Customs and trade

Operators of warehouse found liable for amounts equal to duty on stolen cigarettes

02 March 2017

This article was originally published by the Customs Brokers and Forwarders Council of Australia and the Australian Federation of International Forwarders.

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.


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 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).

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.


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