Low Value Parcel Processing Taskforce

Interim Report

MARCH 2012

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Table of contents

Executive summary......

Introduction......

Reformcontext ...... 7

Growth in low value imports......

Current import handling and administration processes......

Tariff classification and duty calculation......

Application of GST......

Border and biosecurity fees and charges......

Modes of importing low value goods......

Air and sea cargo......

Process map for the operation of the Integrated Cargo System (ICS)......

International mail......

International travellers......

Taskforce activities to date......

Review of existing business and border agency processes......

Review of regulatory arrangements......

Assessment of current and future operating environment......

Investigation of alternative approaches operating internationally......

Domestic stakeholder consultation......

International consultation......

Reform development and assessment......

Assessment Process......

Further work to be undertaken......

Assessment of potential solutions......

Detailed assessment of prospective solutions (including costings)......

Consultation with stakeholders......

Development of reform implementation program......

Appendix A: Terms of reference......

Appendix B: Biographical details – Taskforce members......

Appendix C: International mail initiatives......

Appendix D: Regulatory framework......

Appendix E: Summary of international low value import schemes......

Appendix F: International mail products and categories......

Appendix G: International mail and cargo volumes......

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Executive summary

The purpose of this Interim Report is to provide an update with respect to the progress of work being undertaken by the Low Value Parcel Processing Taskforce (LVPPT), which has been established to investigate new approaches for the handling and administration of low value imports of goods, particularly in the international mail stream, including options for revenue collection.

The Interim Report has been prepared in a form to enable public release, while at the same time ensuring that no aspect of Australia’s customs, border security or biosecurityprocesses has beencompromised. The Final Report to be provided to Government will incorporate such relevant detailsin relation to those matters as are required.

Key activities to date

The key activities that the Taskforce has undertaken to date include:

  • reviewing the existing methods used for handling and administering imports of low value goods, including:
  • international mail handling processes undertaken by Australia Post;
  • air and sea cargo operations undertaken by logistics operators such as express couriers, freight forwarders, licensed customs brokersand cargo terminal operators;
  • border security and biosecurity assessment processesfor international mail, and both air and sea cargo;
  • customs duty and GST assessment processesfor international mail, and both air and sea cargo;
  • reviewing the arrangements under which existing methods for handling and administering imports of low value goods are regulated, including:
  • Commonwealth legislation and regulatory instruments;
  • international treaty arrangements, cooperative agreements and ancillary instruments; and
  • administrative arrangements between Australia Post and the Australian border agencies;
  • assessing the current and potential future environment in which approaches for handling and administering imports for low value goods need to be considered, including:
  • current and expected volumes and characteristics of low value goods imported intoAustralia;
  • technological innovations with respect to parcel processing, tracking systems and import processing information management systems;
  • international initiatives being undertaken with respect to international mail processing, including those occurring under the auspices of:
  • the Kahala Posts Group;[1]
  • the Medici Group;[2]
  • the World Customs Organization (WCO)/Universal Postal Union (UPU) Contact Committee;[3]
  • reviewing international initiatives including:
  • ongoing multilateral (e.g. World Trade Organization) and bilateral tariff reform processes;
  • the Asia-Pacific Economic Cooperation (APEC) Honolulu Declaration to …‘… establish commercially useful de minimis values in our economies that will exempt low-value shipments from customs duties and streamline entry documentation requirements’;[4]
  • investigating alternative approaches with respect to the handling and administering imports of low value goods operating internationally, including:
  • a desktop review of approaches undertaken in seven countries – the United Kingdom, Canada, Singapore, Korea, Japan, the United States and New Zealand; and
  • a study trip of Canada, the United Kingdom and Singapore to meet with the designated postal operators and relevant border agencies in those countries to understand the logistics, revenue, reporting, compliance and cost recovery mechanisms in these jurisdictions for the processing of low value imports.

Reform development and assessment

The Taskforce is developing potential solutions to reform the way in which low value import processing may be undertaken in Australia. These potential solutionsconsider a number of aspects including:

  • infrastructure and/or information systems changes to streamline international mail gateway operations (with respect to both Australia Post and Australian border agency activities);

  • process changes to streamline international mail gateway operations (as a total process involving Australia Post and Australian border agency activities);
  • simplification of duty and/or GST assessment and collection processes; and
  • alternate payment methods for duty and/or GST revenue.

While potential solutions for reform to import handling and administration processes are being identified and assessed, at this stage detailed costing and associated analysis has not been completed. As such, it is not feasible to advise what recommendations with respect to reform of current arrangements may be contained in the Final Report.

