Senate

Revised Explanatory Memorandum

(Circulated by the authority of the Minister for the Environment, the Hon Greg Hunt MP and the Treasurer, the Hon J.B. Hockey MP)

Chapter 5 - Removal of equivalent carbon price from taxable fuels

Outline of chapter

5.1 Chapter 5 describes the changes to relevant legislation to remove the equivalent carbon price from liquid and gaseous fuels. These amendments:

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adjust fuel tax credits (FTCs) for certain uses of taxable fuel; and

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reduce excise and excise equivalent customs duty imposed on aviation fuel.

Context of amendments

5.2 All taxable fuel (including petrol and diesel) produced in, or imported into, Australia has excise or excise equivalent customs duty (fuel tax) imposed on it when it enters the Australian market. To reduce the incidence of fuel tax on certain business users, fuel tax credits (FTCs) are provided to business taxpayers for a variety of uses of fuel.

5.3 In particular, FTCs are provided to:

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all off-road business users of taxable fuel; and

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business users of heavy vehicles (over 4.5 tonnes) for fuel used for travelling on public roads (these FTCs are reduced by the road user charge).

5.4 FTCs are also available for non-business users for taxable fuel that they acquire or manufacture in, or import into, Australia to the extent that it is used to generate electricity for domestic use.

5.5 The equivalent carbon price was applied to certain uses of taxable fuels through several mechanisms. These mechanisms included reducing the entitlement to FTCs for fuels such as petrol and diesel as well as increasing the rates of excise and excise equivalent customs duty applied to aviation fuel. The rates of duty were not increased on other types of fuel.

5.6 These amendments remove the equivalent carbon price from taxable fuels by repealing the changes which were made to impose the equivalent carbon price.

Comparison of key features of new law and current law

Detailed explanation of new law

Increases to FTCs for certain uses of taxable fuel

5.7 To implement an equivalent carbon price on certain uses of taxable fuel, FTCs were reduced for some recipients with effect from 1 July 2012. However, specified uses of fuel were exempt from the equivalent carbon price. For example, there was no reduction in FTCs for business users of fuel in heavy vehicles travelling on public roads or for fuel used otherwise than by combustion. Fuel used in specified agriculture, forestry and fisheries activities was also exempt from the equivalent carbon price.

5.8 The amount of the reduction in FTCs to remove the carbon reduction from taxable fuels subject to the equivalent carbon price is called the 'amount of carbon reduction'. The amount of carbon reduction is different for different fuel types, reflecting the different emission rates for different fuels.

5.9 These amendments increase FTCs for taxable fuel that was subject to the equivalent carbon price through a reduction in FTCs. For these recipients, FTCs are increased by the applicable amount of carbon reduction. This ensures that FTCs for fuel use subject to the equivalent carbon price are restored to what they would have been had the carbon tax not been implemented. The current and new FTC rates are set out below for taxable fuels subject to the equivalent carbon price. [Schedule 1, items 121, 122 and 123, sections 43-5 and 43-8, Fuel Tax Act]

5.10 Consequential amendments are also made to Fuel Tax (Consequential and Transitional Provisions) Act 2006 to remove references to the reductions in FTCs due to the equivalent carbon price. These references are not required following the repeal of the carbon tax. [Schedule 1, items 108, 109, 110, 122, 135, 136, 138, 143, 147, 152 and 155, sections 2-1, 40-5, 43-5 and 110-5, Fuel Tax Act; item 12(2A), Schedule 3, Fuel Tax (Consequential and Transitional Provisions) Act 2006]

Reductions in excise and excise equivalent customs duty for aviation fuel

General provisions

5.11 The reductions in excise and excise equivalent customs duty will be implemented by the Excise Amendment Bill and the Customs Amendment Bill. When enacted, the names of those Bills will be the Excise Tariff Amendment (Carbon Tax Repeal) Act 2014 and the Customs Tariff Amendment (Carbon Tax Repeal) Act 2014. [Excise Amendment Bill, clause 1] [Customs Amendment Bill, clause 1]

5.12 All amendments made by the Excise Amendment Bill and the Customs Amendment Bill have effect according to the terms set out in the Bills. [Excise Amendment Bill, clause 3] [Customs Amendment Bill, clause 3]

5.13 The formal provisions in sections 1, 2 and 3 of the Excise Amendment Bill and the Customs Amendment Bill commence on the day that the Governor-General gives the Royal Assent. The operative provisions commence on 1 July 2014. [Excise Amendment Bill, clause 2] [Customs Amendment Bill, clause 2]

Changes in rates of duty for all aviation fuel

5.14 Prior to the implementation of the carbon tax, FTCs were not available for aviation fuel in any circumstances. Increases to the rates of excise and excise equivalent customs duty were made to implement an equivalent carbon price on aviation fuel. The equivalent carbon price was represented by increases in the rates of duty equal to a 'carbon component rate'. The carbon component rates are different for aviation kerosene and aviation gasoline, reflecting the different emission rates for the different aviation fuels.

