The main form of fuel taxation in Australia is Commonwealth excise. This is currently levied on petroleum products.9 Other fuel taxes levied by the Commonwealth within the scope of the Inquiry are:
customs duty: while excise is a tax on the domestic production of goods, customs duty is levied on similar imported products; and
Goods and Services Tax (GST): is a broad based consumption tax levied at an ad valorem rate of 10 per cent applying to all fuel products sold in Australia; all GST revenue is transferred to the States.
Section 90 of the Constitution reserves to the Commonwealth the power to levy excise. In the past the States, excluding Queensland, levied certain fees on petroleum products, including by way of business franchise fees. However, laws allowing collection of such fees were cast into doubt by the High Court on 5 August 1997. 10
From 6 August 1997, at the request of the States, the Commonwealth adjusted excise rates (on tobacco and petroleum products) and wholesale sales tax (on liquor) to fund revenue replacement payments to the States for the loss of business franchise fees. Whilst revenue replacement payments were formally abolished from 1 July 2000, as part of The New Tax System, the States still receive the equivalent amount of revenue from fuel revenue replacement payments as they did prior to taxation reform. This is because the Commonwealth guaranteed that in each of the transitional years following the introduction of taxation reform, the States would be no worse off than had the reforms to Commonwealth-State financial relations not been implemented.
Excise raised almost $12 billion11 in 2000-01, while customs duty contributed around $45 million. Table 5.1 shows that the contribution of excise as a share of Commonwealth revenue has changed little over the last 15 years.
Table 5.1: Fuel excise collections, 1986-87 to 2001-02
(a) Does not include crude oil excise and excludes the Diesel Fuel Rebate Scheme.
(b) Does not include excise collections on behalf of State Governments as a replacement for business franchise fees.
(c) Does not include GST collected from fuel.
Source: Budget Paper No. 1 2001-02, AusInfo, 22 May 2001, and prior year budget papers.
The key pieces of Commonwealth legislation relating to excise are:
the Excise Act 1901 and its Regulations;
the Excise Tariff Act 1921; and
the various Fuel (Penalty Surcharge) Acts 1997.
The Excise Act sets up the basic excise regime, while the Excise Tariff Act defines the products to which excise is applicable and sets out the rates of duty. The Fuel (Penalty Surcharge) Acts extend the legislative framework beyond the point where the power of the Excise Act effectively ends (ie when a product is removed from the licensed premises of an excise manufacturer).
Responsibility for excise collection was transferred to the Australian Taxation Office (ATO) from the Australian Customs Service (Customs) in 1998. The ATO also administers the collection of GST. Customs administers the collection of customs duty on similar imported petroleum products. In practice the vast majority of imported product is actually entered via the excise system for further blending and manufacturing.12
All excisable goods are defined in the Excise Tariff Act, with excise rates mirrored in the customs tariff for imports of the same type of goods. A manufacturer of excisable goods is required under the Excise Act to be licensed, and is only entitled to manufacture products named in the licence at specified premises.
Duty is collected when excisable goods are `entered for home consumption', which normally means when they are removed from the licensed premises of the excise manufacturer and are available for sale. Liability for duty is usually deferred by the manufacturer and paid weekly by obtaining a `periodic settlement' permission. Until duty is paid, the goods remain under the control of the ATO. Underbond goods (goods on which duty has not been paid) must be stored in licensed premises or in approved places. Permission must be obtained for any movement of goods in or out of such premises.
Table 5.2 shows the current rates of excise for petroleum products along with specific other fuels that have been listed in the tariff with a zero rate of excise. Table 5.3 shows estimated Commonwealth excise collections in 2001-02.
Table 5.2: Fuel excise rates as at 1 August 2001 (cents per litre)
(a) For some products the excise payable may be refunded or remitted (refer section 5.1.5).
(b) A number of `other uses' are prescribed in excise legislation for most products. Where more than one rate applies for `other use' per product, no rate has been given (except for aviation fuel rates).
(c) Excise collected on aviation fuel is hypothecated to the Civil Aviation Safety Authority and Airservices Australia for provision of aviation services such as traffic control, navigation and air safety regulation.
(d) Fuel oils are typically heavy fuels not suited for use in vehicle engines. The properties of fuel oil for the purpose of excise are defined in subsection 3(4) of the Excise Tariff Act 1921.
(e) The excise rate for these products only applies to use other than as a fuel (eg as a lubricant).
(f) The excise status of other alternative fuels under the current legislation is being determined.
Source: Australian Taxation Office information drawn from Excise Tariff Act 1921, The Schedule.
Table 5.3: Estimated Commonwealth excise collections, 2001-02 ($m)
(a) Includes lead replacement petrol.
