Home
      About Us
      Contacts
      Offshore Oil & Gas
      Towage
      Superannuation
      Members
      News
      National Conference 2003
      Blue Water Shipping
      Health, Safety & Welfare
      High Court Decision - CSL
      Life Boat Accidents
      What Can I do through the Unio
      Enquiries

AUSTRALIAN COASTAL SHIPPING: A NEW POLICY

The Hon. Alannah MacTiernan MLA
Minister for Planning and Infrastructure (WA Gov't)

1.      Introduction

Australia is a nation dependent on international trade – 85 percent of what we produce is for export - with markets and suppliers often far distant from our shores.

We are also predominantly a nation of coastal dwellers, with over 85 percent of our population strung out along some 37,000 kilometres of coastline.

Shipping is clearly essential to our international trade.  It also has the potential to play a much more significant role in domestic freight movements.  Yet the involvement of Australian companies in the nation’s overall shipping activity is disappointingly small.

Australia’s external shipping task is well over 500 million tonnes per annum and is predicted to grow by 50 per cent within ten years.  Despite the size of this demand, Australian vessels carry less than two percent of international freight, half of that carried as recently as 1995-96.

The domestic shipping task is now over 50 million tonnes per annum and predicted to grow by ten per cent within ten years. While the majority of this task is still met by Australian vessels – over 80 percent - foreign vessels operating under permit moved some 11.5 million tonnes in 2001-2002. This means that foreign vessels carry more of the country's domestic trade than Australian vessels carry in our own external trade

A recent study commissioned by the Australian Maritime Group presented strong grounds to suggest that Australian shipping has a most limited future within the present policy constraints which confront it.

The question that needs to be asked is whether there are benefits in developing a sustainable Australian shipping industry. If there are benefits, the next question relates to what steps need to be taken to achieve that outcome.

This paper argues that there needs to be a thorough analysis of the issue so that these questions can be adequately addressed.

 

2.      Government Policy Overseas

Nearly every country in the world with a coast of its own regards coastal shipping as an integral part of its domestic transport system. There are a variety of approaches from overseas Governments to support their local industry in line with this position. 

The longstanding approach of successive US Governments is a blunt one. Except in the most extreme circumstances, foreign vessels are just not allowed to carry domestic trade. Any additional cost of freighting product by sea under this policy is tacitly acknowledged. However, it is readily accepted that this is outweighed by the indirect benefits of a strategic and economic nature flowing from a stringent cabotage policy.

The European approach relies more on a series of support mechanisms for domestic shipping rather than overt intervention as in the US. The support mechanisms endorsed by most European Governments include favourable tax regimes for shipowners, offsetting the cost of employing domestic seafarers and encouraging training in the local industry.

The policies of overseas governments are discussed more fully in the appendices to this paper.

 

3.      Imperative for Consideration in Australia

Australia's merchant fleet has diminished considerably over recent times. The number of Australian flag vessels stood at 54 in 2002, a reduction of 24 vessels or 31 per cent over the last decade. Furthermore, during the last six years, the average annual net investment in Australian shipping was A$44.4 million (real) compared with A$222.7 million (real) between 1990-91 and 1995-96.

While investment in Australian shipping has dropped, so the age of local vessels has increased. The average age increased from eight years in 1991 to 15 years in 2002. As a result, the average age of the Australian fleet is now 1.1 years higher than the average age of the international fleet.

Significant investment decisions will shortly have to be made by Australian shipowners. It is of concern that the present policy environment is not conducive to a positive outcome from that process.

 

4.      Policy Administration in this Country

The Commonwealth Navigation Act describes the cabotage policy pursued by successive national governments in this country for many years, the principle of which is that Australian coastal trade should be reserved for licensed Australian vessels.

The legislation recognises that when a licensed vessel is not available, the Commonwealth may issue a permit for a foreign vessel to engage in the coastal trade. It is in this area of administration that the intention of the Navigation Act is being largely circumvented via the granting of permits to unlicensed vessels without adequate consideration of available licensed options.

The situation contributes significantly to reductions in the Australian fleet, as operators see little impediment to obtaining permits for foreign vessels and so operate their shipping business accordingly - ie using unlicensed vessels.

The increase in the issue of permits by the Commonwealth is relevant. These rose to 751 in 2001-02, an increase of 270 per cent over the previous decade. Freight carried under permit rose 782.1 per cent across the same period.

Exacerbating the problem for operators of licensed vessels is the unsympathetic financial and legislative regime in Australia relative to the supportive policies of other countries with whose vessels they compete.

 

5.      Characteristics of A Sustainable Australian Shipping Industry

If an Australian shipping industry is to be sustainable, it must exhibit:

•           the ability to supply cost-effective shipping services to users;

•           the same regulatory and fiscal regimes as foreign operators with whom it competes;

•           world's best practice in the provision of safe shipping services; and

•           international standard training in all maritime activities to ensure a skill base accessible by Australian defence forces and other maritime professions

 

6.      Benefits of a Sustainable Australian Shipping Industry

(a) National Defence and Security Issues

Defence considerations favour a strong local shipping industry.

