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Taxation of Alternative Fuels Legislation Amendment Bill 2011



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ISSN 1328-8091

Parliament of Australia Departmentof Parliamentary Services

This Digest replaces an earlier version dated 17 June 2011.

Contents

Purpose .................................................................................................................................................... 3

Background .............................................................................................................................................. 3

Fuel Tax Inquiry ................................................................................................................................... 4

Howard Government’s proposals ....................................................................................................... 4

Basis of policy commitment ..................................................................................................................... 5

2010-11 Budget................................................................................................................................... 6

13 May 2010: elaboration of 2010-11 Budget announcement .......................................................... 6

7 September 2010: further extension of phasing for ethanol ............................................................ 7

15 October 2010: release of discussion paper ................................................................................... 7

24 January 2011: exposure draft of legislation ................................................................................... 7

Committee consideration ........................................................................................................................ 9

Policy position of non-government parties/independents...................................................................... 9

Position of major interest groups .......................................................................................................... 10

Financial implications ............................................................................................................................. 11

Key provisions ........................................................................................................................................ 12

Schedule 1—Amendments ............................................................................................................... 12

Part 1—Excise Act 1901 ............................................................................................................... 12

Part 2—Fuel Tax Act 2006 ........................................................................................................... 13

Part 3—Product Grants and Benefits Administration Act 2000 .................................................. 15

BILLS DIGEST NO. 132, 2010-11 27 June 2011

Taxation of Alternative Fuels Legislation Amendment Bill 2011

Richard Webb Economics Section

Part 4—Taxation Administration Act 1953 .................................................................................. 15

Concluding comments ........................................................................................................................... 15

Taxation of Alternative Fuels Legislation Amendment Bill 2011 3

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Taxation of Alternative Fuels Legislation Amendment Bill 2011

Date introduced: 12 May 2011

House: House of Representatives

Portfolio: Treasury

Commencement: Clauses 1 to 3—and anything else in the Bill not covered by the table in clause 2—commence on Royal Assent. Schedules 1 and 2 commence on 1 December 2011 but will not commence if three items in three proposed Bills do not commence before 1 December 2011. These items are:

• Part 1 of Schedule 1 to the Excise Tariff Amendment (Taxation of Alternative Fuels) Act 2011

• Part 1 of Schedule 1 to the Customs Tariff Amendment (Taxation of Alternative Fuels) Act 2011,

and

• Schedule 1 to the Energy Grants (Cleaner Fuels) Scheme Amendment Act 2011.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill's home page, or through http://www.aph.gov.au/bills/. When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.

Purpose

The Taxation of Alternative Fuels Legislation Amendment Bill 2011 (the Bill) is one of four related Bills. The other three Bills are the Energy Grants (Cleaner Fuels) Scheme Amendment Bill 2011, the Excise Tariff Amendment (Taxation of Alternative Fuels) Bill 2011, and the Customs Tariff Amendment (Taxation of Alternative Fuels) Bill 2011. Together, the Bills have two main purposes. The first purpose (which the Bill mostly does) is to establish the framework for the imposition of excise on certain petroleum-based fuels which are now excise-free, where the proposed excise rates will be ‘discounted’ relative to the ‘general’ rate of excise which applies to petrol and diesel. The second purpose is to provide for the continued subsidisation of the use of renewable fuels. This Bills Digest should therefore be read in conjunction with the Digests for those Bills.

Background

Excise is applied to some fuels used in transport and at different rates. The ‘general’ rate of excise is 38.143 cents per litre (cpl), which applies to petrol and diesel.

So-called ‘alternative’ fuels—that is, alternatives to petrol and diesel—are taxed in different ways. Alternative fuels can be divided into those that are petroleum-based and those that are renewable.

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Petroleum-based fuels are compressed natural gas (CNG), liquefied natural gas (LNG), and liquefied petroleum gas (LPG), all of which are excise-exempt. Methanol is also excise-exempt.

Renewable fuels are biodiesel, ethanol and methanol. The rate of excise on biodiesel, renewable diesel, and ethanol is 38.143 cpl. A grant of 38.143 cpl may be payable on biodiesel and renewable diesel under the Energy Grants (Cleaner Fuels) Scheme.1 A production subsidy of 38.143 cpl is payable on ethanol. The effect of the grants for biodiesel and renewable diesel and the ethanol production subsidy is to reduce the so-called ’effective’ excise rate to zero.

