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The recent decision of James and Chief Executive Officer of Customs [2009] AATA 670 (4 September 2009) demonstrates the potential pitfalls of trying to import goods duty free that are manufactured in a free trade zone.

The importer shipped a US manufactured yacht to New Zealand in order to upgrade the vessel before then engaging a crew to sail the yacht to Australia. The importer paid customs duty upon entry of the vessel into Australia but then later realised that it may be duty-free under the Australia – United States Free Trade Agreement (AUSFTA).

The dispute concerned whether the diversion of the vessel to New Zealand and carrying out the works meant that the yacht did not qualify as ‘US Originating Goods’ under the AUSFTA.

The specific consignment or transhipment rule in the AUSFTA stipulates that the goods are not US originating goods if when they are shipped through a third country they undergo any process of production or any other operation (other than unloading, re-loading, any operation to preserve them in good condition or any operation that is necessary for them to be transported to Australia).

The two points that the Tribunal focused on were, firstly, whether the work carried out in New Zealand was a process of production, and secondly, whether the work was necessary.

The Tribunal found in favour of customs on both points. On the issue of process of production, the Tribunal took a fairly strict approach of interpretation and noted that where the end product was different from the original product produced in the United States it will not qualify (unless it satisfied the preservation or necessity exceptions).

Regarding necessity, the Tribunal found that the extra work although desirable for undertaking substantial voyages, it was not necessary. The yacht could have been sailed across the Tasman with out the installation of the extras.

This case is important in that it is only the second case we are aware of concerning the AUSFTA. Whilst the importer’s case in our view did not appear strong, it shows that the Australian Customs are likely to maintain a strict interpretation to the consignment rule so that the rules of origin are not unduly relaxed. Importers will need to be very cautious to make sure that they get appropriate advice and retain the duty free status where possible.

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