In the US, the Navy has strongly supported the longstanding and stringent cabotage policy of successive national governments. The Navy has expressed concern that any reduction in the domestic shipping industry there would dilute the ability of the merchant marine to support defence deployment, would decrease the number of US seafarers able to crew strategic vessels and would weaken the maritime industrial base of shipyards and repair facilities.

From a national security viewpoint, the current situation in this country is that foreign nationals work the Australian coast on a semi-permanent basis without the sort of vetting which would accompany overseas labour seeking employment  in any other domestic industry. Foreign crews are issued with Special Purpose Visas which are less stringent than the work permits required of other overseas people wanting to work in Australia.

(b) Maintenance of National Skill Base

 

The national skill base relevant to the provision of fundamental maritime services is diminishing because of a lack of local shipping activity.  Industry has expressed concern, for example, about the dwindling local resource base for providing pilotage services in Australian ports and pointed to the growing practice of bringing in overseas pilots, some with questionable levels of training and local knowledge. 

The diminishing skill base can also impact on towage services, the offshore oil and gas industry and on-shore shipping-related activities where blue water experience is important.

A strong and sustainable Australian shipping industry would provide a local resource and address this problem.

 

(c) Provision of Ancillary Maritime Services

Charter parties call for legal and insurance services to be provided from centres like London and Tokyo despite equivalent services being available in Australia at lower cost. The national Government should be taking an interest in the professions associated with shipping by encouraging the development of export on a cost-insurance-freight (CIF) basis rather than the commonplace free-on-board (FOB).

 

(d) Protecting our Coastal Environment

To ensure the protection of our precious coastal environment, we need to insist that ships entering our waters are safe to operate and crewed by fully trained professionals. The Australian shipping industry is systematically undercut by foreign flagged vessels that often do not meet these standards.

 

(e) Developing a Sustainable Transport System

The Western Australian Government is working diligently to achieve greater sustainability in meeting the transport task.  This requires a more realistic assessment of the economic, environmental and social impacts of existing transport modalities than has occurred in the past.

Consistent with that approach, it can be argued that a modal shift towards shipping in the national freight task will lead to:

 

§         economic benefits including lower national freight costs, reduced road construction and maintenance outlays and less transport induced damage to cargoes;

§         environmental benefits including lower greenhouse gas emissions, reduced noise levels and greater fuel efficiency; and

§         community benefits including reduced levels of road congestion and traffic accidents.

 

Despite the obvious value of these benefits and externalities, the evidence is that they are not being adequately exploited. Domestic shipping's share of the national freight task has declined from nearly 40 per cent in 1984-85 to 25 per cent in 2000-01.

However, accounting for these benefits and externalities can present a significantly different outcome to that derived from more traditional analysis. 

For example, the Western Australian Government subsidises a regular shipping service to its North West region.  The support was originally justified on the grounds of providing a competitive freight alternative to remote communities and this still remains an important policy consideration in respect of the service.  However, more recent analysis also indicates that the savings in road costs represented by this sea-borne freight, together with additional revenue streams generated in the regions by the service (ports and transport industry) and taxes paid to Government, in total considerably exceed the level of direct Government support. The respective figures are in the order of $5.0 million per annum and $3.5 million per annum.

As an aid to policy-making in the area, a better understanding needs to be generated of the full impact of a shift to shipping, where it is an alternative for the carriage of domestic freight.

 

(f) Seeking Appropriate Opportunities for Resource Development

Large and resource-rich States such as Western Australia have a growing demand for coastal shipping, generally in terms of the continuous and long-term movement of bulk product from one side of the country to the other.  Just one such project now well advanced In Western Australia has a potential ongoing coastal shipping requirement of 2 million tonnes annually over the next two years, growing to 3.7 million tonnes per annum thereafter.

A strict interpretation of Federal legislation suggests that this and similar tasks would have be carried out by the Australian shipping industry.  It is of concern then, that while the resource sector is growing, the shipping industry is not.  This represents a significant strategic issue for the future development of the economy.

As an aid to formulating appropriate shipping policy, a national audit should be conducted of the resource sector’s future coastal shipping requirements.

 

(g) Economic Activity

In terms of macro-economic impacts, freight rates paid to overseas shipping companies now have a significant influence on the nation's current account. Whereas Australian shipping earned $180 million in 2001-2002, a massive $3.1 billion left the country in freight payments to foreign shipowners. This latter amount now constitutes nearly 14 per cent of the current deficit.

At another level, the operation of the Australian shipping industry, defined in its broadest sense, already has significant national economic impact.  Activities associated with shipping in this country - such as container handling, freight forwarding, marine surveying, ship building and agency work - have been estimated to employ 80,000 people and generate value of $14 billion per annum.

These are enormously significant figures, particularly given the historically low point of the industry at present.  The positive economic impacts associated with the local industry will be diluted if these activities continue to decline and be replaced by offshore operators.

 

The quantum and composition of these impacts needs to be confirmed and agreed on as a basis for future policy discussion.

