Senate

Revised Explanatory Memorandum

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

Chapter 1 Executive summary

Outline of chapter

1.1 This chapter provides an overview of the key elements of the fuel tax credit system for providing fuel tax relief to businesses and households.

Background: fuel tax reform

1.2 In the energy white paper, Securing Australia's Energy Future , the Government announced a major programme of reform to modernise and simplify the fuel tax system. The reform programme will commence on 1 July 2006, with the introduction of a single fuel tax credit system to replace the current complex system of fuel tax concessions.

1.3 The changes will lower compliance costs, reduce tax on business and remove the burden of fuel tax from thousands of individual businesses and households. Under fuel tax reform the effective application of fuel tax will be limited to:

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business use of fuel in on-road applications in motor vehicles with a gross vehicle mass of 4.5 tonnes or less;

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business use on-road in motor vehicles with a gross vehicle mass of more than 4.5 tonnes (with the exception of a carve-out intending to preserve previous entitlements for eligible fuel use in vehicles with a gross vehicle mass of 4.5 tonnes) but only to the extent of the road-user charge;

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for private use on-road in motor vehicles and in certain off-road applications; and

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aviation fuels (where tax is imposed for cost recovery reasons).

1.4 As part of this process, all currently untaxed fuels used in internal combustion engines will be brought into the fuel tax system over time with the intention of imposing fuel tax on fuels when they are used in transport applications.

1.5 Fuel tax will be applied to currently untaxed fuels from 1 July 2011. Effective fuel tax on these fuels will phase in over five equal annual steps commencing on 1 July 2011 and ending on 1 July 2015. The final fuel tax rate applying to these fuels will incorporate a 50 per cent discount on the energy content fuel tax rates that would otherwise apply.

1.6 In developing fuel tax reform, the Government has been guided by a view that, to the greatest extent practical the fuel tax system should:

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apply in a consistent and transparent way to all relevant fuels and fuel users;

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be competitively neutral, avoiding instances where taxed fuels compete with untaxed fuels;

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minimise fuel tax on business inputs;

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minimise compliance and administration costs for business and government; and

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take account of the government's environmental, social and fiscal objectives.

The fuel tax credit system

1.7 These Bills provide for the payment of fuel tax credits to taxpayers to remove or reduce the incidence of fuel tax levied on taxable fuels.

1.8 This system - taxing and crediting - is necessary to deal with the fact that currently fuel tax is paid by the manufacturer or importer of the fuel, generally well before its eventual use (whether in a private vehicle or otherwise). Therefore, the fuel tax is levied under current arrangements on the assumption that the fuel could be used in a taxable way, and credits are allowed to reverse the effect of the tax when it becomes clear that the fuel will be put to a non-taxable use covered by the legislation.

1.9 From 1 July 2006 fuel tax credits will be claimable by businesses via the business activity statement (BAS) in the same way as goods and service tax (GST) input tax credits. Business interactions with the Australian Taxation Office (ATO) will be simplified and reduced as businesses will have a single point of ATO contact and the necessity of separate claim forms will be removed.

1.10 Separate claiming arrangements will apply to non-business claimants claiming for household use of fuel in electricity generation.

The current arrangements for providing fuel tax relief

1.11 Fuel tax concessions are currently provided under the Energy Grants (Credits) Scheme Act 2003 and the remission, refund and rebate provisions in the Excise Act 1901 and the Customs Act 1901 . The Government's intention is for the free rate applied to certain drummed and marked fuels not used as a fuel to be removed from 1 July 2006.

The Energy Grants Credits) Scheme

1.12 The Energy Grants (Credits) Scheme provides a grant for the use of diesel fuel (and alternative fuels in the case of the on-road credit) in activities that are eligible for an off-road credit and an on-road credit. No credits are provided for the use of petrol.

1.13 Eligibility for the off-road credit under the Energy Grants (Credits) Scheme is restricted to the business use of diesel and diesel-like fuels (such as fuel oil and burner fuels) in specified activities. These activities mainly occur in mining, primary production and rail and marine transport. Other activities include the generation of electricity at retail/hospitality and residential premises, and the use of fuel at hospitals, nursing homes and aged persons homes.