Fuel Tax Inquiry

The taxation of transport fuels reflects a range of historical and other factors and lacks an overriding rationale.2 The Fuel Tax Inquiry (the Inquiry) injected some logic by recommending that all liquid fuels be included in the fuel taxation system—including ethanol, biodiesel, LNG, LPG, and CNG—and that fuel tax rates be based on their relative energy content.3

Howard Government’s proposals

The Howard Government proposed implementing some of the Inquiry’s recommendations. Notably, the Howard Government did not change the excise rates on petrol or diesel. Rather, the same rate continued to apply to both fuels even though diesel has a higher energy content per litre than petrol. However, the Howard Government accepted the recommendation that fuels that were excise-exempt (LPG, CNG and LNG) be brought into the excise net. It also decided to ‘broadband’ fuels into three excise categories based on energy content (with a separate category for CNG). Finally, the Howard Government decided that the excise rates on alternative fuels would be half what they would be if rates were based solely on energy content—the so-called ‘discount’ for alternative fuels—where the discount is relative to the general rate of excise. These rates were to apply from 1 July 2015. Table 1 summarises the Howard Government’s proposals.

1. Details of his scheme can be found on the Australian Taxation Office website; viewed 14 June 2011, http://www.ato.gov.au/businesses/pathway.aspx?sid=42&pc=001/003/044, 2. For a brief history of excise in Australia, see D James, ‘’Beer and cigs up!’ A recent history of excise in Australia’, Background Paper, no. 5, Parliamentary Library, Canberra, 1995-96, viewed 17 May 2011,

http://www.aph.gov.au/library/pubs/bp/1995-96/96bp05.pdf and R Webb, ‘Excise taxation: developments since the mid-1990s’, Research brief, no. 15, Parliamentary Library, Canberra, 2005-06, viewed 17 May 2011, http://www.aph.gov.au/library/pubs/rb/2005-06/06rb15.pdf 3. Fuel tax inquiry report, Commonwealth of Australia, Canberra, March 2002, p. 29, viewed 17 May 2011, http://fueltaxinquiry.treasury.gov.au/content/report/default.asp

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Table 1: Fuel excise rates from 1 July 2015

Fuel type

Energy content (megajoules/litre) Excise rate (cents/litre)

Discounted rate

High-energy content fuels: petrol, diesel, gas to liquids, biodiesel Above 30 38.143

19.1 (biodiesel)

Mid-energy content fuels: liquefied petroleum gas, liquefied natural gas, ethanol, dimethyl ether Between 20 and 30 25 12.5 (all)

Low-energy content fuels: methanol Below 20 17

8.5 (methanol)

Other: compressed natural gas

Between 38 and 41 (megajoules per cubic metre) 38.0 (cents per

cubic metre)

19.0 (cents per cubic metre)

Source: Australian Government, Securing Australia's Energy Future, Canberra, 2004, p. 96.

The Howard Government proposed phasing in these rates over several years by means of excise credits which are payable under the Fuel Tax Act 2006 (the Fuel Tax Act). The credits would be reduced over time until the ‘final’ excise rates applied from 1 July 2015 as shown in Table 2.

Table 2: Proposed effective excise rates on alternative fuels (cents per litre)

1 July 2011

1 July 2012

1 July 2013

1 July 2014

1 July 2015

Fuel High-energy content Biodiesel 3.8 7.6 11.4 15.3 19.1

Mid-energy content

Liquefied petroleum gas, liquefied natural gas, ethanol 2.5 5.0 7.5 10.0 12.5

Low-energy content

Methanol 1.7 3.4 5.1 6.8 8.5

Other

Compressed natural gas 3.8 7.6 11.4 15.2 19.0

Source: Department of Prime Minister and Cabinet, Fuel Excise Reform, Canberra, 2004. Note: rates are cents per litre except compressed natural gas, which is cents per cubic metre.

Basis of policy commitment

The Government has made several announcements regarding alternative fuels taxation. These are set out below.

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2010-11 Budget

In the 2010-11 Budget—which was introduced on 11 May 2010—the Government announced that it—like the Howard Government—would implement an energy-content-based fuel tax system, and that it would phase in the introduction of the effective excise on ethanol from 1 July 2011:

The Government will amend the 2004-05 Budget measure to introduce an energy content-based fuel excise system. This measure is estimated to have an increase in revenue of $276.5 million and an increase in expenses of $1.5 million over the forward estimates.

