It is a common adage that most alcohol gets better with age. Unfortunately, the taxation of alcohol does not.
In over a century, customs duty (on imports) and excise duty (on Australian manufacturers) have not fully matured, or perhaps more aptly, they have turned sour.
Over 120 years since their introduction, customs and excise are not often in the public eye like income tax or GST, but they are complex and highly regulated areas worth significant revenue. Despite their long history or, perhaps, because of the age of the legislation, they also continue to produce both unanticipated and at times perverse liabilities.
We have summarised the background to excise and customs below, including the basic concepts and areas of regulation. Critically, we have also outlined the potential liability (at least in the eyes of the ATO) that can arise for an amount equivalent to the duty for anyone that had possession, custody or control of excisable or customable goods on which duty was not paid.
The potential liability of anyone with possession, custody or control of the dutiable goods is enormous. The liability can apply to the owner of the goods, a warehouse employee where the goods are held or even a truck driver transporting goods.
Given the ATO can (and does) issue statutory demands to anyone in contact with or connected to dutiable goods with limited (if any) consideration of that person's knowledge of the unpaid duty liability - everyone associated with dutiable goods has a potential problem.
Customs and excise duty date back to Australian Federation, and provide the Federal Government effective control and taxation of:
- excise: tobacco, alcohol and fuel products manufactured in Australia; and
- customs: all goods imported into Australia, with tobacco, alcohol and fuel treated effectively the same as excisable goods (as excise equivalent goods or EEGs).
Liability for duty
The owner of the goods is liable to pay customs or excise duty (as relevant) when the goods are entered for home consumption. In short, goods are entered for home consumption when an import declaration (for customs) or entry form (for excise) is lodged with the relevant authority and the duty paid.
With respect to customs, each successive owner is liable for the duty, regardless of whether they imported the goods.
The rate of customs and excise payable on the good is determined by the classification of the goods under the relevant tariff act. The correct classification of goods can have a significant impact on the duty liability. For example, an alcoholic seltzer classified as beer for excise purposes may have duty payable up to (maximum) $37 per litre of alcohol, compared to a seltzer classified as a spirit (or pre-mix) with duty payable up to $62 per litre.
If goods are wrongly classified, the error will need to be rectified and in specified circumstances, a refund may be available for an overpayment.
Once the goods are entered,they can typically be delivered into home consumption - released into the Australian market with more limited control by Australian authorities. Alternatively, if duty is paid on goods that are subsequently exported from Australia, a drawback of the duty paid may be available to the exporting entity.
Until the goods are entered and excise or customs is paid (and sometime thereafter), the goods are under the control of either the Australian Border Force (for customable goods) or Australian Taxation Office (for excisable goods and EEGs). Goods on which customs or excise have not been paid are referred to as underbond goods, and for excisable goods and excise equivalent goods:
- they must be stored in a licenced warehouse, in accordance with any conditions attached to the warehouse licence; and
- they cannot be moved from the licenced warehouse without a written movement permission from the relevant authority, typically the ATO.
If excisable goods or EEGs (in particular) are not stored in a licenced warehouse or are moved without permission, the ATO may find that the goods were not kept safely or appropriately accounted for; in effect, the goods are treated as if they have been delivered into the Australian market or are in circulation.
In this case, the relevant authority may issue a statutory demand for an amount equivalent to the unpaid duty liability as detailed below.
Liability for equivalent amount of duty
Under section 35A Customs Act 1901 (Cth) and section 60 Excise Act 1901 (Cth), the relevant authority (typically the ATO) has a discretion to issue a statutory demand for an amount equivalent to the unpaid duty on the dutiable goods.
These provisions give enormous power to the government authorities to recover unpaid duty. Not only are the successive owners of customable goods liable for the actual duty, but for customs and excise authorities can issue innumerable statutory demands to recover an amount equivalent to the unpaid liability. Australian Courts have confirmed, for example, that a statutory demand can be enforced against an individual at the same time that authorities are prosecuting the owner of the goods for the actual duty liability, and that authorities can recover under multiple demands at the same time provided that they do not recover more than the unpaid duty liability.
