A Guide for Australian Importers on Risks, Responsibilities, and Key Trade Terms
INCOTERMS 2020 is the most recent update to the Invoice Commercial Terms.
This guide has been written in simple language to make complex issues easy to understand.
Whenever an Australian importer purchases goods from overseas, the overseas supplier, in the fist instance, generally provides a quote or a proforma invoice detailing (1) the goods, (2) the kilograms, (3) cubic measurements, (4) currency and (5) INCOTERMS.
The INCOTERMS were created and are used to determine who, between the seller (exporter) and the buyer (importer), is responsible for fees, charges and risk. Risk is the key word. What risk is the seller (exporter) willing to bear? And what risk is the buyer (importer) willing to bear?
There are eleven (11) INCOTERMS, but we will discuss the most common nine (9).
EXW
EXW stands for Ex-Works. The seller will sell you the goods, but the buyer is responsible for all things, costs, and risks from the moment the goods are collected from the seller’s warehouse. This scenario of EX-Works places a large financial responsibility on the Australian buyer’s shoulders.
We do not recommend EXW; however, overseas suppliers sometimes only sell the goods if the Australian buyer is willing to take financial responsibility for everything from the supplier’s warehouse. In most instances, Platinum® can arrange insurance for the goods if Platinum® is contacted before the goods depart from the overseas supplier’s premises. Australian importers would need to rely upon a customs broker like Platinum®.
FCA/FOB
FCA stands for Free Carrier. It tends to be an air freight term, meaning that the overseas supplier will sell you the goods, undertake the overseas customs clearance in their country, and deliver the goods to the freight forwarder or airline overseas. All costs and risks will then flow to the Australian importer. In most instances, Platinum® can arrange insurance for the goods if Platinum® is contacted before the goods depart from the overseas supplier’s premises. Australian importers would need to rely upon a customs broker like Platinum®.
FOB stands for Free on Board. It tends to be a sea freight term, and it means that the overseas supplier will sell you the goods, undertake the overseas customs clearance in their country, and deliver the goods to the freight forwarder or to the overseas port. All costs and risks will then flow to the Australian importer. In most instances, Platinum® can arrange insurance for the goods if Platinum® is contacted before the goods depart from the overseas supplier’s premises. Australian importers would need to rely upon a customs broker like Platinum®.
CPT/CFR
CPT stands for Carriage Paid To. It tends to be an air freight term, meaning that the overseas supplier will sell you the goods, undertake the overseas customs clearance in their country, deliver the goods to the freight forwarder or airline overseas and arrange to have the goods transported to an Australian airport. All costs and risks will then flow to the Australian importer. CPT does not include insurance. The Australian importer must arrange insurance coverage before the goods depart from overseas. In most instances, Platinum® can arrange insurance for the goods if Platinum® is contacted before the goods depart from the overseas supplier’s premises. Australian importers would need to rely upon a customs broker like Platinum®.
CFR stands for Cost and Freight, it tends to be a sea freight term and it means that the overseas supplier will sell you the goods, undertake the overseas customs clearance in their country, deliver the goods to the freight forwarder or to the overseas port overseas and arrange to have the goods transported to an Australian seaport. All costs and risks will then flow to the Australian importer. CFR does not include insurance. The Australian importer must arrange insurance coverage before the goods depart from overseas. In most instances, Platinum® can arrange insurance for the goods if Platinum® is contacted before the goods depart from the overseas supplier’s premises. Australian importers would need to rely upon a customs broker like Platinum®.
CIP/CIF
CIP stands for Carriage and Insurance Paid To, it tends to be an air freight term and it means that the overseas supplier will sell you the goods, undertake the overseas customs clearance in their country, deliver the goods to the freight forwarder or airline overseas and arrange to have the goods transported to an Australian airport and also insure the goods. All costs and risks will then flow to the Australian importer. CIP does include insurance. The Australian importer would be required to pay for such things as airline terminal charges at the Australian air cargo terminal or freight forwarder, customs clearance, import taxes and delivery to their address. Platinum® recommends this INCOTERM. Australian importers would need to rely upon a customs broker like Platinum®.
CIF stands for Cost Insurance and Freight, it tends to be a sea freight term and it means that the overseas supplier will sell you the goods, undertake the overseas customs clearance in their country, deliver the goods to the freight forwarder or to the overseas port and arrange to have the goods transported to an Australian seaport and also insure the goods. All costs and risks will then flow to the Australian importer. CIF does include insurance. The Australian importer would be required to pay for such things as Australian port charges to the shipping company or freight forwarder, customs clearance, import taxes and delivery to their address. Platinum® recommends this INCOTERM. Australian importers would need to rely upon a customs broker like Platinum®.
DAP
DAP stands for Delivered At Place, it can be used for both air freight or sea freight shipments and it means that the overseas supplier will sell you the goods, undertake the overseas customs clearance in their country, deliver the goods to the freight forwarder or airline overseas and arrange to have the goods transported to an Australian airport or wharf, insure the goods, pay all Australian fees except taxes and deliver the goods to the Australian importers address. Most, if not all, risks are placed upon the shoulders of the overseas seller.
With DAP, the Australian importer would be required to pay for import duty and import GST, and a customs broker would be required to clear the shipment. Platinum® has no issue with this INCOTERM. This INCOTERM is generally encountered with very large financial imports, and the overseas supplier packages this DAP service for their Australian buyers. Importers would need to rely upon a customs broker like Platinum® to clear the shipment through the Australian border. Once cleared, the goods would be delivered to the Australian importer’s address by their overseas supplier’s nominated carrier.
DDP
DDP stands for Delivered Duty Paid, it can be used for both air freight or sea freight shipments and it means that the overseas supplier will sell you the goods, undertake the overseas customs clearance in their country, deliver the goods to the freight forwarder or airline overseas and arrange to have the goods transported to an Australian airport or wharf, insure the goods, pay all Australian fees – including import duty but not including import GST (unless specified) and deliver the goods to the Australian importers address. Most, if not all, risks are placed upon the shoulders of the overseas seller.
With DDP, the Australian importer would be required to pay for import GST (unless otherwise specified) and a customs broker to clear the shipment. Platinum® does not recommend this INCOTERM as it tends to be abused by overseas suppliers.
Overseas suppliers will advise Australian importers that they can ‘package’ the sale into a DDP shipment. This means that the Australian importer has no control over the shipment, and they are sitting in the dark waiting for someone to call them to say whether the import GST needs to be paid and then advise the Australian importer as to when the goods are going to be delivered.
The Australian importer does not have a dedicated customs broker reviewing the shipment; it is in the hands of the overseas supplier’s nominated customs broker. It is more common than one may imagine that the overseas supplier will devalue the commercial invoice to ensure that the taxes are low or zero.
The primary issue is that the Australian importer owns the goods, and the Australian importer will be liable to the Australian Border Force (ABF) if the customs entry processed by the overseas supplier’s nominated customs broker is audited within five (5) years of communication and found to be incorrect (Customs Act 1901, Section 243T and Section 243U).
Platinum® does not recommend DDP shipments; the risks to the Australian importer are far too significant.