(b) Leaded petrol will be phased out nationally by 1 January 2002. States may phase it out sooner.
(c) Includes aviation gasoline, aviation turbine fuel, fuel oil, heating oil and kerosene.
(d) Excludes crude oil excise.
Source: Budget Paper No.1 2001-02, AusInfo, 22 May 2001.
The structure of the excise tariff (and similarly the customs tariff) has evolved as a result of the policy objectives of successive governments (refer Box 5.1). This is reflected in the varying rates applying to different petroleum products and for different uses of the same product (Table 5.2).
The current tariff structure has established a concessional system whereby certain products are either taxed at a lower rate when used as a fuel for industrial purposes or do not attract any excise when used other than as a fuel. These two instances are referred to as concessional use.
This concessional system generally applies to fuel as follows:
products used as a fuel in an internal combustion engine (ICE) (such as petrol and diesel) are taxed at the full rate of excise;
products used as fuel, other than in an ICE (eg heating oil and kerosene for industrial purposes) are taxed at a concessional rate;14and
products not used as a fuel (eg solvents) are excise free as are certain alternative fuels (including LPG and ethanol).
A number of remission and refund provisions are also set out in the excise regulations that reduce excise for certain industries and for prescribed uses of petroleum products. Like the excise tariff, these provisions have developed over a number of years for various policy reasons.
In addition to the concessional system built into the tariff structure, various other mechanisms have been implemented in the form of rebates, subsidies and grants to provide reductions in the cost to consumers of petroleum products (and fuel more generally).
Fuel substitution issues
The current tariff structure potentially provides incentives to substitute concessionally taxed products in applications that attract a higher excise rate.
A number of measures have been put in place over the past few years to combat these fuel substitution practices. These include:
the marker regime for concessional product;
restructure of the tariff to remove petrol and diesel concessional rates; and
the application of conditions to `weekly settlement' and `underbond movement' permissions to assist in achieving better compliance levels.
The marker regime and the remissions system
In 1998 legislation came into effect requiring the addition of a chemical marker to concessional fuel sold in bulk. Fuel that attracts the full rate of excise can then be tested for presence of the marker to ensure that the correct amount of excise has been paid. Some exceptions to this regime exist where the addition of the marker will adversely affect the product. As a result, a `remission system' has been put in place where permission is granted for excise to be remitted at the time of entry for home consumption on the basis of end use.
The fact that some concessional products are exempt from containing the marker means there is still risk of continued substitution activity - where unmarked concessional product can be used (or blended with petrol or diesel) for use in an internal combustion engine.
The marker regime (and associated remission system) has introduced an excise compliance burden on those who legitimately deal in concessional product. Until the new fuel substitution measures were brought in it was not necessary to be licensed or to lodge entries detailing the petroleum products manufactured. The fuel substitution measures and the marker regime place responsibility on industry to be aware of the ultimate end use of concessional products that they sell.
Consistency of administration
The separation of administration of excise and customs duty for `like' imported petroleum products has brought about two administrative agencies that have different legislation, powers and systems to enforce compliance. This has the potential to create inconsistencies in the system, fuel substitution practices and costs for those complying with different systems.
Recently, the ATO has received a marked increase in the level of enquiries on the taxation treatment of alternative fuels. These enquiries are generally made during a product's research and development to determine the effect of taxation on its cost effectiveness.
Classification of new alternative fuels can be time consuming for both business and administrators due to the research necessary to assess the composition of the fuel and determine how it should be classified within the excise tariff. This largely reflects the capacity of the legislative framework to keep pace with rapid developments in the fuel market.
The terms `rebates, subsidies and grants' are often used interchangeably in relation to the descriptions of government programmes. When looked at individually, each has specific meaning in terms of its economic impact and legislative intent. For example, a grant may or may not have a direct relationship to the amount of tax paid depending on the objective of the grant, whereas a rebate is specifically tied to an amount of tax paid and can only be up to 100 per cent of that amount.
In this section, a rebate includes government measures directly related to fuel products that have the intention of offsetting the tax levied on those products. Subsidies and grants include government measures aimed at reducing the cost of fuel to consumers or aimed at influencing fuel use.
This section covers the main rebates, subsidies and grants provided at both Commonwealth and State levels.
The Commonwealth has allocated $2.9 billion in funding for fuel-related rebates, subsidies and grants in 2001-02. The main programmes are summarised in Table 5.4.
Diesel Fuel Rebate Scheme
This scheme offsets the excise on diesel and like fuels used off-road for particular purposes by providing a full rebate of excise and customs duty. It is administered by the ATO under the Excise Act 1901.
