House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Emulsified diesel / water fuel blends

This bill will incorporate alterations to the Excise Tariff Act 1921 to allow the water component of emulsified diesel/water fuel blends produced by manufacturers licensed under the Excise Act 1901 to be free of excise duty. The special provisions for diesel/water emulsified blends are an environmental initiative designed to encourage clean fuel technology.

Date of effect: The alterations to duty provisions were notified by Excise Tariff Notice No. 2 (2001), which was published in Special Gazette No. S448 on 25 October 2001, and will be taken to have effect on and from that date. Excise Tariff Proposal No. 1 (2002) was tabled in Parliament on 21 February 2002.

Proposal announced: The proposal was announced on 25 October 2001 via Special Gazette No. S448.

Financial impact: The removal of excise duty from the water component of emulsified diesel/water fuel blends is not expected to result in any significant loss of revenue.

Compliance cost impact: Nil.

Product stewardship oil exemptions

This bill will incorporate alterations to the Excise Tariff Act 1921 to exclude certain oil products from the product stewardship oil (PSO) levy. The exemptions from the PSO levy support the original intention of the levy to reduce the impact of waste oil on the environment.

Date of effect: The alterations to duty provisions were notified by Excise Tariff Notice No. 1 (2002), which was published in Special Gazette No. S109 on 12 April 2002, and will be taken to have effect on and from 15 April 2002. Excise Tariff Proposal No. 2 (2002) was tabled in Parliament on 29 May 2002.

Proposal announced: The proposal was announced on 12 April 2002 via Special Gazette No. S109.

Financial impact: Exempting certain oils from the levy would reduce the costs for businesses using these oils (there will no longer be an excise of approximately 5.3 cents per litre). The estimated cost to the Government is around $1.3 million per annum.

Compliance cost impact: Compliance costs will be reduced for certain business as producers of these oils will no longer be required to report on them.

National scheme for low alcohol beer

This bill will incorporate alterations to the Excise Tariff Act 1921 to introduce new rates of excise duty for certain beer. The change to beer excise rates is a measure agreed with the States and Territories which replace State and Territory subsidies for low alcohol beer, with assistance now to be delivered through lower excise rates.

Date of effect: Excise Tariff Proposal No. 3 (2002) was tabled in the Parliament on 26 June 2002. The new rates for certain beer will be taken to have effect on 1 July 2002.

Proposal announced: The proposal was announced by the Treasurer on 22 March 2002.

Financial impact: The cost of the scheme is estimated to be about $68 million in 2002-2003. The States will make a financial contribution to the national scheme, which is commensurate with the State subsidies in place prior to the commencement of the scheme, and the Commonwealth will fund the shortfall. The Commonwealth will deduct the States financial contributions from each States budget balancing assistance, for as long as each State continues to receive budget balancing assistance. As the States cease to receive budget balancing assistance the Commonwealth will be effectively fully funding the scheme. Each States contribution will be indexed annually to the consumer price index. The Commonwealths contribution is estimated to be $5.1 million in 2002-2003 and will rise to effectively the full cost of the scheme from 2007-2008, which will be about $70 million a year on current estimates.

Compliance cost impact: The scheme will reduce compliance costs for industry, eliminate the requirement for wholesalers to lodge a claim for a rebate, and eliminate administration costs for the States and Territories.

Summary of regulation impact statement

Regulation impact on business

Impact: The States and Territories will make financial contributions to the national scheme in 2002-2003 based on their subsidy expenditures for 2001-2002. The Commonwealth Government will find the shortfall between the cost of the scheme and the State and Territory financial contributions which is estimated to be $5.1 million in 2002-2003 and will meet the full cost of the scheme (about $70 million a year) from 2007-2008 on current estimates. The price of low alcohol beer should fall in some States and Territories. There may be some small price increases in some States and Territories in some market segments.

Main points:

•

The national scheme will eliminate the requirement for wholesalers to lodge a claim for a rebate of excise that they have borne. It will also reduce compliance costs for industry and eliminate administration costs for the States and Territories as they will no longer be required to pay subsidies.

•

The scheme will result in a variety of pricing outcomes across the States and Territories with the price of low alcohol beer expected to fall by up to 8% in some States and Territories. However, prices may increase marginally in some market segments. These increases are not expected to be significant for consumers as either the price increase will be negligible or the market share of the affected products is quite small.

