession on the production of PMV's to 25 per cent and extend its application to include production for the export market as well as the domestic market
• enable PMV manufacturers to earn duty credits for the production of engines and engine parts, and
• enable PMV manufacturers to earn a 10 per cent credit on investments in productive assets.

The ACP, AMTP and ASP component

ACIS is intended to enable component manufacturers, tooling producers and service providers to claim the following benefits:

• duty credit equal to 25 per cent of the value of new investment in plant and equipment, and
• duty credit equal to 45 per cent of the value of research and development investment.

Where MVP's produce automotive components, tooling or services for a third party, they too can access the 25 per cent investment allowance and the 45 per cent research and development allowance.

AusIndustry will be the Government agency responsible for the administration of ACIS.

Financial impact

Financial estimates are subject to variables including exchange rates, world and domestic market growth rates and consumer choice for imported vehicles. The following points mark the core of the financial impact upon the Australian economy:

• forgone revenue from ACIS benefits will not exceed $2 billion over the five years from 2001 to 2005.
• continuing benefits under the existing 15 per cent duty free allowance paid on the production of PMV's for sale in Australia and New Zealand will be uncapped. Forgone revenue is estimated to total $825 million over the five years from 2001 to 2005
• ACIS will involve higher administrative costs to Government and higher compliance costs to industry than the existing assistance arrangements but these costs are not quantified, and
• forgone revenue due to the proposed tariff cuts in the fiscal year 2005 will be $500 million - assuming the current PMV market will continue its growth rate and imports will increase to satisfy the domestic market.

Related matters

The global automotive industry is now characterised by a network of equity cross holdings and joint ventures. The evidence suggests that the Australian industry is moving with this trend.(10)

German and US carmakers, Daimler-Benz and Chrysler, recently agreed to a $55 billion merger. Some commentators see this merger as being likely to create a more dynamic new corporation, which will force the global industry to look at further rationalisation.(11)

World green house concerns have added pressure on carmakers to reduce vehicle weight and fuel consumption by significant degree.(12) This may indirectly strengthen the position and marketing options available to those manufacturers specialising in small vehicle production. As a final point, the Minister's statement of 25 May 1998 provides that:

The 'forecast' of $6 billion in annual exports by the year 2005 appears to be an industry 'goal' rather than a 'forecast', though the Australian Automotive Exporters Group believes the target is achievable by a sustainable, prosperous and internationally competitive Australian automotive industry.(14)

Main Provisions

Clause 6 defines major terms used in the Bill. The commencement date of the scheme is intended to be 1 January 2001. However, it may commence on an earlier date providing the date is proclaimed and is the first day of a calendar year (subclause 6(1)).

Establishment of ACIS

Clause 13 provides that there is established by the Bill a scheme to be knows as the Automotive Competitiveness and Investment Scheme or ACIS.

Basic Eligibility Requirements

The major effect of Subdivision B of Division 3 (clauses 16-20) is to set the basic scheme eligibility criteria to be met by producers of motor vehicles, components, machine tools and providers of automotive services. In respect of eligibility for motor vehicle producers (MVP), eligibility is limited to those manufacturers who, in the 12 months preceding application membership application:

• produced in Australia 30,000 motor vehicles, or
• at least 30,000 engines.

In respect to eligibility for automotive component producer (ACP), eligibility is limited to those producers of automotive components who, in the 12 months preceding application:

• produced in Australia at least one kind of automotive component for use as original equipment in at least 30,000 motor vehicles, or in at least 30.000 engines, and the production value of such components was at least $500,000, or
• the production value of the automotive components as original equipment was at least $500,000 and comprised at least 50% of the production value of all automotive components produced by the person.

In respect to eligibility for automotive machine tool producers (AMTP), eligibility is limited to those producers which, in the 12 months preceding application:

• produced in Australian automotive machine tooling to the value of $500,000 and
• at least 50% of that value was for automotive machine tools and automotive machine tooling used to produce original equipment.

In respect to eligibility for providers of automotive services (ASP), eligibility is limited to those providers which, in the 12 months preceding application:

• the production value of automotive services provided in Australia was at least $500,000, or
• at least 50% of that production value was for services related to the production of motor vehicles or original equipment.

