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Excise Amendment (Compliance Improvement) Bill 2000



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Bills Digest No. 26 2000-01

Excise Amendment (Compliance Improvement) Bill 2000

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Contents

Passage History.......................................................................................................................... 1

Purpose....................................................................................................................................... 1

Background ................................................................................................................................ 1

Tobacco excise ........................................................................................................................ 1

Illicit tobacco trade .................................................................................................................. 2

Passage of the Bill through the Parliament.............................................................................. 2

Senate Economics Legislation Committee Consideration of the Bill................................. 3

Revenue cost .................................................................................................................. 3

Impact of taxes............................................................................................................... 3

Health issues .................................................................................................................. 3

Industry involvement ..................................................................................................... 4

Compliance with the Bill ............................................................................................... 4

Main Provisions ......................................................................................................................... 5

Schedule 1 - Amendment of the Excise Act 1901................................................................... 5

Licensing for excise purposes............................................................................................. 5

Manufacturer licence ..................................................................................................... 5

Producer licence............................................................................................................. 5

Dealer licence................................................................................................................. 6

Penalties relating to licences .......................................................................................... 6

Granting of licences ....................................................................................................... 6

Licence conditions ......................................................................................................... 7

Control of tobacco leaf, seed or plant ................................................................................. 8

Movement of tobacco .................................................................................................... 8

Unlawful possession of tobacco..................................................................................... 8

Unlawfully buying and selling tobacco ......................................................................... 8

Penalties for tobacco related offences............................................................................ 8

Unlawful possession, movement and selling of excisable goods ....................................... 9

Infringement notices ...................................................................................................... 9

Search powers of officers ................................................................................................. 10

Alternative penalties ......................................................................................................... 10

Endnotes................................................................................................................................... 10

Contact Officer......................................................................................................................... 11

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Passage History

Excise Amendment (Compliance Improvement) Bill 2000

Date Introduced: 21 June 2000

House: House of Representatives

Portfolio: Treasury

Commencement: Royal Assent

Purpose

To improve compliance with the excise law and protect the excise revenue base with a particular focus directed against illicit tobacco. It aims to do this by:

• establishing a new licensing system for the growing, transporting, trade, manufacture and storage of tobacco, and

• introducing a new penalty regime with larger monetary penalties combined with sentences of imprisonment for some offences.

Background

Tobacco excise

Prior to 1 November 1999 excise duty on tobacco products was calculated according to a complex formula involving a combination of a Commonwealth weight based charge, plus a hybrid state surcharge based on both the wholesale price of tobacco and the tobacco weight.1 These arrangements encouraged the manufacture of low value, low weight cigarettes, principally packaged in large packets.

Since 1 November 1999 tobacco products have been subject to a per-stick rate of duty, the Government's rationale for the change being that this was a health measure, intended to remove the incentive to buy and sell these low weight, larger packs of cigarettes. Specifically, any cigarette, cigar, bidi or other stick based tobacco product with an actual tobacco content of not more than 0.8 grams per stick is subject to a duty rate of $0.18872 per stick. All other tobacco products are subject to a rate of $235.90 per kilogram of tobacco content. At the time of introduction it was estimated that this change would

2 Excise Amendment (Compliance Improvement) Bill 2000

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

provide an increase in revenue in 1999-2000 of around $300 million and in subsequent years an additional revenue of around $440 million.2

Illicit tobacco trade

Threatening to erode this significant excise revenue base is a growing trade in illegal tobacco, known as chop chop. Chop chop is processed tobacco leaf sold both as loose leaf and tailor made cigarettes. According to the tobacco industry it is available in the majority of tobacco retail outlets throughout the country. Chop chop consists mainly of Australian grown tobacco leaf and is supplied through domestic growers in Victoria, Queensland and New South Wales.

This illegal trade in chop chop is of concern not only to Government but also to the tobacco industry. In February 2000 the tobacco industry led by Philip Morris prepared a submission to Government entitled 'Chop Chop'; A Report on the Manufacture and Sale of Illegal Tobacco in Australia. This report argued that despite recent raids and seizures by customs officials,3 the Australian Taxation Office (ATO) resources were inadequate to deal with the tobacco excise evasion. In particular, the report recommended that there should be an increase in resources devoted to dealing with the illegal tobacco trade and there should be a much tougher penalty regime imposed on those convicted of offences relating to this trade.