 

7.      Constraints to Change

A number of constraints to the achievement of a sustainable Australian shipping industry have been highlighted in related discussions over the years.  They include:

§         a fiscal regime which disadvantages local shipowners against those from other developed countries with whom we compete;

§         a legislative regime which imposes a variety of operational costs on local shipowners not borne by foreign flag operators involved in the domestic freight task; and

§         an industrial regime that makes Australian crews competitively expensive.

§          

Other constraints have been more recently identified including:

§         operational factors such as lack of appropriate tonnage;

§         commercial factors such as shipping inaccessibility and low modal profile (especially in the liner trades); and

§         the growing availability of permits to trade on the coast by foreign-flag carriers.

 

All of these constraints need to be confirmed and the cost of addressing them recognised.

 

8.      The Justification for Policy Development

The elements of this discussion are not new.  What has not been done previously, however, is to consciously bring the two sides of the discussion together as a guide to future policy direction.

The benefits of a strong Australian shipping industry, both economic and strategic, need to be confirmed.  The cost of addressing constraints to the achievement of that outcome needs to be identified.

The essential policy question to be answered then relates to whether the one justifies the other.  Until that fundamental question is answered, shipping in this country will continue to be conducted in a policy vacuum.  Given the importance of this activity to our economic advancement, this is unacceptable.

 

9.      Recommendation

This paper has suggested the need for further analysis before a consensus national shipping policy can be arrived at.  The outcome is of significance to all jurisdictions, not just the Commonwealth.  Accordingly, it is recommended that the matter be referred to a Special Working Group of the Standing Committee on Transport to progress as a matter of urgency, with early reporting back to Ministers. 

Appendix One:

U.S. Cabotage Measures: The Jones Act

 The Jones Act:

 

The Jones Act is the common name for Section 27 of the Merchant Marine Act of 1920. The legislation's intent is to promote a healthy American flag fleet and protect that fleet from unfair foreign competition. Accordingly, the Jones Act requires that cargo moving between US ports be carried in a vessel that was built in the US and is at least 75 per cent owned by American citizens or corporations. Since Jones Act vessels are necessarily registered in the US, general labour and immigration laws require that crew members be American citizens or legal aliens.

 

US Domestic Shipping Activity:

 

The domestic shipping operations of the American merchant marine provide essential services to 41 States reaching 90 percent of the US population. More than 44,000 vessels comprise the US domestic fleet, ranging from containerships to coastal tankers, inland grain tows to dredges, Great Lakes self-unloaders and passenger ferries. Nearly 2,500 seafarers are employed on US domestic vessels.

 

During 1999, the industry handled over 1.1 billion tons of cargo, which is about 23 percent of all domestic surface transportation. Some 80 million passengers were also carried annually by domestic shipping.

 

The three major trade areas covered by the Jones Act are the domestic ocean service, Great Lakes and the inland waterways. By far the largest of the domestic markets is the inland waterway barge network, which includes shipments on the Mississippi River system and the intracoastal and navigable internal waterways of the Atlantic, Gulf and Pacific Coasts.

 

The inland fleet totals over 33,000 vessels. Some 700 million tons of freight are moved on US inland waterways. Of this cargo, the principal commodities carried are bulk such as coal, oil products, and food/farm products.

 

Adminstration of the Act

 

The U.S. Customs Service has direct responsibility for enforcing the provisions of the Jones Act and is limited to granting waivers from the Act only in the interest of national emergency or for a vessel in distress. Waivers of the Jones Act are extremely rare.

 

The US Government expressly prohibits the domestic shipping industry from accessing various construction and operational subsidy programmes available to US international operators.

 

Political Positions

 

In the mid and late 1990s, there was a debate about the continued need for cabotage laws, key among which is the Jones Act. A 1995 US International Trade Commission report characterised the Jones Act as a restraint on the import of transportation services and estimated the annual cost to the US economy at $2.8 billion. The Commission put the view that that an open-coast policy would result in a shipping rate decline of 26 per cent.

 

Criticisms of US domestic policy galvanised industry support into a coalition called the Maritime Cabotage Task Force. The Task Force argued that the Jones Act was not anti-competitive, pointing out that carriers compete fiercely among themselves with contracts being lost on tenths of a cent per ton. It was also noted that the domestic fleet competes successfully with efficient long haul railroads and land transport companies.

 

The position of the Task Force was endorsed by Congress and the Department of Defence, together with the Clinton and subsequently the Bush administrations.

 

National Security

 

A US Navy study commissioned in 1998 warned of major strategic consequences in the absence of the Jones Act. Concern was expressed about decreases in the number of US flag vessels available to support defence deployment, in US mariners to crew strategic vessels and a weakening of the maritime industrial base of shipyards and repair facilities.

 

The study estimated that the domestic fleet would be able to generate 46 percent of seafarers to crew strategic vessels that convoy supplies to US troops overseas in times of emergency. It saw that any reduction in US domestic shipping activity would result in insufficient numbers of mariners available to man both the commercial merchant marine and defence deployment vessels.

 

During the Gulf War, US flag tankers diverted from domestic trades delivered more than 20 percent of the fuel needed by US troops. Also during that conflict, there were instances when foreign flagged vessels chartered to deliver supplies refused to enter the war zone.

