House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP, and the Minister for Home Affairs, the Hon Brendan O'Connor MP)

Chapter 3 - Adjustment of fuel tax rates - customs duty

Outline of chapter

3.1 This chapter outlines the operation of the amendments to the Customs Tariff Act 1995 by the Clean Energy (Customs Tariff Amendment) Bill 2011 to provide a 'cent-for-cent' impact on the use of aviation and non-transport gaseous fuels, equivalent to the carbon emission price of the fuel, had the gaseous fuels been subject to carbon pricing.

Context of amendments

3.2 Aviation fuels, although subject to a small hypothecated levy to fund the Civil Aviation Safety Authority (CASA), do not receive fuel tax credits (FTC)s. Gaseous fuel for transport purposes are being brought into the fuel tax system under the alternative fuels legislation. However the gaseous fuels for non-transport purposes will be outside the FTC system. This is because non-transport liquified petroleum gas (LPG) and liquified natural gas (LNG) will receive a remission on the excise and excise equivalent customs duty, and non-transport compressed natural gas (CNG) will receive an exemption from the excise and excise equivalent customs duty imposed on gaseous fuels.

3.3 Therefore aviation fuels and non-transport gaseous fuels are not eligible for FTCs and are not covered by the Government's Clean Energy Plan mechanism to impose a carbon content price on their fuel costs, through FTC reductions.

Summary of new law

3.4 To bring these fuels into the Government's Clean Energy Plan, domestic aviation fuel excise equivalent customs duty will be increased by an amount equivalent to the carbon price to provide an effective carbon price for aviation. Similarly, the fuel tax exemption on non-transport CNG and the fuel tax remission for non-transport LPG and LNG will be adjusted on a 'cent-for-cent' basis equivalent to the carbon content price on the fuels, had the gaseous fuels been subject to carbon pricing.

Comparison of key features of new law and current law

Detailed explanation of new law

Adjustments of excise equivalent customs duty

3.5 The aviation fuels (Sub-headings 2710.11, 2710.19, 2710.91, 2710.99 (and 2710.12 after 1 January 2012) of Schedule 3 to the Customs Tariff Act 1995 ) are subject to a relatively small fuel tax (excise and customs duty) hypothecated to fund CASA. While keeping distinct the hypothecated CASA funding, the fuel tax rates will be adjusted by the amount of the notional carbon price that would be put on the fuel emissions, had aviation fuel been subject to a carbon charge. [ Schedule 1, Part 1, Divisions 1 and 2 ]

3.6 The formula for calculating the aviation fuel excise equivalent customs duty rate will be:

Aviation fuel excise equivalent customs duty rate rate = hypothecated CASA levy + aviation fuel carbon component rate

3.7 A new tariff item will be created for non-transport CNG (Sub-heading 2711.21.20 of Schedule 3 to the Customs Tariff Act 1995 ). [ Schedule 1, Part 1, Division 3, items 31 and 35 ]

3.8 The formula for calculating the non-transport CNG excise equivalent customs duty rate will be:

Non-transport CNG excise equivalent customs duty rate = CNG carbon component rate.

3.9 The formula for adjusting the remission on the non-transport LPG and LNG fuel will be established in excise and customs regulations.

Aviation fuel and non-transport CNG carbon component rate

3.10 The aviation gasoline and aviation kerosene carbon component rate on which the excise increases will be based are expressed in cents per litre and will be calculated by multiplying the relevant period carbon charge by the emission rate for the respective fuel. The relevant emission rate for aviation gasoline is 0.0022 tonnes of carbon emission per litre, and for aviation kerosene the relevant emission rate is 0.0026 tonnes of carbon per litre.

3.11 Table 3.1 lists the notional carbon emission charge by cents per litre of aviation fuel over the fixed carbon price period.

3.12 The excise equivalent customs duty exemption for non-transport CNG in section 77HA of the Taxation of Alternative Fuels Legislation Amendment Act 2011 will be amended so that non-transport CNG will become subject to excise equivalent customs duty at a rate equivalent to the CNG carbon component rate unless it is for private use. [ Schedule 1, Part 1, Division 3, item 31 ]

3.13 The CNG carbon component rate will be expressed in cents per kilogram and will be calculated by multiplying the relevant period carbon charge by the CNG emission rate of 0.0029 tonnes of carbon emission per kilogram.

3.14 Table 3.2 lists the LNG and CNG carbon component rate by cents per kilogram.

Timing of the excise equivalent customs tariff adjustment

3.15 The first adjustment of the fuel tax for aviation and non-transport gaseous fuels will take effect from 1 July 2012. There will be two further yearly adjustments on 1 July 2013 and 1 July 2014 followed by six-monthly adjustments beginning on 1 July 2015.

3.16 The amount of the fuel tax adjustment will be based in 2012-13, 2013-14 and 2014-15 on a carbon charge of $23.00 per tonne, $24.15 per tonne and $25.40 per tonne respectively.

3.17 From 1 July 2015, the fuel tax adjustment will be based on the preceding six-month average carbon auction price. The average auction price used on 1 July 2015 will be for the preceding six-month forward permit auctions. For subsequent periods the average priced used will be for the actual six-month period. As the average carbon price may decrease rather than increase over the six-month period, the corresponding aviation fuel tax adjustment could be a decrease rather than an increase. [ Schedule 1, Part 2 ]

3.18 Amendments will also be made to the Schedules in the Customs Tariff Act 1995 which provide for existing Free Trade Agreements (Schedule 5 to the Australia-US Free Trade Agreement, Schedule 6 to the Thailand-Australia Free Trade Agreement, Schedule 7 to the Australia-Chile Free Trade Agreement and Schedule 8 to the ASEAN-Australia-New Zealand Free Trade Agreement) to ensure that the carbon charge for aviation fuel and CNG also applies to the Free Trade Agreements.

Commencement and application provisions

3.19 The amendments to the Customs Tariff Act 1995 will commence on 1 July 2012 providing section 3 of the Clean Energy Bill 2011 commences on that date.

3.20 Amendments to the Customs Tariff Act 1995 shall apply to goods that were imported on or after 1 July 2012. It also applies to goods imported before 1 July 2012 but not entered into home consumption until on or after 1 July 2012.

Changes of rates of duty

3.21 The Clean Energy (Customs Tariff Amendment) Bill 2011 sets out excise equivalent rates of customs duty applicable to aviation fuels and CNG, from 1 July 2012. New section 19A in the Customs Tariff Act 1995 will give effect to subsequent adjustments to these duty rates. Section 19A will link duty rates for these goods to the equivalent items in the Excise Tariff Act 1921 and will automatically adjust those duty rates when duty rates change in the Excise Tariff Act 1921 . This is similar to the mechanism in the present section 19 of the Customs Tariff Act 1995 that links changes to customs rates of duty for alcohol and tobacco products to rates of duty in the Excise Tariff Act 1921 , for the purposes of twice yearly CPI duty rate adjustments.

3.22 This mechanism will ensure that rates of customs duty for aviation fuels and CNG are the same as set out in the Excise Tariff Act 1921 . [ Schedule 1, Part 2, item 41 )]