CUSTOMS AMENDMENT REGULATIONS 2007 (NO. 1) (SLI NO 268 OF 2007) EXPLANATORY STATEMENT

ATTACHMENT A

DETAILS OF THE CUSTOMS AMENDMENT REGULATIONS 2007 (No. 1)

Regulation 1 - Name of Regulations

This regulation provides that the title of the Regulations is the Customs Amendment Regulations 2007 (No. 1).

Regulation 2 - Commencement

This regulation provides for the Regulations to commence on the day after they are registered.

Regulation 3 - Amendment of Customs Regulations 1926

This regulation provides that the Customs Regulations 1926 (the Principal Regulations) are amended as set out in Schedule 1 to the Regulations.

SCHEDULE 1 - AMENDMENTS

Item [1] - Regulation 179A

This item amends the Principal Regulations by repealing and substituting regulation 179A of the Principal Regulations.

A Tariff Concession Order (TCO) is an instrument that results in a concession which reduces the duty payable on goods that are the subject of a TCO. In most cases, the duty is reduced to ‘Free’. Upon application, a TCO is granted in relation to goods where no substitutable goods are produced in Australia in the ordinary course of business. In order for an importer or the CEO of Customs to determine whether or not there is a local substitute for particular goods, enquiries may be made of certain prescribed organisations.

Paragraph 269F(3)(d) of the Act requires all TCO applications to include particulars of enquiries made of certain prescribed organisations. Subsection 269M(6) of the Act provides that the CEO of Customs may also consult a prescribed organisation with a view to obtaining advice in relation to whether there are producers of substitutable goods in Australia. The relevant prescribed organisations are listed in regulation 179A of the Principal Regulations.

The names of the prescribed organisations have changed over time, but remain effectively the same organisations.

The Regulations repeal and substitute regulation 179A of the Principal Regulations. New regulation 179A lists the current names of the prescribed organisations referred to in paragraph 269F(3)(d) and subsection 269M(6) of the Act as follows:

· Industry Capability Network Limited;

· Industry Capability Network (NSW) Ltd;

· Industry Capability Network (Victoria) Limited;

· Industry Capability Network (Queensland);

· Industry Capability Network South Australia (ICNSA);

· Industry Capability Network Western Australia (ICNWA);

· Industry Capability Network Tasmania (ICNTAS);

· Northern Territory Industry Capability Network (NTICN); and

· Industry Capability Network (ACT).

Item [2] - Schedule 2, after item 28

This item amends the Principal Regulations by inserting additional items in Schedule 2 to the Principal Regulations, and inserting new tariff subheadings in Column 2 of the additional items.

Paragraph 269SJ(1)(b) of the Act provides that the CEO of Customs must not make a TCO in respect of goods declared by the Principal Regulations to be goods to which a TCO should not extend. Regulation 185 of the Principal Regulations provides, inter alia, that for the purposes of subsection 269SJ(1) of the Act, a TCO should not extend to goods classified under a heading or subheading in Column 2 of an item in Schedule 2 to the Principal Regulations, unless the goods are listed in Column 3 of the item.

Manufacturers of clothing, and certain finished textile products such as household linen and curtains, are given special assistance under the Commonwealth Government’s Textile, Clothing and Footwear (TCF) Post-2005 Assistance Package. This includes the opportunity to use duty credits that are earned through the production of clothing and certain finished textile products mentioned above, to offset the duty payable on imported clothing and finished textile products. TCOs can also currently be granted in relation to those certain finished textile products. However, a TCO cannot be granted in relation to clothing as the subheadings for clothing are included in Column 2 of Schedule 2 to the Principal Regulations.

As a consequence, manufacturers of certain finished textile products may access two duty concession schemes, whereas the manufacturers of clothing can only access one. This undermines the policy objectives of the TCF Post-2005 Assistance Package. The Regulations address this anomaly by ensuring TCOs cannot be made in relation to specified finished textile products.