The excise and excise-equivalent customs duty rate for ethanol will be set at 25 cents per litre from 1 July 2011, phasing down to 12.5 cents per litre from 1 July 2015. There will be an offsetting grant payment to domestic ethanol producers that will be progressively reduced from 22.5 cents per litre on 1 July 2011 to zero by 1 July 2015. There will be no offsetting grants for excise-equivalent customs duty.

The measure will provide the Australian ethanol industry with adequate time to prepare for the forthcoming changes. 4

The estimated budgetary effect is shown in Table 3.5

Table 3: Fuel tax — amending the arrangements for fuel ethanol

Revenue ($m)

2009-10 2010-11 2011-12 2012-13 2013-14

Australian Customs and Border Protection Service

64.5 51.5 37.0

Australian Taxation office

55.0 41.0 27.5

Total

119.5 92.5 64.5

Related expense ($m)

Australian Taxation Office

3.5

-2.0

13 May 2010: elaboration of 2010-11 Budget announcement

The 13 May 2010 announcement elaborated on the 2010-11 Budget announcement.6 This included—like the Howard Government’s proposal—a 50 per cent discount for excise on alternative fuels. The announcement also confirmed that CNG, LPG, LNG, biofuels, ethanol, and biodiesel would

4. Australian Government, Budget measures: budget paper no. 2: 2010-11, Commonwealth of Australia, Canberra, 2010, p. 23, viewed 18 May 2011, http://cache.treasury.gov.au/budget/2010-11/content/bp2/download/bp2_v2.pdf 5. Ibid.

6. N Sherry (Assistant Treasurer) and M Ferguson (Minister for Resources and Energy), Government to implement 50 per cent tax discount for alternative fuels, joint media release, no. 99, 13 May 2010, viewed 20 May 2011, http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2010/099.htm&pageID=003&min=njsa&Year= &DocType=0

Taxation of Alternative Fuels Legislation Amendment Bill 2011 7

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enter the effective excise system. The 13 May 2010 announcement also extended the phasing in period for ethanol:

As part of the implementation of the energy content based taxation of all fuels originally announced in the 2003-04 Budget, the Government has announced a new staged phasing in of the regime to address the sudden loss in the relative tax advantage of domestic ethanol compared to imported ethanol that would have occurred under the policy announced by the previous Government.

7

7 September 2010: further extension of phasing for ethanol

On 7 September 2010, the Government announced that it would extend the transition period for ethanol beyond that announced on 11 May 2010 and confirmed on 13 May 2010.8 Under this proposal, assistance will be provided for ethanol until 1 July 2020. Table 4 shows this proposal.

Table 4: Proposed effective excise rates on ethanol (cents per litre)

1 July 2011 1 July 2012

1 July 2013

1 July 2014

1 July 2015

1 July 2016

1 July 2017

1 July 2018

1 July 2019

1 July 2020

1.25 2.5 3.75 5 6.25 7.5 8.75 10 11.25 12.5

Source: Treasury, Implementation of alternative fuels taxation policy. Discussion paper, Canberra, 2010, viewed 23 May 2011, http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=1845

15 October 2010: release of discussion paper

On 15 October 2010, the Government announced the release of a draft discussion paper.9 The Government released this to allow interested parties to comment on the Government’s proposals. The closing date for comments was 12 November 2010.

24 January 2011: exposure draft of legislation

On 24 January 2011, the Assistant Treasurer released exposure draft legislation and draft explanatory information for the taxation of alternative fuels.10 The media release stated:

7. Ibid.

8. There was no separate media release for this announcement. However, it is referred to in B Shorten (Assistant Treasurer and Minister for Financial Services and Superannuation), Release of discussion paper on alternative fuels taxation, media release, 15 October 2010, viewed 18 May 2011, http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2010/003.htm&pageID=003&min=brs&Year= &DocType=

9. Ibid.

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The draft legislation is consistent with the Government's long standing plan to bring alternative fuels into the fuel taxation regime, with a 50% tax discount compared to regular petrol on an energy equivalent basis. It reflects the Howard Government policy announced in the 2004-05 Budget, as well as the changes announced by the Government in the 2010-11 Budget and as part of the agreement with independent MPs, to recognise the special characteristics of the ethanol industry.

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The Government also confirmed its intention to delay the introduction of taxation on alternative fuels by five months from 1 July 2011 until 1 December 2011. The cost of this delay, and other changes, is shown below.