1.14 Eligibility for the on-road credit is confined to the use of diesel and specified alternative fuels (liquefied petroleum gas, liquefied natural gas, compressed natural gas, biodiesel and ethanol). Its purpose is to reduce transport costs, particularly for regional and rural Australia where costs are more pronounced. It is also intended to maintain the pre-GST price relativities between diesel and alternative fuels by providing a credit for the use of specified alternative fuels in applications that are eligible for a diesel on-road credit. Eligibility for the on-road credit is restricted to the use of eligible fuels in vehicles weighing:

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over 20 tonnes gross vehicle mass operating in all areas; and

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between 4.5 tonnes gross vehicle mass and 20 tonnes gross vehicle mass only when operating outside of or across defined metropolitan boundaries. The metropolitan boundaries do not apply to emergency vehicles, primary producers and buses using alternative fuels.

Remission, refunds and rebates

1.15 Section 78 of the Excise Act 1901 allows remissions, rebates and refunds of excise duty in prescribed circumstances and subject to prescribed conditions and restrictions. A similar provision is contained in the Customs Act 1901 .

1.16 A remission is a mechanism that allows holders of a remission certificate to obtain prescribed fuel products fuel tax-free for use in prescribed circumstances. Remission and refunds commonly relate to solvent and burner fuel applications, kerosene for some specific fuel uses, and diesel and petrol substitutes for non-fuel uses.

These Bills and the fuel tax credit system

1.17 The Fuel Tax Bill 2006 combines in one piece of legislation, the means of providing fuel tax relief to businesses and households. It is intended that from 1 July 2011, this Bill will also provide the legislative basis for taxing certain liquefied and compressed gaseous fuels, when fuel tax is levied on liquefied petroleum gas, liquefied natural gas and compressed natural gas for the first time.

1.18 The fuel tax credit reforms will be phased in, commencing 1 July 2006, with the final changes taking effect on 1 July 2012.

1.19 Table 1.1 provides an overview of how fuel tax will apply when the reforms are fully implemented from 1 July 2012.

1.20 Fuel tax will continue to be levied on aviation fuels as the tax is not imposed for general revenue raising reasons but as a method of cost recovery for various services and oversights of the aviation industry. A levy will also continue to be collected on certain lubricant oils under the Product Stewardship (Oil) Act 2000 . This non-hypothecated levy assists in offsetting the cost of benefits paid to oil recyclers as an incentive to undertake increased recycling of waste oil.

Application of the fuel tax credit system

Use of fuel in off-road applications

1.21 Under the fuel tax credit system, all fuel acquired or manufactured in, or imported into, Australia for use in off-road applications for business purposes will become tax-free over time. In this context, tax-free treatment occurs through a credit of tax paid - that is, the fuel is effectively tax-free (for convenience, the term 'tax-free' when used in this explanatory memorandum means an 'effectively fuel tax-free status' - it does not refer to an exemption from fuel tax or a zero actual rate of tax).

Fuel for electricity generation

1.22 Businesses and households will be entitled to claim a fuel tax credit for fuel tax payable on all fuels acquired or manufactured in, or imported into, Australia for use in electricity generation from 1 July 2006.

Fuel for burner applications and non-fuel uses

1.23 All fuels acquired or manufactured in, or imported into, Australia for use other than in an internal combustion engine will be effectively fuel tax-free from 1 July 2006. Use of fuel other than in an internal combustion engine includes:

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fuel used in burner applications such as heating (use as a fuel);

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diesel fuel used in the manufacture of explosives, in the calcination process for the production of alumina and as a flocculent in coal washeries; and

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non-fuel uses such as use as a solvent or in the manufacture of products such as paint and certain solvents, cleaning agents and the like.

1.24 Under fuel tax reform, all of the current mechanisms for delivering fuel tax-free treatment for petroleum products will be removed by 30 June 2006 and from 1 July 2006 fuel tax will apply to all petroleum products, including blends of petroleum products suitable for use in an internal combustion engine. Effective fuel tax-free treatment for these products where used other than as a fuel in an internal combustion engine will be delivered by a fuel tax credit to either the user of the fuel, or at another point in the supply chain, depending on whether the use is business or private.

1.25 For the business use of petroleum products as burner fuels or in non-fuel uses, the effective fuel tax-free treatment will be delivered through a fuel tax credit to the business as the end user of the product.

1.26 Where a petroleum product is used as an ingredient in the manufacture of another product that cannot be used as a fuel in an internal combustion engine, for example, paint and certain solvents, printing inks, cleaning agents, adhesives and the like, the manufacturer (eg, a paint manufacturer) will be entitled to a fuel tax credit on the petroleum component. Where the product cannot be used as a fuel in an internal combustion engine, the Commissioner of Taxation (Commissioner) is not required to issue a determination under section 95-5 that the product being a blend of fuel no longer constitutes a fuel.