 

Appendix Two:

 

Maritime Aid Policies in European Countries

 

Denmark

 

•           introduced a tonnage tax in 2002

•           shipowners have the option of paying standard corporate tax or paying tax based on fleet tonnage irrespective of actual profit or loss on operations

 

Finland

 

•           in 1992, introduced system to compensate shipowners for higher cost of employing local seafarers

•           shipowners eligible for repayment of seafarers' income taxes and 3-5 % of social security payments

•           now considering full restitution of all social security costs

•           also about to introduce a tonnage tax

 

France

 

•           shipowners may raise 100 % of funds to finance ship buildings from private investors and after five years of operation acquire vessel for half of its construction cost

•           direct subsidies available to compensate shipowners for cost of sailing under the French flag in terms of salaries and social charges

 

Germany

 

•           from 1999, shipowners can choose between flat tonnage tax and normal income tax

•           measure worth US $70 million per annum when introduced

•           subsidy programme also available worth US $ 40 million per annum aimed at reducing non-wage labour costs and encouraging training in the maritime sector

 

Ireland

 

•           commercial vessels flying the Irish flag and at least 51 % owned by Irish residents qualify for a flat 10 % tax rate (compared to standard corporate tax of 32 %)

•           introduced training subsidy in 1996 to put more Irish seafarers on British vessels

•           the 2002 Budget provided Irish seafarers with special income tax allowance and full refund of pay-related social insurance to shipowners

 

Italy

 

•           from 1998, shipowners pay tax of 7.4 % compared to standard corporate tax of about 50 %

•           also State pays for social security and pension schemes for Italian seafarers

•           notwithstanding, Italian vessels the most expensive in Europe and industry has suffered since EU deregulated coastal trades in 1999

 

Netherlands

 

•           shipowners can choose between paying a flat tax based on fleet tonnage or corporate tax of 35 % on net profits

•           employers also receive relief equivalent to 38 % of gross wages for Dutch seafarers resident in the Nedlands and 10 % for those living overseas

•           the most attractive tax regime in the EU, whose success has caused Government to examine applying same policy to other related industries

 

Norway

 

•           shipowners are refunded 12 % of wages paid to Norwegian seafarers if a certain number of national are employed

•           seafarers living in Norway may be entitled to an allowance of 30 % on their pre-tax income

•           from 1996, ship earnings have been exempt from corporation tax in exchange for imposition of a tonnage tax

•           tonnage tax has subsequently risen and local shipowners complain they are paying four times as much as competitors in the Netherlands

 

Sweden

 

•           a net wage system is available under which shipowners pay wages net of tax and social security contributions

•           shipowners now lobbying for a tonnage tax

 

United Kingdom

 

•           tonnage tax introduced in 2000

•           shipowners can choose to remain on standard corporation tax or go onto a tonnage tax with taxes based on fleet tonnage irrespective of profits or losses

•           tonnage tax means effectively that income and capital gains for most sorts of shipping activity become tax exempt

•           introduction of tonnage tax seen as biggest boost to British shipping in more than two decades

•           shipowners under the tonnage tax regime are required to operate various training schemes for seafarers

 **************************************************************************************************************************************************************

 

DIESEL REBATE GOES TO (FOREIGN) PERMIT SHIPS!

 

In a quite extraordinary debate in the Australian Senate on 24th June 2003 the Government succeeded in continuing to pay the diesel rebate to SVP and CVP ship operators.

The diesel rebate [in legislation known as the Energy Grants Credits scheme] is meant to give remote area Australians some relief from the burden of Government excise on fuel. This makes some policy sense in a country that has been tormented by the tyranny of distance. In effect it is a regional development policy.

But when the Opposition moved to stop this credit flowing to foreign operators of SVP and CVPs the Government jumped in to ensure that they can retain the fiscal benefit.

Green Senators Brown and Nettle and Democrats Allison, Ridgeway and Greig joined the ALP in trying to put an end to the foreign shipping companies rort. But former Democrat Meg Lees voted with the Government to continue the Australian subsidy to SVP and CVP operators. Democrats Cherry and Bartlett missed the vote [oops].

The result…… foreign operators can take advantage of our domestic transport policies but do not have to comply with Australian laws regarding income tax, company tax, superannuation, health and safety, compensation etc.

Not only is this not a level playing field it is positively tilted in favour of the foreign operator.

 

Senator O’BRIEN (Tasmania) (7.53 p.m.)—I

move opposition amendment (1) on sheet 2884: (1) Page 31 (after line 12), after clause 37, insert:

37A Non-entitlement

Despite the other provisions of this Part, use in marine transport does not include use for a purpose in a vessel in marine transport where a vessel is operating under a single or continuing voyage permit.

