House of Representatives

Second Reading Speech

Mr Shorten (Assistant Treasurer and Minister for Financial Services and Superannuation)

I move:

That this bill be now read a second time.

This bill is one of a number of bills that together introduce fuel tax reforms first announced by the former Howard government in its 2003-04 budget.

The bills phase in the new taxation arrangements in respect of liquefied petroleum gas, liquefied natural gas and compressed natural gas. The bills also clarify the tax treatment of renewable fuels, namely ethanol, methanol and biodiesel, and correct a legislative anomaly that was wilfully ignored by the former Howard government, providing much-needed certainty for the renewable fuels industry.

Over time, the rate of excise applied to LPG, LNG and CNG will be calculated on the basis of the energy content of those fuels, discounted by 50 per cent to recognise the fuel security, potential environmental, and regional development benefits arising from their use. These arrangements will be phased in incrementally over a five-year period to ensure that industry and users of the fuels have sufficient time to adjust to the new system.

According to the ACCC's December 2010 report on the petroleum industry, Australia enjoyed the lowest automotive LPG prices in the OECD. The introduction of taxation on LPG will bring Australia into line with most other OECD countries.

This bill also includes a commitment that renewable fuels (ethanol, methanol and biodiesel) do not pay effective excise. This commitment reflects discussions with our crossbench colleagues and industry on these longstanding reforms. It will mean that these renewable fuels will play an important part in Australia's transition to a low-carbon economy and future energy security.

The taxation and grant arrangements that currently apply to ethanol, namely application of fuel taxation to both imported and domestically produced ethanol with a grant for domestically produced ethanol, will be maintained for a period of 10 years before a review is undertaken. Similarly, the taxation arrangements for biodiesel and renewable diesel, and the availability of the energy (cleaner fuels) scheme grants, will remain in place before a review is undertaken after 10 years.

The government will also exclude methanol, used in certain racing vehicles, from the new regime because of its limited use and small market. This recognises the concerns of the industry.

While the government has not made any final decisions about the treatment of fuel in the carbon price arrangements, a principle of carbon pricing is to apply a price that reflects the relative emissions of different activities.

The government notes the claims of the LPG industry that LPG generates 13 per cent less emissions than regular petrol and the low-carbon opportunities of ethanol, methanol, biodiesel and other alternative fuels. The government is committed to addressing the relative emissions generated by those fuels as part of its consideration of arrangements for fuel under the carbon price.

The support of the parliament for this legislation is crucial.

Under the former government's legislation that will apply unless new legislative arrangements are made, the taxation arrangements for both imported and domestically produced ethanol will both jump to 7.6c per litre from 1 July 2011. This will mean that on this date the net excise on domestic ethanol will rise by 7.6c per litre and the duty on imported ethanol will fall by more than 30c per litre. In addition, the tax on imported and domestic ethanol will continue to rise each year by more than 7.6c per litre until they are both taxed at the petrol rate of 38.143c per litre. Biodiesel will also be overtaxed from 1 July 2011 if the bills are not passed. The consequences of these arrangements would be devastating for industry. The Gillard Government is committed to completing the unfinished business of the Howard government and to acting in the national interest. It is imperative to have these bills passed to avoid the unintended tax consequences on the ethanol and biodiesel industries.

Once enacted, the legislation will provide certainty for alternative fuels taxation so that industry will be able to make decisions, confident in the knowledge of the tax arrangements that apply.

This is in stark contrast to the position of the Liberal-National coalition.

In May 2003 the then Treasurer, Peter Costello, announced the alternative fuels tax arrangements as long-term, important reforms-saying Australia must have a more consistent and sustainable fuel tax regime.

In December 2003 the then Prime Minster, John Howard, said the reforms will result in a more consistent and neutral tax regime for fuels used in vehicles. The then Deputy Prime Minister, John Anderson, at the time emphasised the importance of investment certainty.

This stance was reaffirmed by the coalition as recently as the 2010 federal election campaign. But after eight years of being coalition policy, on 28 January this year, the Leader of the Nationals made it clear that the opposition now opposed these once bipartisan fuel tax reform arrangements. This is despite the fact that the coalition was happy to include the positive revenue implications of this policy in the budget forward estimates from the time this policy was first announced.

In the face of this regrettable opportunistic policy reversal by the coalition, the government is determined to get on with the job, mindful of the new paradigm, but determined to act in the national interest.

It is critical that the bills are considered promptly in the parliament. Royal Assent is necessary before 1 July 2011 to prevent the changes legislated for ethanol, biodiesel and renewable diesel by the Howard government coming into operation on 1 July 2011. These changes would seriously undermine Australia's renewable fuels manufacturing industry.

These bills have been developed following an extensive consultation process with industry that included the release for comment of a discussion paper and release of exposure draft legislation.

The bills will also give effect to the government's decision announced on 24 January 2011 at a cost of $26 million, to defer the start date of the new taxation arrangements for alternative fuels until 1 December 2011. This decision reflects the government's commitment to listen and respond to concerns raised by industry and provides additional time, particularly for the gaseous fuels industry, to prepare for these changes.

The new tax arrangements contained in the bills that apply to the taxation of LPG have been developed in close consultation with the LPG industry to ensure that industry compliance costs are minimised to the greatest extent possible.

These bills also address industry concerns about the fuel tax credit arrangements applying to alternative fuels when blended with other fuels. The bills set out rules to work out fuel tax credit entitlements for blends of fuels and ensures that current arrangements are maintained.

The application of fuel tax to alternative fuels by the package of bills recognises that ethanol, biodiesel and renewable diesel are already in the excise and customs system and generally qualify for existing grants. The bills ensure that these current arrangements will continue, with a review after ten years.

Grants currently payable under the Energy Grants (Cleaner Fuels) Scheme Act 2004 will continue to be payable from 1 July 2011. Renewable diesel and biodiesel will continue to have fuel tax applied at the full fuel tax rate of 38.143 cents per litre with cleaner fuels grants offsetting the fuel tax.

Methanol and the gaseous fuels (compressed and liquefied natural gas and liquefied petroleum gas) are not in the fuel tax system at present. Methanol will remain outside the system.

CNG, LNG and LPG will enter the fuel tax system from 1 December 2011 and be covered by new arrangements. These set duty on a net basis without applying an offsetting grant against duty payable and set the rates of fuel tax on CNG and LNG in cents per kilogram rather than on volumetric terms. These changes were supported during consultations as industry considered that they would reduce business compliance costs.

These improvements to the former Howard government policy reflect a government that is willing to listen. The Gillard government is committed to getting this policy right, and to continuing to monitor the policy settings over time.

Accordingly, the Gillard government will review the operation of the legislation after 30 June 2015 as it applies to LNG, CNG and LPG. At this time, a review of this longstanding policy will be timely given broader energy issues, including a carbon price. It would also be an appropriate time to analyse industry compliance costs, particularly in the LPG sector. Such a review can also consider issues such as the size of the alternative fuels sector and the market growth of these industries.

A separate later review of the taxation and grant arrangements that apply to ethanol, biodiesel, renewable diesel and methanol will be undertaken by the government after 30 June 2021. The exclusion of methanol from duty will also be reviewed at this time.

Full details of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 are contained in the combined explanatory memorandum.

Debate adjourned.