Table 5: Alternative fuels: cost of delayed introduction of taxation and other changes

Revenue ($m)

2010-11 2011-12 2012-13 2013-14 2014-15

Australian Customs and Border Protection Service - 2.0 - - -

Australian Taxation Office - -240.0 -199.0 -135.0 -69.0

Total - -238.0 -199.0 -135.0 -69.0

Related expense ($m)

Australian Taxation Office - -212.0 -199.0 -135.0 -69.0

The Government will delay the introduction of excise and excise-equivalent customs duty on alternative fuels until 1 December 2011 in response to representations from industry to allow additional time to implement the tax changes.

The Government will also simplify the arrangements by applying transitional tax rates to gaseous fuels and biodiesel at the scheduled effective tax rates during the transition to 2015-16, instead of imposing tax at the final rate and providing offsetting production grants.

The Government will also make several other minor changes, including revising the unit of measurement of compressed and liquefied natural gas for taxation purposes from cents per litre to cents per kilogram, consistent with general industry practice.

These changes are expected to reduce the fiscal balance by $26 million over the forward estimates period.

10. B Shorten (Assistant Treasurer and Minister for Financial Services and Superannuation), Release of exposure draft legislation for the taxation of alternative fuels, media release, no. 17, 24 January 2011, viewed 23 January 2011, http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/017.htm&pageID=003&min=brs&Year= &DocType=0

11. Ibid.

Taxation of Alternative Fuels Legislation Amendment Bill 2011 9

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Further information can be found in the press release of 24 January 2011 issued by the Assistant Treasurer. 12

Table 6 summarises the Government’s proposals.

Table 6: Summary of proposed effective excise rates for alternative fuels

Fuel Effective excise rate Excise base Date of effect

CNG 26.13 cpk 1 July 2015

LNG 26.13 cpk 1 July 2015

LPG 12.5 cpl 1 July 2015

Biodiesel 0 cpl Note a

Ethanol 12.5 cpl Note b

Methanol 0 cpl Note c

Renewable diesel 0 cpl Note a

Notes:

cpk: cents per kilogram cpl: cents per litre

(a) Excise of 38.143 cpl less grant of 38.143 cpl under the energy grants cleaner fuels scheme. Subject to review after 30 June 2021. (b) Ethanol is now subject to excise of 38.143 cpl less a production subsidy of 38.143 cpl. The 12.5 cpl is to come into force on 1 July 2020. Subject to review after 30 June 2021. (c) Methanol is excise-free

Committee consideration

The Bill was referred to the House of Representatives Standing Committee on Economics for inquiry. The Committee reported on 1 June 2011. Details of the inquiry are at http://www.aph.gov.au/house/committee/economics/TaxingFuels/index.htm

Policy position of non-government parties/independents

As noted above, the Howard Government initially proposed subjecting alternative fuels to excise. However, on 28 January 2011, the leader of the Nationals announced that the Coalition would oppose the Bill.13

The Independent member for Kennedy, Mr Bob Katter, has reportedly lobbied to preserve incentives for ethanol production.14

12. Australian Government, Budget measures: budget paper no. 2: 2011-12, Commonwealth of Australia, Canberra, 2008, p. 14, viewed 23 May 2011, http://cache.treasury.gov.au/budget/2011-12/content/download/bp2_revenue.pdf

13. W Truss (Leader of the Nationals), Labor’s death knell for Australian alternative fuels industry, press release, 28 January 2011, viewed 23 May 2011, http://www.warrentruss.com/release.php?id=1687

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The Independent Member for Denison, Mr Andrew Wilkie, opposes the introduction of excise on LPG.15

The Independent member for New England, Mr Windsor, reportedly said he is concerned about the impact of the tax on LPG and that ethanol should not be subject to excise.16

Position of major interest groups

The Australasian Convenience and Petroleum Marketers Association opposes the Bill on several grounds including the compliance burden that it will impose on small-sized to medium-sized businesses, and the alleged negative effects on local communities, especially in regional areas.17

The Australian Institute of Petroleum has expressed the following view (among others):

AIP supports the principle that all fuel used for road transport use ‐ including liquid fuels (conventional fuels and biofuels) and gaseous fuels (LPG, LNG and CNG) ‐ should be taxed on a comprehensive and neutral basis, to ensure the most efficient and robust tax system for road transport fuels.

∙ AIP supports all road transport fuels being brought within the fuel excise system so that all fuels (equitably) will need to comply with relevant fuel quality and environmental performance standards.

∙ AIP supports energy content as an appropriate and neutral basis for taxing all transport fuels.

