House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 3 - Introduction of excise duty on biodiesel

Outline of chapter

3.1 Schedule 1, Part 4, amends the Excise Tariff Act 1921 to include biodiesel as an excisable good in the Excise Tariff Schedule, defines biodiesel, and imposes excise duty at a rate of $0.38143 per litre. A formula is also inserted into the Excise Tariff Act 1921 for the calculation of excise duty payable on biodiesel blends.

Context of amendments

3.2 This measure was announced by the Government in the 2003-2004 Federal Budget and is part of the Government's policy of long term fuel tax reform arrangements that will bring all currently untaxed fuels into the excise and customs duty systems. The reform establishes a broad sustainable taxation framework and provides increased certainty for investors.

3.3 Grants are provided under the Energy Grants (Cleaner Fuels) Scheme Bill 2003 for the production of pure biodiesel and the biodiesel component in blends that will offset the excise duty. Grants are similarly provided for imported biodiesel to offset customs duty. The result is that biodiesel meeting the fuel standard is effectively free of duty prior to the gradual reduction of the grant by five even annual instalments commencing from a date that may be specified under the Energy Grants (Cleaner Fuels) Scheme Bill 2003.

3.4 These amendments validate Excise Tariff Proposal No. 4 (2003) that imposed excise duty on biodiesel from 18 September 2003.

Summary of new law

3.5 The amendments alter the Schedule to the Excise Tariff Act 1921 by inserting biodiesel as an excisable product, at a rate of $0.38143 per litre and inserting a formula for determining the duty payable on petroleum blends containing biodiesel.

Detailed explanation of new law

3.6 Biodiesel is brought into the Schedule to the Excise Tariff Act 1921 as an excisable product with an excise rate of $0.38143 per litre as subitem 11(L). [Schedule 1, Part 4, items 29 and 30]

3.7 A definition of 'biodiesel' is inserted into the Excise Tariff Act 1921 as subsection 3(1). Biodiesel is defined as fuel for use in an internal combustion engine and that is manufactured by chemically altering vegetable oils or animal fats (including recycled oils from these sources) to form mono-alkyl esters. [Schedule 1, Part 4, item 26]

3.8 Blends of excisable petroleum products are dealt with under section 6G of the Excise Tariff Act 1921 and subsection 6G(2C) provides a formula for calculating the duty payable on blends including biodiesel and ethanol. The formula takes into account the 'volume of biodiesel', 'biodiesel rate', 'volume of ethanol', 'ethanol rate', 'volume of other substances', 'diesel rate' and 'previously paid duties'. These terms are defined in the subsection. [Schedule 1, Part 4, item 28]

3.9 As a consequence of the insertion of subsection 6G(2C), subsection 6G(1) is amended to encompass the inserted subsection. Subsection 6G(1) is intended to provide a formula for calculating duty on blends not included in the other subsections and the amendment will exclude the blends addressed in subsection 6G(2C). [Schedule 1, Part 4, item 27]

Application and transitional provisions

3.10 The amendments are taken to have effect on and from 18 September 2003.

Regulation Impact Statement

Policy objective

3.11 This bill brings biodiesel into the excise system from 18 September 2003 as part of a broader fuel tax reform package. The intention of the reforms is to provide a more certain, sustainable, consistent and neutral tax regime for all fuels used in internal combustion engines. The Government is also committed to the introduction of a commercially viable renewable fuels industry.

3.12 The introduction of excise duty on biodiesel, with the provision of an equivalent subsidy, is intended to bring biodiesel into the excise regime and provide industry certainty while allowing time for industry to adjust and establish markets prior to the introduction of effective excise for biodiesel. The final excise duty rate for biodiesel and other alternative fuels entering the excise system will be 50% of the excise duty rate applying to fuels with similar energy content. The final excise duty rate for biodiesel will be $0.191 per litre.

Implementation

3.13 This measure was announced on 13 May 2003 to take effect on 18 September 2003. The excise duty was introduced by means of an Excise Tariff Proposal, a longstanding mechanism for implementation of government policy introducing new items or altering excise duty rates for existing items classified in the Schedule to the Excise Tariff Act 1921 pending introduction of a validation bill amending that Act. The addition of biodiesel to the Excise Tariff Schedule is consistent with the treatment of other fuels for use in an internal combustion engine.

3.14 The excise duty of $0.38143 per litre on biodiesel will be offset by the availability of a grant for biodiesel, at an equivalent rate, to producers of final fuels containing biodiesel, subject to certain conditions. These conditions include that the fuel meets the relevant fuel quality standards under the Fuel Quality Standards Act 2000. Standards for biodiesel have been established as inferior quality biodiesel potentially has negative environmental and health impacts and may lead to vehicle operation problems.

3.15 Under the fuel tax reform package the final excise duty rates applying to fuels for use in an internal combustion engine are based on the energy content of the fuel, banded as high, medium and low. The final excise duty rate for alternative fuels entering the excise regime, including biodiesel, will be discounted by 50% on the full energy content rate. The final excise duty rate for biodiesel, a high energy content fuel in the same energy content band as petrol and diesel (with an excise duty rate of $0.38143 per litre), will therefore result in a final rate of $0.191 per litre.

Assessment of impacts

3.16 The major impacts of the imposition of excise duty on biodiesel are:

•

the liability of manufacturers of biodiesel to pay the excise duty. This duty will be offset by the availability of an equivalent subsidy for producers of biodiesel in final fuels; and

•

the requirement that manufacture (including blending of biodiesel and other fuels, which is treated as manufacture under the Excise Act 1901 ) and storage of biodiesel and fuels containing biodiesel must be licensed under the excise legislation.

