James and Chief Executive Officer of Customs

[2009] AATA 670

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2009] AATA 670

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2009/0377

GENERAL ADMINISTRATIVE DIVISION		)
Re		ALAN JAMES

Applicant

And CHIEF EXECUTIVE OFFICER OF CUSTOMS

Respondent

DECISION

Tribunal Deputy President P E Hack SC

Date4 September 2009

PlaceBrisbane

Decision The Tribunal affirms the decision under review.  

..............Signed...............

Deputy President

CATCHWORDS

CUSTOMS – Australia-United States Free Trade Agreement – preferential treatment for duty purposes – consignment of goods to Australia via New Zealand – whether addition in New Zealand of various fittings to a yacht amounted to an operation necessary for the transportation of the yacht to Australia – decision affirmed

WORDS & PHRASES – “process of production” – “operation” – “necessary”

Customs Act 1901 (Cth) s 153YL

The Commonwealth and the Postmaster-General v The Progress Advertising and Press Agency Co Pty Ltd (1910) 10 CLR 457   

REASONS FOR DECISION

4 September 2009	Deputy President P E Hack SC
Introduction

1. In May 2004 Australia and the United States entered into a Free Trade Agreement. The Parliament gave effect to the Agreement by, inter alia, making amendments to the Customs Act 1901 (Cth) that have the effect of imposing preferential rates of customs duty on goods obtained or produced in the United States that are imported into Australia.

2. The applicant in these proceedings, Mr Alan James, imported a 13 metre cruising yacht from the United States into Australia via New Zealand. He sought to have duty imposed at the preferential rate of duty but Customs decided that he was not entitled to the preferential rates because of work done on the yacht in New Zealand. It is that decision that Mr James seeks reviewed in the Tribunal.

   Factual Background

3. There was very little factual controversy between the parties. In May 2007 Mr James (and his spouse) entered into a contract in writing with a New Zealand company to purchase a Catalina 42 Mk II yacht. The yacht was to be constructed in the United States to a standard design and shipped to Auckland in a shipping and storage cradle aboard a cargo vessel. The contract specified that “Extras” to the value of NZD41,662 would be “supplied and fitted in Auckland”. Those extras include a bimini (in effect, a hard surface roof over the cockpit) with an extra rail and side curtains, safety gear, a dodger (a type of spray curtain) and a folding propeller. The extra represented approximately 10% of the purchase price.

4. During the journey from the United States to Auckland the mast and rigging were stored separately on the shipping cradle. They were installed, along with the extras, when the yacht was unloaded in Auckland. Mr James took delivery of the yacht in Auckland and engaged a crew to sail the yacht to Australia.

5. In March 2008, around the time of the yacht’s arrival in Australia, Mr James’ customs brokers made an entry for customs and paid duty on the yacht at 5%, the ordinary rate for yachts of that type, on the basis that the yacht had been imported from New Zealand. Subsequently Mr James became aware of the possibility of obtaining a refund of the duty paid on the basis that the yacht had been manufactured in, and imported from, the United States and was thus entitled to the preferential rate (which appears to be nil). An amended customs entry was lodged on that basis.

6. The amended entry was treated by Customs as an application for a refund of the duty that had been paid (AUD17,244.03) and of the GST (AUD1,724.40) on that duty. On 14 November 2008 a delegate of the Chief Executive Officer of Customs rejected the claim for a refund. That decision was affirmed on internal review on 9 January 2009.

7. There is no dispute that the yacht has been correctly classified nor is there any dispute that the yacht, so far as its construction is concerned, satisfies the product-specific rule of origin of goods of the category of that classification. The dispute centres on the consequences for duty purposes of the fitting of the extras in Auckland.

   The legislation

8. By virtue of s 163 of the Customs Act duty paid may be made “in such circumstances…as are prescribed”. Those circumstances are prescribed in Regulation 126 of the Customs Regulations 1926 (Cth). That relied upon here is paragraph (1)(e) of that Regulation which permits a refund where duty has been paid “through manifest error of fact or patent misconception of the law”. Mr Northcote, the solicitor for Customs, did not suggest that the present case would not fall into that category were the matter otherwise to be determined favourably to Mr James.

9. Division 1C of Part VIII of the Customs Act deals with “US originating goods” to which preferential rates of duty apply. It is sufficient to note that US originating goods are goods wholly obtained, or produced entirely, in the United States. The critical provision in this case is s 153YL of the Customs Act. It is in these terms:

   “(1)Goods are not US originating goods under this Division if:

   (a)they are transported through a country or place other than the US or Australia; and

   (b)they undergo any process of production, or any other operation, in that country or place (other than unloading, reloading, any operation to preserve them in good condition or any operation that is necessary for them to be transported to Australia).

   (2)This section applies despite any other provision of this Division.”

   The issues

10. There is no doubt that s 153YL(1)(a) was satisfied; the yacht was transported through New Zealand.

11. The issues are these:

    (1)did the fitting and installation of the extras amount to a “process of production, or any other operation” in New Zealand? and,

    (2)if it did, was that an operation to preserve the yacht in good condition or an operation that was necessary for the yacht to be transported to Australia?

    A process of production

12. The legislation provides no definition of what is meant by “process of production” or “operation”. It can be seen, having regard to the use of the adjective “other” to qualify “operation” that “operation” encompasses the processes of production. Similarly, the exclusionary words suggest that the activities of unloading, reloading, steps designed to preserve goods and transport them are also to be regarded as operations. These matters rather suggest that the legislature intends “operation” to be construed broadly.

