TM Law’s Alexis Cahalan reviews a recent High Court decision dealing with responsibility to pay Customs Duty

A recent Australian High Court decision in Comptroller of Customs v Zappia [2018] HCA 54 has identified in what circumstances an employee will be held to be in possession and control of dutiable goods and, therefore, liable for duty payable in relation to the goods.

The Facts

Zaps Transport (Aust) Pty Ltd was the operator of a bonded warehouse at Smithfield, NSW.  It was licenced under Part V of the Customs Act 1901 such that importers could store goods at Zaps bonded warehouse without duty being payable until the goods, in this case, cigarettes were entered for home consumption.

Mr Zappia senior was a director of Zaps. His son, Domenic Zappia was employed as Zap’s general manager and warehouse manager.  Mr Zappia senior and Domenic identified themselves in a formal document to the Australian Taxation Office as participating in the management and control of the warehouse.

Following four previous robberies, on 23 May 2015, 400,000 sticks of cigarettes were stolen from the Smithfield warehouse.  Both the Zappias were absent at the time of the theft.  This meant that no duty had been paid on the goods.  The Collector of Customs issued a notice under s35A(1) of the Customs Act demanding payment of the duty in the sum of A$188,032 on the basis that the goods had not been kept safely.  The demand was issued not only to Zaps as the warehouse operator, but also to Mr Zappia senior and his son for payment of the duty on the goods.  All parties applied to the Administrative Appeals Tribunal for a review of the demand.

The Tribunal agreed with the Collector.  It found Zaps had been entrusted with possession, custody and control of the tobacco, that the father was the person in “overall command of the business” and that both he and his son exercised control over the tobacco products, even though the “big” decisions were made by the father.  The Tribunal found it relevant that it was the son who had authority to represent Zaps in the initial meetings with the Australian Taxation Office.

Federal Court reverses AAT decision

Only the son went on to appeal the decision to the Australian Federal Court. By this time Zaps had gone into liquidation and the father declared bankrupt.  Domenic may have decided that it was an unpleasant prospect for a young man to be declared bankrupt and hoped that the Federal Court would find that as a mere employee he was not liable within the meaning of “owner”. The son was successful. The Federal Court found that “owner” was not to be interpreted as directed towards the kind of control exercised by an employee of a licenced warehouse and made a distinction between someone in “paramount control” such as the father, and “subordinate control” such as the son.  The Federal Court’s decision in favour of the son was appealed to the High Court by the Comptroller of Customs.

High Court Unanimous on Appeal

The High Court reversed the Federal Court decision and found that the son was a person who had been “entrusted” with the possession, custody or control of dutiable goods.

The High Court was of the view that the son, Domenic:

  • Had authority to direct what was to happen to the goods on a day to day basis;
  • This in turn established that he had the requisite degree of authority or power in relation to the tobacco, and
  • The fact that the tobacco was stolen during a time when he had that degree of authority established that he had failed to keep the goods safely.

The High Court looked to the purpose of the Customs Act namely “to ensure that customs duty is paid before delivery of those goods into home consumption”. On that basis it adopted an expansive interpretation of what it meant to be in possession, custody or control of dutiable goods. It is whether the entity holds that power rather than the means by which it is exercised.

The High Court went on to state “several persons may each possess power or authority to the requisite degree within a chain of command or hierarchy of responsibility”.  This was the case here with Zaps, Mr Zappia senior and son Domenic each found to have possessed the requisite authority.

The decision in Zappia makes it clear, for the purposes of the Customs Act 1901, “owner” has a wide definition which facilitates the duty following the goods as they travel through the transport chain.  It includes not only the legal owner of the goods, but also an:

  • Importer or exporter;
  • Consignee
  • Agent
  • Any person beneficially interested in or having control or power of disposing of or dealing with the dutiable goods.

Important considerations for “owners” of dutiable goods

When the ATO issues a notice under s35A(1), it calculates the duty payable according to the date the demand is made rather than the date the goods were imported.  Depending on the quantity and value of the goods the difference in these rates can be considerable.  The amount payable may, therefore, be more than the duty which would have applied as at the date of importation.

A section 35A(1) notice can form the basis for the ATO to apply for  liquidation or bankruptcy if the debt is not paid; the notice imposes strict liability. This means that the ATO will not need to establish the legitimacy of the notice or the underlying reasons for the notice being issued.  It makes no difference if the responsible person has taken steps to secure the goods.  A company’s credit ratings may be adversely affected by the existence of a winding up order being issued.

The scheme of the Customs Act provides for several parties in the import chain to be liable to pay duty.  The High Court’s decision in Zappia is a timely reminder that proper responsibility for dutiable goods must be maintained by any party having authority over the goods. This would extend to customs brokers correctly releasing goods electronically.

Alexis Cahalan, Principal Lawyer, Thomas Miller Law

This article appears in the current issue of the Freight & Trade Alliance’s “Across Borders” publication

Author: Alexis Cahalan, Principal Lawyer

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