The provisions also provide for eligibility based on prospective production and the national interest. Where eligibility for application is accorded on national interest grounds by the Minister, the decision is subject to disallowance by the Parliament.

Division 4 of Part 3 (clauses 21-22) provides that eligible groups of companies may be registered.

Divisions 5 and 6 and Part 3 (clauses 21-40) of the Bill deal with the certain of the scheme's administrative requirements relating to registration. Major requirements include:

• an ongoing requirement that
• the MVP produce in Australia each year at least 30,000 motor vehicles or at least 30,000 engines;
• if the MVP has been registered on national interest grounds, compliance with such conditions relating to ongoing registration as specified by the Minister;
• each scheme participant must provide the Secretary with quarterly returns in the manner prescribed by the regulations;

Parts 4 and 5 (clauses 41-60) of the Bill deal with credit. Scheme participants earn duty credits which can be used to offset customs duty, or may be transferred.

MVP's will be able to claim:

• Duty credits totalling 15% plus 10% of the value of production of PMV's sold in Australia or New Zealand, multiplied by the general tariff rate applying to imports of PMV's;
• Duty credits totalling 25% of the value of production of PMV's (other than PMV's sold in Australia and New Zealand), engines and engine components, multiplied by the general tariff rate applying to imports sold in Australia or New Zealand, multiplied by the general tariff rate applying to imports of PMV's, engines and engine components;
• Duty credits totalling 10% of the value of their new investment in plant and equipment averaged over the preceding three years;
• Duty credits totalling 25% and 45% where the MVP produces automotive components, machine tools or services for a third party.

ACP's, AMTP's and ASP's will be able to claim:

• Duty credits totalling 25% of the value of their new investment in plant and equipment averaged over the preceding three years; and
• Duty credits totalling 45% of the value of their investment in research and development averaged over the preceding three years.

Note: Except for the first credit, the amount claimable is to be reduced by other Commonwealth assistance payable for the relevant activity/expenditure.

$2 billion cap

Clause 53 provides that the Secretary must not enter in the ACIS ledger credit in relation to modulated production and investment which exceeds $2 billion (The modulation process is to be carried out in accordance with guidelines made under clause 55).

5% of sales cap

Clause 54 provides that duty credit issued to a scheme participant must not exceed 5% of the sales value of the participant's ACIS goods and services. ACIS goods and services are defined to mean the sale value of the goods or services provided by the participant as a result of activities that earned, or would have earned the scheme participant duty credit.

Dealing in and use of duty credit

Part 7 of the Bill (clauses 74-77) deal with dealing in and use of duty credit. Clause 75 allows duty credit holders to transfer duty credits to other persons. The parties to the transfer must notify the Secretary of the transfer.

Clause 76 provides the Minister with power to declare that ACP, AMTP or ASP investment credit may only be used for importing motor vehicles or off-setting a liability under the proposed ACIS (Unearned Credit Liability) Act 1999. Where the Minister makes such a declaration the notice of the declaration must be tabled in both Houses of Parliament within 15 days of the notice being made. Clause 77 allows the Minister to limit the use of modulated production credits in the same way as investment credits under clause 76. While the Explanatory Memorandum to the Bill does not provide a rationale for clauses 76 and 77 it is arguable that the provisions might assist in balancing allocations.

Obligations relating to documents

Part 10 of the Bill (clauses 108-109) deals with obligations relating to quarterly returns and business plans. The obligations include that scheme participants:

• maintain, or create and maintain, documents that evidence all the particulars contained in each quarterly return
• maintain such documents for five years after lodgment
• provide the Secretary with updates of the business plan provided with their application for participation in the scheme.

Administrative review

Clauses 111 and 114 specifies the kinds of decisions made under the Bill which may be reviewed by the Administrative Appeals Tribunal, including:

• a decision of the Secretary as to whether a scheme participant is entitled to duty credit;
• a decision by the Secretary that a person is not a fit and proper person;
• a decision by the Secretary to deregister a participant; and
• a decision by the Secretary not to issue MVP production credit, or as to the amount of any MVP production credit to be issued.