∙ AIP supports relief from the burden of excise being provided for ‘business inputs’ to production. 18

The Australian Lot Feeders’ Association (ALFA):

... believes that given the significant and distortionary subsidy assistance and protection provided to ethanol manufacturers by the current fuel excise arrangements over a number of

14. S Ryan, ‘LPG tax to drive up taxi fares’, The Australian, 13 May 2011, viewed 30 May 2011, http://www.theaustralian.com.au/business/lpg-tax-to-drive-up-taxi-fares/story-e6frg8zx-1226054967128 15. A Wilkie, Wilkie makes a stand on Tassie fuel prices, press release, 27 May 2011, viewed 30 May 2011, http://www.andrewwilkie.org/content/index.php/aw/press_releases/ 16. L Taylor, ‘Government clings to income from fuel tax’, Sydney Morning Herald, 23 March 2011, viewed 31 May 2011,

http://www.smh.com.au/national/government-clings-to-income-from-fuel-tax-20110321-1c3w7.html#ixzz1NnM0skk2 17. R Zivkusic, ‘Alternative fuels tax criticised’, Australian Transport News, 13 May 2011, viewed 31 May 2011, http://www.fullyloaded.com.au/industry-news/articleid/73706.aspx 18. Australian Institute of Petroleum, Submission to the House Standing Committee on Economics, Inquiry into the

taxation of alternative fuels, 20 May 2011, viewed 31 May 2011, http://www.aph.gov.au/house/committee/economics/TaxingFuels/subs/sub03.pdf

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years, such manufacturers should be required to pay the full 25c /litre excise from December 2011, as originally intended by the Howard Government. 19

Biofuels Association Chief Executive, Heather Brodie, applauded the decision to extend the grants for ethanol, biodiesel and renewable diesel while methanol retains its untaxed status.20

LPG Australia opposes the imposition of excise on LPG tax partly on the grounds that the proposal seems to be inconsistent with the Government’s intent to reduce carbon dioxide emissions.21

Smorgon Fuels has welcomed, among other things, the extension of the grant arrangements for biodiesel.22

Financial implications

According to the Explanatory Memorandum, the Bill (and the three related Bills) will result in a gain to revenue over the forward estimates of $518.5 million.23

Table 7 : Financial impact ($ millions)

2011-12 2012-13 2013-14 2014-15 16.5 102 166 234

The introduction of taxation of LPG, LNG and CNG will result in some compliance costs.

19. Australian Lot Feeders’ Association, Submission to the House Standing Committee on Economics, Inquiry into the taxation of alternative fuels, 20 May 2011, viewed 31 May 2011, http://www.aph.gov.au/house/committee/economics/TaxingFuels/subs/sub02.pdf

20. S Ryan, op. cit. 21. LPG Australia, Submission to the House Standing Committee on Economics, Inquiry into the taxation of alternative fuels, 25 May 2011, viewed 31 May 2011, http://www.aph.gov.au/house/committee/economics/TaxingFuels/subs/sub04.pdf

22. Smorgon Fuels, Submission to the House Standing Committee on Economics, Inquiry into the taxation of alternative fuels, 20 May 2011, viewed 31 May 2011, http://www.aph.gov.au/house/committee/economics/TaxingFuels/subs/sub01.pdf

23. Explanatory Memorandum, Taxation of Alternative Fuels Legislation Amendment Bill 2011, Excise Tariff Amendment (Taxation of Alternative Fuels) Bill 2011, Customs Tariff Amendment (Taxation of Alternative Fuels) Bill 2011 and Energy Grants (Cleaner Fuels) Scheme Amendment Bill 2011, p. 4.

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Key provisions

Schedule 1—Amendments

Part 1—Excise Act 1901

Section 4 of the Excise Act 1901 (the Excise Act) contains definitions. LPG, when used as a fuel in an internal combustion engine, is primarily used to power transport vehicles such as taxis. Item 2 inserts into subsection 4(1) a definition of ‘excisable LPG use’. The thrust of this definition is that excisable LPG use is when LPG is used as a fuel in an internal combustion engine. However, excisable LPG use does not include use in forklifts.

