There has been a significant increase in the volume of low value parcels entering into Australia in recent years. Between the financial years 2006/7 to 2010/11, the number of parcels (comprising Express Mail Service (EMS) items, packets of less than 2kg and parcels over 2kg) being delivered through Australia’s international mail gateways has grown from 23.56 million to 48.06 million – an increase of 104.0 per cent. This represents a compound annual growth rate of 19.5 per cent over the four years, although it should be noted that the compound annual growth rate for the last two years was 36.0 per cent. The bulk of the increase in parcels has been packets of less than 2kg, which represents 80.1 per cent of the increased volume. Over the same period, the volume of parcels valued between $0 and $1000 passing through international air cargo operators has increased from approximately 6.3 million to 10.4 million.
Source: Australian Customs and Border Protection ICS data.
As the Productivity Commission highlighted in its report into Australia’s retail industry, this growth in parcel numbers has been driven largely by the growth in online shopping, The online shopping market has benefited from a variety of factors including an expansion in online shopping offerings, growing consumer familiarity and sense of security with online shopping, and a rising Australian dollar.
As numerous submissions provided to the Productivity Commission’s inquiry also highlighted, unlike goods purchased in Australia, goods valued at or below $1000 that are purchased online from overseas are generally not subject to either customs duty or GST.6 This threshold is considerably higher than those which apply in many other jurisdictions – for example, in the United Kingdom (£15 (A$23) for VAT; £135 (A$205) for duty);7 and Canada (C$20 (A$19) for duty and GST) (see further Appendix E).8
According to the National Retail Association, this growth is anticipated to continue, with online sales projections for the coming period ranging from 7.6 per cent to 20.4 per cent per annum.9 While recognising that these projections relate variously to domestic and international online sales growth, and may also include products such as ticket deliveries, simply assuming an annual parcel growth in line with the mid-point of these estimates (14 per cent per annum), would mean that over the next four years Australia would see an increase in mail parcels passing through the international gateways to around 81 million by 2014/15. Similarly, growth in air cargo may also be expected.
It is in this environment that the Taskforce is now investigating new approaches for the handling and administration of low value imports of goods, including options for revenue collection. To illustrate some of the complexities that the Taskforce needs to have regard to in assessing alternative ways forward,10 this Interim Report now sets out some of the key aspects of the current import handling and administration processes for low value goods, and also a brief description of the different attributes of each of the ways in which low value goods are imported into Australia.
Current import handling and administration processes
Under current arrangements, when low value goods arrive in Australia they are required to be assessed both for border security and biosecurity risks, and also for any revenue liability e.g. customs duty and/or GST. Prohibited or restricted goods for border security purposes include such items as drugs and precursors, firearms, weapons and ammunition (including chemical weapons and military goods), laser pointers, pornography and other objectionable material, and certain toys. Biosecurity risks relate to the threat of exotic pests and diseases entering, and establishing, in Australia and the potential that these risks pose to harm the primary production sectors, the environment and human health.
Responsibility for Australia’s border security and biosecurity lies predominately with Australia’s border agencies – the Australian Customs and Border Protection Service (Customs and Border Protection), and the Department of Agricultural, Fisheries and Forestry Biosecurity (DAFF Biosecurity) respectively. Customs and Border Protection is also responsible for revenue assessment and collection.
Both Customs and Border Protection and DAFF Biosecurity utilise risk management tools to determine the exact manner by which any particular good is processed at the border. In part, these risk management tools rely on the information that is available with respect to those goods. In certain instances, particularly with respect to air and sea cargo, much of the required information is available in electronic format prior to the goods arriving in Australia. This information is obtained through both cargo reporting processes and through declarations (see below). In other cases – particularly with respect to goods arriving through international mail – the requisite information is obtained on or subsequent to arrival. While the Taskforce necessarily is having regard to the risk assessment process for border security and biosecurity purposes in determining its recommendations, the exact manner in which this information is utilised is not detailed in this Interim Report so as not to compromise any aspect of Australia’s customs, border security or biosecurity operations.