5.15 Prior to the imposition of the equivalent carbon price on aviation fuel, the rates of duty on aviation fuel were equal to the amount representing a levy to fund the Civil Aviation Safety Authority (CASA).

5.16 These amendments remove the 'carbon component rate' from the rates of excise and excise equivalent customs duty imposed on aviation fuels. With the removal of the carbon component rate, the rates of duty for both aviation kerosene and aviation gasoline are reduced to the pre-carbon tax rate of 3.556 cents per litre, which represents the hypothecated levy to fund CASA. [Excise Amendment Bill, items 6 and 7, Schedule (cell at table subitem 10.6 and 10.17, column headed "Rate of Duty"), Excise Tariff Act 1921] [Customs Amendment Bill, items 2 to 37, Schedule 3 (subheadings 2710.12.61, 2710.19.40, 2710.91.40, 2710.91.61, 2710.99.40 and 2710.99.61, column 3), Schedule 5 (cells at table items 60, 66, 76, 80, 88 and 92, column 3), Schedule 6 (cells at table item 63, 69, 79, 83, 91 and 95, column 3), Schedule 7 (cells at table item 62, 68, 78, 82, 90 and 94, column 3), Schedule 8 (cells at table item 68,74, 84, 88, 96 and 100, column 3), Schedule 9 (cells at table item 67, 74, 85, 89, 99 and 103, column 3), Customs Tariff Act 1995]

5.17 Consequential amendments are made to the Excise Tariff Act 1921 and Customs Tariff Act 1995 to accommodate the removal of the carbon component rate from excise and excise equivalent customs duty on aviation fuel. [Excise Amendment Bill, items 1 to 5, sections 3(1) and 5(1) and sections 6FA, 6FB and 6FC, Excise Tariff Act 1921, Schedule (note 2 to Schedule heading and table heading), Excise Tariff Act 1921] [Customs Amendment Bill, item 1, section 19A, Customs Tariff Act 1995]

Removal of additional FTC for aviation fuel subject to the Opt-in scheme

5.18 As large users of aviation fuel were able to opt-in to be covered by the carbon pricing mechanism from 1 July 2013, the increases in rates of excise and excise equivalent customs duty were offset by the provision of an additional FTC for aviation fuel covered by the Opt-in scheme. However, only the part of the fuel tax attributable to the carbon component rate was eligible for FTCs (the part of the fuel tax comprising the hypothecated levy to fund CASA was not eligible for a FTC).

5.19 These amendments remove the additional FTC for aviation fuel covered by the Opt-in scheme, to reflect that the rates of duty on aviation fuel are reduced by the removal of the equivalent carbon price and that the fuels are also no longer covered by the carbon pricing mechanism. [Schedule 1, items 117 and 126, sections 41-30(2) and 43-11, Fuel Tax Act]

5.20 Consequential amendments are made to the Fuel Tax Act to reflect the removal of the additional FTC for aviation fuel covered by the Opt-in scheme. [Schedule 1, items 108, 110, 111, 112, 115, 116, 120, 124, 125 and 138, sections 2-1, 40-5, 41-1, 41-5(3)(b), 41-30, 43-1, 43-10 and 110-5, Fuel Tax Act]

Consequential amendments to reflect the removal of the carbon pricing mechanism

Removal of additional FTC for certain uses of non-transport gaseous fuels

5.21 The equivalent carbon price is imposed on the non-transport use of gaseous fuels through the carbon pricing mechanism. However, as specified agriculture, forestry and fishery activities are exempt from the carbon tax, the non-transport use of gaseous fuels used in these activities receive an additional FTC to compensate for the effect of the equivalent carbon price which is embedded in the price of the gaseous fuel.

5.22 With the repeal of the carbon tax, this additional FTC for the non-transport use of gaseous fuels used in these activities is no longer required. Therefore, this additional FTC for the non-transport use of gaseous fuels used in specified agriculture, forestry and fishery activities is removed. [Schedule 1, item 119, Division 42A, Fuel Tax Act]

5.23 Consequential amendments are also made to the Fuel Tax Act to reflect the removal of this additional FTC. [Schedule 1, items 113, 114, 118, 127 to 134, 137, 139 to 142, 144 to 146, 148 to 151, 153 and 154, sections 41-15(1), 41-25(2)(a)(ii), 41-35 and 110-5 and Subdivision 43-B, Fuel Tax Act]

Application provisions

5.24 The changes to FTCs apply to taxable fuel acquired, manufactured or imported on or after 1 July 2014. [Schedule 1, items 334 and 335]

5.25 Nothing in the Carbon Tax Repeal Bills is intended to alter the existing definitions in the Fuel Tax Act. The meaning of the terms 'acquire', 'manufacture' and 'import' are set out in Fuel Taxation Ruling FTR 2007/1. The changes to rates of excise duty apply to goods that are entered for home consumption on or after 1 July 2014. [Excise Amendment Bill, item 8]

5.26 The changes to rates of excise equivalent customs duty apply to goods imported into Australia on or after 1 July 2014, and to goods imported before that time where the time for working out the rate of import duty on the goods has not yet occurred. [Customs Amendment Bill, item 38]