Items 3 and 33 insert an identical definition of LPG, the former into subsection 4(1) of the Excise Act and the latter into section 110-5 of the Fuel Tax Act. Paragraph 1.31 of the Explanatory Memorandum describes LPG and its uses.24

Item 4 inserts a definition of ‘LPG remission’. This is a rebate of excise duty on LPG because the LPG is not intended to be used for an excisable LPG use. Such a definition is necessary because LPG used for certain purposes is not eligible for a rebate whereas in other cases, the remission is automatic. The Explanatory Memorandum states:

The Excise Regulations 1925 and the Customs Regulations 1926 will be amended to provide an automatic remission of duty where the LPG is supplied for a non-transport use. 25

Section 58 of the Excise Act deals with entry of goods for home consumption. In short, this means that goods that are excisable or subject to customs duty must be subjected to excise or customs duty before they can be released for use. Subsection 58(2) provides that stabilised crude petroleum, condensate or LPG must not be exported unless they have first been entered for home consumption. Subsection 58(3) provides that subsection 58(2) does not apply if these products are derived from ‘prescribed petroleum’ as defined in section 5B of the Excise Tariff Act 1921. Item 7 repeals existing subsection 58(3) and inserts a new subsection 58(3). The latter extends existing subsection 58(3) by adding that subsection 58(2) does not apply if stabilised crude petroleum or condensate obtained from prescribed petroleum are produced in a Resource Rent Tax area (also as defined in the Excise Tariff Act 1921). The definition of Resource Rent Tax area in the Excise Tariff Act 1921 is an area that is subject to the petroleum resource rent tax.26

24. Explanatory Memorandum, op. cit., p. 13. 25. Ibid., paragraph 1.34. p.14. 26. The petroleum resource rent tax applies to all petroleum projects in offshore areas (or Commonwealth adjacent areas) under the Offshore Petroleum and Greenhouse Gas Storage Act 2006, other than production licences derived

from the North West Shelf exploration permits WSA-P-1 and WA-P-28, which are subject to excise and royalty payments.

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Subsection 65(1) of the Excise Act lists the bases (for example, volume and weight) to which excise applies. Item 8 adds energy content to this subsection.

Item 10 adds two new sections—77HA and 77HB—which deal with the conditions under which CNG, LPG and LNG are excise-exempt. The thrust of these sections is that these fuels are exempt if they are used for purposes other than in road transport such as manufacturing certain fuels or forklifts. For example, subsection 77HB(b) provides that LPG and LNG are excise-exempt if they are used to manufacture petroleum condensate or stabilised crude petroleum oil (paragraph 77HB(i)) or LPG, LNG or other hydrocarbons (paragraph 77HB(b)(ii)).

Item 11 inserts two new sections: 77L and 77M. In summary, proposed section 77L imposes notification requirements on a person who (a) holds a manufacturer’s licence (and whose fuel use is therefore excise-exempt) and (b) who sells LPG to another person and (c) the LPG is subject to an excise remission. Section 77L requires the licence holder to tell the buyer, at the time of sale or supply, that the LPG is subject to remission. New subsection 77L(3) specifies what the notice must contain. Note: the purpose of new section 77L is to ensure that the buyer knows that excise may be payable on the purchase.

Proposed section 77M provides for a penalty to be imposed on persons to whom LPG is sold, and the LPG is subject to remission, but who then use the LPG for an excisable purpose.

Item 12 introduces new section 117BA into the Excise Act. This provides for a penalty to be imposed on persons who illegally and wilfully sell LPG, that is subject to remission, for an excisable use. Note: whereas proposed section 77M relates to use, proposed section 77L relates to sale.

Part 2—Fuel Tax Act 2006

The Fuel Tax Act 2006 (the Fuel Tax Act) provides credits (rebates) against the excise paid on fuels used in certain activities. The effect of a credit is to reduce the effective excise rate below its legislated rate, that is, the effective rate is the legislated rate less the credit. The Explanatory Memorandum notes that:

The purpose of the fuel tax credits is to avoid distorting business investment decisions and behaviour that would occur through taxing business inputs. 27

As a result of the credits:

... fuel tax is only effectively collected from fuel consumed in:

∙ vehicles for private use and for other private purposes;

27. Explanatory Memorandum, op. cit., paragraph 1.80, p. 23.

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∙ business use on-road in motor vehicles with a gross vehicle mass of more than 4.5 tonnes but only to the extent of the road-user charge;

∙business use in vehicles of 4.5 tonne gross vehicle mass or less used on public roads; and

∙certain industry use (for example, quarrying, manufacturing and construction industries) in off-road applications. These activities are currently entitled to a fuel tax credit of 19.0715 cpl (which is 50 per cent of the full rate of 38.143 cpl). The full rate applies to these activities from 1 July 2012.

