House of Representatives

Explanatory Memorandum

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

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

General outline and financial impact

Removal of excise exemption for fuel ethanol

This bill amends the Excise Tariff Act 1921 to remove the excise exemption for fuel ethanol and impose an excise duty rate equivalent to that applying to petroleum. The amendments alter the Excise Tariff Schedule classification and duty rate for fuel ethanol and the formula in the Excise Tariff Act 1921 for determining the excise duty on fuel/ethanol blends.

Date of effect: The alterations to the duty provisions for fuel ethanol were notified by Excise Tariff Proposal No. 4 (2002), and commenced on 18 September 2002. The amendments in this bill are taken to have effect on and from that date. Excise Tariff Proposal No. 4 (2002) was tabled in Parliament on 16 September 2002.

Proposal announced: The proposal was announced on 12 September 2002 in a media release by the Prime Minister.

Financial impact: The revenue from the imposition of excise duty on fuel ethanol is estimated to be $26 million in 2002-2003 and $34.4 million in 2003-2004. This revenue is offset by the provision of a domestic production subsidy at a rate equivalent to the excise duty.

Compliance cost impact: Minor compliance and administration costs.

Summary of regulation impact statement

Regulation impact on business

Impact: There is currently a very small number of domestic producers of denatured ethanol for use as fuel. These producers of fuel ethanol are required to pay excise duty at a rate equivalent to that applying to petrol (currently 38.143 cents per litre) on a product previously classified at a 'Free' rate under the Excise Tariff Schedule.

Main points:

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A 12-month production subsidy, equivalent to the excise duty and applying from the date of commencement of the excise on fuel ethanol, 18 September 2002, has been available for new and existing domestic producers of fuel ethanol. Ongoing arrangements have been announced in the 2003-2004 Federal Budget.

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Minor compliance costs may be incurred in adjusting computer systems to the new classification of fuel ethanol, setting up payment procedures and obtaining licences and permissions where these are not already in place.

Chapter 1 Removal of excise exemption for fuel ethanol

Outline of chapter

1.1 This chapter explains amendments to the Excise Tariff Act 1921 that remove the 'Free' excise rate for fuel ethanol and impose an excise duty rate equivalent to that applying to petroleum, and provide a new formula for determining the excise duty on fuel/ethanol blends.

1.2 Item 2 of Schedule 1 alters the Excise Tariff Act 1921 by replacing the provisions in section 6G for determining excise duty payable on fuel/ethanol blends. [Schedule 1, item 2]

1.3 Items 5, 7 and 8 of Schedule 1 amend the Schedule to the Excise Tariff Act 1921 by altering the classification and excise duty rate of denatured ethanol for use as fuel. [Schedule 1, items 5, 7 and 8]

1.4 Items 1, 3 and 4 make consequential changes to section 6G which sets out the manner of determining duty payable on excisable blended petroleum products. [Schedule 1, items 1, 3 and 4]

Context of amendments

1.5 The Government announced on 12 September 2002 the removal of the exemption from excise and customs duty for fuel ethanol from 18 September 2002 and the imposition of a duty rate equivalent to that applying to petroleum. The excise measure was implemented by Excise Tariff Proposal No. 4 (2002) and is validated by these amendments to the Excise Tariff Act 1921.

1.6 The measure is part of the Government's strategy to encourage the production and use of biofuels in transport over time. A 12-month production subsidy for existing and new domestic fuel ethanol producers was introduced at the same time. This provided a targeted means of maintaining the use of biofuels in transport in Australia while the Government considered longer-term arrangements. Ongoing arrangements have been announced in the 2003-2004 Federal Budget.

Summary of new law

1.7 The amendments alter the tariff classification provisions in the Excise Tariff Schedule for denatured ethanol for use as fuel, remove the 'Free' excise rate and impose an excise duty rate equivalent to that applying to petroleum, currently 38.143 cents per litre. The amendments also substitute a new formula in the Excise Tariff Act 1921 for determining the excise duty on fuel/ethanol blends.

Comparison of key features of new law and current law

Detailed explanation of new law

1.8 Denatured ethanol for use as fuel is currently classified in the Excise Tariff Schedule as subitem (R) under item 2, relating to certain alcohol products, and has a 'Free' rate. The amendments alter the classification by omitting subitem 2(R) and adding denatured ethanol for use as fuel as subitem (K) under item 11, relating to petroleum products. The excise duty rate for subitem 11(K) is $0.38143 per litre. [Schedule 1, items 5 and 8]

1.9 The description of the goods covered by item 11 is extended to include 'denatured ethanol for use as fuel in an internal combustion engine' as paragraph (e). [Schedule 1, item 7]

1.10 Section 6G sets out the manner of determining duty payable on blended petroleum products. Currently subsection (2) provides the formula for blends of gasoline and denatured ethanol on the basis that denatured ethanol is classified to item 2 of the Excise Tariff Schedule and at a different rate from gasoline. The amendments repeal subsection (2) and insert a new subsection (2) that refers to denatured ethanol as classified to item 11 of the Excise Tariff Schedule and provides a new formula for determining the excise duty payable on a blend of fuel ethanol and other goods classified to item 11 (petroleum and certain other products) or item 12 (blended petroleum products) of the Excise Tariff Schedule. The formula enables previously paid duty on the constituent elements of the blend to be taken into account. The terms used in the formula, volume, blending rate, excise equivalent rate and previously paid duties are defined. [Schedule 1, item 2]

1.11 The subsection 6G(2) amendments broaden the reference from gasoline to goods classified to item 11 or 12 (petroleum products or blended petroleum products) of the Excise Tariff Schedule to take into account any of the products with which fuel ethanol may be blended. The amendments also specify that, if the petroleum product has a lead content, it does not exceed 13 milligrams per litre, to ensure calculation at the appropriate unleaded petrol rate.

