Small and medium-sized enterprises (SMEs) are under threat on so many fronts.
Equally, the customs clearance system is under extreme strain due to increases in importing statistics.
Let’s look first at the freight forwarding and customs clearance systems. Why are they under increased pressure now?
Assistant commissioner Josh Frydenberg remarked in June that the number of international mail parcels imported between 2006-07 and 2010-11 doubled to more than 48 million. Since then the number had nearly doubled again. The fastest growth had been in imports under the $1000 threshold.
The rise in online purchasing and individual imports under the current – and generous – $1000 tax free threshold means that our customs clearance process is already under-checking imported goods. The sheer volume of packages entering leaves no room for officials to complete the necessary checks.
This is a dangerous set of circumstances, clearly evident to customs brokers already. Australia has an exposed pressure point. And where there is opportunity, there is misbehaviour.
The current Self Assessed Clearance [SAC] process is open to abuse. It is fair to say that, in the past year, the broker industry has seen SAC’s gradually decrease from $900 USD to $750 USD to now, quite commonly, $650 USD. What this means is that businesses are listing lower values on their imported goods to clear through Customs with less charges.
It is fraud, on a micro level, in direct relation to the diving Aussie dollar. It makes sense: the lower Aussie dollar means businesses are not as profitable as they were. And less profit leads to even more importers declaring fraudulently. Businesses are trying to avoid further losses wherever they can, and at whatever cost.
But fraud is still fraud. The Customs Act 1901 [Section 4] defines as smuggling: the importation, introduction or exportation, or attempted importation introduction or exportation of goods with intent to defraud the revenue.
There may be checks and balances in place by Border Force but most of the onus is on customs brokers to undertake the checks and balances before lodging the declaration. The role of a broker has then changed.
Customs brokers don’t have access to importers’ bank accounts to verify the true amount paid to the supplier, the best that they can do is volunteer it to Border Force to request Evidence of Monies Price Paid [EMPP], to safeguard their own brokerage compliance history. Many times they discover that the declared amount is as low as one third of the actual value. This adds pressure to customs brokers to make sure that for the next five years there are no reasons to receive an infringement notice from Border Force.
What is even more alarming is that some global suppliers are asking their customers “what price would you like stated on the commercial invoice?” This is a concerning measure of the state of the importing system in Australia, which is evident internationally.
Why is it that SMEs are leading the misbehaviour?
The fall of the dollar can be said to be affecting smaller businesses the hardest in terms of importing. SMEs need to look for ways to keep importing costs low in order to remain competitive, particularly amongst bigger players.
Today the USD exchange rate is sitting at around 0.7309. Six months ago it was 0.7773 and a year ago it was 0.938. We’re looking down the barrel at 0.60 by December 2016.
How does this play out? Simply put, goods sourced internationally now cost more from the outset. The first strike is that shipping costs will increase because they are quoted in USD. The second strike is the sea freight port and destination charges in Australia will be higher as these charges are more than often determined and quoted in USD and then billed in AUD. The third strike is the higher Australian dollar value of the goods imported. The value of the goods is calculated on the day the stock departs from overseas – which provides uncertainty. So this translates to the higher Australian dollar value, therefore higher import duty payable, higher GST payable and an Importing Processing Charge (IPC) which at the current moment is not payable for goods under $1000AUD.
SME importers no doubt have a hard time then, as always, due to bigger competitors buying stock cheaper and in higher volumes. The sting is fierce.
And here we are about to lump another issue into the mix. This could very well be the breaker – the proposed reduction of Australia’s tax-free threshold.
Under the current system, we have a very generous tax free threshold of $1000 of which SMEs are the great benefactors. (The threshold in competing countries is far lower: $0 in the US, $20 in Canada and just £15 the UK).
This has been an advantage for SMEs and an opportunity to find ways to save on importing where bigger players cannot. For example, they often operate on low stock numbers and therefore have greater flexibility with importing. In essence, under the current system, smart SMEs with good importing advice can operate efficiently, and find honest ways to save by tweaking their approach to importing. They also don’t have to be registered for GST if their business or enterprise has a GST turnover (gross income minus GST) of $75 000 or less.
The immediate effects of a reduced tax-free threshold on these SMEs is clear. Further crisis. If every import increases by at least 5% duty and the proposed 15% GST plus the Import Processing Charge [IPC]), there will be considerably less flexibility in managing overseas orders to remain under the threshold – whatever threshold that may be.
Additionally, we have no idea how the government plans to collect taxes and IPC if the threshold lowers to as little as $20. SME importers could face import duty and GST and an IPC on items with a value as low as $14 USD.
SMEs may close shop under these additional costs. And as a result, the independent broker industry will also suffer the loss of clients on its books.
Another question that comes to mind, and for which I don’t have an answer, is how will legitimate gifts be handled in this scenario?
But the issues continue to spiral. We return to a previous sticking point: the sheer increase of packages arriving by Australia Post and now needing assessment, processing, billing and storing will be almost unthinkable. This burden of administration, how will it work?
The natural assumption is that the system won’t cope with the load, the resources won’t be there to handle the processing and therefore there is another hole in the net.
When I look into the future I predict that the green sticker on the outside of many more parcels will “value declared for Customs $17 AUD”.
This is before we even consider the GST reform under discussion. Not only are importers facing additional pressure of increased GST overall, but food and drink importers may now be exposed to GST when previously they were not, as foods may be re-classified as “fresh food”. Similarly for other currently exempt goods including medical goods and precious metals.
This spells more burden on the checking system, but importantly, yet more difficulty for SMEs trying to turn a profit.
So it seems, a marriage of unhappy events is leading to more questions than answers at present. Brokers are seeing the failures of the system in the rise of fraud already. They are also anticipating the failures of the system in the future, which is looking far from certain for some of their more affected clients, SMEs.
This article by Platinum Freight CEO Peter McRae appeared on the Lloyds List Australia Website Aug 17, 2015