Assessment for revenue liability by Customs and Border Protection is also dependent on specific information with respect to each imported good. Generally, imported goods may be subject to either duty and/or GST. Under current policy settings,11 imported goods which are valued at or below $1000 for the purposes of customs duty are generally not subject to either customs duty and/or GST.12
The information requirements and administrative processes needed to assess customs duty are considerable. This is because duty assessments need to have regard to a number of factors, including the nature of the product, its value, the country in which it was produced and whether any other concessional treatment applies.13
To facilitate international trade, the classification of goods for duty (and statistical) purposes is done in accordance with the Combined Australian Customs Tariff Nomenclature and Statistical Classification, commonly known as the Working Tariff.14
The system encompasses a 10-digit level classification, which is known as the Harmonized Tariff Item Statistical Code (HTISC). The HTISC was last updated on 1 January 2012. The 10-digit level code is based upon a 6-digit hierarchical classification designed by the World Customs Organization (WCO) called the Harmonized Commodity Description and Coding System (HS). This WCO classification system is updated every five years to keep the commodity codes relevant. The international HS provides codes for over 5,000 commodities. However, in some cases further detail is required to enable identification of goods that are of particular interest or importance to Australia. The extensions exist for:
Customs and Border Protection purposes, to differentiate between imported goods grouped under a single 6-digit HS code. It is generally driven by the need to identify varying import duty rates on similar goods and is achieved by adding two digits to the HS code, making an 8-digit code. The extension is maintained by Customs and Border Protection;
statistical purposes, to provide a finer level of detail and is achieved by adding two digits to the Customs 8-digit codes (creating a 10-digit code). Statistical codes are maintained by the ABS.
These arrangements are given effect through the Customs Tariff Act 1995. The primary classification system and the relevant tariff rates that apply to those goods runs to some 97 chapters (see Schedule 3, Customs Tariff Act 1995).15
Most goods that are not free of duty are generally subject to a 5 per cent rate of tariff, while clothing, textiles and footwear attract a tariff of 10 per cent. In determining liability for duty on any low value imports, regard must also be had to any tariff concession arrangements, including those to which Australia is a party as a result of multilateral or bilateral agreements.
These arrangements mean that the task of classifying goods for the purposes of assessing customs duty is a complex one. As such, the vast majority of importers use the services of a customs broker or agent to expedite the clearance process, as it requires a relatively detailed knowledge of Customs procedures and systems, and knowledge of tariff classification applicable to a variety of goods. Customs brokers must be licensed and an individual applicant for a broker’s licence must demonstrate that they are a person of integrity and that they possess the requisite skills and knowledge to be a broker (see Pt XI, Customs Act 1901).
Application of GST
Assessment of the GST liability on imported goods requires information on the nature of the goods as certain goods, such as food and medical supplies, are GST exempt. The GST on importation is imposed at a rate of 10 per cent of the sum of the value of the goods, any duty or wine equalisation tax applicable and the cost of transport and insurance of the goods.16 However, incidence of the GST is intended to apply to final consumption and not on business inputs. Therefore a business that is registered for GST, will generally be eligible for an input tax credit (ITC) to offset their import GST liability. The effect is that most business imports will be a ‘wash transaction’ with the GST offset by the ITC, which represents no net gain to revenue.
Border and biosecurity fees and charges
In considering potential changes to low value import handling and administration, it is noted that both Customs and Border Protection and DAFF Biosecurity impose a set of fees and charges associated with the lodgement of import declarations and the inspection and other services that may be required to clear incoming goods.
In the case of both Customs and Border Protection and DAFF Biosecurity, charges vary depending on whether declarations are made electronically or manually, and whether they relate to sea, air or post consignments. Declarations with respect to air and sea consignments are generally lodged electronically, while manual processes are more commonly used in the international mail stream. In 2010-11, of 17,318 full import declarations processed through the postal system, 13,007, or 75 per cent, were manually entered. In contrast, of the 1.596 million full import declarations processed through the air cargo system 1,315 or 0.08 per cent were entered manually. For sea cargo the figures are 1.542 million full import declarations of which 1,106, which is 0.7 per cent, were entered manually.