Product stewardship oil indexation

This bill will incorporate alterations to the indexation provisions of the Excise Tariff Act 1921 to remove the application of the provisions from oil products classified to item 15 of the Schedule to that Act. The removal of the indexation provisions from oils provides for consistency of treatment between petroleum fuels and certain oils subject to the PSO levy for non-fuel use, and reduces costs to business.

Date of effect: The proposed alterations will commence on Royal Assent, to apply to the indexation period commencing on 1 February 2003 and any subsequent indexation period.

Proposal announced: The abolition of oils and lubricants excise indexation was published in the Treasury Mid-Year Economic and Fiscal Outlook (MYEFO) document on 17 October 2001.

Financial impact: The net cost to revenue of the abolition of oil products indexation is $1.1 million in 2002-2003, $1.8 million in 2003-2004 and $2.5 million in 2004-2005.

Compliance cost impact: Costs will be reduced for business as manufacturers of these oils will no longer be required to adjust their systems to accommodate indexation increases to the rate of excise every 6 months.

Chapter 1 - Emulsified diesel / water fuel blends

Outline of chapter

1.1 This chapter explains amendments to the Excise Tariff Act 1921 that will allow the water component of emulsified diesel/water fuel blends produced by licensed Excise manufacturers to be free of excise duty.

1.2 Items 1 to 3 of Schedule 1 alter the Excise Tariff Act 1921 by adding a new provision to duty provisions for excisable blended petroleum products, section 6G, and making minor consequential amendments to the existing provisions. [Schedule 1, items 1 to 3]

Context of amendments

1.3 Around the world, new fuels and technologies are being developed, trialled and commercialised in response to environmental concerns. There is evidence to suggest that one such fuel, a blend of automotive diesel fuel and water, emulsified using a small percentage of proprietary additives, offers a cost effective way to reduce harmful emissions from heavy-duty engines without expensive modification to vehicles.

1.4 Several companies are seeking to promote these technologies in Australia. The difficulty these companies face is that, under existing legislative provisions that took effect in 1994, excise duty applies to the totality of the blended fuel, including the water component.

1.5 The Government considered that this clean fuel technology should be encouraged. Alterations to the Excise Tariff Act 1921 will give effect to this decision.

Summary of new law

1.6 Section 6G of the Excise Tariff Act 1921 will be amended to include a provision for emulsified blends of diesel fuel and water that allows for the water component to be free of excise duty. [Schedule 1, item 3]

Detailed explanation of new law

1.7 Section 6G of the Excise Tariff Act 1921, which specifies how duty is determined for excisable blended petroleum products, will be amended to include a new provision (subsection 6G(3)) with a specific formula for emulsified blends of diesel fuel and water that allows for the water component to be free of excise duty. [Schedule 1, item 3]

1.8 The provision spells out that the blends are emulsified diesel/water blends and the water component is added water to ensure that diesel blends in general, which commonly contain a small amount of naturally occurring water, will not be captured by the new provision.

1.9 As normal automotive diesel fuel contains additives and detergents that are included in the volume of product on which excise is payable, the emulsifier/additives component of the emulsified blends is to be dutiable (as with the diesel, at the diesel rate).

1.10 As the components of the blend are to be sourced only from locally produced (i.e. not imported) product on which duty has not been paid, subsection 6G(1) will be amended to exclude emulsified diesel/water blends from the application of the general section 6G provisions. [Schedule 1, item 1]

1.11 A consequential amendment will also be made to subsection 6G(1A) to ensure that the duty rate applicable to the diesel/water blends mirrors the maximum diesel rate set out in the existing provisions. [Schedule 1, item 2]

Application and transitional provisions

1.12 The amendments are taken to have effect on and from 25 October 2001.

Chapter 2 - Product stewardship oil levy exemptions

Outline of chapter

2.1 This chapter explains amendments to the Excise Tariff Act 1921 that will exclude certain oil products from the product stewardship oil (PSO) levy.

2.2 Items 4 to 6 of Schedule 1 alter the Excise Tariff Act 1921 by adding definitions of goods which are exempt from the PSO levy to section 3, and altering the description of item 15 in the Schedule. [Schedule 1, items 4 to 6]

Context of amendments

2.3 The intention of the Product Stewardship Arrangements is to reduce the impacts of waste oil through an excise style levy imposed on virgin oils and lubricants. Where oils are used in the manufacture of another product, are not contributing to the waste oil problem and are clearly distinguishable from oils that do, these oils should be excluded, where feasible, from the levy. The Government has decided to exempt certain oil products meeting these criteria from the PSO levy. Alterations to the Excise Tariff Act 1921 will give effect to this decision.