Table 5.4: Overview of Commonwealth fuel rebates, subsidies and grants
(a) Alternative fuel grants account for less than one per cent, based on 2000-01
Source: Australian Taxation Office and AusIndustry (Petroleum Products Freight Subsidy Scheme).
The rationale for this scheme dates to the period when fuel excise revenue was hypothecated to fund road construction and all diesel fuel used off-road was exempt from excise when first applied in 1957. In 1982, due to administrative and eligibility concerns, the previous scheme for exemption from diesel excise was converted into the Diesel Fuel Rebate Scheme. Under the scheme all diesel users were required to pay excise, with some off-road users eligible to claim a full or partial rebate. Primary producers (agriculture, forestry and fishing), miners, users of diesel for heating, lighting, hot water, air-conditioning and cooking for domestic purposes, and at hospitals, nursing and aged care homes were eligible for the rebate. Primary producers received a full rebate of excise, while other categories were only eligible for a partial rebate.
The most significant change to the scheme in recent years was in 1998 when the Government announced its proposals for The New Tax System. This included an intention to extend the off-road scheme to include all off-road business use of diesel fuel. Subsequent negotiations with the Australian Democrats resulted in this extension being made to rail and marine transport only. However, activities that had previously only received a partial rebate were given a full rebate of excise (eg mining and residential activities). The scheme was also extended to include rebates for like fuels.
Issues around the administration of this scheme are largely associated with eligibility requirements. These have resulted from the interplay between detailed legislation and case law, particularly for the mining industry.
Diesel and Alternative Fuels Grants Scheme
This scheme was part of The New Tax System changes in July 2000 and is administered by the ATO under the Diesel and Alternative Fuels Grants Scheme Act 1999.
The scheme is intended to reduce transport costs to business and particularly to benefit regional Australia. It provides a grant of around 18.5 cpl for diesel and reduces the cost of alternative fuels such as ethanol, compressed natural gas and LPG to maintain previous price relativities with diesel.
Eligibility is for all business related on-road use of diesel and alternative fuels in vehicles over 20 tonnes gross vehicle mass. Eligibility for vehicles between 4.5 and 20 tonnes depends on where the journeys are undertaken and the type of transport service provided. The grant is not available for journeys solely within major metropolitan areas. However, journey restrictions do not apply to vehicles transporting passengers or goods solely on behalf of a primary production business, buses using alternative fuels, and emergency vehicles. The eligible journey restrictions are intended to address concerns about air quality in large metropolitan areas.
Like the Diesel Fuel Rebate Scheme, this scheme excludes certain activities from claiming the grant (in this case certain transport activities). Issues around administration predominantly relate to the records that must be kept by those recipients who operate smaller trucks and cross metropolitan boundaries.
The sectors directly receiving the Diesel Fuel Rebate and Diesel and Alternative Fuels Grants are shown in Table 5.5.
Table 5.5: Commonwealth rebate and grant claims by sector(a)
(a) DFRS refers to Diesel Fuel Rebate Scheme and DAFGS refers to Diesel and Alternative Fuels Grants Scheme. Figures based on actual claims lodged as at July 2001.
(b) Transport means marine and rail transport for the purposes of the DFRS. The transport category includes storage for the purposes of the DAFGS.
(c) Others include commercial and residential uses, such as health services. In relation to DAFGS, large users in the Others category include construction, manufacturing, wholesaling and retailing, as well as claimants which have not nominated a sector.
Source: Australian Taxation Office.
Fuel Sales Grants Scheme
This scheme was introduced on 1 July 2000 as part of The New Tax System. It provides to registered retailers a grant of one cpl in non-metropolitan zones and two cpl in remote zones. There is an additional remote zone premium of one cpl where the fuel price is consistently over $1.21 per litre.
The scheme is administered by the ATO under the Fuel Sales Grants Act 2000 and the Product Grants and Benefits Administration Act 2000. The Australian Competition and Consumer Commission monitors how this subsidy is passed on to consumers.
Petroleum Products Freight Subsidy Scheme
This scheme was introduced in 1965 and is intended to reduce the price of eligible petroleum products in remote locations of Australia by reducing the freight component of the purchase price of fuel. The scheme subsidises the cost of transporting fuel to various points of sale in remote Australia to ensure that purchasers do not pay more than a `customer pays margin' (currently set at 15.3 cpl).15 Distributors receive refunds of freight costs over the customer pays margin if they undertake in writing to pass the benefits to retailers.