13. The legislative context needs also to be borne in mind. The word is found within the Part of the Act that creates a preferential customs duty regime for goods wholly obtained, or produced entirely, in the United States. The particular section excludes that regime when the criteria within it are satisfied and does so despite any other provision of the Division.

14. In my view the sub-section is to read as excluding preferential treatment where activities are undertaken on goods that mean that it can no longer be said that the goods were produced entirely in the United States. The yacht, as shipped to New Zealand, was wholly produced in the United States. The addition of the extras meant that the end product was different from that which had been exported from the United States. It is likely, in my view, that the addition of the extras amounted to a process of production in New Zealand but it is enough to conclude, as I do, that at amounted to an operation.

15. Thus I am satisfied that the first question must be answered in the affirmative.

    Preservation or necessity for transport

16. Mr James, correctly in my view, did not suggest that the fitting of the extras was an operation to preserve the yacht in good condition. If anything they added to its condition but the condition of the yacht would not have been lost, absent usual wear and tear, without the fitting of the extras.

17. The argument of the parties focussed upon whether the extras were necessary for transportation to Australia.

18. No authority was cited to me on the meaning of “necessary” in this context and I was informed that s 153YL of the Customs Act had not been considered at either Court or Tribunal level.

19. There is authority of respectable vintage about the meaning of “necessary” in the context of a statute that authorised the making of regulations for “all other matters and things which may be necessary for carrying out [the Post and Telegraph Act 1901 (Cth)] or for the efficient administration thereof.” In The Commonwealth and the Postmaster-General v The Progress Advertising and Press Agency Co Pty Ltd[1] Higgins J said this:

    ”Now, the word ‘necessary’ may be construed liberally, not as meaning absolutely or essentially necessary, but as meaning appropriate, plainly adapted to the needs of the Department – to ‘the carrying out’ of the Act or its ‘efficient administration’ … But the power does not extend to everything which the Governor-General in Council considers to be necessary. The regulation must be necessary, in the sense which I have stated.” 

    [1] (1910) 10 CLR 457 at 469.

20. His Honour’s remarks were referred to with approval by the Court in Ronpibon Tin N.L. v Federal Commissioner of Taxation[2] when considering the meaning to be given to “necessarily” in the expression “losses and outgoing necessarily incurred in… gaining or producing…income” i.e. the second limb of s 51(1) of the Income Tax Assessment Act 1936 (Cth). It is now well-settled that “necessarily” in that context means “that the expenditure must be dictated by the business ends to which it is directed, those ends forming part of or being truly incidental to the business”[3].   

    [2] (1949) 78 CLR 47 at 57

    [3]        Federal Commissioner of Taxation v Snowden & Willson Pty Ltd (1958) 99 CLR 431, 437 (Dixon CJ)

21. Construing “necessary” in this way might be thought to be of some assistance to Mr James but I have reached the conclusion that the context requires “necessary” to be read in the first of the senses used by Higgins J i.e. absolutely or essentially necessary, rather than as appropriate. I reach that view for similar reasons to those that are set out in paragraph 14 above. To construe “necessary” in the sense of being appropriate to the task would defeat what I regard as the evident legislative intent of ensuring that only goods wholly obtained, or produced entirely, in the United States would obtain preferential treatment.    

22. As the submissions for Customs point out, correctly in my view, the yacht could have been transported to Australia in exactly the same condition as it was transported to New Zealand. It was housed in a shipping cradle and could simply have been loaded aboard another vessel. But more broadly, the fitting of the extras was not “necessary” to enable the yacht to be sailed to Australia. It was certainly desirable and made for greater comfort and safety for the crew, as Mr Neil Cullen, who skippered the yacht across the Tasman, pointed out. Nonetheless, sailing across the Tasman could have been undertaken without the fitting of the extras.

23. Thus I conclude that the fitting of the extras was not necessary for the yacht to be transported to Australia.

    Conclusion

24. Given that I am satisfied that the fitting of the extras to the yacht amounted to an operation in New Zealand that was not one of unloading, reloading or preservation, or one necessary to enable the yacht to be transported to Australia I am satisfied that s 153YL(1)(b) of the Customs Act is also made out. It follows that I am satisfied that the yacht was not “US originating goods” under Division 1C of Part VIII of the Customs Act and thus not entitled to the preferential rate of duty. I would then affirm the decision under review.

25. I should add, because Mr James expressed some concern about it, that neither the making of the claim for a refund nor the rejection of it by Customs or the Tribunal reflects adversely upon him. His claim was made and prosecuted with utmost probity in circumstances where, because of incomplete information, Customs encouraged the making of the claim. Part of the policy purpose for the Tribunal is to enable citizens to have merits review undertaken of government decisions that affect the citizen. The present case, which involved a difficult and obscure area of law, is an a fortiori case where it was appropriate for Mr James to seek an independent review of Customs’ decision.      

    I certify that the 25 preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President P E Hack SC

    Signed:         ..............Signed...................................
      Melissa Hamblin, Associate

    Dates of Hearing  25 August 2009

    Date of Decision  4 September 2009
    For the Applicant  In person
    Solicitors for the Respondent    Australian Government Solicitor