Don't lose any sleep over the new notice on the definition of "owner"
The Department of Immigration and Border Protection has released its long awaited updated notice on the definition of "owner" – DIBPN No. 2017/16. The notice may create some level of hysteria and panic, but the reality is the liability of those involved in the supply chain, particularly customs brokers, remains the same. The bad news is that potential liability for customs brokers, remains very high. But for others in the supply chain, this notice is unlikely to impact significantly in a practical, day to day sense.
What does the notice say
Various sections of the Customs Act 1901 impose obligations on the "owner". For instance, section 165 of the Act provides that underpaid duty is payable by the "owner". Section 240 provides that the "owner" of goods imported into Australia must retain commercial documents for 5 years.
"Owner" is defined in section 4 of the Act as "any person (other than an officer of Customs) being or holding himself or herself out to be the owner, importer, exporter, consignee, agent, or person possessed of, or beneficially interested in, or having any control of, or power of disposition over the goods".
This is an extraordinarily wide definition and as pointed out in the notice – "This means that most parties participating in an import or export supply chain, including licensed customs brokers, may be considered the "owner" for the purposes of the Customs Act".
In essence, the broad definition in the Act means that almost any person in the supply chain can be liable for underpaid duty. In those circumstances, the notice sets out how the Department will decide who to pursue, given they can seek payment from nearly any party in the supply chain for underpaid duty. The following points are made:
the Department is legislatively obliged to pursue underpaid duty – it is not a choice;
this can include pursuing the party that is not commercially liable to pay the duty – a distinction not always appreciated by commercial participants;
generally (read "almost always"), a demand will first be made against the importer named on the import declaration. If the duty is paid there is no further action required;
another party may be pursued if it is uneconomical to pursue the importer named on the import declaration, such as where the importer is based overseas or is insolvent;
if another party is pursued, it will be after the Department has considered the involvement and actions of parties in relation to the goods. The impact of a party's conduct on the non-payment of duty will be relevant;
additionally, if duty is underpaid, it may be relevant to consider who is in possession or control of those goods. Reference is made to Notice 2014/50 which makes clear that a purchaser under a DDP (delivered duty paid) transaction may be the target of a demand for short paid duty.
In summary, the following parties should be most concerned if there is an underpayment of duty:
the importer named in the import declaration;
any party that contributed to the underpayment of duty – especially if that party showed a disregard to their obligations under the Act; and
an innocent purchaser of goods under a DDP transaction.
Why we do not believe there is reason to be alarmed
It does sound scary – anyone in the supply chain can be liable for underpaid duty.
However, these are the reasons why we believe that customs brokers will not see any change in their day to day working life:
customs brokers have always been liable as if they were the owner under section 183 of the Act;
realistically, an underpayment of duty will usually occur when incorrect information has been provided to the Department. Section 243T of the Act imposes liability equal to 100% of the underpaid duty on a party that made the statement or caused the false statement to be made. A customs broker will fit into this category;
the Department has made clear it will pursue a party that has contributed to the short payment by disregarding their obligations. If a customs broker has deliberately or recklessly provided false information, they face much more severe penalties than the requirement to pay underpaid duty (for instance, under section 234 a false statement recklessly made can result in a penalty equal to double the underpaid duty).
The case of the non-importing innocent purchaser of goods is more severe. Other than by reviewing the import declaration (which it is not automatically provided), the purchaser cannot tell if there has been an underpayment of duty. Comfort can be taken from the fact that we are only aware of one instance where the Department has pursued an innocent purchaser of goods for underpaid duty. Nevertheless, we would have preferred that as a matter of policy the Department elected not to pursue underpaid duty from a bona fide/innocent purchaser. Ultimately, it is the Department that elects to release the goods and has the option to review whether duty has been incorrectly paid. It seems unfair that if the Department elects to release goods and later determines that duty was underpaid, that an innocent purchaser should be the party liable for payment of that duty.
What to do now
The Notice on "owner" does not require a change in risk strategies, but it should prompt customs brokers, freight forwarders and importers to revisit existing strategies. We recommend the following:
For customs brokers, have in place quality assurance systems so you can have confidence in the information you provide Customs;
Service providers need to ensure that their terms and conditions are enforceable and contain indemnities in respect of duty payable;
Service providers should also consider some form of security, such as an enforceable right to exercise a lien or personal guarantees;
Service providers should review their insurance and ask whether it contains coverage against a duty liability, as opposed to fines;
Purchasers should undertake due diligence on their suppliers. You can't turn a blind eye to a supplier's relaxed approach to trade compliance and not expect it to come back to bite you;
Purchasers should be suspect of any occasion where the difference between a FOB price and a DDP price does not make sense or the supplier seems overly keen to supply on a DDP basis. It may be better to factor the duty into the price, but not accept DDP terms; and
Purchasers should ask for a copy of the import declaration.
In this Trump-era, there is plenty to be worried about if you are involved in international trade. However, our view is that the new notice on the definition of "owner" under the Customs Act should not be what keeps you awake at night.
Please feel free to contact us if you would like to discuss your company's approach to managing the risks involved in international trade.