The Excise Amendment (Compliance Improvement) Bill 2000 (the Bill) is a response to these concerns.

Passage of the Bill through the Parliament

The Bill was introduced into the House of Representatives on 21 June 2000 and set for debate the following day. During that debate the Opposition speaker, Mr Kelvin Thomson, acknowledged there was bipartisan support for legislating against tobacco excise evasion but criticised the Government for giving the House and the public only 24 hours in which to consider the provisions of the Bill.

Following a report by the Selection of Bills Committee, the Senate referred the Bill to Economics Legislation Committee (the Committee) on 28 June 2000 for examination and report.4 The Selection of Bills Committee requested that an opportunity be given for public comment on the provisions of the Bill. The Committee received only 3 submissions to the inquiry5 and took evidence from representatives from the Australian Institute of Management, Philip Morris, British American Tobacco and the ATO. The Committee reported on 17 August 2000 and recommended that the Senate pass the Bill. The following section of the digest draws on the Committee's Report.

Excise Amendment (Compliance Improvement) Bill 2000 3

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Senate Economics Legislation Committee Consideration of the Bill

Revenue cost

Submissions to the inquiry by tobacco manufacturers highlighted the cost of the illegal tobacco industry, with conservative estimates ranging from $400 million6 to $600 million7 annually. This translates into a loss of excise revenue of over $300 million8 annually. Another financial impact of the illegal trade is the loss of income to the legal tobacco industry. This loss is estimated to be around $120 million,9 which includes losses to manufacturers, wholesalers and retailers. Some witnesses estimated that if the chop chop industry remains unchecked it could reach sales of 2000 tonnes by December 2000.10 Such dramatic growth would place pressure on legitimate retailers to sell chop chop in order to be competitive in the market place. Note however that these figures are provided by the tobacco industry and the Government's Explanatory Memorandum suggests that in fact the erosion of excise revenue attributable to the illicit trade is difficult to estimate.11

Impact of taxes

Several witnesses and submissions criticised the impact of the current levels of taxing of tobacco products, stating that high taxes are driving the illegal industry. The Committee noted that 118 grams (210 cigarettes) of legal tobacco in the form of ready rolled cigarettes retails for $66.50, this includes a tax component of $47.35, whereas a similar amount of loose leaf illegal tobacco retails for $5.90.12 Some witnesses argued that the current levels of ‘punitive’ taxes are creating an environment which allows the illegal trade in tobacco to flourish. According to these witnesses regular tax increases aimed at reducing smoking numbers are simply driving more smokers to opt for the cheaper chop chop product.13

Evidence given by British American Tobacco Australasia (BATA) suggested placing a tax on the pre-rolled empty cigarette filter papers, known as tubes. BATA stated that most of the one billion tubes imported annually are used to produce pre-rolled chop chop cigarettes. However, Philip Morris stated that tubes are also used by legal roll-your-own smokers, so any tax on tubes would discriminate against that group. It was the Committee’s view that a tax on tubes may compound the chop chop problem by encouraging smokers to switch to cheaper substitute material to produce cigarettes.

Health issues

Submissions also raised health issues and suggested the unregulated sale of chop chop bypasses government health regulations and manufacturing standards. Consequently, sales of illegal tobacco have no health warnings on the packaging and avoid controls over tar and nicotine levels and other additives. The lack of regulation on the sale of chop chop also makes it more readily available to children through mail order outlets or other unregulated channels, making it a significant risk to community health.

4 Excise Amendment (Compliance Improvement) Bill 2000

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Industry involvement

Witnesses to the inquiry claimed that the main supply of tobacco leaf for the chop chop industry is from legitimate growers, who supply both the legal and illegal industries.14 These growers are attracted by the higher prices paid by the illegal manufacturers for tobacco leaf ($10 to $20 per kilo as opposed to $6 per kilo paid by legal manufacturers). The Committee noted that this nexus between the illegal and legal trade provides an opportunity for legitimate manufacturers to assist in monitoring tobacco production, by predicting the crop yields of their growers. These estimates could help authorities to identify the origins of tobacco supplied to the illegal trade.