The Regulations amend Schedule 2 to the Principal Regulations, insert new items, and insert the following tariff subheadings in Column 2 of the new items: 6302.10.00; 6302.21.00; 6302.22.00; 6302.29.00; 6302.31.00; 6302.32.00; 6302.39.00; 6302.60.00; 6302.91.20; 6303.12.10; 6303.19.10; 6303.91.10; 6303.92.10; and 6303.99.10. These are the tariff subheadings under which household linens, being bed linen, kitchen linen and towels, and curtains are classified.

The inclusion of these subheadings in Column 2 of Schedule 2 ensures that a TCO cannot be made in respect of these goods. In addition, under subsection 269SJ(2) of the Act, any existing TCOs made in respect of these goods are taken to be revoked the day upon which the Regulations come into effect.

ATTACHMENT B

Regulation Impact Statement

Background

On 23 November 2003, the Minister for Industry, Tourism and Resources, the Hon Ian Macfarlane MP, announced the Government's $747 million TCF Post-2005 Assistance Package. The Package is a ten-year plan for the textile, clothing and footwear ("TCF") industry that provides certainty in relation to the rate of duty applicable to TCF products and the amount of Government assistance available to the industry.

In determining the quantum of the Package the Government decided to concentrate the support available under the Package towards those firms manufacturing clothing and certain finished textile products as they face the greatest level of tariff adjustment coming down from a tariff of 17.5 per cent to five per cent in ten years. The Government's decision to focus support on these manufacturers is consistent with the Productivity Commission's ("PC") findings in its inquiry Review of TCF Assistance (Report No. 26, 31 July 2003).

This concentration of support includes:

· an extended legislated phased rate of tariff reductions. Tariffs for clothing and certain finished textile products are scheduled to reduce from 17.5 per cent to 10 per cent on 1 January 2010 and then five per cent on 1 January 2015. All other TCF tariffs will be reduced to five per cent by 1 January 2010. This extended phasing of the reduction of tariffs is a key part of the Government's policy to provide certainty to this sector of the industry as it continues to restructure in order to be more able to complete in a freer trade environment in the future, post 2015;

· additional support for firms manufacturing clothing and certain finished textile products. These manufacturers will receive:

grant support under the TCF Post-2005 (SIP) Scheme for a total of ten years, whilst other TCF manufacturers are only able to access grant support for five years, until 2010; and

duty credits in respect of increased domestic production under the Product Diversification Scheme ("PDS") until 2015; and

· the implementation of the supply chain efficiency program for clothing and certain finished textile product manufacturers in 2010.

The objective of the $575 million TCF Post-2005 (SIP) Scheme, under the Textile, Clothing and Footwear Strategic Investment Program Act 1999, is to provide a detailed legislative framework for fostering the development of a sustainable and internationally competitive TCF manufacturing industry and TCF design industry in Australia by providing incentives which will promote investment and innovation.

The Scheme provides grant support, annually and in arrears, to TCF firms that invest in capital and innovation. Firms manufacturing clothing and certain finished textile products are able to access the Scheme for ten years, and, in addition have access to grant support in respect of expenditure in relation to non-production related information technology. Firms manufacturing other TCF products are limited to five-year's worth of support under the Scheme, and are not able to receive grants in respect of non-production related information technology expenditure.

In addition, only firms manufacturing clothing and certain finished textile products are eligible to receive an annual duty credit in respect of their increased domestic manufacturing production under the PDS. Tying duty credits to the rate at which manufacturers increase their production in Australia is consistent with the Government's policy to encourage improvement in the competitiveness of Australia's TCF manufacturers.

These two Schemes are also predicated on firms having established long-term business plans involving ongoing domestic manufacturing and investment activities. The TCF Post-2005 (SIP) Scheme requires firms to: register annually; to have met a minimum expenditure cap of $200 000; claim a grant annually and in arrears of the expenditure being incurred; and to demonstrate a long-term commitment to manufacturing in Australia. The PDS is directly linked to the rate at which manufacturers increase their domestic manufacturing on a year-to-year basis.