28

The current fuel tax rates, eligible fuels, and activities for which credits can be claimed are summarised on the Australian Taxation Office website.29

Item 15 omits from section 2-1 of the Fuel Tax Act the words ‘It is intended that this Act be extended to apply to certain compressed and liquefied gaseous fuels’. As noted above, the Howard Government proposed phasing in excise on CNG, LPG and LNG over several years. The proposed mechanism was to impose excise on these fuels and then reduce credits under the Fuel Tax Act until the final rates were reached. The Government proposes a more direct (and simpler) approach by applying the proposed excise rates directly on the fuels, that is, doing away with the fuel tax credits. Consequently, the above words in section 2-1 are redundant.

Section 41-1 of the Fuel Tax Act summarises what Division 41 of the Fuel Tax Act is about. Item 17 omits certain words from section 41-1 and substitutes other words that describe the purposes for which it may be possible to claim fuel tax credits. These purposes fall into two categories. The first is when fuel is used to carry on an enterprise. The second is where fuel is supplied to a private user for domestic heating or where the fuel is packaged for use in other than an internal combustion engine or for making a taxable supply of LPG into certain kinds of tanks.

Item 21 adds new subsections 41-10(3) and 41-10(4) which deal with entitlement to a fuel tax credit when LPG is supplied into certain kinds of tanks. The Explanatory Memorandum summarises these two subsections as follows:

Unlicensed distributors of LPG that acquire LPG that is subject to excise will be entitled to fuel tax credits to allow the sale of LPG to be effectively excise-free if:

∙ supplied to businesses in tanks of 210 kilograms or less capacity for non-transport use; or

∙ supplied to residential premises for non-transport use. 30

Item 22 provides that new subsections 41-10(3) and 41-10(4) apply to fuel acquired, manufactured or imported on or after 1 December 2011.

28. Ibid., paragraph 1.81, p. 24. 29. Australian Taxation Office (ATO), Fuel tax credit rates and eligible fuels, ATO website, viewed 31 May 2011, http://www.ato.gov.au/content/00174722.htm 30. Explanatory Memorandum, op. cit., p. 11

Taxation of Alternative Fuels Legislation Amendment Bill 2011 15

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Section 43-5 of the Fuel Tax Act contains provisions setting out how applicants must calculate their fuel tax credit entitlements. Item 26 repeals subsection 43-5(2) and substitutes new subsections 43- 5(2) and 43-5(2A). The latter contains a table to be used when working out the day that is relevant to claims for credits. New subsection 43-5(2) in effect provides that for the purpose of calculating the effective fuel tax rate—that is, the excise less the credit—the calculation must be based on the day(s) from which the tax, grant or subsidy commences as per the table in new subsection 43-5(2A). Note: it is necessary for applicants to establish the correct day because under the Government’s proposals, excise rates and fuel tax credits amounts will change.

Subsection 43-5(4) of the Fuel Tax Act deals with the amount of effective fuel tax for blends of petrol and diesel. Item 27 repeals section subsection 43-5(4) while item 28 inserts a new section 43-7. The latter, which also deals with how to calculate the effective fuel tax for fuel blends is a much expanded version of subsection 43-5(4). The explanatory memorandum discusses the provision of new section 43-7 in paragraphs 1.85 to 1.89 inclusive.31

Part 3—Product Grants and Benefits Administration Act 2000

Part 10 of the Product Grants and Benefits Administration Act 2000 is headed ‘Protection of confidentiality of information’. However, Part 10 does not contain any provisions. Item 35 repeals the heading.

Part 4—Taxation Administration Act 1953

Section 250-10 of the Taxation Administration Act 1953 summarises tax-related liabilities. Subsection 250-10(2) contains an index of each tax-related liability under other Acts. Item 36 inserts into the index a penalty for using LPG for excisable LPG use.

Concluding comments

While there are differences between the Government’s proposals and the Howard Government’s proposals, there are still major similarities. They include: broadly basing some excise on energy content, although the Bill—as with the Howard Government’s proposals—does not apply this principle to petrol and diesel; subjecting CNG, LPG and LNG to excise; and providing a discount for renewable fuels. Differences between the Howard Government’s proposals and the Government’s proposals include the extension of the subsidies for biodiesel, renewable diesel, and ethanol, and the extension of fuel tax credits to unlicensed distributors of LPG.

With respect to ethanol, whereas the Howard Government proposed imposing effective excise starting on 1 July 2011, under the current proposals, the ethanol industry will have at least 15 years

31. Ibid., pp. 24-25.

16 Taxation of Alternative Fuels Legislation Amendment Bill 2011

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to adjust. The ethanol production subsidy started in 2003-04 and the Bill proposes ending this on 30 June 2019 with the subsidy then subject to review. Whilst subsidisation of ethanol production may have been justified initially as an ‘infant industry’, one can question how long the industry needs to adjust. Since its inception, the cumulative cost of the ethanol production subsidy has amounted to more than half a billion dollars as shown in Table 8. Extending the phase-in period to 30 June 2019 will further increase the cost to taxpayers.