Generally, fees and charges are determined in accordance with the Australian Government’s Cost Recovery Guidelines 2005, along with, in the case of DAFF Biosecurity, the Quarantine Services Fees Determination 2005 and in the case of Customs and Border Protection, the Import Processing Charges Act 2001 and ancillary regulations. An issue for the Taskforce is to determine whether alternate arrangements for the collection of fees and charges are
consistent with these guidelines and whether efficiencies may be achieved in existing processes so as to facilitate a reduction in these fees and charges.
Modes of importing low value goods
Imports of low value goods can enter into Australia in three main ways:
as air cargo and as sea cargo;
through the international mail stream;
by international travellers bringing in goods.
Each of these import streams has quite different attributes – both with respect to the nature of goods being imported, and also with regard to the processes by which the importation occurs. Potential reform to import handling and administration needs to have regard to these attributes. Air and sea cargo
Low value consignments sent through air cargo by both individuals and business comprise mainly clothing (41 per cent) and electronic goods (19 per cent).17 Other goods included mechanical parts, sporting goods, books and magazines, medical supplies, CDs and DVDs, and food. Appendix G details data on the actual volume of low value threshold imports.
In the case of both air and sea cargo, the importation of goods is primarily undertaken by specialist service providers such as express couriers or freight forwarders that have control of goods throughout the importation process. Providers can choose which countries they operate in, to whom they provide their services and the nature of goods that they are willing to transport. Moreover, these providers have put in place integrated business systems by which they manage the importation and logistics process on behalf of their customers.
A key aspect of these business systems relates to the information which providers obtain at the time goods enter into their control. This information is generally comprehensive having regard to regulatory requirements, is captured prior to the goods arriving in Australia and is available pre arrival in electronic format – features that enable it to be utilised throughout the importation process.
The availability of this electronic information simplifies the importation process for both the provider and border agencies in a variety of ways:
it provides information which can be utilised by border agencies in assessing goods for border security and biosecurity risks. The cargo destined for Australia is reported into the Integrated Cargo System (ICS)18 by authorised reporters in the supply chain. Under current arrangements, this information is presented in both cargo reports and through the import declaration process. Importers of goods either as air or sea cargo are required to make declarations as to the nature of those goods and the level of detail in those declarations varies depending on the value of the goods in question. For goods valued above $1,000 a Full Import Declaration (FID) is required; for goods valued at or below $1,000 a Self-Assessed Clearance is required.19 Generally, the information contained in cargo reports and through declarations enables border agencies to undertake their responsibilities more efficiently;
Process map for the operation of the Integrated Cargo System (ICS)
Source: Australian Customs and Border Protection Service
it allows goods to be tracked easily through the importation process. This means goods that are identified for particular treatment by border agencies can be located and sorted easily through the use of relevant information management systems, tracking systems and physical infrastructure; and
it provides an information base by which importers and border agencies are able to assess revenue liability. Moreover, as the information is available from the beginning of the importation process, assessments made by importers can be done prior to the goods arriving from Australia, and hence revenue collection can occur without delay where the importer (or their customers) has already provided for the payment of that liability in advance. This is of greater importance with respect to air cargo, where expeditious delivery times are more critical.
It must, however, be recognised that the potential availability of information does not mean that changes to Australia’s current policy settings necessarily would be without cost to air and sea cargo operators. Business systems have been established having regard to existing requirements, such as the number of licensed customs brokers required to classify imported goods and the size and layout of licensed depots. As such, were there for example to be a change to revenue assessment requirements that necessitated greater volumes of goods to be assessed for customs duty, this could be expected to result in increased costs associated with duty assessments as well as other costs such as those associated with storage and delivery delays.