Compliance with the Bill

During the hearings Philip Morris, BATA and other witnesses expressed strong support for the Bill. These bodies forecast that the Bill would not wipe out the problem of illegal tobacco but was a step in the right direction. However, the same witnesses raised concerns that for the legislation to make an impact it would need to be adequately resourced:

As I said, everybody involved in policing this needs to be better resourced. We need to have more people on the ground. If you can capture some of that $300 million in revenue, there are adequate funds around to provide these resources.15

In response the ATO pointed out that they will be expanding their capability by an extra 85 investigators, primarily concerned with the tobacco industry.16 The Committee concluded that the success of the new measures will also require the support and expertise of the industry, particularly in areas such as crop monitoring and other jointly funded projects. The Committee encouraged the industry to extend such assistance to government agencies in stamping out the chop chop industry.

The Committee concluded that the most effective point at which to successfully counter the illegal trade in tobacco is at the growing stage. The Committee therefore encouraged both government and industry to investigate methods of better monitoring crops and predicting yields, similar to surveillance used in the poppy industry in Tasmania.

The Committee recommended that the Parliament pass the Bill.

Excise Amendment (Compliance Improvement) Bill 2000 5

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Main Provisions

Schedule 1 - Amendment of the Excise Act 1901

Items 1-19 insert new definitions into section 4(1) of the Excise Act 1901 (the Principal Act).

Licensing for excise purposes

Currently the concept of a licence applies in the excise context only in relation to the manufacture of excisable goods. The Bill will extend that concept to other areas of activity.

Item 26 repeals Parts III and IV of the Principal Act and inserts a new Part III. This Part establishes a new licensing scheme which will cover tobacco producers and dealers as well as manufacturers of all excisable goods.

In order to extend this coverage the current definition of licence is repealed and redefined to mean:

• a producer licence;

• a dealer licence;

• a manufacturer licence; and

• a storage licence (item 6).

Manufacturer licence

A person wishing to manufacture excisable goods (including tobacco goods) will still be required to hold a manufacturer licence (proposed section 25). A manufacturer licence is defined as a licence that authorises the licence holder to manufacture excisable goods (item 11). A licensed manufacturer must manufacture excisable goods according to the requirements of the Act and the licence (proposed section 26). Further that person must manufacture the goods only at premises specified in the licence (proposed section 27).

Producer licence

A person who wishes to grow tobacco will be required to hold a producer licence (proposed section 28). A producer licence is defined as a licence that authorises the holder to produce tobacco seed, plant and leaf (item 15). A licensed producer must only grow or produce tobacco according to the requirements of the Act and the licence (proposed section 26). Further a producer must produce and store tobacco only at premises specified in the licence and must keep accounts and make returns in accordance with the regulations (proposed sections 30, 31 and 32).

6 Excise Amendment (Compliance Improvement) Bill 2000

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Dealer licence

A person who wishes to deal in tobacco will be required to hold a dealer licence (proposed section 33). A dealer licence is defined as a licence that authorises the holder to produce tobacco seed, plant and leaf (item 4). A licensed dealer must only deal in tobacco according to the requirements of the Act and the licence (proposed section 34). Further a dealer must store the tobacco and carry on the business as a dealer only at premises specified in the licence. The dealer must also keep accounts and make returns in accordance with the regulations (proposed sections 36 and 37).

Penalties relating to licences

Breaches of these licensing requirements will be subject to a two tiered penalty structure. This means they may be prosecuted either as fault based offences or as offences of strict liability. In the case where the person breaches the particular licence requirement either knowingly or recklessly they will be subject to:

• 2 years imprisonment; and/or the greater of

• 500 penalty units (currently $55,000) and 5 times the amount of the potential loss of revenue.17

Where the person breaches these requirements without the requisite elements of intention or recklessness (ie where it is a strict liability offence) then that person will be subject to a penalty of 100 penalty units (currently $11,000).

Licensed producers and dealers who fail to keep accounts will be subject to a lesser penalty of 30 penalty units (ie $3,300).

