ATO Interpretative Decision

ATO ID 2006/225

Excise

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Issue

Can a blend of fuels and other substances be used as fuel in an internal combustion engine for the purposes of subitem 10.30 of the Schedule to the Excise Tariff Act 1921 (the Schedule), if the blend would cause material damage to an engine within a short period (such as a day or 100 kilometres)?

Decision

No. A blend of fuels and other substances cannot be used as fuel in an internal combustion engine for the purposes of subitem 10.30 of the Schedule, if the blend would cause material damage to an engine within a short period (such as a day or 100 kilometres).

Facts

A licensed excise manufacturer blends fuel with other substances.

The resultant blend is intended for various uses. However the blend is not intended for use in an internal combustion engine.

If the blend is used in an internal combustion engine, it is capable of propelling the vehicle for a short distance. However, the use of the blend would result in material damage to the engine within a short period of time.

Reasons for Decision

Subitem 10.30 of the Schedule covers blends of one or more fuels (with our without other substances), not covered elsewhere in item 10, that can be used as fuel in an internal combustion engine (other than goods covered by section 77J of the Excise Act 1901).

The expression 'can be used as fuel in an internal combustion engine' does not appear anywhere else in the Excise Tariff Act or related Acts.

Nor is the expression defined in the legislation. It therefore takes its ordinary meaning.

The expression 'can be used as fuel in an internal combustion engine' may be contrasted with the expressions 'for use as fuel in an internal combustion engine' and 'otherwise than for use in an internal combustion engine', both of which appeared frequently in the Excise Tariff Act prior to the 1 July 2006 amendments.

While the phrase 'for use in' suggests a connection with the intended use of the product, the phrase 'can be used as fuel' suggests an objective test based on the physical properties of the product. This view is supported by the Explanatory Memorandum which explained the amendments to the Excise laws that apply from 1 July 2006. Paragraph 1.113 of the Explanatory Memorandum to the amending Excise laws and Excise tariff bills explains the intent behind subitem 10.30 of the Schedule as follows:

Subitem 10.30 in the excise tariff applies to blends that can be used as fuel in an internal combustion engine [Schedule 1, item 45, subitem 10.30 in the table]. This test is a practical, objective test of whether the blend can be used in an internal combustion engine, not whether the blend is designed or intended to be used in that way. For example, paint can be manufactured by blending toluene (subitem 10.25) with other substances including pigments. An objective test says that paint cannot be used in an internal combustion engine. Paint is therefore not classified to subitem 10.30 (or any other item).

The difficulty is that not all blends are as clear-cut as paint.

In the case Mobil Oil Australia Limited v. David Read (Commissioner of Taxes) (Unreported, NT Supreme Court, Thomas J, 28 February 1996), the court considered the meaning of the phrase 'capable of use' which is similar in meaning to 'can be used'.

The Court considered the meaning of the following phrase which appeared in subsection 3(1) of the Business Franchise Act (NT) ('BFA') (now repealed):

"petroleum products" means -

(a)

a petroleum or shale product used or capable of use in propelling a diesel engined road vehicle; or ....

The plaintiff, Mobil Oil, sought a declaration from the court that the expression 'capable of use in propelling a diesel engined road vehicle' did not apply to one of its imported products, LFO-12, and therefore the product was not a 'petroleum product' for the purposes of the BFA. If LFO-12 had been found to be a petroleum product, Mobil Oil would have been liable to pay an additional licence fee of about $252,400.

In his reasons for decision, Thomas J makes the following findings of fact (at paragraph 23):

(1)

There is no evidence LFO-12 has been used in the Northern Territory or anywhere else in Australia to propel a diesel engined road vehicle.

(2)

The reason it is unsuitable is not because of local conditions but because of the nature of the composition of LFO-12.

(3)

LFO-12 can be used to start a diesel engined road vehicle, however, on the affidavit evidence I have already accepted it will damage the engine if used for more than short periods.

(4)

If LFO-12 is blended with other substances and then actually used as distinct from being capable of being used to propel a diesel engined road vehicle, then it will be subject to the application of the Business Franchise (Tobacco) Amendment Act under the first part of the definition of petroleum products, because it has been used in propelling a diesel engined road vehicle.

(5)

LFO-12 is, on the evidence, unsuitable to use to propel a diesel engined road vehicle because of the long term damage it causes to those vehicles.

Thomas J concluded that 'capable of use' must include fitness for use, on the basis of the ordinary meaning of the words in the definition. Thomas J rejected the argument of counsel for the NT Commissioner that the test was intended to be an objective one and therefore did not import any considerations of suitability or fitness which are subjective and liable to uncertainty. His Honour states (at paragraph 34):

On the facts as found in this case I am not satisfied on the balance of probabilities that LFO-12 is fit for use in a diesel engined road vehicle. It is not practical for use in a diesel engined road vehicle without adversely affecting the performance and condition of the diesel engine.

We can infer from the reasoning of Thomas J that an objective test does not exclude considerations of fitness for use. This is a reasonable position, as fitness for use as fuel in an engine can be established on the basis of objectively observable criteria, such as performance and engine damage.

We also find support for interpreting the expression 'can be used as fuel in an internal combustion engine' as meaning that the product must be at least suitable for use as fuel for more than a limited period of time without causing engine damage. Thomas J did not refer to engine modifications in his findings of fact or his conclusions.

Thomas J did not elaborate on the meaning of a 'short period' in this context. The affidavit evidence of expert witnesses also uses the expressions 'short period' and 'extended period' without further elaboration. It is reasonable to infer that 'extended period' refers to a period of service rather than merely a test period - a period of service might be measured in terms of days or hundreds of kilometres. A 'short period' would be considerably less - perhaps less than a day or a hundred kilometres.

Given the wording of subitem 10.30 of the Schedule, its purpose as outlined in the Explanatory Memorandum to the amending provisions, and the abovementioned views of Thomas J. in interpreting a similar phrase, it may be concluded that a blend of fuel with other substances cannot be used as fuel in an internal combustion engine if it is likely to cause material damage to the engine within a short period.

Legislative References:
Excise Tariff Act 1921
   Schedule
   item 10
   subitem 10.25
   subitem 10.30

Case References:
Mobil Oil Australia Ltd v. David Read
   (Commissioner of Taxes) (Unreported, NT Supreme Court, Thomas J, 28 February 1996)
   BC 9600432

Other References:
Explanatory Memorandum to the Excise Tariff Amendment (Fuels) Bill 2004

Keywords
Excisable goods manufacturer
Fuel blending
Not for use in an internal combustion engine

Business Line:  Indirect Tax

Date of publication:  18 August 2006

ISSN: 1445-2782