Summary of new law

2.4 Section 3 of the Excise Tariff Act 1921 and item 15 of the Schedule will be amended to exclude certain oil products, by definition, from the PSO levy and alter the description of item 15 in the Schedule. [Schedule 1, items 4 to 6]

Detailed explanation of new law

2.5 Section 3 of the Excise Tariff Act 1921 will be amended to exclude certain products from the PSO levy by adding definitions in subsection 3(1) and new subsection 3(6) for the following products that meet specified criteria:

•

certain food grade white mineral oils;

•

certain polyglycol brake fluids; and

•

certain aromatic process oils.

[Schedule 1, items 4 and 5]

2.6 The description of item 15 of the Schedule to the Excise Tariff Act 1921 will be amended to exclude the newly defined products for this tariff item classification. [Schedule 1, item 6]

Application and transitional provisions

2.7 These amendments are taken to have effect on and from 15 April 2002.

Consequential amendments

2.8 Complementary amendments to the Customs Tariff Act 1995 for PSO exemptions are being addressed through Customs Tariff Amendment Bill (No. 2) 2002.

Chapter 3 - National scheme for low alcohol beer

Outline of chapter

3.1 This chapter explains amendments to the Excise Tariff Act 1921 which introduce new rates of excise duty for certain beer.

3.2 Item 7 of Schedule 1, alters item 1(C) of the Schedule to the Excise Tariff Act 1921 by reducing certain rates of beer. [Schedule 1, item 7]

Context of amendments

3.3 The new rates give effect to the Governments decision to implement a national excise scheme for low alcohol beer, announced by the Treasurer on 22 March 2002 following the meeting of the Ministerial Council for Commonwealth-State Financial Relations and Outcome of Loan Council Meeting. The key feature of this scheme is the cessation of State and Territory subsidies for low alcohol beer, with assistance to be delivered through lower excise rates.

Summary of new law

3.4 The Excise Tariff Act 1921 will be amended to reflect a number of changes to the excise duty rates for certain beer. Excise duty rates for certain beer will be reduced to give effect to the Governments decision to introduce a national scheme for low alcohol beer. The amendments will also remove an anomaly in the current excise rates that has allowed manufacturers to reduce their excise liability by marginally increasing the alcohol content of the beer from 3.5% to 3.6%. [Schedule 1, item 7]

Detailed explanation of new law

3.5 Subitem 1(c) of the Schedule to the Excise Tariff Act 1921 will be amended to reduce certain rates of excise duty on beer as follows:

•

the rate of excise duty for beer packaged in individual containers exceeding 48 litres has been reduced from $16.46 to $5.69 per litre of alcohol for low alcohol beer with less than 3% alcohol by volume;

•

the rate of excise duty for beer packaged in individual containers not exceeding 48 litres has been reduced from $45.46 to $28.49 per litre of alcohol for low alcohol beer; and

•

the rate of excise duty for beer packaged in individual containers not exceeding 48 litres has been reduced from $38.59 to $33.22 per litre of alcohol for mid strength beer with less than 3.5% alcohol by volume.

3.6 In each case, the excise rates of duty are calculated on that alcohol content over 1.15%. All other duty rates for beer are unchanged.

Application and transitional provisions

3.7 The new rates for certain beer are taken to apply on and from 1 July 2002.

Consequential amendments

3.8 Complementary amendments to the Customs Tariff Act 1995 for low alcohol beer are being addressed through Customs Tariff Amendment Bill (No. 2) 2002.

REGULATION IMPACT STATEMENT

Background

3.9 The national scheme will eliminate the requirement for wholesalers to lodge a claim for a rebate from the States and Territories that is equivalent to part of the excise paid on the beer to the Commonwealth. Currently wholesalers are required to lodge a claim for rebate of a portion of the excise that they have paid to the Commonwealth in each State or Territory where the wholesaler operates. This will no longer be the case as the subsidy is provided through lower excise rates. The cost to comply with excise requirements will remain unchanged and changes required to adjust to the new lower rates of excise are already in place to accommodate biannual indexation changes.

3.10 Health policy appears to favour the continued subsidisation of low alcohol beer. Current research suggests, however, that there are likely to be decreasing social benefits from subsidising products with higher alcohol contents such as mid and full strength beer.