The Tariff Concession System allows firms to apply for and receive a Tariff Concession Order ("TCO") in respect of the importation of these products, subject to particular tests, which if granted allows these products to be imported duty free.

Generally, firms wishing to import clothing are unable to apply for TCOs as clothing is listed in Schedule 2 of the Customs Regulations 1926 (known as the Excluded Goods Schedule ("EGS")) thereby prohibiting concessional entry (with a few exceptions) under the Tariff Concession System. However, firms seeking to import certain finished textile products are able to apply for TCOs as these products have not been included on the EGS.

In its July 2003 report on TCF assistance, the PC stated that in contrast to the tariffs for other TCF products, there was an argument for delaying the achievement of a five per cent tariff for clothing and certain finished textile products beyond 2010. This was because these products faced further reductions after 2005 of 12.5 percentage points to achieve that rate. The PC further reported that while the benefits to the consumers and user industries from lower tariffs for clothing and certain finished textile products would be delayed by deferring the full reduction, the potential for the assistance reforms to trigger disruptive adjustment would be diminished.

The PC was also mindful that the fortunes of many local yarn and textile suppliers are closely allied to those of their customers in clothing and certain finished textile product sectors. Hence, the PC was concerned that there was a risk that disruptive adjustment at the end of the production chain that could create 'knock-on' problems.

The PC reported that the case for 'erring on the side of caution' also provided a reason for delaying the attainment of the five per cent target for clothing and certain finished textile products until 2015.

In its summary on its findings on Post-2005 tariff levels for the TCF industry, the PC stated that it preferred:

· a reduction to five per cent by 2010 for TCF products other than clothing and certain finished textile products;

· a reduction to five per cent by 2015 for clothing and certain finished textile products; and

· tariff reductions to be made at the end of each relevant five year period.

The PC was of the view that this approach would best meet the goal of enhancing overall community welfare while giving the sector time to adjust and minimise the risk of excessive disruptions. The PC also considered that the required tariff reductions should be legislated as soon as possible after the Australian Government made its decision on Post-2005 TCF assistance.

The Government accepted the PCs recommendations in relation to Post-2005 tariff levels for the TCF industry and in December 2005 the Customs Tariff Amendment (Textile, Clothing and Footwear Post-2005 Arrangements) Act 2004, which put in place the phased rate of tariff reductions, was enacted.

Problem

Dual access to tariff relief under the Tariff Concession System and the assistance to adjust to the lowering of tariffs in 2010 and 2015 under the TCF Post-2005 (SIP) Scheme is not possible for manufacturers of clothing as clothing is listed in the EGS thereby prohibiting TCOs (with a few exceptions) under the Tariff Concession System.

This is consistent with the policy of the EGS and with the policy of giving TCF manufacturers in Australia ten years of tariff certainty during which time they can benefit from the range of assistance measures that the Government is providing them to adjust to a freer trade environment.

In 2006, the Minister for Industry, Tourism and Resources raised an issue of inconsistency in relation to the treatment of certain finished textile products within the Tariff Concession System with the Prime Minister and the Treasurer.

The inconsistency is that manufacturers of certain finished textile products in Australia are able to obtain duty free entry under the generally available Tariff Concession System (subject to the “substitutability” test) despite their special treatment under the TCF Post-2005 Assistance Package. On the one hand, they are treated the same as clothing manufacturers; on the other hand they are treated the same as manufacturers of products other than clothing.

The TCF Post-2005 Assistance Package gives manufacturers of TCF products that have the highest tariff (and who therefore face the greatest adjustment pressures) an extra five years of special assistance to adjust to tariffs reducing to the general five per cent. This policy is compromised when the same manufacturers might not actually face those higher adjustment pressures if their product does not attract duty because of a TCO. Both clothing and certain finished textile products have the same, higher tariff.