This power goes well beyond the ATO's debt collection abilities in income tax or other federal taxes. For example, for almost all (if not all) other federal taxes, except on very rare occasions the tax liability can only be recovered from the entity that owes the liability. At its highest, outside customs and excise the debt may only be recovered from another person under bankruptcy clawback provisions, director penalty provisions or the like.
There are only two conditions precedent before the authorities determine whether to exercise their discretion and issue a demand:
- the entity had or was entrusted with possession, custody or control of excisable or customable goods; and
- the goods were not kept safely, or the individual failed to account for the goods.
Possession, custody or control
As recently as 2018, the High Court of Australia recognised that:
'[t]he reference to "the possession, custody or control" of dutiable goods is appropriately construed as a compendious reference to that degree of power or authority which is sufficient to enable a person to meet the obligations both to keep those goods safely and, on request by a Collector, either to show the goods to a Collector or to satisfy a Collector that the goods have been dealt with in accordance with the Act. A person who "has" the possession, custody or control of dutiable goods within the meaning of the section is a person who possesses the power or authority in relation to those goods to that degree, irrespective of the manner in which that person might choose to exercise that power or authority.'
(Comptroller General Customs v Zappia (2018) 361 ALR 194, at )
In its decision, the High Court further confirmed that the power or authority of the person does not need to be exclusive or paramount, and therefore it does not matter where the person is within a chain of command or hierarchy of responsibility. A person is not disqualified from having the requisite degree of power or authority because they are subject to the direction of another.
The Courts have considered that the following people were (or may be) liable under a statutory demand:
- a warehouse licence holder, where the licence holder gave the keys to the licenced warehouse to a Customs official (and the goods were subsequently stolen). The fact that the Customs officer had the key did not disqualify the licence holder from physical possession, custody or control of the goods. (see Collector of Customs (NSW) v Southern Shipping Co Limited)
- the manager of a licenced warehouse, who made operation decisions regarding the warehouse and had operation control of the warehouse and excisable goods, and was the son of the sole director of the company that owned the warehouse (who also received a statutory demand). (See Comptroller General Customs v Zappia)
- directors, shareholders and/or employees of the holder of a warehouse licence that stores underbond goods. (See Zappia, and Hurley v Collector of Customs)
Authorities have also sought to extend the purview of sections 35A and 60 to persons that do not have physical power or authority over the goods. This might include, for example, the chief financial officer of a business engaged in trading dutiable goods because the person could (potentially) identify from the business records that duty was not paid, and are responsible for managing the entities liabilities.
Keep goods safely or account
The obligation to keep goods safely is not an absolute liability, such that a person is potentially liable if they do not keep goods safely (i.e. duty is not paid) regardless of their efforts or conduct - it is not necessary to avoid the unavoidable.
However, the requirement that goods are kept safely (or to account for the goods) is very onerous and it is not relevant if a person has taken reasonable precautions or made a reasonable effort to ensure the goods were kept safely (and duty would be paid). In 2008, Justice Finkelstein of the Federal Court observed that
'. short of a showing that, say, Godzilla had stomped the warehouse, the respondents could not avoid liability for a failure to keep dutiable goods safe, no matter how many precautions they had taken in an attempt to safeguard the cigarettes.' (Drew v Dribb (2008) 249 ALR 790, at )
In the case of Southern Shipping Co Limited (mentioned above), the licenced warehouse owner was liable under a statutory demand when the Customs official held the key to the warehouse, and the goods were stolen from that warehouse.
What this means
The reach for customs and excise liabilities exceeds every other federal tax liability, and Australian Courts have expressly recognised that a statutory demand may be 'unfair'. Despite this, and the despite the fact that the authorities' ability to track goods into, within and out of Australia has changed significantly since the early 1900s when the provisions were enacted to protect Australian revenue, they remain unchanged.
Anyone that is connected with or involved in businesses dealing in excisable goods or EEGs should carefully review their position with that entity, and risk of liability. This is an industry where ignorance is certainly not bliss and can have disastrous consequences.
Manufacturers, importers, warehouse operators and anyone connected in any way to such entities or dutiable goods should carefully review their commercial operations, including their insurance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.