3.11 The introduction of a national scheme also presents an opportunity to remove an anomaly that allows manufacturers to reduce their excise liability. Beer manufacturers have been able to reduce the amount of excise payable on locally produced beer by approximately $0.84 on every carton by marginally increasing the alcohol content of the beer from 3.5% to 3.6% alcohol by volume. This increase in alcohol volume allows for duty to be paid at $33.22 per litre of alcohol (full strength beer rate rather than $38.59 per litre of alcohol (mid strength beer rate)). Reducing the excise duty rate of mid strength packaged beer from $38.59 to $33.22 per litre of alcohol will counter this anomaly.

3.12 The State and Territory rebate arrangements in place prior to 1 July 2002 require wholesalers to lodge claims for rebate from the States and Territories that is equivalent to part of the excise paid on the beer to the Commonwealth. The rebates range across the States and Territories, which results in a variety of pricing outcomes.

Policy objective

3.13 The purpose of the national excise scheme for low alcohol beer is to replace existing State and Territory rebate schemes with a uniform and administratively efficient concession in the rate of excise duty on low alcohol beer. The national scheme will eliminate the requirement for wholesalers to lodge a claim for a rebate of excise that they have paid. It will also reduce compliance costs for industry and eliminate administration costs for the States and Territories.

Policy proposal

3.14 While the principal objective of the State and Territory schemes is to subsidise low alcohol beer, the merit in applying the same criteria to all alcohol products was considered. The working party noted that the different market characteristics of other alcohol products, including their different demand elasticities, product and marketing characteristics, and the different health aspects of consumption of these products required careful consideration.

3.15 Given the complexity of the issues, the negligible level of existing State and Territory subsidies and the principal focus being the tax treatment of beer, the working party noted that the policy option to extend the concession to other alcohol products would be more appropriately considered by the Commonwealth at a later date. Whether the State and Territory subsidies for other alcohol products should continue would be a matter entirely for the discretion of each State and Territory government.

3.16 Most State and Territory schemes extend subsidies to mid strength beer (alcohol content of more than 3.0% alcohol by volume but no more than 3.5% alcohol by volume). It is questionable whether such schemes could reasonably be described as low alcohol subsidies. The concession threshold should therefore be set at 3.0% alcohol by volume. While this will reduce the subsidy for mid strength beer and may lead to small price increases in some States, the continued subsidisation of mid strength beer is also questionable from a health policy perspective.

3.17 To ensure that there are minimal price increases for beer in moving to the national scheme, the concession threshold and rate of subsidy would have to be consistent with the maximum currently applying in jurisdictions. As half of the State and Territories have a 12% rebate (including the 2 largest States), a 12% concession represents a reasonable balance between minimising the price effects and not substantially increasing the cost of the subsidy. Tasmania was the only State with a higher subsidy at 13%.

Implementation options

3.18 The implementation of a national excise scheme for low alcohol beer requires alteration to the excise duty rates in the Schedule to the Excise Tariff Act 1921 for certain beer. It was considered that the national scheme could be implemented within a 6 week period from the date of public announcement. While the administrative aspects of gazetting a tariff notice are relatively straight forward and could be implemented sooner, industry preferred at least 6 weeks notice of the new arrangements in order to amend their pricing schedules and arrangements. Accordingly, other options were not applicable. The commencement of the scheme on 1 July was considered appropriate by the Commonwealth as there would be no benefit gained if the scheme were to begin earlier than this.

Impact group identification

3.19 The changes to the excise duty rates for certain beer are expected to affect beer manufacturers and wholesalers, consumers and State and Territory governments.

Assessment of impacts

Consumer impacts

3.20 Consumers in Queensland, Western Australia and the Northern Territory are expected to benefit from the new national scheme. Prices for low alcohol beer are expected to decline by up to 8% in those States and Territories. Some price increases may occur in some market segments in some States and Territories, but the increases are not expected to be significant for these consumers. This is because either the price effects are negligible or the market share of the affected products is quite small.

3.21 Estimated price effects of the national excise scheme are as per the table below:

(a) Change in the retail price of a 285ml glass of beer (middie).

(b) Change in the retail price of a carton of beer (24 375ml).