The Government's policy of providing the TCF manufacturing sector with ten years of tariff certainty is also compromised as TCOs may be revoked or varied when requested by a producer of substitutable goods.

This uncertainty extends to importers of the finished textile products as the tariff that would have applied at the time of ordering the goods might have changed by the time the products were imported if a TCO was granted, varied or revoked in the period between ordering and receiving the goods.

Whilst the number of manufacturers who might benefit from both the special assistance available under the TCF Post-2005 Assistance Package and duty free entry of the finished textile products under a TCO is unknown, exports of these products exceeded $11 million in 2005-06. For the same year, 17 firms were registered under the TCF Post-2005 (SIP) Scheme as manufacturers of these products in Australia.

The inconsistent treatment of certain finished textile products results in uncertainties for manufacturers of the goods in Australia and for importers of the goods that have been manufactured offshore.

It also undermines the effectiveness of the Government's policies for the TCF manufacturing industry in Australia and presents an anomaly for the policy underpinning the EGS.

The finished textile products in question are those that are classified under the following tariff subheadings:

· 6302.10.00 - Bed linen, knitted or crocheted;

· 6302.21.00 - Other bed linen printed, of cotton;

· 6302.22.00 - Other bed linen printed, of man-made fibres;

· 6302.29.00 - Other bed linen printed, of other textile materials;

· 6302.31.00 - Other bed linen, of cotton;

· 6302.32.00 - Other bed linen, of man-made fibres;

· 6302.39.00 - Other bed linen, of other textile materials;

· 6302.60.00 - toilet linen and kitchen linen, of terry towelling or similar terry fabric of cotton;

· 6302.91.20 - Goods, NSA, as follows (a) face washers; (b) towels;

· 6303.12.10 - Synthetic fibre curtains, knitted or crocheted;

· 6303.19.10 - Other textile material curtains, knitted or crocheted;

· 6303.91.10 - Cotton goods as follows (a) bed valances [ruffles]; (b) curtains;

· 6303.92.10 - Synthetic fibre goods as follows (a) bed valances [ruffles]; (b) curtains; and

· 6303.99.10 - Other textile material goods as follows (a) bed valances [ruffles]; (b) curtains.

Objective

The objective is to maximise the effectiveness of the Government's TCF Post-2005 Assistance Package by ensuring that manufacturers in Australia of clothing or certain finished textile products operate in an environment of certainty and stability in relation to the duty rates payable on competing imported products. These manufacturers face greater adjustment pressures than other TCF manufacturers and because of this have been given special assistance in the TCF Post-2005 Assistance Package until 2015. This includes assurance that the tariff in relation to clothing and certain finished textile products will be 17.5 per cent until 1 January 2010 when it will be reduced to 10 per cent until 2015.

This certainty and stable tariff environment was a key consideration when the TCF Post-2005 Assistance package was agreed with the TCF industry following the public review of TCF assistance by the Productivity Commission in 2003.

Options

In considering the problem, three options were examined:

1. Allow certain finished textile products to be imported duty free under the Tariff Concession System (that is, maintain the status quo)

Leaving matters as they are would counteract the tariff stability and certainty that is central to the Government’s policy for the TCF industry. TCOs allow duty free entry conditional upon there being no substitutable goods produced in Australia. However, it should be noted that these concessional arrangements are not guaranteed as TCOs may be revoked by Customs when requested by a producer of substitutable goods. If this were to happen, the duty payable reverts to the applied rate—currently 17.5 per cent.

Under this option, the Government would be treating certain finished textile products as goods of general manufacture whilst also treating them as goods that should have tariffs that are higher than manufactured goods generally. This tension is unavoidable under this option.

2. Deny manufacturers of certain finished textile products access to the TCF Post-2005 Assistance Package

Excising the manufacture of certain finished textile products from the TCF Post-2005 Assistance Package would go some way to minimise the anomalous treatment of these products under the Tariff Concession System, on the one hand, and the TCF Post-2005 Assistance Package, on the other hand. The product group as a whole could be excised from the Package or assistance could be refused to manufacturers when a particular product is covered by a TCO.