The open application of this significant benefit for the operators of foreign vessels operating under single and continuing voyage permits is a major issue for the opposition. This benefit adds to the existing high level of advantage given to foreign operators with the permit system. The opposition has been asking about how these bills apply to these vessels, and we finally got a few answers. It is now clear that some benefit accrues, and Labor opposes this. Advice from the Treasurer’s office is that overseas vessels operating on the Australian coastal trade on single voyage or continuing voyage permits are able to claim a rebate under the Diesel Fuel Rebate Scheme for fuel they purchase in Australia or import into Australia. We are also advised by the Treasurer’s office that overseas vessels entering into Australia to commence coastal voyages are required to pay import duty on any fuel on board the ship on arrival. Overseas vessels operating on the Australian coastal trade are not allowed to purchase duty free fuels. Importantly, the advice from the Treasurer also confirms that the ship owner-operator can apply for a rebate under the marine transport category of the Diesel Fuel Rebate Scheme for any fuel that has been imported or purchased duty paid and that the Energy Grants (Credit) Scheme will maintain this entitlement. This is another example of the Howard government

propping up foreign operators in unfair competition against Australian shipping and their workers.

 

 

 

Senator BROWN (Tasmania) (8.11 p.m.)—

Senator O’Brien wins in this case. If we cannot legislate to ensure that people are paid fairly—the same for the same work—in this country then those who do not pay should not get the subsidies. That is pretty clear.

 

 

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

MAJOR SHORTCOMINGS OF

AUSTRALIAN MARITIME LEGISLATION

 

MARTIN BYRNE

ASSISTANT FEDERAL SECRETARY

AUSTRALIAN INSTITUTE OF MARINE AND POWER ENGINEERS

 

MLAANZ  29TH CONFERENCE

MELBOURNE OCTOBER 2002

 

INTRODUCTION

 

This paper deals with three major areas of Commonwealth legislation that impact on the Australian maritime industry and that have major shortcomings. Those are the Navigation Act, the Migration Act and the Income Tax Assessment Act.

 

When taken together these pieces of legislation, regulations made pursuant to them and the interpretations applied by the Courts, tilt the playing field well and truly against the Australian shipping industry and Australian seafarers. This applies both in the international trades and in relation to the coastal trade or the domestic shipping industry. By contrast other OECD nations have recognised the unfair competition and taken action to counter it.

 

The net effect of the legislation is that the Australian shipping industry and Australian seafarers have to meet a set of standards that do not apply to non-Australian shipping and non-Australian seafarers. This has created an unfair situation that makes it very difficult if not impossible for the Australian players to compete. In turn, this has led to a significant contraction of the Australian shipping industry in recent years. Guest workers are taking over Australian coastal shipping.

 

If the decline of the Australian shipping industry continues the nation risks losing a strategic transport capability of quite fundamental importance – the ability to transport commodities and processed goods in and out of (and even around) our island nation. Indeed during the recent East Timor conflict, foreign flag vessels had to be chartered in by our Navy because there were insufficient Australian flag vessels available to carry out the task.

 

Unless there is a change in policy leading to legislative change by the Federal Government Australian flag shipping will continue to stagnate and decline.

 

NAVIGATION ACT 1912

 

The Navigation Act is an omnibus law that has developed over the best part of a century to deal with a variety of matters maritime.

 

It was originally a product of the UK Merchant Shipping Acts of the 19th Century.

The Navigation Act is the main vehicle for the implementation of Australia’s obligations under a number of IMO Conventions.

 

On its face the legislation appears to be responsive to the needs of the players in the maritime industry or to events and circumstances of the times. It has been much amended and recently reviewed.

 

The major shortcoming of the Navigation Act is that it does not promote an Australian shipping industry.

 

The Navigation Act does not require that foreign vessels participating in the Coasting Trade must comply will all of the requirements that apply to Australian flag vessels that are licensed for the Coasting Trade (see Appendix 1). There is a double standard here. The Australian law works to the disadvantage of the Australian operators and Australian seafarers.

 

In relation to the international trades, there are simply no mechanisms in the Navigation Act or anywhere else to encourage Australian participation in the task of transporting Australia’s exports or imports. In a globalizing world, Australia is missing out on participation in the key service for trade of most real goods i.e. shipping.

 

Globalization has been a buzzword of the last decade but the maritime industry has been a truly global one for many decades, if not centuries. The IMO Conventions have been a primary method for dealing with global maritime issues during the 20th Century. Compliance with IMO Conventions and the national laws that implement them has been patchy. The Ships of Shame Report highlighted many of these problems in the early 1990s after a period of numerous bulk shipping disasters. The more recent ICONS report, Ships, Slaves and Competition, demonstrated that ‘the more things change, the more they stay the same’. Peter Morris’ address to the MLAANZ Conference last year detailed the problems of enforcement of international standards.

 

Port State Control (PSC) in Australia and many other nations has arguably raised the physical standard of ships visiting Australia (and the other complying nations). As the recent groundings of the Doric Chariot, Hanjin Dampier, and Bunga Teratai Satu demonstrate however the operation of ships in Australian waters is still a hazardous one. And because of our PSC inspection reputation, we are not seeing the worst ships in our waters.

 

What has happened during the latter part of the 20th Century is that the economics of shipping have altered fundamentally. Cost minimization has driven the separation of ship ownership, ship registration, ship management and ship operation. The term Flag of Convenience (FOC) covers the concept of a country which has no physical connection with a vessel but is prepared to register the vessel at cut-price rates and without being rigorous about the implementation of IMO standards (or in some cases any standards).

