On 11 March 2024, the Government announced that it would abolish almost 500 tariffs from 1 July 2024. Their compliance costs often exceed the revenue collected. Many do not collect more than $100k pa. And, yet, they affect $85b in trade. This approach can teach us about simplification of the tax system in other areas.

  • Following the announcement, Treasury released for consultation a list of tariffs that are proposed to be abolished. The announcement and consultation follow a research paper by the Productivity Commission released on 5 August 2022.
  • The research paper broadly argues that the cost of the tariff system primarily arises from the complexity of the system in Australia’s low tariff environment. Tariffs that have the greatest costs were dubbed ‘nuisance tariffs’, reflecting how little revenue they raised while providing negligible benefits for producers and imposing significant compliance burdens.
  • These reforms are stated to be an important step towards simplifying Australia’s trading system and removing compliance costs for Australian businesses, particularly small‑to‑medium enterprises. If legislated, the proposed reforms will remove 14% of Australia’s total tariffs and are estimated to save businesses more than $30 million in compliance costs each year.
  • The relevant tariffs have been selected as the Government is of the view that their abolition will deliver benefits to businesses without adversely impacting Australian industries or constraining Australia in sensitive free trade agreement (FTA) negotiations.

Overview of Australia’s tariff system 

A tariff is a tax imposed by one country on goods and services that are imported into it from other countries. This is generally done to protect the producers of the same, or similar, goods and services in the country imposing the tariff. Tariffs can also be used to deter businesses and consumers in a country from importing or consuming goods from a specific country for political reasons. Examples include Australia’s tariff on all imports from Russia following the conflict between Russia and Ukraine.

All goods imported into Australia need to be self-assessed under the correct tariff classification as noted in the Customs Tariff Act 1995 (Cth) (Tariff Act). This is not an easy requirement to meet as goods are classified in Schedule 3 to the Tariff Act across 21 sections and 97 chapters. A good can be quite specifically defined yet only a certain portion of the good that would meet the general descriptor for the item may be covered.

Importers who incorrectly classify goods may inadvertently pay extra in tariffs or be subject to potential penalties for incorrect reporting. Each classification has a statutory tariff rate. Further, the tariff classifications have changed over time, with a harmonised classification system applying from 1 January 2022 that replaced the 2017 classifications.

The tariff rate may also be impacted by other factors, such as concessional rates for 58 items or preferential trade agreements (PTA) between Australia and other jurisdictions. PTAs between countries can have different conditions or rates as they are negotiations between nations and are not consistent across all. Further, PTAs can be bilateral or multilateral, adding to the potential confusion for importers to navigate.

This results in importers having to undertake a significant amount of work to ensure that they have appropriately classified the goods. Further to tariffs, importers also have other tax considerations, such as whether GST applies to the goods or services being imported.

While tariffs can theoretically be an efficient way to collect revenue, the operation of Australia’s tariff system is not. Despite all this difficult and time-consuming compliance work, around 90% of importers do not pay a tariff. This is emblematic of the ‘nuisance’ created by Australia’s tariff system. The Government estimates that the complexity causes between $0.57 to $1.57 in administrative and compliance costs for every dollar of tariff revenue raised.

It is a positive sign to see the proposed abolition of tariffs that impose compliance burdens without raising any notable revenue. Many of the tariffs proposed to be abolished raise less than $100,000 in revenue each year. In total, they raise an insignificant amount of revenue despite impacting approximately $8.5 billion in trade. There is much we can learn and apply to other areas of our taxation and superannuation system.

Abolishing and reforming other taxes 

Similar to nuisance tariffs, several other legislative regimes raise insignificant revenue while imposing significant compliance costs on taxpayers and administrative costs for the ATO. Examples include:

  • Fringe benefits tax (FBT) — the Federal Budget 2023–24 estimates that receipts from FBT are expected to raise approximately $3.5 billion in 2023–24, approximate 0.5% of all taxation revenue. Despite raising such a small percentage of taxation revenue, the ATO estimates that the FBT tax gap is one of the largest for all taxes. That is, there is a larger degree of non-compliance with FBT compared to other market segments. This is likely due to the high degree of complexity involved in the FBT system and lack of awareness of the detailed rules. The current system should be abolished and replaced with a new system that uses a clear, principles-based approach to tax employees on the value of the benefits to ensure that the underlying policy rationale of appropriate taxing non-salary remuneration is maintained. [There are, however, other things that could be said.
    • Partly, the FBT has been successful, if it drives taxpayers back into remunerating through remuneration assessable to the employee. It is like the SGC in this regard – the aim is to have no-one paying the tax, because they did pay the requisite superannuation, on time.
    • The FBT has conceptual problems, though, because it taxes the employer, not the employee. The FBT creates three classes employees – those who can be remunerated tax free (because it is imposed on employers, and some of them are exempt from FBT); those who can receive concessionally taxed non-cash remuneration (because their employer is income tax exempt, but not FBT exempt) and those who are fully taxed on their remuneration.
    • The better way to do this, is to assess non-cash benefits, to the employee, at FBT style amounts, and make the employer obliged to pay the relevant FBT tax amounts, to the Commissioner, as a credit to the tax on the non-cash benefit (like the way that PAYG withholding works). Some employers already have to make PAYG style payments, to the Commissioner, even though there’s been no cash benefit, from which to withhold.
    • Sensible changes, of this nature, will be hard to achieve, though, because whole industries have grown up around the concessions and anachronisms, in the FBT system.]
  • Luxury car tax (LCT) — revenue from LCT is expected to be approximately one-fifth of that raised from FBT. Its role in our modern tax system is unclear and its continuation should be questioned. If the Government wants to incentivise certain categories of motor vehicles compared with others, these incentives would be more appropriately positioned by integrating them into our income tax legislation (e.g. deduction boosts for certain categories of motor vehicles) rather than administering them through separate legislation.
  • Alcohol taxation — the regime for taxing alcohol in Australia is complex and the effective rate depends on various factors including the type of alcohol, where it is consumed and the existence of any grants/incentives. Certain types of alcohol are inconsistently taxed. For example, the wine equalisation tax (WET ) is a fixed rate based on the value of the wine while the taxation for beer and spirits is based on the alcohol volume. To understand the complexity of the regime, there are five different excise rates for the taxation of beer alone. A strong case exists for replacing the varying excise rates with a uniform approach that applies to all forms of alcohol. This would simplify the regime and bring efficiencies for participants.

[Something like the Productivity Commission research, for simplifying other taxes, might be a good way to kick this off.]


This article appeared in The Taxation Institute’s weekly TaxVine email publication (No.8, 15.3.24).

My EDITORIAL COMMENTS appear in [square brackets]



FJM 15.3.24