Under this option, however, the Government would be still be treating certain finished textile products as goods of general manufacture and as goods that should have tariffs that are higher than manufactured goods generally.

3. Treat finished textile products that are subject to higher tariffs in the same way as clothing is treated

Treating finished textile goods that are subject to the high tariff in the same way as clothing would require the finished textile goods to be listed in the EGS. This would result in the goods attracting a 17.5 per cent applied duty rate as inclusion in the EGS would trigger revocation of relevant TCOs under the Customs Act 1901.

Impact Analysis

1. Allow certain finished textile products to be imported duty free under the Tariff Concession System (that is, maintain the status quo)

This option would be the most costly as the Government would be forgoing tariff revenue as well as providing $747 million of industry assistance to manufacturers of the finished textile products and other TCF products manufactured in Australia.

The anomalous situation in which certain textile products are treated as goods of general manufacture for one purpose and as special goods for another purpose would be expected to grow as importers push to increase the numbers and scope of the TCOs.

The impact of allowing the inconsistency in the treatment of certain finished textile products and clothing under the Tariff Concession System to continue would be the undermining of the Government's tariff policy for these two sectors.

Importers (and arguably consumers), however, would benefit from the lower prices paid for these products if the products were covered by a TCO. Whilst the quantum of this cost is difficult to estimate, nearly $10 million of revenue was forgone in relation to imports of these goods by 217 importers taking advantage of 22 TCOs that covered some of the certain finished textile products subject to higher tariffs in 2006.

2. Deny manufacturers of certain finished textile products access to the TCF Post-2005 Assistance Package

Under this option, denial of the special assistance available to manufacturers of certain finished textile products would be unworkable under the TCF Post-2005 (SIP) Scheme as eligibility for grants depends on participation in the Scheme over the longer term (at least 2–3 years). It would be impractical and administratively costly for TCF firms to opt in and out of the Scheme depending on whether TCOs have been made or revoked.

If, under this option, denial of the special assistance were to be based on the excision of all finished textile goods under the TCF Post-2005 Assistance Package, manufacturers of the finished textile products in Australia who have invested in new TCF plant or equipment and innovation in the process of adjusting to the lower tariffs, and in anticipation of receiving the special assistance under the TCF Post-2005 (SIP) Scheme and the PDS, would be disenfranchised.

It is not possible to quantify the assistance being received under the TCF Post-2005 Assistance Package by virtue of the manufacture in Australia of the finished textile products that have higher tariffs, or the design for manufacture in Australia of the products (design activity that would also be impacted by each of the three options). However, 17 TCF firms that registered for assistance under the TCF Post-2005 (SIP) Scheme in relation to 2005–06, claimed to be involved in the manufacture of the finished textile products.

The impact of this option on importers (and arguably consumers) would be the same as the impact of the first option.

3. Treat finished textile products that are subject to higher tariffs in the same way as clothing is treated

Denial of concessional entry for the goods under this option would have an adverse impact on importers of the certain finished textile products and would risk a negative flow-on effect to consumers of these goods. In 2006, 217 importers took advantage of the TCOs that covered some of the finished textile products subject to higher tariffs. Because TCOs are predicated on there being no objections by domestic manufactures of substitutable goods it is unlikely that this option would serve any protective purpose in relation to Australian TCF manufacturers.

However, the Government's tariff policy for the TCF industry is not based on protectionism. Rather, it is about minimising the risk of excessive disruption arising from the Government's tariff reduction policy. Consistent with the PC's recommendations, the TCF policy is to provide clothing and certain finished textile product manufacturers with more breathing space thereby facilitating a smoother adjustment process.