Granting of licences

Item 27 inserts a new Part IV into the Principal Act. It deals with applying for and granting of licences. Applications for a licence may be made to the Collector according to the requirements in proposed subsection 39(2). The granting of licences is discretionary and proposed section 39A sets out the factors the Collector may have regard to in refusing to grant a licence. These include:

• whether the applicant is a fit and proper person

• the ability of the applicant to keep the requisite accounts and records

• whether there are revenue reasons for refusing to grant the licence

• the adequacy of the physical security of the premises for storing, manufacturing or producing the particular product

• the suitability of the plant and equipment to be used for manufacturing or storing the particular product, and

Excise Amendment (Compliance Improvement) Bill 2000 7

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

• whether in the case of a storage licence the grant of the licence would delay liability for duty.

Factors to be considered in determining whether a person is 'fit and proper' include whether the person:

• has been convicted of an offence under the Excise Act in the last ten years

• has been convicted of an offence under any Commonwealth, State or Territory Act that is punishable by imprisonment for a period of one year or longer or by a fine of 50 penalty units or more

• is an undischarged bankrupt

• has held a licence which has been cancelled, or

• has submitted an application that contained false or misleading statements (proposed section 39B).

Similar factors would be considered in determining whether a company was 'fit and proper' for holding a licence (proposed section 39C).

Manufacturer licences remain in force until the day of renewal or until 31 December of the year granted. Producer, dealer and storage licences remain in force unless cancelled (proposed section 39E).

Licence conditions

A licence may be suspended or cancelled if the Controller has reasonable grounds to believe certain circumstances exist. These circumstances include:

• where the person or company is no longer considered 'fit and proper' for the purposes of holding a licence;

• where a condition of the licence has been breached

• where the licence holder has made a statement to the ATO that is false or misleading

• where it is otherwise necessary for revenue protection reasons, or

• for the purpose of ensuring compliance with the 'Excise Acts' (proposed section 39G and 39L).

In addition a licence may be suspended for the period in which the holder should reasonably be provided with the opportunity to provide reasons why their licence should not be cancelled. It is also possible for a licence to be cancelled without being suspended.

A licence must be cancelled if:

8 Excise Amendment (Compliance Improvement) Bill 2000

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

• the licence holder requests cancellation, or

• the licence holder no longer possesses any excisable goods or tobacco seed, plant or leaf (proposed subsection 39L(2).

Proposed sections 39J and 39L detail the method of suspending and cancelling licences and proposed section 39M sets out the arrangements for dealing with excisable goods after a licence has been cancelled.

Control of tobacco leaf, seed or plant

Movement of tobacco

Currently there are no restrictions on the movement of tobacco leaf. According to the Government this provides wide scope for the product to enter the illicit tobacco market. Under the Bill the movement of tobacco leaf will be subject to gaining written permission from the ATO (proposed section 44). In addition to this permission all tobacco bales will need to be identified with approved tobacco leaf labels unless the ATO has waived this requirement. Proposed section 117D prohibits a person moving tobacco leaf without obtaining permission as set out in proposed section 44.

Unlawful possession of tobacco

Proposed section 117C relates to unlawful possession of tobacco seed, plant or leaf. It prohibits a person who does not have a licence or other permission from possessing tobacco seed, plant or leaf.

Unlawfully buying and selling tobacco

Paragraphs 120(1)(ii) and 120(1)(iii) of the Principal Act currently prohibit the buying and selling of tobacco leaf in situations where producers, dealers and manufacturers are not registered or licensed. The current penalty is a fine not exceeding $1000. Item 54 repeals these paragraphs in order to impose a stricter penalty regime. Proposed sections 117E and 117F prohibit a person from buying tobacco leaf, seed or plant from anyone other than a licensed dealer, producer or manufacturer. Proposed sections 117G and 117H prohibit a person from selling tobacco leaf, seed or plant to anyone other than a licensed dealer, producer or manufacturer.

Penalties for tobacco related offences

These provisions introduce a two tiered penalty structure similar to that applied throughout the Bill. In the case where a person engages in unlawful activities relating to the movement, possession, buying and selling of tobacco either knowingly or recklessly they will be subject to:

• 2 years imprisonment; and/or the greater of

Excise Amendment (Compliance Improvement) Bill 2000 9

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

• 500 penalty units (currently $55,000) and 5 times the amount of the potential loss of revenue.18

Where the person engages in these activities without the requisite elements of intention or recklessness (ie a strict liability offence) then that person will be subject to a penalty of 100 penalty units.