1.27 In order that private users of these products will not have to enter the fuel tax credit system, a fuel tax credit will apply further up the supply chain with the benefit passed on in the price of the product, ensuring that the product is effectively fuel tax-free for these users. For products used as burner fuels, such as kerosene and heating oil, the distributor will be entitled to claim a fuel tax credit for fuel sold to a private household. For products used in non-fuel applications, such as kerosene used as a solvent, a fuel credit would be given to the packager of such products, packaged in containers of a certain size for resale in retail outlets.

Other uses of fuel in off-road applications

1.28 From 1 July 2006 a fuel tax credit will apply to the acquisition or manufacture in, or importation into, Australia of diesel and diesel-like fuels in applications that currently qualify for an off-road credit under the Energy Grants (Credits) Scheme.

1.29 From 1 July 2008 the acquisition or manufacture in, or importation into, Australia of taxable fuel for use in other off-road applications will become eligible for a 50 per cent fuel tax credit of the fuel tax paid on the fuel. At the same time the acquisition, manufacture or importation into Australia of petrol will become eligible for a 100 per cent fuel tax credit of the fuel tax paid for all uses that were previously eligible for an off-road credit under the Energy Grants (Credits) Scheme.

1.30 It is intended that alternative fuels such as biodiesel, domestically-produced ethanol, liquefied petroleum gas, compressed natural gas and liquefied natural gas begin to incur effective fuel tax from 1 July 2011. From that date the acquisition, manufacture or importation into Australia of these fuels for use in off-road business applications will become eligible for a fuel tax credit equivalent to the amount of fuel tax paid on the fuel.

1.31 Table 1.2 shows the effective fuel tax rates applicable to alternative fuels during the period from 1 July 2011 to 1 July 2015.

1.32 The acquisition or manufacture in, or importation into, Australia of all taxable fuels will qualify for a fuel tax credit of the effective fuel tax paid on the fuel when they are used in off-road business applications from 1 July 2012.

Use of fuel in on-road applications

1.33 From 1 July 2006 the metropolitan boundaries governing eligibility for on-road credits for heavy vehicles under the Energy Grants (Credits) Scheme will be removed. This will expand fuel tax relief for fuel used in road transport by allowing a partial fuel tax credit for all taxable fuels - including petrol - acquired or manufactured in, or imported into, Australia for use on-road for all business purposes in registered vehicles with a gross vehicle mass of more than 4.5 tonnes. The partial credit will be equal to the fuel tax rate minus a road-user charge.

1.34 The road-user charge is set in accordance with the National Transport Commission's heavy vehicle charging determination process. The fuel tax-based charge will be adjusted annually in a similar fashion to the way that the States and Territories adjust registration fees for heavy vehicles. Changes to the charge will be made by varying the level of fuel tax credit paid for fuel used in heavy vehicles.

1.35 The grant available as an on-road credit under the Energy Grants (Credits) Scheme for fuel used in vehicles of 4.5 tonnes is grandfathered by a proposed transitional provision that provides a fuel tax credit to fuel acquired after 30 June 2006 and is used in vehicles of 4.5 tonnes where the vehicle was acquired before 1 July 2006.

Grants for alternative fuels under the Energy Grants (Credits) Scheme

1.36 Fuel grants will continue to apply from 1 July 2006 to 30 June 2010 under the Energy Grants (Credits) Scheme for the purchase for use of alternative fuels (biodiesel, ethanol, liquefied petroleum gas, liquefied natural gas and compressed natural gas) in registered vehicles with a gross vehicle mass of over 4.5 tonnes. The grant rates payable in respect of these fuels will be reduced to zero in five equal annual steps commencing on 1 July 2006 and concluding on 1 July 2010.

1.37 Table 1.3 shows the alternative fuel grant rates that will apply under the Energy Grants (Credits) Scheme during the phasing-out period.

Fuel tax credits for alternative fuels under these Bills

1.38 As fuel tax on alternative fuels is levied at a 50 per cent discount to the full energy content rate, the tax rates for fuels other than petrol and diesel are expected to be below the road-user charge for the foreseeable future. Users of these fuels in on-road applications will not be entitled to a fuel tax credit until the rate exceeds the road-user charge.

How will fuel blends be treated?

1.39 The treatment of fuel blends, and the entity able to claim a fuel tax credit relating to a fuel blend, will depend on whether or not the blend can be used as a fuel in an internal combustion engine.

