Operators of warehouse
found liable for amounts
equal to duty on stolen
cigarettes
The decision of the AAT in Zaps Transport (Aust)
Pty Ltd, Domenic Zappia and John Zappia
ats the Comptroller - General of Customs
continues the long line of judgments holding those
operating licensed warehouse liable for amounts
equivalent to customs duty. However in this case,
that liability has expanded beyond the licensee
itself to individual directors and officers of the
licensee, which many in industry will consider to
be a disturbing outcome.
Legislative background
Most of the reported decisions relating to section
35A of the Customs Act 1901 (Act) (and the
equivalent provisions of the Excise Act 1901)
relate to those holding alcohol and tobacco
products which are subject to very high rates of
duty. In part due to those high rates, the products
are often imported in bulk and held in a “licensed
warehouse” where customs duty and GST does
not need to be paid but the goods are subject
to a strict regime which imposes significant
obligations on the licensees. Section 35A of the
Act then provides that even if no duty is payable
(as the goods have not been “entered into home
consumption”), if those persons “entrusted with
possession, custody and control” of the goods fail
to keep the goods safely or cannot account for
the goods under section 37 of the Act, then those
persons can be liable for an amount equivalent
to the customs duty which would have been
payable.
Gone - but not forgotten
However the value of such tobacco and alcohol,
matched with the duty or excise otherwise
payable, means that such goods are often
subject to theft from licensed premises or even
abandonment to the point of becoming stale
(as in the Coynes decision in the Federal Court).
Concerns on such goods and the manner in
which they are imported and stored has led to
other actions by Government including the ABF’s
tobacco “strike force”. Media releases by the ABF
and AFP include announcements on seizure of
such goods and the imposition of fines on those
handling the goods. The last Federal budget
increased levels of duty and excise again and
foreshadowed the introduction of new powers for
the ATO along with new offences.
Facts
As with other decisions in this area, liability
arose from theft of the goods. The licensee had
taken delivery of cigarettes from its client but
subsequently its licence was varied to remove the
ability to store tobacco after thefts of cigarettes
from the premises. Permission to move the goods
to another warehouse had not been forthcoming
and the licensee was also in negotiations with
its client on amounts owing to the licensee. It
was clear that the licensee was also retaining the
goods on account of moneys allegedly owing by
the client including liability to duty for other goods
of the client which had disappeared from the
premises.
While the negotiations continued, the cigarettes
remained on the premises of the licensee and on
23 May 2015, 400,000 cigarettes were stolen from
the warehouse. In the great tradition, a demand
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for an amount equivalent was issued but in this
case it was issued to the licensee (the company),
and a director and manager of the licensee.
Section 35A and the limited
“Godzilla” defence to liability
Section 35A has long presented a problem for
those holding goods under customs control. It
throws a wide net of liability over those connected
with the goods. In the decision in this case, the
presiding member, a Deputy President of the AAT
described the liability as “startlingly wide”. In
an earlier decision of the Federal Court, Justice
Finkelstein stated that:
“Thus, short of 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”
In another decision of the Federal Court, Justice
Dodds - Streeton commented:
“The current legislation contemplates that that,
on breach of its virtually absolute obligation to
prevent the unauthorised delivery of goods to
home consumption, a licensee will be liable to
pay an amount pursuant to section 35A of the Act
without entitlement to remission”
Extension of liability to directors and
officers
What makes this decision of additional interest
however is that the liability under section 35A
of the Act has been extended to a director and
manager of the licensee, not just to the corporate
licensee. There is a well-established concept
that directors and officers are generally not liable
for the debts or liabilities of a company (subject
to limited exceptions for some tax and other
statutory amounts).
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However, in this case the AAT upheld the demand
against the director and officer of the licensee (a
“manager”) on the basis of the wording of section
35A of the Act that they were persons to whom
the “goods has been entrusted” for “possession,
custody and control”. Even though the licence
had been varied to remove the right to handle
tobacco and no permission had been given to
move the goods to another licensed premises, the
continued hold on the goods and the senior roles
of the director and officer were enough to treat
them as within the category of parties who could
be liable under section 35A of the Act.
Other possible consequences
The decision also throws up some other related
issues
>> Handling tobacco and liquor fraught with
danger. Not only are they bad for you, even
handling the goods in a licensed premises or
elsewhere can bring significant liabilities to
amounts equivalent to customs duty or excise
together with liability to penalties and the
suspension or loss of the licence.
>> The situation is about to become more
complicated and fraught with more risks as
new liabilities, offences and penalties are soon
to be created, along with new powers to the
ABF.
>> The availability of insurance to cover these
liabilities is very limited and there must be
real questions on whether any insurance is
available to individual directors and other
officers.
>> The nature of the liability under section 35A
and associated penalties for failing to hold
goods safely or account for the goods (strict
liability offences) make the provisions of
terms and conditions of trade of paramount
importance. Indemnities for such liabilities are
crucial along with the ability to enforce them.
>> The decision raises, once again, the issue
of whether a licensee could also be liable
for primary customs duty as “owner” of the
goods. While this was addressed in the Coynes
decision with the Federal Court, holding that a
licensee would not be an “owner” (which was
then the position of Customs), that decision
pre-dated the draft Notice issued by the DIBP
seeking to extend the liability to “owner” to
almost all parties in the supply chain. That
Notice was subject to extensive comment
and criticism and a finalised version has yet to
issue, 12 months later. Presumably there will
not be a change to that position as otherwise
that raises the ability to seek remission or
refund (denied in Coynes).
>> Customs licensing regime is currently under
close review by the DIBP which may change
the nature of liability for operators of licensed
premises and I doubt that the liability will be
reduced or the nature of the regime be made
any easier!
These all need to be considered by those involved
in the licensing regime as well as their insurers. As
always, if pain persists, please see your lawyer.
For more information contact:
Andrew Hudson
Partner
T +61 3 9321 7851
[email protected]
Rigby Cooke Lawyers
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