 

Large elements of the global maritime industry are structured to minimize taxation and exposure to risk through exploitation of the FOC concept.

 

Corporations are established to take advantage of the most lenient laws that can be found and the countries most desperate for foreign exchange are engaged in a constant downward spiral in an effort to retain their meagre benefits from the registration of vessels.

 

The current dispute over the Coasting Trade provisions of the Australian Navigation Act is an exercise in determining how far Australia is prepared to allow this corrupt international process to penetrate into the national polity.

 

The Single Voyage Permit and Continuing Voyage Permit system has become a mechanism for the Minister for Transport to waive virtually all Australian laws and standards in domestic shipping.

 

The Permit system does not permit the foreign shipping company to participate in the Australian Coasting Trade on the same terms as Licensed Australian shipping. Rather it permits the foreign shipping company to engage in coastal voyaging without needing to comply with all of the burdensome requirements imposed on Australian operators.

 

Why would any Parliament have agreed to such a gaping hole in the legislative framework? Simply because it was really only intended to be used sparingly and infrequently. It was meant to supplement Australian transport when there was not enough Australian shipping capacity to do the job. Now Australian shipping capacity is being re-flagged to ensure that there is no Australian shipping available to do the job.

 

There is no inherent competitive advantage held by Ukrainian seafarers over Australian seafarers despite what CSL has been quoted as saying. It is obvious that a crew of 27 will be able to do a great deal more maintenance on a vessel than a crew of 17.

 

The advantage that CSL gain from (ab)using the Permit system is avoidance of all Australian civil laws and regulations:

CSL does not pay any corporate income tax in Australia in relation to the earnings from the CSL Pacific or the Stadacona (former CSL Yarra);

CSL does not pay Australian minimum rates of pay to the seafarers it employs on the 2 vessels;

CSL does not pay any payroll tax in relation to the seafarers it employs on the 2 vessels;

CSL does not pay superannuation contributions for the seafarers it employs on the 2 vessels;

CSL does not provide Annual Holidays for the seafarers it employs on the 2 vessels;

CSL does not pay workers compensation premiums for the seafarers it employs on the 2 vessels;

CSL does not provide long service leave to the seafarers it employs on the 2 vessels;

The Ukrainian seafarers employed by CSL do not pay income tax on their wages;

 

Turning to the international trades, countries throughout the world have taken measures to ensure that they retain their shipping industries because they recognize the economic and strategic importance of shipping.

 

The European Commission in 1997 adopted a specific policy setting out what they call the Maritime State Aid Guidelines for member countries. The rationale was described as follows:

Many third countries have developed significant shipping registers, sometimes supported by an efficient international services infrastructure, attracting shipowners with a fiscal climate which is considerably milder than within EC Member States. The low tax environment has resulted in there being an incentive for companies not only to flag out their vessels but also to consider corporate relocation. It should be emphasised that there are no effective international rules at present to curb such tax competition and few administrative, legal or technical barriers to moving a ship's registration from a Member State's register. This leaves all Member States having significant fleets with a common problem: the creation of conditions which allow fair competition with flags of convenience seems the best way forward.

 

The Guidelines went on to indicate the type of fiscal support that would be permitted within the EU:

 

In order to counter this tendency, many Member States have taken special measures to improve the fiscal climate for shipowning companies, including, for instance, accelerated depreciation on investment in ships or the right to reserve profits made on the sale of ships for a number of years on a taxfree basis, provided that these profits are reinvested in ships.

 

These fiscal alleviation measures which apply in a special way to shipping are considered to be State aid. Equally, the system used in certain Member States and third countries of replacing the normal corporate tax system by a tonnage tax is a State aid. Tonnage tax means that the shipowner pays an amount of tax linked directly to the tonnage operated. The tonnage tax will be payable irrespective of the company's actual earnings, or profits or losses made.

 

Such measures have been shown to safeguard high quality employment in the onshore maritime sector, such as management directly related to shipping and also in associated activities (insurance, brokerage and finance). In view of the importance of such activities to the economy of the Community and in support of the earlier stated objectives, these types of fiscal incentive can generally be endorsed.

 

The Guidelines also set out the additional measures relating to labour costs which may be permitted among EU members:

 

However, maritime transport presents a special case, as the Commission accepted in adopting its guidelines on State aid in 1989 and the communication on reduction of labour costs. In particular, aid in the field of social security and seafarers' income taxation, tending to reduce the burden borne by shipping companies without reducing the level of social security for the seafarers and resulting from the operation of ships registered in the Community may be considered compatible with the common market.; The Commission considers that this approach remains valid.

 

The Guidelines make it clear that the objective is not just to give corporate handouts:

 

Support measures for the maritime sector should, therefore, aim primarily at reducing fiscal and other costs and burdens borne by EC shipowners and EC seafarers (i.e. those liable to taxation and/or social security contributions in a Member State) towards levels in line with world norms. They should directly stimulate the development of the sector and employment, rather than provide general financial assistance.

