The Tariff Classification of Functional Units

Following is an article I had published in Lloyds List in May 2016.

The purpose of s.XVI N4 is to differentiate between machines which are fitted together (composite machines of s.XVI N3) and production / manufacturing lines in which machines work together to fulfil a common function or purpose (s.XVI N4). This latter Note allows lines and turnkey operations that are imported in the one consignment the benefit of a single classification to the function of that line whether or not they are connected.  In the words of a member of the Customs Co-operation Council that drafted Note 4: “if you have a plant producing milk then the only thing you would exclude from a unit classification is the cow”.

S.XVI N4 requires that “Where a machine (including a combination of machines) consists of individual components (whether separate or interconnected by piping, by transmission devices, by electric cables or by other devices) intended to contribute together to a clearly defined function covered by one of the headings in Chapter 84 or Chapter 85, then the whole falls to be classified in the heading appropriate to that function.”

The Classification Guide on Functional Units issued by Department of Immigration and Border Protection (“DIBP”) in August 2015 requires that, “goods that do not directly contribute to the function are not covered by the Note” Where does this Note contain this limitation? Why is an artificial narrowing of a legal provision of the Tariff Act supported?

In plain speak, Note 4 provides for a single classification in Chapter 84 or 85 (or Ch 90 by virtue of Ch 90 Note 3) even if, while all the machines must contribute together to the function of the line, some of them do not directly contribute to it or, if imported separately, fall to a different tariff classification, for example, a pump in a bottle filling line. This interpretation of Note 4 has been supported by the Courts for many years and is evidenced in many older TCOs.

What then has happened that has led to this changed interpretation by DIBP and why then is industry experiencing ongoing difficulty in the ability of NTAC to identify and classify functional units? And why then, having identified a Functional Unit, is it becoming so very difficult to obtain a TCO for same because of this inability? Why is the acceptance of what is a Functional Unit so very different now to what it was in the past? DIBP claims that nothing has changed in their current interpretation of Note 4 is not supported by their past practices, documents or decisions. Commentary has been issued that claims current decision making is not a change of practice, whereas brokers, many of whom have been in the game far longer than most customs officers, hold the evidence to know that this is patently untrue. Industry has not failed to note that many of these decisions appear to have a strong consideration of revenue forgone rather than the legislation as it is written.

The Customs Act 1901 provides that a TCO will be approved where Customs is satisfied that no “substitutable goods” are produced in Australia in the ordinary course of business, with substitutability defined as capable of being put to a use (including a design use) to which the locally manufactured goods can be put. As part of the TCO application, the applicant must provide sufficient research to demonstrate how this core criteria has been established.  Provided the core criteria is met the legislation then provides at s.269P that the TCO must be made.  The way to avoid making a TCO is for the Regulator to claim that goods are not a Functional Unit classified under the one heading that describes that function. The Department should be required to explain its ongoing difficulty in understanding S.XVI N4 and the current restricted interpretation it is attempting to place upon it by this Tariff Classification Guide.

While recognising the time limits to which we all must pay heed and the current delays in obtaining a Tariff Advice (TA), industry is therefore encouraged to obtain a TA before relying on ANY past practices, guidance or interpretation in this area. There would appear not to have been a change in the Legal Notes or any case law to support changing interpretations by DIBP but members’ current experience in the application of s.XVI N4 by NTAC has been otherwise.

The Classification Guide is available at this link:

This article does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.