Analysis of costs / benefits

Costs of compliance

3.22 The national scheme will eliminate the requirement for wholesalers to lodge a claim for a rebate from the States and Territories that is equivalent to part of the excise paid on the beer to the Commonwealth. Currently wholesalers are required to lodge a claim for rebate of a portion of the excise that they have paid to the Commonwealth in each State or Territory where the wholesaler operates. This will no longer be the case as the subsidy is provided through lower excise rates. The cost to comply with excise requirements will remain unchanged and changes required to adjust to the new lower rates of excise are already in place to accommodate biannual indexation changes.

Administration costs

3.23 There are negligible changes to administration costs for the Australian Taxation Office as legislative and administrative arrangements for the collection of excise duty and alteration to excise duty rates are already in place. This scheme will reduce administration costs for the States and Territories as existing subsidy schemes are replaced.

Financial impact

3.24 The States and Territories will make financial contributions to the national scheme in 2002-2003 based on their subsidy expenditures for 2001-2002. The States and Territories will advise the Commonwealth of their subsidy expenditures for 2001-2002 in sufficient time for their financial contribution for 2002-2003 to be incorporated into the December 2002 quarterly Budget Balancing Assistance payments.

3.25 The cost of the scheme for the Government is estimated to be about $68 million in 2002-2003. This will be about $5.1 million per annum higher than the cost of current State and Territory subsidies. The States and Territories will continue to make a financial contribution to the national scheme, which is commensurate with their current State and Territory subsidies (approximately $62.9 million), and the Commonwealth will fund the shortfall of $5.1 million.

3.26 The State and Territory contributions to the funding of the national scheme would be indexed to the March on March CPI outcome to maintain the real value of their contributions. The Commonwealth will eventually fund the entire cost of the national scheme once all States and Territories cease to receive Budget Balancing Assistance from the Commonwealth and consequently cease to make a financial contribution.

3.27 Overall, the national scheme is designed to minimise price effects, while at the same time ensuring that the cost of subsidies does not increase significantly.

Consultation

3.28 A national scheme was proposed by the Commonwealth Treasurer in correspondence to State and Territory Treasurers. Treasury officials participated in a working party to consider the scheme arrangements, and reported through Heads of Treasuries in the States and Territories.

3.29 Industry representatives were consulted in regard to receiving notice of the new arrangements in order to amend their pricing schedules.

3.30 The working party also undertook a survey of literature and research relating to the health policy aspects of beer consumption to determine whether taxation concessions for low alcohol beer lead to improved health outcomes and, if so, how effective that policy option is when compared with alternative policy options.

Conclusion and recommended option

3.31 The national excise scheme for low alcohol beer was a measure announced by the Treasurer on 22 March 2002 following the meeting of the Ministerial Council for Commonwealth-State Financial Relations and Outcome of Loan Council Meeting. As amendments to the excise duty rates are legislated in the Schedule to the Excise Tariff Act 1921, only amendments to legislation can give effect to the Governments decision.

Chapter 4 - Product stewardship oil indexation

Outline of chapter

4.1 This chapter explains amendments to the indexation provisions of the Excise Tariff Act 1921 that restrict the application of the provisions.

4.2 Item 8 of Schedule 1 alters section 6A of the Excise Tariff Act 1921.

Context of amendments

4.3 The abolition of indexation of excise duty for all oils classified to item 15 of the Schedule to the Excise Tariff Act 1921 removes an inconsistency between the treatment of oil and fuels that arose when indexation was removed from all petroleum fuels as part of a package of cuts to petrol and diesel fuel excise on 2 March 2001. Alteration to the Excise Tariff Act 1921 will give effect to this decision.

Summary of new law

4.4 Section 6A of the Excise Tariff Act 1921 will be amended to remove certain oil products classified to item 15 of the Schedule to the Excise Tariff Act 1921 from the indexation provisions. [Schedule 1, item 8]

Detailed explanation of new law

4.5 Automatic indexation of rates of excise duty is provided for in section 6A of the Excise Tariff Act 1921. It applies to all excisable alcohol, tobacco and oil products for non-fuel use that attract a duty rate other than free.

4.6 Section 6A of the Excise Tariff Act 1921 will be amended to exclude all oil products classified to item 15 of the Schedule to the Excise Tariff Act 1921 from the application of the provisions, for the indexation period commencing on 1 February 2003 and any subsequent indexation period.

Application and transitional provisions

4.7 These amendments will apply in respect of indexation that occurs on or after 1 February 2003.

Consequential amendments

4.8 Complementary amendments to the Customs Tariff Act 1995 for product stewardship oil indexation are being addressed through Customs Tariff Amendment Bill (No. 2) 2002.