 

In line with the objective, therefore, the following action on employment costs should be allowed for EC shipping:

 

- reduced rates of contributions for the social protection of EC seafarers employed on board ships registered in a Member State,

 

- reduced rates of income tax for EC seafarers on board ships registered in a Member State.

 

For this type of aid, a maximum reduction of liabilities to zero may be permitted, allowing Member States to bring employment related costs to levels in line with world norms which often entail exemption from tax and social security liabilities for seafarers. However, no subsidy on net wages of EC seafarers may be granted, as this might lead to a distortion of competitive conditions between Member States. The alleviation of fiscal burdens would not remove the interest of the shipowner in negotiating an appropriate salary package with potential crew members and their labour representatives. Seafarers from Member States with lower wage levels would still, therefore, have a competitive advantage over those from other Member States with higher wage expectations. In any event, EC seafarers will continue to be more expensive than the cheapest available in the global market. Hence, there is no danger of overcompensation entailed in this measure.

 

Just in case any member country might be tempted to go over the top, the Guidelines set a maximum level of aid:

 

A reduction to zero of taxation and social charges for seafarers and of corporate taxation of shipping activities is the maximum level of aid which may be permitted.

 

Following the introduction of these guidelines most if not all EU countries have introduced extensive support measures for their shipping industry. These include the full range of measure identified in the Guidelines (see Appendix 2 for a summary).

 

Meanwhile the Australian Government has removed the support that did exist. The Ship Capital Grants Act 1987, s57AM of the Income Tax Assessment Act 1936 and the International Shipping (Australian Resident Seafarers) Grants Act 1995 provided some measure of assistance to the Australian shipping industry “towards levels in line with world norms”. These measures were repealed by the Howard Government immediately upon election giving a clear signal about the Government’s shipping policies.

 

MIGRATION ACT

 

The Migration Act 1958 regulates the arrival in Australia of non-citizens.

 

It could be regarded as gratuitous to comment about how the Migration Act has been used in 2001 and 2002 in conjunction with the “border security” issue to ensure that non-citizens are not allowed into this country.

 

By contrast, the Government and the Department of Immigration and Multicultural and Indigenous Affairs have been quite accommodating to non-citizens who are seafarers on foreign flag ships.

 

For many years the Migration Act has empowered the Minister to issue visas to people who wish to visit Australia.

 

There is a special type of visa for seafarers on foreign vessels engaged in international voyages. This is called the special purpose visa(s.33(2)(a), Migration Act). The Migration Regulations specify that the members of the crew of non-military ships are taken to have been granted special purpose visas(Regulation 2.40, Migration Regulation 1994).

 

In other words the special purpose visa is not issued it is taken to have been issued. It is effectively deemed to be issued.

 

There is however a proviso that the ship must be engaged in an international voyage. That is that the ship will depart Australia to a place outside Australia during the course of the voyage (Regulation 2.40(6)).

 

With the aplomb of Sir Humphrey Appleby, the First Assistant Secretary of the Department of Transport and Regional Services, Mr. G. Feeney advised the Senate Estimates Committee this year that foreign flag vessels which are granted Single Voyage Permits or Continuing Voyage Permits to trade between Australian ports are regarded as still being on international voyages.

 

In addition, the DIMIA also takes the view that a vessel operating under a Single Voyage Permit or a Continuing Voyage Permit is on an international voyage. DIMIA therefore regards the foreign seafarers on board these ships as being taken to have special purpose visas.

 

Examination of trading patterns shows that some of the foreign vessels trading between Australian ports using SVPs or CVPs are not actually engaged in international voyages. Some ships are using permits to replace former Australian flag vessels in dedicated trading patterns of repeated, regular voyages between Australian ports. They do not continue to foreign ports. The foreign seafarers on those vessels are therefore not entitled to be ‘taken to be issued with special purpose visas’. On the face of it the seafarers are in the same legal position as the persons on the so-called SIEVs (suspected illegal entry vessels), they are illegally in Australia.  Minister Ruddock has not however taken the same heavy-handed approach as he has taken with the asylum seekers.

 

It goes without saying that these seafarers are not subject to all of the normal legislation that applies to other people working in Australia. Laws such as the Occupational Health and Safety Acts, Compensation Acts, Workplace Relations Act, Income Tax, Payroll Tax etc do not appear to apply to these seafarers or their employers.

 

AIMPE and the other maritime unions have however taken steps to test the application of the Workplace Relations Act (and the Maritime Industry Seagoing Award made thereunder) to the CSL vessels’ crew.

 

Of course the Crimes At Sea Act 2000 does ensure that Australian criminal law applies to these vessels and the persons on them.

 

Interestingly a recent NSW Court of Appeal case Union Shipping New Zealand v Morgan [2002] NSWCA 124 indicates that the common law may also apply to foreign seafarers on foreign vessels in Australian, or at least NSW, ports. In that case, the Court of Appeal dismissed an appeal by the shipping company against a decision by the primary judge to allow the hearing in NSW of a claim arising from an allegedly tortious injury suffered  by a New Zealand seafarer whilst the NZ vessel was discharging its cargo in Port Kembla.  After a detailed review of the relevant texts (including Cheshire, Dicey, Kahn-Freund, Nygh and O’Connell) Heydon JA, Hodgson JA and Santow JA rejected the old concept that the law of the flag should apply in all respects on board a ship. Their Honours found that New South Wales law applies.