Unlawful possession, movement and selling of excisable goods

Items 52 and 53 repeal sections 117 and 119 of the Principal Act which currently prohibit unlawfully possessing and moving excisable goods on which duty has not been paid. Proposed sections 117, 117A and 117B replace these provisions. Specifically proposed section 117 will prohibit the possession of excisable goods on which excise duty has not

been paid. Proposed section 117A will prohibit the moving without permission of excisable goods on which excise duty has not been paid and proposed section 117B will prohibit the selling of excisable goods on which duty has not been paid. The new provisions introduce the two tiered penalty structure used throughout the Bill. In the case where the person engages in these unlawful activities either knowingly or recklessly they will be subject to:

• 2 years imprisonment; and/or the greater of

• 500 penalty units (currently $55,000) and 5 times the amount of the potential loss of revenue.19

Where it is a strict liability offence the penalty will be 100 penalty units (currently $11,000).

Infringement notices

Where a person sells or possesses excisable goods on which excise duty has not been paid that person may be subject to a fixed penalty imposed by an infringement notice instead of being prosecuted for the offence. The amount of the penalty would be fixed at 20 penalty units (currently $2,200). This is seen as an efficient way of addressing the retailing of illicit tobacco. According to the Explanatory Memorandum an infringement notice would be issued where there is a high degree of certainty that the physical element of the offence exists and the risk of frequency of the offence is high, but the seriousness of the offence or degree of culpability of the offender is relatively low.20 Proposed Part XA sets out the arrangements for issuing infringement notices (item 59).

Items 37- 39 introduce new and stricter penalty arrangements for the unlawful moving of excisable goods under customs control.

10 Excise Amendment (Compliance Improvement) Bill 2000

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Search powers of officers

Under section 87 of the Principal Act a customs officer has the power to search without a warrant vehicles which are about to leave a factory or other 'excise place'. Proposed section 87AA considerably extends the power of the officer in that he or she can stop any vehicle at any time and any place providing the officer has reasonable grounds for believing that the vehicle contains tobacco goods or excisable goods and the vehicle is to be used in committing an offence.

Note that this additional power is in keeping with the powers given to customs officers under section 104 of the Principal Act in relation to detaining and searching suspected persons.

Alternative penalties

Where the new penalty provisions in the Bill contain both monetary and imprisonment penalties, the court will have the discretion to impose either or both penalties (proposed 127A, item 57).

Endnotes

1 These complex arrangements were introduced as a necessary short-term measure to shore up State revenue when, in August 1997, the States' business franchise fees on tobacco products were held to be unconstitutional by the High Court in Ha & Hammond v New South Wales (1997) 189 CLR 465.

2 Treasurer, Press Release: Reform of Tobacco Taxation, 3 February 1999.

3 'Crackdown on tobacco racketeers', Age, 15 June 1999, p. A3.

4 Selection of Bills Committee, Report, no. 10 of 2000, dated 28 June 2000.

5 Philip Morris Limited, Oztobacco and British American Tobacco, Australasia.

6 Senate Economics Legislation Committee, Consideration of the Excise Amendment (Compliance Improvement) Bill 2000, Submission by Philip Morris, p. 4.

7 Submission by British American Tobacco, Australasia, p. 1.

8 Evidence to the Senate Economics Legislation Committee, p. 21.

9 Submission by British American Tobacco, Australasia, p. 1.

10 ibid.

11 Explanatory Memorandum, p. 3.

Excise Amendment (Compliance Improvement) Bill 2000 11

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

12 Evidence to the Senate Economics Legislation Committee, p. 21.

13 ibid.

14 ibid.

15 Evidence to the Economics Legislation Committee, p. 25.

16 Ibid, p. 32.

17 Note that the alternative penalty based on potential loss of revenue does not apply to all offences.

18 Note that the alternative penalty based on potential loss of revenue does not apply to all offences.

19 Note that the alternative penalty based on potential loss of revenue does not apply to all offences.

20 Explanatory Memorandum, para 1.14.

Contact Officer Mary Anne Neilsen 28 August 2000 Bills Digest Service Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document. IRS staff are available to discuss the paper's contents with Senators and Members and their staff but not with members of the public.