Other fuel-related rebates, subsidies and grants
The Product Stewardship (Oil) Scheme
This scheme was introduced as part of Measures for a Better Environment (refer section 5.3). It is intended to encourage the environmentally and economically sustainable reuse of waste oils by providing a benefit to oil recyclers for the appropriate treatment of waste oil products. The scheme involves a levy-benefit arrangement where a five cpl levy is paid by manufacturers of virgin oil and lubricants to fund benefit payments to recyclers. Recyclers are able to claim benefits at various rates, depending on the final product and end use. The scheme is administered by the ATO under the Product Stewardship (Oil) Act 2000 and the Product Grants and Benefits Administration Act 2000.
The Commonwealth, through the Office for Aboriginal and Torres Strait Islander Health, provides subsidies to fuel suppliers for the supply of Avgas to remote Aboriginal communities to replace petrol used in motor vehicles. These arrangements form part of a broader strategy to address petrol sniffing within Aboriginal and Torres Strait Islander communities. To date, some 31 communities in Central Australia, Western Australia, and the top end of the Northern Territory are using the Comgas Scheme.
Payments to shale oil producers
Under excise legislation, producers of naptha from shale mined in Australia are eligible to claim a payment for naptha that is used to produce unleaded petrol. Payment amounts are calculated by reference to the amount of excise duty payable on the volume of unleaded petrol that can be obtained from that naptha. This volume depends on the equipment used in manufacture, but is generally around 90 per cent.
There is currently only one producer of naptha from shale oil claiming this payment.
All states except the Australian Capital Territory offer subsidies for on-road use of diesel and, in most cases, petrol as illustrated in Table 5.6. The Western Australian Government also offers a grant of $500 for the conversion of motor vehicles from petrol to LPG.
The various diesel and petrol subsidies are generally designed to be claimed back from State Revenue Offices by fuel distributors or retailers and bulk end users after sales have occurred.
The Inquiry has been asked to examine the fuel-related measures included in the Measures for a Better Environment statement, announced by the Government in May 1999.
Some of these measures specifically concern fuel taxation. Some others target fuels via mechanisms other than taxation, while the remainder are expected to have an indirect effect on fuel.
There are various approaches to reducing emissions included in the measures, most focused on transport. Some are aimed at improving the environmental performance of conventional fuels by either changes in the quality of these fuels or the vehicles that use them. Others are aimed at encouraging the use of alternative fuels, either in transport or other applications.
The full list of measures is described at the following Internet address, http://www.pm.gov.au/news/media_releases/1999/changes3105.htm. The measures with most relevance to this Inquiry are briefly described in Box 5.2. Elements of Measures for a Better Environment that were incorporated into the Diesel Fuel Rebate Scheme and the Diesel and Alternative Fuels Grants Scheme are described in section 5.2.1.
Table 5.6: State fuel subsidies
(a) In 1997, some jurisdictions introduced fuel subsidies to align their pre-existing regimes with the new Commonwealth excise arrangements. Some subsidies shown in this table date from that time while other jurisdictions introduced new schemes with The New Tax System after July 2000.
(b) For NSW, Tasmania and the Northern Territory, 2000-01 figures do not reflect annual costs of the scheme but actual expenditure in 2000-01.
(c) The NSW Government pays subsidies for five zones in Northern NSW to enable local sellers of petroleum products to compete with subsidised sellers in Queensland. The zonal subsidies decrease as the distance from the Queensland border increases.
(d) This figure represents Queensland's estimated actual fuel subsidy payments in 2000-01 including payments made from July to October 2000 under the 1997 scheme. Payments under the new scheme commenced in December 2000.
(e) The provisional up-front subsidy amount is 8.354 cpl; the remaining 0.046 cpl is a compensatory component towards administration costs.
(f) This rate is indexed to Commonwealth fuel excise; 0.71 cpl applied from 1 March 2001.
(g) The South Australian Government pays subsidies for two zones - between 50 km and 100 km from the Adelaide GPO excluding Yorke Peninsula (Zone 2) and over 100 km from the Adelaide GPO (Zone 3).
Source: State and Territory Revenue Offices.
12 Under excise legislation blending is constituted as part of the manufacturing process. Therefore product imported for the purpose of blending with domestic product attracts an excise duty rather than a customs duty.
13 The 1.5 cpl excise reduction applied to all uses of petroleum fuels that attracted the full rate of excise duty, with products attracting a concessional rate receiving a proportional reduction. Abolition of indexation applied to all petroleum fuels with the exception of lubricants.
15 This margin was indexed to the Consumer Price Index from 1983 subject to annual Ministerial review. Discretionary increases of 4 cpl in both 1985 and 1987 were intended to restrict coverage to more remote locations. Indexation was not applied in 2000 and 2001.
Copyright | Disclaimer | Privacy Statement