 

It would not be appropriate to move on without noting that in Maritime Union of Australia and others v Hon. John Anderson and others [2000] FCA 850, the unions challenged the approach of the Minister to the granting of SVPs. Had the unions’ application been successful the CSL Yarra may well have been the beneficiary and had access to the fertilizer cargoes of WMC Fertilizers and Western Bulk Carriers out of Townsville. Kenny J of the Federal Court found, however, that the unions had no standing in the matter.

 

That judgement effectively entrenched the highly manipulative method of SVP applications that have come to be accepted practice over the past 7 years. Applicants tailor the terms and timing of their applications to ensure that no licensed Australian ship is capable of fulfilling the requirements.

 

INCOME TAX ASSESSMENT ACT

 

While the Tax Act is not a piece of Maritime legislation, the discussion about the maritime industry indicated that tax is a core issue in the shipping business. The Tax Act has a big impact on Australian seafarers.

 

This is especially the case in relation to the participation of Australian seafarers in international shipping. Recently the taxation of the overseas earnings of an Australian resident seafarer was the subject of litigation in the Federal Court of Australia in Chaudhri v Commissioner of Taxation [2001] FCA 554 (15 May 2001). A subsequent application to the High Court for leave to appeal this decision was turned down so the Federal Court decision stands.

 

In essence the decision means that s.23AG of the Income Tax Assessment Act is to be interpreted as meaning that the earnings of an Australian seafarer overseas are not earnings in a foreign country and are therefore not subject to the normal exemption for foreign earnings of Australians working overseas.

 

“1 Mr Chaudhri was at all times in the year of income a resident of Australia.

2 At all relevant times, Mr Chaudhri was employed by a company incorporated in Bermuda pursuant to a contract of employment which stipulated that it was deemed to have been made in Hong Kong and to be governed in all respects by the laws of Hong Kong. The parties to that contract agreed to submit to the jurisdiction of Hong Kong.

3 Mr Chaudhri served, pursuant to this contract of employment, as an officer aboard two merchant ships which flew the Panamanian flag.

4 Since departing Australia for his employment on 18 September 1995 and until his return to this country on 19 January 1996 (a period well in excess of ninety-one days), the ship on which Mr Chaudhri served, as one would expect, docked at various foreign ports and travelled through the territorial waters of foreign countries and on the high seas.

5 The income which was derived by Mr Chaudhri in the relevant year of income pursuant to his contract of employment was income derived by him in his capacity as an employee engaged in foreign service and thus salary or wages as those words are used in the definition of "foreign earnings" in s 23AG(7) of the Income Tax Assessment Act 1936 ("the Act").

6 The question which arises for decision is whether the income which Mr Chaudhri earned in the year of income was exempt from income tax under s 23AG of the Act. As that section stood during the year of income, it provided relevantly as follows:

"(1) Where a resident, being a natural person, has been engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived by the person from that foreign service is exempt from tax.

(2) An amount of foreign earnings derived in a foreign country is not exempt from tax under this section if the amount is exempt from income tax in the foreign country only because of any of the following:

...

(7) In this section:

...

`foreign earnings' means income consisting of earnings, salary, wages, commission, bonuses or allowances but does not include any payment, consideration or amount that...

`foreign service' means service in a foreign country as the holder of an office or in the capacity of an employee."

 

The Full Court went on to decide that :

 

31… a policy of subjecting to Australian income tax the earnings of an Australian resident who is outside the jurisdiction of any country levying taxation would seem entirely rational.

32 In our opinion, the learned Deputy President of the Tribunal was correct in holding that the income which Mr Chaudhri derived was not exempted from tax in accordance with s 23AG.

 

In interpreting this provision of the Tax Act, the Federal Court did a fine job of defending the revenue base for the ATO. However this leaves the Australian resident international seafarer disadvantaged in comparison to most other international seafarers. Not only crews from Third World nations but even for example seafarers from the UK are exempt from tax on income earned on international voyaging (over a minimum period). Crudely put, it is just far cheaper to employ seafarers of virtually any other nationality than Australians because they don’t have income tax taken out of their pay.

 

Obviously in the context of the Australian domestic economy it jars to hear it argued that a group of employees should not be subject to the normal income tax laws. However when the global overview is taken, Australia’s policy disadvantages Australian seafarers.

 

By contrast of course Australian merchant bankers, lawyers and consultants etc. working overseas do take advantage of the provisions of s23AG of the ITA Act and return home subsequently enriched by the experience.

 

 

 



l Home l About Us l Contacts l Offshore Oil & Gas l Towage l Superannuation l Members l News l National Conference 2003 l Blue Water Shipping l Health, Safety & Welfare l High Court Decision - CSL l Life Boat Accidents l What Can I do through the Unio l Enquiries l