This option would help ensure the policy integrity of the TCF Post-2005 Assistance Package by rectifying the anomalous treatment of clothing and certain finished textile product manufacturers under the Tariff Concession System. At the same time, however, it would remove access to the Tariff Concession System by importers of these products. It is not known how many importers are 'import only' firms, which are ineligible to access the PDS and are also unable to access TCOs as a result of this option.

Whilst higher costs to importers would result under this option, the tariff stability and certainty afforded by this option could benefit importers who might otherwise find themselves in a situation of having to cover the cost of a 17.5 per cent tariff imposed whilst the goods were in transit—a situation that could arise if a TCO was varied or revoked. In 2006, for instance, three TCOs that covered some of the finished textile products subject to higher tariffs were revoked, three of the TCOs were varied with the effect of narrowing their scope and 13 of the TCOs are currently under review by the Administrative Appeals Tribunal.

This option would have the lowest cost to the Government of the three options.

Consultation

Amendments impacting on the administration of the Tariff Concession System have occurred over recent years. Such changes, including the removal of the three per cent revenue duty applicable to imported business inputs subject to a TCO are rarely given exposure prior to their introduction. To do so would provide significant commercial advantage to some entities and distort the market for such goods. There has therefore been no consultation, other than between Ministers and with the Australian Customs Service, on these proposals.

TCOs are made under Item 50 to Schedule 4 of the Customs Tariff Act 1995. Amendments affecting the rate of import duty that is used in the application of the Customs Tariff Act 1995 are not usually the subject of industry consultation. An additional concern would be to identify affected parties. Whilst users of a TCO may be fairly readily identified, TCOs may be used by any importer of goods meeting the description of the TCO, so identification of potential users is always problematic.

The Government’s $747 million TCF Post-2005 Assistance Package followed a public review of TCF assistance by the Productivity Commission. In its report, Review of TCF Assistance (Inquiry Report No. 26, 31 July 2003), the PC states that it invited comment on the advantages and disadvantages of making the opportunity to apply for exemption from the EGS more generally available, together with suggestions for controlling the associated administrative and compliance costs.

Whilst this issue is not the specific issue under considered here, the PC's experience is informative. At page 117 of the report, the PC states that:

Responses from the various sectional interests involved, however, have done little to clarify where an appropriate balance might lie. Those supporting the status quo pointed to the compliance and administrative costs likely to be associated with, and follow, changes to the EGS, as local manufacturers and importers argued issues of product substitutability. Those seeking change reiterated their views that the EGS acts to prevent concessional importation of goods for which there are no locally made substitutes.

The Commission notes that all of these issues will become of much less concern as TCF tariffs are reduced in 2005 and subsequent years. It notes also that, in any case, removal from the EGS might not do much to help importers, unless the criteria for the TCS were to be changed.

The TCF tariff reduction program and the special treatment for manufacturers of clothing and certain finished textile products under the TCF Post-2005 (SIP) Scheme were debated in the Parliament during passage of the Customs Tariff Amendment (Textile, Clothing and Footwear Post-2005 Arrangements) Act 2004 and the Textile, Clothing and Footwear Strategic Investment Program Amendment (Post-2005 Scheme) Act 2004. A record of the debate is recorded in the Senate and House of Representatives Hansards.

Conclusion and recommended option

Including certain finished textile products in the EGS will help ensure the integrity and effectiveness of the TCF Post-2005 Assistance Package, noting that this will result in the revocation of the existing TCOs relating to these goods.

In agreeing the TCF Post-2005 Assistance Package and passing the relevant legislation, the Government and the Parliament considered that the benefits of the Assistance Package would, on balance, be greater than the benefits of a five per cent tariff in the shorter term.

Implementation & review

Listing finished textile goods that are subject to the higher tariff in the EGS will require an amendment of Schedule 2 of the Customs Regulations.

The relevance of the goods listed in the EGS will be reviewed in the lead-up to tariffs reducing to five per cent.

Commonwealth Numbered Regulations - Explanatory Statements