1.40 The term 'use' in section 41-5 is intended to cover use of the fuel to make a blend that cannot be used as a fuel in an internal combustion engine. In most instances it will be self evident whether the blend can be used as a fuel, but to ensure certainty in cases where it is not self evident, the Commissioner is able to make a determination under section 95-5 that a blend of a fuel and another product does not constitute a fuel.

Fuel blends that can be used in an internal combustion engine

1.41 Use of a fuel to make a fuel blend that can be used as a fuel in an internal combustion engine does not constitute use of the fuel by the manufacturer of the blend. In these circumstances, the end user of the blend will be entitled to claim the fuel tax credit for any fuel tax on the constituents of the blend.

1.42 If the Commissioner has issued a determination under section 95-5 that the blend no longer constitutes a fuel, the manufacturer of the blend (and not the end user) is entitled to claim the fuel tax credit for any fuel tax paid on the constituents of the blend. This is because it is the manufacturer who uses the taxable fuel. If the blend the manufacturer produces is determined to not constitute a fuel it is no longer a taxable fuel and no fuel tax credit is available to purchasers and end users of the product. Some examples of types of fuel blends where the Commissioner may determine that the fuel blend no longer constitutes a fuel are certain solvents, fuel additives and fuel injector cleaners.

Fuel tax credits applying to fuel blends

1.43 Where a fuel blend meets a particular fuel standard, for instance petrol or diesel, it is treated as having fuel tax paid on it at the rate applicable to the unblended fuel covered by the standard. For fuel blends where one of the constituents attracts fuel tax at a discounted rate, such as a blend of diesel and biodiesel, the result of this treatment would actually be a fuel tax credit in excess of the fuel tax actually embedded in the price of the fuel. Where a fuel blend does not meet a fuel standard, the amount of fuel tax credit will not be more than the actual fuel tax embedded in the price of the fuels that make up the blend.

Fuel blends that cannot be used in an internal combustion engine

1.44 Use of a fuel to make a fuel blend that cannot be used as a fuel in an internal combustion engine constitutes fuel use that entitles the manufacturer of the blend to a credit for any fuel tax paid on the constituents of the blend. In such instances the end user will have no entitlement to a fuel tax credit. Generally the efficacy of use of a fuel blend in an internal combustion engine is clear, for example, paint and certain solvents, cleaning agents, printing inks, and adhesives cannot be used as a fuel in an internal combustion engine. However, in less certain circumstances, the Commissioner can determine that the blend no longer constitutes a fuel.

Timetable for the implementation of fuel tax reform

1.45 The new fuel tax credit system will commence on 1 July 2006. Table 1.4 depicts how the fuel tax credit available for different fuel uses will be phased in over the period of the reform ending 1 July 2012.

Environmental measures

1.46 As a supplement to measures already in place for addressing the environmental impact of fuel use, the Government will introduce two new measures to ensure that those businesses receiving fuel tax credits meet appropriate environmental standards. These environmental measures are:

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the requirement for large fuel users to be a member of the Greenhouse Challenge Plus Programme; and

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compliance with emissions performance criteria by vehicles using diesel fuel in on-road applications.

Membership of the Greenhouse Challenge Plus Programme

1.47 Businesses claiming over $3 million each year in fuel tax credits will need to be members of the Greenhouse Challenge Plus Programme. Under this programme member businesses must measure their greenhouse gas emissions, develop action plans for greenhouse gas abatement and report to the Government on their actions.

Compliance with emission performance criteria

1.48 Operators of diesel vehicles with a gross vehicle mass of more than 4.5 tonnes are required to meet an emissions performance criterion to be entitled to a fuel tax credit. The vehicle must either:

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have been manufactured after 1 January 1996;

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be part of an accredited audited maintenance programme;

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meet the Australian Transport Council's in-service emission standard (referred to in the National Environment Protection (Diesel Vehicle Emissions) Measure ); or

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comply with a Government-endorsed maintenance schedule which includes an emissions component.

1.49 These criteria are designed to ensure that the operators of diesel vehicles have an incentive to make sure their vehicle meets the emissions standard set under the National Environment Protection (Diesel Vehicle Emissions) Measure .

1.50 Vehicles used in carrying out a primary production business that are used primarily on an agricultural property are exempt from compliance with the performance criteria, as these vehicles do not generally contribute to urban air quality problems.