Impact group identification

3.17 Australia currently has limited commercial biodiesel production. As the biodiesel industry is in early stages of development for product development, operations and markets, the size of the market and the participants in that market are difficult to establish with certainty. The Australian Taxation Office (ATO) estimates that at present about 2 million litres are produced annually, compared to 14 billion litres of diesel.

Biodiesel manufacturers

3.18 There is a small number of large scale commercial manufacturers of biodiesel, and some production by small/medium scale and small-scale personal use producers.

Large manufacturers

3.19 The ATO has identified three commercial scale manufacturers with biodiesel production capacity ranging in size from around 50,000 litres to 1.5 million litres per year. The ATO consultation with industry participants indicates that up to eight additional large manufacturers may enter the industry over the next 12 to 18 months, with maximum output capacity estimates ranging from 1 million litres to 60 million litres per year, and the majority around 40 million litres per year. Entry to the industry will be influenced by factors such as the availability and cost of feedstock, market demand and ability to service that demand on a viable commercial scale.

Small/medium producers

3.20 There is a number of small/medium scale manufacturers and small-scale personal use producers. It is difficult to assess the number of these and the quantity and quality of biodiesel produced. The ATO has estimated that there may be around 12 small/medium scale manufacturers, producing around 50,000 litres each per year. These producers range from operators who collect and recycle waste oil and fats as biodiesel for on-selling and persons who produce biodiesel for their own use. To date five of these have been licensed.

3.21 The viability of small/medium scale manufacturers will be affected by factors such as the availability of feedstock, and the ability to meet the requirements for licensing under the excise legislation and the fuel standards applying to biodiesel, in order to receive the biodiesel subsidy. Further development of the commercial sector of the biodiesel industry may result in greater competition for waste oil and fuel standards may provide a significant barrier to small/medium scale manufacturers.

Personal use manufacturers

3.22 In addition there are an estimated 500 to 1,000 small-scale personal use producers. The Government's announcement does not include an excise exemption for the production of biodiesel for personal use. This accords with the general principle that excisable fuel production is subject to the provisions of the excise licensing regime in which the criteria to be satisfied is normally directed to commercial scale production. It is unlikely that such producers would readily be able to demonstrate compliance with fuel standards. In addition, the nature of the chemicals used in the process of producing biodiesel from waste oils and fats is such that they are potentially toxic for both the producer and the environment.

Blenders of biodiesel and other fuels

3.23 Commercial blending of biodiesel with other fuels requires a manufacturer's licence as blending is treated as manufacture under section 77H of the Excise Act 1901. Three companies have informed the ATO that they are currently blending, or intend to blend, biodiesel on a commercial scale and excise licences have been issued to these companies.

Storage of biodiesel

3.24 Storage of biodiesel fuels, for example, for blending or distribution requires an excise storage licence.

Analysis of costs/benefits

3.25 The excise legislation concerning licensing for manufacture and storage provides for a number of criteria to be satisfied, including suitability of applicants, the physical security of the premises, and adequate recording systems to enable satisfactory auditing for protection of the revenue.

3.26 The cost to apply for a licence to manufacture or store excisable goods and provide the information required by the ATO for determination whether to grant a licence should not be significant. Licences are free and the information to be provided covers matters such as the 'fit and proper' nature of the applicant person or company; the proposed area to be covered by the licence; details of the construction of the premises; details of equipment, such as the capacity of storage tanks; and physical security, such as alarm systems; details of the type and quantities of the products to be manufactured or stored; information on the proposed arrangements for paying the excise liability; intention to move excisable product to and from the premises while the excise duty remains unpaid; the method of determining the amount of duty payable, and details of the recording system to be used.

3.27 The cost of meeting the requirements for security of premises, adjusting recording and reporting systems and arranging excise remission are difficult to assess as they vary depending on companies' existing arrangements. It is expected the costs would be minor to moderate for a large commercial scale operation that would already have adequate security and production records and needs only to adjust systems to allow for appropriate recording for excise purposes and payment of duty. For a small/medium manufacturer, the cost may be more significant.

3.28 Net revenue gain from biodiesel excise (and customs) duty, allowing for displacement of diesel, is estimated at $5 million for 2003-2004 and $10 million for 2004-2005. The estimated biodiesel subsidy is $15 million for 2003-2004 and $44 million for 2004-2005.

Consultation

3.29 Prior to the announcement of the excise duty on biodiesel government consultations with industry stakeholders around biodiesel fuel standards indicated that one of the barriers to the market uptake of biodiesel was uncertainty around the biodiesel excise arrangements. The policy announcements in the 2003-2004 Federal Budget were intended to address that uncertainty.

3.30 The ATO has consulted extensively with biodiesel industry participants affected by the imposition of excise on biodiesel. Through industry groups, associations and relevant internet sites the ATO has identified current and potential commercial and non-commercial producers. Members of these associations and additional contacts developed from those members were advised of an Information Forum for the Biodiesel Industry held in Sydney in July 2003. In addition, a Consultative Forum for biodiesel industry participants was held in Sydney in October 2003.

Conclusion

3.31 The introduction of excise duty on biodiesel, with the provision of an equivalent subsidy, assists the biodiesel industry to develop with certainty regarding taxation arrangements prior to the introduction of effective excise for all fuels for use in internal combustion engines.