1.12 Consequential amendments omit references to item 2 (the previous classification of fuel ethanol) and insert a reference to item 12 in subsection 6G(4). This subsection sets out the previously paid duties to be taken into account where goods that are constituent elements of a blended product include another blended product. [Schedule 1, items 1, 3 and 4]

Application and transitional provisions

1.13 The amendments are taken to have effect on and from 18 September 2002.

Consequential amendments

1.14 Complementary amendments to the Customs Tariff Act 1995 for customs duty on imported fuel ethanol are being addressed through the Customs Tariff Amendment Bill (No. 2) 2003.

Chapter 2 Regulation impact statement

Policy objective

2.1 The removal of the fuel tax exemption and the imposition of excise and customs duty at a rate equivalent to petroleum on denatured ethanol for use as fuel was introduced as part of a package of measures in the context of reform of the Australian sugar industry. The biofuels industry depends on Australian agricultural production for its feedstock and builds expertise in Australia's agricultural industries.

2.2 This measure is part of the Government's strategy to encourage the production and use of biofuels in transport over time. At the same time as bringing fuel ethanol into the excise regime on an equivalent basis to petroleum, the Government introduced a 12-month production subsidy for existing and new domestic fuel ethanol producers. This provided a targeted means of maintaining the use of biofuels in transport in Australia. The Government has announced ongoing arrangements for fuel ethanol in the 2003-2004 Federal Budget.

Implementation options

2.3 The measure was announced on 12 September 2002 to take effect from 18 September 2002 and the excise changes were implemented by an Excise Tariff Proposal, the usual mechanism for immediate implementation of government policy altering excise rates for items classified in the Excise Tariff Act 1921, pending introduction of a validation bill amending that Act.

Assessment of impacts

2.4 The major impact of the removal of the excise exemption and the imposition of an excise rate equivalent to petroleum is the liability of current producers of denatured ethanol for use as fuel to pay excise duty (currently 38.143 cents per litre) on a product previously classified in the Excise Tariff Schedule at a 'Free' rate.

2.5 A 12-month production subsidy of 38.143 cents per litre has been available for domestic producers of fuel ethanol from the same date as the imposition of the excise duty, 18 September 2002. The production subsidy is administered by the Department of Industry, Tourism and Resources.

2.6 In addition, there are minor compliance cost impacts in meeting Excise Acts requirements on current and new producers of denatured ethanol and blenders of denatured ethanol and petroleum products.

Impact group identification

2.7 The domestic fuel ethanol industry involves a very small number of companies. There are 2 groups identified as impacted by the imposition of excise duty on fuel ethanol. These are:

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producers of fuel ethanol, who are required to pay excise duty and may incur minor compliance costs for licences where these are not already in place; and

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other entities dealing with denatured ethanol where the liability for the duty has not been discharged. In the main this affects blenders of denatured ethanol with other petroleum products. Such entities will incur minor costs in complying with Excise Acts requirements for obtaining licences and movement permissions for dealing with the fuel ethanol.

2.8 Consumers are not expected to experience an increase in petrol prices from this measure. The measure changes the administrative mechanism to continue to deliver what is effectively excise free fuel ethanol. The petrol market is very price competitive and will not use components that do not lead to a price competitive product.

Compliance costs

2.9 The obligation to pay the excise duty falls on producers of denatured ethanol for use as fuel as the liability for excise duty occurs at the point of production. The Excise Acts require manufacturers of excisable goods to be licensed. The current producers of denatured ethanol are already licensed under the Excise Acts.

2.10 For current producers of denatured ethanol there is a minor adjustment required to computer programs to reflect the change in classification of denatured ethanol for use as fuel from Excise Tariff Schedule item 2(R), which relates to alcohol products, to item 11(K), relating to petroleum products.

2.11 Minor compliance costs will be incurred in the setting up of payment procedures where these are not already in place. It is estimated by the ATO that these compliance costs would not exceed $200.

2.12 Any new producer of denatured ethanol for supply to the fuel market will be required to apply for a licence from the ATO at a cost estimated at about $20 for completing the application form and obtaining the licence. There is no fee for the licence itself. A security of $200 is required for the licence and is returned upon cancellation of the licence provided compliance requirements have been met, or after 3 years of demonstrated compliance.

2.13 Under the excise arrangements, before the excise liability is discharged excisable goods may be moved only to licensed premises and with permission from the ATO. If blenders receive denatured ethanol under this arrangement to blend with other petroleum products before excise liability is discharged, they will be required to have an appropriate licence and permission. There is no cost for the licence or permission apart from the minor cost of arranging to obtain these.

Administration costs

2.14 Administration costs for the ATO are negligible as administrative and reporting arrangements are already in place for denatured ethanol for use as fuel under the current item 2(R) classification in the Excise Tariff Schedule. Some adjustments in client arrangements between alcohol and petroleum products management systems may be needed but again the costs involved should be negligible.

Financial impact

2.15 Revenue impact from excise duty on denatured ethanol for use as fuel is estimated to be $26 million in 2002-2003 and $34.4 million in 2003-2004. This revenue is offset by the domestic production subsidy.

Consultation

2.16 The ATO has been consulting with the companies affected by the measure concerning the administrative arrangements. There have been no significant problems raised in these consultations.

Summary

2.17 The impact of the imposition of excise duty on fuel ethanol is offset by the domestic production subsidy arrangements, effectively maintaining excise free fuel ethanol. The net costs to producers of fuel ethanol are in implementing minor compliance and administration changes.