Consultation

In carrying outits activities, the LVPPT has been assisted significantly to date by the consultations that it has undertaken with a number of stakeholders, including:

  • Australian Government departments and agencies:
  • Australian Bureau of Statistics;
  • Australian Customs and Border Protection Service;
  • Department of Agriculture, Fisheries and Forestry;
  • industry participants:
  • Australia Post;
  • Australian Federation of International Forwarders (AFIF);
  • Conference of Asia-Pacific Express Carriers (CAPEC);
  • Customs Brokers and Forwarders Council of Australia Inc. (CBFCA);
  • Post Office Agents Association Limited (POAAL); and
  • business representatives such as
  • Australian Music Association;
  • Australian National Retailers Association (ANRA);
  • Australian Retailers Association (ARA);
  • Bicycle Industries Australia;
  • eBay Australia & New Zealand;
  • Retail Cycle Traders Australia; and
  • Visa Australia.

The preparation of the Final Report will require further consultation, including with parties with whom the LVPPT has not yet had the opportunity to engage,such as State and Territory governments.

Reference material

This Interim Report contains a number of appendices that provide relevant background, including material that isbeing used to inform the LVPPT’s development and assessment of potential reformsolutions. These appendices are:

  • AppendixA: Terms of Reference
  • Appendix B: Biographical details – Taskforce Members
  • Appendix C: International mail initiatives
  • Appendix D: Regulatory framework
  • Appendix E: Summary of international low value importschemes
  • Appendix F: International mail products and categories
  • Appendix G: International mail and cargovolumes

LVPPT INTERIM REPORT1

Introduction

On 9 December 2011, the Government released, and responded to, the Productivity Commission’s final report on the Economic Structure and Performance of the Australian Retail Industry.[5] The terms of reference for the inquiry included an examination of the sustainability and appropriateness of the current indirect tax arrangements, and the extent that process reform and technology could reduce the administrative costs of collecting indirect taxes and duty on imported goods.

The Commission’s Recommendation 7.1 stated that:

“There are strong in-principle grounds for the low value threshold (LVT) exemption for GST and duty on imported goods to be lowered significantly, to promote tax neutrality with domestic sales. However, the Government should not proceed to lower the LVT unless it can be demonstrated that it is cost effective to do so. The cost of raising the additional revenue should be at least broadly comparable to the cost of raising other taxes, and ideally the efficiency gains from reducing the non-neutrality should outweigh the additional costs of revenue collection.”

The Government response to this recommendation was to note it and state that it would reassess the appropriateness of the low value import threshold when it receives the final report of this Taskforce.

Further, the Commission proposed in at Recommendation 7.2 that:

“The Government should establish a taskforce charged with investigating new approaches to the processing of low value imported parcels, particularly those in the international mail stream, and recommending a new process which would deliver significant improvements and efficiencies in handling. The taskforce should comprise independent members, with the Australian Customs and Border Protection Service (Customs), the Australian Quarantine and Inspection Service (AQIS), Australia Post and the Conference of Asia Pacific Express Carriers providing advice. The terms of reference should outline the criteria that any new system must satisfy including: minimising the costs of processing and delivery delays, streamlining the assessment of Customs Duty, user pays, and without compromise to the border protection functions of Customs and AQIS. This review should report to Government in 2012 and propose an expeditious timeframe for its proposed changes.

Once an improved international parcels process has been designed, the Australian Government should reassess the extent to which the LVT could be lowered while still remaining cost-effective.”

The Government agreed with this recommendation.

Consequently, on 9 December 2011 the (then) Assistant Treasurer, the Hon Bill Shorten, with the Minister for Broadband, Communications and the Digital Economy, the (then) Minister for Home Affairs and Justice and the (then) Minister for Small Business jointly announced the establishment of aTaskforce.

The key role of the Taskforce is to investigate new approaches for the handling and administration of low value imports of goods, including options for revenue collection. The Terms of Reference set out a range of matters for the taskforce to consider in forming its recommendations. A copy of the Terms of Reference is at Appendix A.

The members of the Taskforce are Dr Bruce Cohen (Chair), Professor Caroline Chan and Mr Jim Marshall.Biographical details of Taskforce Members are contained atAppendix B.

The Terms of Reference for the Taskforce stated that it should release an interim report in three months from its establishment. This Interim Report is intended as a progress report on the status of the Taskforce’s investigation and does not contain firm recommendations. It is the intention of the Taskforce to submit theFinal Report to the Assistant Treasurer, the Hon David Bradbury, in July 2012 in accordance with the Terms of Reference. The Final Report will contain a comprehensive blueprint for reform, with costed alternatives and timeframes for implementation.

Reform contextGrowth in low value imports

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 48.06million – 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 36.0per 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 ofsecurity 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 7.6per 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 purposesin 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 biosecurityoperations.

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]

Tariff classification and duty calculation

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 producedand 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. Theprimary classification systemand the relevant tariff rates that apply to those goodsruns to some 97 chapters (see Schedule 3,Customs Tariff Act 1995).[15]