Legislative design of the fuel tax credit system

1.51 These Bills will provide fuel tax relief to businesses and householders. It will also provide a system for the taxation of certain liquefied and compressed gaseous fuels that are locally produced or imported, from 1 July 2011, when fuel tax begins to be phased in for liquefied petroleum gas, liquefied natural gas and compressed natural gas.

1.52 Under these Bills, fuel tax relief will be provided in the form of a fuel tax credit for fuel tax embedded in the price of the fuel. The fuel tax credit for businesses will be expected to be claimed on the BAS (with transitional early payment arrangements applying between 1 July 2006 and 30 June 2008) and will be offset against an entity's other tax liabilities. A separate claiming mechanism applies to non-business taxpayers.

1.53 Under these Bills, an entity will self-assess their entitlement to a fuel tax credit as they currently do for the purpose of other indirect taxes.

1.54 Under the fuel tax credit system the accounting and reporting arrangements for business users of fuel align, as far as possible, with the existing arrangements under the GST law. This generally means that if a taxpayer is a business, they:

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have to be registered for the GST to claim a fuel tax credit;

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claim their fuel tax credits on the BAS in the same way that they claim GST input tax credits;

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apply the same tax periods for fuel tax credits as they apply for the GST;

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attribute their fuel tax credits to the same tax period as the GST input tax credit for the acquisition or importation of the fuel; and

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are subject to special GST rules applying to the way that their business is organised (eg, grouping) for the purpose of fuel tax credits.

Coherent principles approach to tax design

1.55 These Bills are drafted using the coherent principles approach to tax design. This approach delivers on the Government's commitment, as part of the A New Tax System proposal in 1998, to design the tax laws using general principles in preference to long and detailed provisions.

1.56 Under coherent principles, the operative legislative provisions that implement the policy are expressed as principles. They prescribe the legislative outcome rather than the mechanism that produces it, and typically avoid the detail that appears in more traditional legislative design approaches.

1.57 The term 'coherent' means that the reader should find the principles cogent. They may be abstract, but they should convey an idea that is meaningful to a reader who is familiar with the subject, even if the principle's full scope is not immediately evident. This approach aims to:

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help the reader make sense and order out of the law;

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capture the essence of the intent of the law, so that it is clear on first approach;

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write the law in a non-technical style, avoiding the use of expressions that can only be understood by referring to definitions or other lower level rules; and

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make the law intuitive or obvious to someone who understands its intent and context.

1.58 The advantages offered by principled-based tax law is that it:

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is conceptually clearer and usually shorter;

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promotes long-term certainty, by providing a framework for working out how the law applies to developments that were not contemplated at the time the law was written; and

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makes the law more stable, with less need for modifications and changes.

1.59 At times, a coherent principle may be wider in its application than the policy intent, for example, it may encompass more situations than desired. Rather than modifying the principle in a way that results in a loss of coherence, carve-outs from the operation of the principle are used.

1.60 Alternatively, a principle may not cover a situation that needs to be treated in a similar way. An add-on to the principle is therefore identified, unless there is a coherent way of reforming the principle at a higher level.

1.61 The aim is for the principles to be consistent with the 'benchmark' tax principles and that deviations for the benchmark be made explicitly. This results in more coherent outcomes in the law.

1.62 The coherent principles approach can accommodate detailed or specific rules when they are needed. However, such rules will not be provided as a matter of course. The principles can be unfolded (providing detail about how the principles will apply in a particular case) in the law itself, in the regulations, but mostly in this explanatory memorandum.

1.63 After enactment, the law will continue to be unfolded, where necessary, through practical application of the law, including, as is currently the case, by rulings made by the Commissioner.

Administration and compliance regime

1.64 These Bills will operate under the general compliance and administrative umbrella of the Taxation Administration Act 1953 (TAA 1953). Matters such as the operation of the running balance accounts, the public and private rulings system, taxation objections, reviews and appeals and the collection and recovery of tax-related liabilities are administered under this legislation.

1.65 The administration of the Fuel Tax Bill 2006 will align with the administration of certain other indirect tax laws (the GST, luxury car tax and the wine equalisation tax) under a new part in the Schedule to the TAA 1953. This part will be modelled on the current indirect tax provisions in Part VI of the TAA 1953. This means that entities will generally have the same rights and obligations in relation to the Fuel Tax Bill 2006 as they have for these other indirect tax laws.

1.66 The legislation proposing to implement the fuel tax credit system, is taxing legislation and should be interpreted as such.