Many of these potential costs have been raised through consultation with industry, and previously in submissions to the Productivity Commission’s inquiry into the Australian retail industry.
International mail
In addition to letters and documents, the type of items that typically come in through international mail include clothing and footwear, cosmetics, electronic goods, books, CDs and DVDs, mechanical parts, sporting goods, musical instruments and food. In addition, both tobacco and alcohol are more commonly sent through the mail than as air cargo.
The processes involved in the importation of goods through the international mail stream are quite different from those in air and sea cargo, and hence give rise to significantly different issues with respect to potential reforms to import handling and administration.
The international mail stream operates under a cooperative rules-based system that is determined through an international treaty arrangement under the UPU Convention. Australia Post is Australia’s designated operator for the international mail stream under the UPU Convention (see also Australian Postal Corporation Act 1989).
Under the UPU Convention and ancillary instruments, Australia Post has a range of service obligations with respect to low value goods. Goods may arrive from any country that is a member of the UPU. Goods may be packaged in a variety of different forms such as packets or small parcels weighing less that 2 kg, as parcels weighing more than 2 kg or as EMS postal items.
Under current arrangements, international mail stream parcels arrive with a paper declaration affixed to the exterior of each article. Consequently Australia Post and the border agencies do not have access to any information in regard to those goods until they arrive at the border. There is an international agreement for the format and content of the declaration, which includes details of the sender, the recipient, and the description and value of the goods.20 However, while these common standards exist, the actual information attached to any individual parcel is outside the control of Australia Post at the time it enters into the mail stream. Further, the information that is actually provided on international mail stream parcels is of variable quality, unverified, it is presented in multiple languages, values are specified in many different currencies, and it is not provided in an easily useable electronic form. In many instances, particularly for smaller parcels, much of the required information is absent. Each of these attributes has the capacity to impact on the efficiency with which international mail can be processed.
In addition, whilst there is a standard for identifying barcodes to be applied on EMS items and parcels over 2kgs, there is no requirement to apply barcodes on packets of less than 2 kgs, making identification and linking any kind of electronic data to such an item difficult.
Gateway operations
All goods that enter into Australia through the international mail stream are processed at one of four international gateways – these are located in Sydney, Melbourne, Brisbane and Perth.
Following the outbreak of Foot and Mouth disease in the UK in 2001 the Government decided to move to 100 per cent screening of all incoming mail, either through x-ray screening or detector dogs. Funding of $49.4 million was provided to Australia Post (through the then Department of Communications, Information Technology and the Arts) to pay for the cost associated with an increased footprint to accommodate this process. The aim was to build new gateways in Melbourne and Sydney. A site was available at Tullamarine airport but no suitable site was available near Mascot Airport in Sydney. A new gateway was built at Tullamarine and a decision was made to refurbish the existing Sydney gateway located at Granville. The gateways became fully operational in mid-2006. Australia Post estimated that the $49.4 million funding covered about 65 per cent of the costs of the infrastructure, leaving a “shortfall” of $26.9 million to be funded by Australia Post. Australia Post was also required to meet its own ongoing operational costs. The introduction of the 100 per cent screening required additional DAFF Biosecurity staff to be allocated to this activity. This was largely funded by the Government. However, a decision was made to have Australia Post fund a proportion of this cost – approximately $3.2 million per annum.21 In May 2010 this determination was increased to $8.2 million per annum.22 Generally, Australia Post does not contribute to the costs incurred by Customs and Border Protection.
