Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 2 Regulation impact statement
Policy objective
2.1 The removal of the fuel tax exemption and the imposition of excise and customs duty at a rate equivalent to petroleum on denatured ethanol for use as fuel was introduced as part of a package of measures in the context of reform of the Australian sugar industry. The biofuels industry depends on Australian agricultural production for its feedstock and builds expertise in Australia's agricultural industries.
2.2 This measure is part of the Government's strategy to encourage the production and use of biofuels in transport over time. At the same time as bringing fuel ethanol into the excise regime on an equivalent basis to petroleum, the Government introduced a 12-month production subsidy for existing and new domestic fuel ethanol producers. This provided a targeted means of maintaining the use of biofuels in transport in Australia. The Government has announced ongoing arrangements for fuel ethanol in the 2003-2004 Federal Budget.
Implementation options
2.3 The measure was announced on 12 September 2002 to take effect from 18 September 2002 and the excise changes were implemented by an Excise Tariff Proposal, the usual mechanism for immediate implementation of government policy altering excise rates for items classified in the Excise Tariff Act 1921 , pending introduction of a validation bill amending that Act.
Assessment of impacts
2.4 The major impact of the removal of the excise exemption and the imposition of an excise rate equivalent to petroleum is the liability of current producers of denatured ethanol for use as fuel to pay excise duty (currently 38.143 cents per litre) on a product previously classified in the Excise Tariff Schedule at a 'Free' rate.
2.5 A 12-month production subsidy of 38.143 cents per litre has been available for domestic producers of fuel ethanol from the same date as the imposition of the excise duty, 18 September 2002. The production subsidy is administered by the Department of Industry, Tourism and Resources.
2.6 In addition, there are minor compliance cost impacts in meeting Excise Acts requirements on current and new producers of denatured ethanol and blenders of denatured ethanol and petroleum products.
2.7 The domestic fuel ethanol industry involves a very small number of companies. There are 2 groups identified as impacted by the imposition of excise duty on fuel ethanol. These are:
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- producers of fuel ethanol, who are required to pay excise duty and may incur minor compliance costs for licences where these are not already in place; and
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- other entities dealing with denatured ethanol where the liability for the duty has not been discharged. In the main this affects blenders of denatured ethanol with other petroleum products. Such entities will incur minor costs in complying with Excise Acts requirements for obtaining licences and movement permissions for dealing with the fuel ethanol.
2.8 Consumers are not expected to experience an increase in petrol prices from this measure. The measure changes the administrative mechanism to continue to deliver what is effectively excise free fuel ethanol. The petrol market is very price competitive and will not use components that do not lead to a price competitive product.
2.9 The obligation to pay the excise duty falls on producers of denatured ethanol for use as fuel as the liability for excise duty occurs at the point of production. The Excise Acts require manufacturers of excisable goods to be licensed. The current producers of denatured ethanol are already licensed under the Excise Acts.
2.10 For current producers of denatured ethanol there is a minor adjustment required to computer programs to reflect the change in classification of denatured ethanol for use as fuel from Excise Tariff Schedule item 2(R), which relates to alcohol products, to item 11(K), relating to petroleum products.
2.11 Minor compliance costs will be incurred in the setting up of payment procedures where these are not already in place. It is estimated by the ATO that these compliance costs would not exceed $200.
2.12 Any new producer of denatured ethanol for supply to the fuel market will be required to apply for a licence from the ATO at a cost estimated at about $20 for completing the application form and obtaining the licence. There is no fee for the licence itself. A security of $200 is required for the licence and is returned upon cancellation of the licence provided compliance requirements have been met, or after 3 years of demonstrated compliance.
2.13 Under the excise arrangements, before the excise liability is discharged excisable goods may be moved only to licensed premises and with permission from the ATO. If blenders receive denatured ethanol under this arrangement to blend with other petroleum products before excise liability is discharged, they will be required to have an appropriate licence and permission. There is no cost for the licence or permission apart from the minor cost of arranging to obtain these.
2.14 Administration costs for the ATO are negligible as administrative and reporting arrangements are already in place for denatured ethanol for use as fuel under the current item 2(R) classification in the Excise Tariff Schedule. Some adjustments in client arrangements between alcohol and petroleum products management systems may be needed but again the costs involved should be negligible.
2.15 Revenue impact from excise duty on denatured ethanol for use as fuel is estimated to be $26 million in 2002-2003 and $34.4 million in 2003-2004. This revenue is offset by the domestic production subsidy.
Consultation
2.16 The ATO has been consulting with the companies affected by the measure concerning the administrative arrangements. There have been no significant problems raised in these consultations.
Summary
2.17 The impact of the imposition of excise duty on fuel ethanol is offset by the domestic production subsidy arrangements, effectively maintaining excise free fuel ethanol. The net costs to producers of fuel ethanol are in implementing minor compliance and administration changes.