Table 8: Ethanol production subsidy ($ millions)

2011-12 67.137

2010-11 138.596

2009-10 102.710

2008-09 79.849

2007-08 35.732

2006-07 31.880

2005-06 15.381

2004-05 8.646

2003-04 20.182

Total 500.113

Note: figures for 2010-11 and 2011-12 estimated.

Sources: Department of Industry and Department of Resources annual reports and portfolio budget statements

More broadly, the cost-effectiveness of subsidies to alternative fuels in Australia is questionable in much the same way as the Grattan Institute found that many grants, rebates and energy efficiency programs have been inefficient ways of achieving carbon dioxide emission reductions.32 The Productivity Commission, in a report issued on 9 June 2011, found that subsidising the use of biofuels such as ethanol costs $364 per tonne of carbon dioxide equivalent.33 Subsidising biofuels is thus an extremely expensive and inefficient way of reducing emissions. Further, the Productivity Commission found that increasing fuel taxes would be cheaper way—at between $57 and $59 per tonne of carbon dioxide equivalent—of reducing emissions.34

The Productivity Commission report supports a 2008 study by the Global Subsidies Initiative titled ‘Biofuels-at what cost? Government support for ethanol and biodiesel in Australia’ found:

32. J Daley, T Edis and J Reichi, Learning the hard way: Australia’s policies to reduce emissions, Grattan Institute, Melbourne, 2011, viewed 30 May 2011, http://www.grattan.edu.au/publications/077_report_energy_learning_the_hard_way.pdf

33. Productivity Commission, Carbon emission policies in key economies, Research Report, Commonwealth of Australia, Canberra, May 2011, p. xxxiii, viewed 14 June 2011, http://www.pc.gov.au/__data/assets/pdf_file/0003/109830/carbon-prices.pdf

34. Ibid., p. xxxv.

Taxation of Alternative Fuels Legislation Amendment Bill 2011 17

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This report calls into question whether such government intervention in the fuels market, and assistance to biofuel production and use, is warranted.

While biofuels can provide some benefits both through the displacement of petroleum and fossil fuels, and (under certain restrictive conditions) through reducing greenhouse gas emissions, this report demonstrates that these gains are relatively small in comparison with their subsidy cost. To measure assistance per unit of fossil fuels avoided through the use of biofuels, one has to take into account the (non-renewable) energy used to plant, fertilize and harvest (in the case of plant-derived biofuels), transport and process their feedstocks into fuel. Such a calculation yields subsidies per avoided fossil fuels (normalized to a petrol- or diesel-equivalent basis) that are in the same range as the wholesale prices of the petroleum-derived fuels that they displace. In other words, the government could have obtained the same fossil-fuel displacement by buying equivalent quantities of petroleum fuels on the open market. The substantial petroleum-based fuel input to biofuels production leads to marginal benefits in terms of energy security.

Subsidizing ethanol at current rates is generally less cost-effective than subsidizing biodiesel as a means to reduce greenhouse gas emissions. In addition, subsidizing biofuels from whole crops is less cost-effective than subsidizing biofuels from low-grade or “waste” materials, such as C-molasses, waste starch or used cooking oil. Even so, the subsidy cost of obtaining a one-tonne reduction of CO2 through biodiesel production from used cooking oil could purchase more than five tonnes of CO2-equivalent offsets on the European Climate Exchange, or more than 30 tonnes on the Chicago Climate Exchange.

35

The main beneficiary of the ethanol production subsidiary is the Manildra Group. Manildra’s Nowra distillery is the largest ethanol producer in Australia.36 CSR, which has a plant in Sarina, Queensland, is another beneficiary.

35. D Quirke, R Steenblik and B Warner, Biofuels - at what cost? Government support for ethanol and biodiesel in Australia, report prepared for The Global Subsidies Initiative, Geneva, April 2008, p, 2, viewed 30 May 2011, http://www.globalsubsidies.org/files/assets/biofuels_subsidies_aus.pdf

36. Manildra Group website, viewed 23 May 20110, http://www.manildra.com.au/our_products/article/ethanol/

18 Taxation of Alternative Fuels Legislation Amendment Bill 2011

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