Concluding Comments

ACIS is a major new industry policy initiative which deserves careful attention. The Minister states that the purpose of ACIS is to provide transitional assistance to achieve sustainable growth in the automotive industry. To achieve the APEC target of free trade by 2010, the tariff wind-down program for automobiles will need to continue beyond 2005. Hence it must be expected that when the Government reviews ACIS IN 2005, there will be industry pressure to extend this assistance program to 2010 as a 'sweetener' for the further tariff cuts. The result may well be a transitional assistance package for ten years rather than five.

Also care will be needed in the administration of ACIS to ensure that the assistance package does not become a barrier to new entrants to this industry. The Explanatory Memorandum states that eligibility criteria will apply to participating firms and to products, services, investments and activities against which benefits can be earned. The threshold eligibility tests for registration under ACIS require minimum levels of production and sales to be achieved. There would appear to be some risk that such threshold tests will discriminate against potential new entrants to the industry, particularly in the components and services areas, and hence provide a barrier to innovation and competition.

A broader concern is the limited potential of this industry for growth. It is a mature industry which has achieved little growth in the volume or value of production in recent years.(15) The value of the growth in exports has been far exceeded by the growth in the value of imports and resulted in the growth of the automotive trade deficit which stood at $7.8 billion in 1997. ACIS cannot change these basic industry characteristics.

Finally there is the issue of whether Australia should continue to deliver the bulk of industry assistance (both tariff and budgetary assistance) to the mature and generally slow growth industries such as motor vehicles and textiles, clothing and footwear. Conversely, it leaves largely unanswered the question of when and how a significant shift might be made in the policy emphasis towards the newer, high growth, knowledge intensive sectors like information technology and telecommunications. ACIS retains the established pattern of directing the bulk of industry assistance to the mature industries.

Endnotes

2. ACIS Administration Bill 1999 & ACIS (Unearned Credit Liability) Bill 1999, Explanatory Memorandum, p. 4.

3. Toyota, Holden, Ford and Mitsubishi. The Bill uses the acronym PMVP when referring to Australian passenger motor vehicle manufacturers.

4. 'Driving the future: Australia's automotive action agenda', Department of Industry, Science and Tourism, the Hon. John Moore, Minister for Industry, Science and Tourism, 25 May 1998.

5. Australian Bureau of Statistics, Manufacturing Industry, Catalogue No. 8221.0, 1995-96.

6. 'Car sales rev up to record', Australian Financial Review, 7 August 1998, p. 2.

7. 'Driving the future: Australia's automotive action agenda', Department of Industry, Science and Tourism, the Hon. John Moore, Minister for Industry, Science and Tourism, 25 May 1998.

8. Report 96/17, 'Automotive Case Study, Micro Reform - Survey of Impacts on Firms', Productivity Commission, September 1996, p. 6.

9. 'Driving the future: Australia's automotive action agenda', Department of Industry, Science and Tourism, the Hon. John Moore, Minister for Industry, Science and Tourism, 25 May 1998.

10. Media Release, the Hon. Tim Fisher / the Hon. John Moore, Deputy Prime Minister, Minister for Trade / Minister for Industry, Science and Tourism, 22 April 1998.

11. Report 96/17, 'Automotive Case Study, Micro Reform - Survey of Impacts on Firms', Productivity Commission, September 1996, p. 140.

12. 'Record industrial marriage', Sydney Morning Herald, reported by Geoff Kitney, 8 May 1998.

13. 'Driving the future: Australia's automotive action agenda', Department of Industry, Science and Tourism, the Hon. John Moore, Minister for Industry, Science and Tourism, 25 May 1998.

14. Ibid.

15. Department of Industry, Science and Tourism, State of the Australian Automotive Industry 1996, p. 77.

16. Ibid., at pp. 21 and 23.

Contact Officer and Copyright Details

Mike Emmery and Ian Ireland
28 June 1999
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

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ISSN 1328-8091
© Commonwealth of Australia 1999

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Published by the Department of the Parliamentary Library, 1999.

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