The majority of parcels that flow through the international mail stream into Australia are subject to manual, labour intensive processes, the nature of which can vary depending upon the category of postal item being processed. Having regard to the border agencies’ risk assessment processes, these items are screened and certain items removed for secondary assessment, as appropriate. As the designated operator in the international mail stream, Australia Post must ensure that it forwards the mail according to the delivery standards published internationally and the most secure means that it uses for its own [Australian] items.23 A postal item remains the property of the sender until it is delivered to the rightful owner, except where it has been seized in pursuance of the legislation of the country of origin or destination.24
At present, the only way to identify articles for revenue liability is through an intensive physical process that involves the manual checking of each article. This activity is currently undertaken in conjunction with Customs and Border Protection’s assessment of mail articles for the full range of border risks. Where articles are assessed as having a value above the threshold, the intended recipient of the goods is required to lodge a FID with Customs and Border Protection and pay assessed duty, tax and an import processing charge before the goods are released. Currently, this is a cumbersome process that occurs after the goods have arrived, and involves both Customs and Border Protection and Australia Post. Until the requisite declaration is made and the assessed liability paid, those goods are held in storage at the international mail gateway.
These arrangements raise issues with respect to the efficiency of the handling and administration processes, their flexibility and useability from a consumer perspective, and present Australia Post with further difficulties in regard to infrastructure constraints, such as storage space and storage management.
A further consequence of these processing arrangements is that any consideration of the duty and GST threshold necessarily has to have regard to the balance between the amount of additional revenue that could be collected from a lower threshold relative to the increased parcel processing costs that could be expected to arise at the international mail gateways as increased volumes are required to be assessed.
In 2010-11, around 39,000 postal items were processed for duty and/or GST liability – of which 17,318 were goods valued at over $1,000, and the remainder related to alcohol and/or tobacco products. This compares with approximately 43,000 items in 2009-10 processed for duty and/or GST liability, of which 19,056 were valued at over $1,000, and the remainder related to alcohol and/or tobacco products. Based on these 2009-10 volumes, the Productivity Commission estimated the additional volumes that would be subject to processing for revenue purposes if the threshold for both GST and duty were lowered. If the threshold had been set at $800, approximately 160,000 parcels would have been subject to revenue assessment; at $500 approximately 1.2 million parcels would have been subject to revenue assessment; and at $100 the number of parcels to be processed for revenue purposes would be around 16 million.25
However, as noted above, the number of parcels entering through the international mail stream, as well as other import streams, is forecast to increase significantly as the on-line market continues to develop. Even without any change to current policy settings, the growth in parcel volumes is putting increasing pressure on the physical capacity, operational efficiency and operational budgets of the international mail gateways. Changes to policy settings would add additional pressure that would need to be managed.
Australia Post revenue
The revenue that Australia Post receives for delivering goods through the international mail stream is determined according to rules established under the UPU Convention, which means they are not set specifically having regard to the costs incurred by Australia Post with respect to fulfilling its service obligations. The revenue received by Australia Post depends on a range of factors including the category of postal item being delivered as well as its performance with respect to delivery times.
As Australia Post noted in its 2010-11 Annual Report, for inbound international parcels weighing less than 2 kilograms it operates at a loss because the cost of delivering these items outweighs the reimbursement that they receive. As a consequence, there is financial pressure on Australia Post to seek ongoing improvements in the efficiency of gateway operations. Separate from any issue relating to current policy settings, the UPU revenue arrangements are providing impetus for changes in how Australia Post, Customs and Border Protection, and the DAFF Biosecurity manage the import handling processing and management of goods that arrive through the international mail stream.
International travellers
Goods imported by international travellers – as the accompanied baggage of an arriving person or purchased by an arriving person at an inwards duty free shop – are generally smaller items for personal use. These typically include alcohol and tobacco products, perfume and cosmetics, and lighter goods such as cameras, computers and MP3 players.
In the case of the international travellers, the rules with respect to liability for duty and/or GST apply whether the traveller is returning home or visiting from overseas. Generally, the rules with respect to imports of this nature provide for tax-free allowances for both alcohol and tobacco, and also for general goods brought in by adults ($900) and children ($450). Having regard to the genesis of this Taskforce and its Terms of Reference, the Taskforce does not consider imports of this nature to be central to the scope of issues it has been asked to address. Nevertheless, regard will be given to imports of this nature to the extent relevant.
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