CHAIR —I now invite you to make a short opening statement after which committee members may wish to ask you some questions.

Mr Kevin —You would be aware that about two months ago Liberty blew the whistle about the fuel scandal that was going on with toluene. As a result of that, the government changed one of the provisions in the legislation to close that rort down. This is probably one of the many rorts that continue to occur in this industry. It is a bit of a moving target—when one rort is shut down, others pop up. Basically, what is happening is that various products are being mixed into both petrol and diesel with the aim of avoiding the excise tax and therefore making a bit of money for the people involved in it. It is probably best if I take some questions, because there are a lot of issues in this. As a wholesaler and a retailer in the fuel market, we are very close to it. We see it a lot clearer than other people because we have to compete with the illegitimate wholesalers of the blended product. We see it very clearly. We could pick it on any day when it is happening because of our inability to compete with some of these people. Over the last couple of years we have had a lot of dialogue with the Customs Service and the Taxation Office to alert them to these issues. We try to make a concerted effort to get rid of the rorts in the industry. That is all.

CHAIR —Thank you, Mr Kevin. In your submission to the committee you say that naptha is being transported to Sydney and Melbourne and mixed with ULP and that it is difficult to detect. Do you have any evidence to the extent of this substitution by naptha or any other substance apart from toluene?

Mr Kevin —It is pretty difficult to put a dollar figure on it. There are a lot of people involved in the industry who make their living out of working very closely within the law or breaking the law by mixing various products into petrol and diesel. Whether it is naptha or toluene or canola oil or whatever, there are people out there whose prime aim is to work out mixing product that is non-exhaustible into fuels. We became aware of naptha about two months ago. Naptha is a hydrocarbon that comes out of a distillation process. It was being mixed with petrol. We were very hopeful at the time of the submission of getting samples of that petrol that was being sold through service stations in Melbourne and Sydney. We were hoping that by analysing them we would be able to show the product was not up to spec and that naptha was present. Unfortunately, I think the people involved in these rorts are a step ahead of us. When we analysed that product it came out looking exactly like petrol, which means that they blended naptha, which has a low octane, into petrol and then they put another product in to lift the octane so that at the end of this process you have a product that looks just as petrol does. So we have been conducting other investigations to go back to the source of this product. We have not got that evidence as yet.

CHAIR —The key purpose of this hearing is these particular bills which are before the parliament. What is your company's view with regard to these bills?

Mr Kevin —We agree entirely with the Australian Institute of Petroleum's submission that everything should have an excise on it. If you have a legitimate need for that product and it is not used in engines on the road, then you can claim back the excise. That is clearly the easiest and simplest and proper way to stop these rorts, otherwise we will be chasing our tail trying to find the next rort that is going to pop up in the next couple of weeks. We say very strongly that what should happen is excise everything and let legitimate users claim back that excise, and that will stop these rorts.

Senator MURRAY —The question that arises from that is: what impost would that have on legitimate users of non-excisable products, particularly in terms of cash flow? You are suggesting a rebate system. What would happen is that they would have to pay the tax and then at some stage it would be rebated after claiming it back, which would obviously impose a financial burden on them in cash flow terms. How do you feel about that side of things?

Mr Kevin —I can understand that. I do not think we are talking lots of dollars, and I do not know the size of the companies involved. Possibly there is a way through with rolling it into the refund with GST. I recognise that that is an issue. I think the broader issue or more pressing issue is the avoidance of excise in fuels. I do not have an answer for that one. I acknowledge it. Certainly in relation to state governments in other areas, franchise fees, which are now included in the excise, are repaid to the oil companies very quickly, within four days. There are mechanisms for getting money back to people who need it as a rebate.

Senator MURRAY —Would you envisage a scheme whereby somebody would perhaps get legitimation up-front and then be exempted thereafter and reviewed, say, annually, or would you expect somebody who is always a legitimate user of non-excisable product to have to go through a rebate system?

Mr Kevin —The tax office might be best to comment on that. All we are trying to do is cut the rorts out. I could not comment on which is the best way of doing it apart from saying that the imperative is there because in the fuel game there are legitimate operators such as us having to compete with people who are breaking the law.

Senator MURRAY —Do you have any idea of the size of these rorts you are referring to?

Mr Kevin —A lot of estimates have been taken by the tax office over the last two years. That has narrowed it down. I think last year we had a figure of about $400 million that was lost in excise that was not collected due to the rort that was going on last year. The government has moved to shut that down. We applaud the government for that. We are catching up to this, but it still keeps popping up. We would estimate that at any one time there is probably around $50 million being avoided in excise through one rort or other per annum.

Senator GEORGE CAMPBELL —Did you say $50 billion or $50 million?

Mr Kevin —I said $50 million.

Senator GEORGE CAMPBELL —What has been the impact of this fuel substitution on your company?

Mr Kevin —It has been dramatic. That is why we are standing up publicly and saying that these rorts have to stop. We estimate that during the course of 1998 and 1999 the rorts would have cost us, because we had to compete with the bodgie product, somewhere in the region of $5 million to $7 million in lost profits. So for us—we are a sizeable but still small company—this is significant money. That is why we are very vigilant about trying to get the government to change the relevant legislation.

Senator GEORGE CAMPBELL —What was the general reaction of people in the industry when you made this public?

Mr Kevin —The reactions of the vast majority was: `Well done. It should have happened sooner.' There was obviously a smaller part who were involved in the rorts who did not like us. We have been subject to death threats and so on because it is significant money that these people are making. For anyone to stand in the way of their rorts and therefore their livelihood they have reacted accordingly.

Senator GEORGE CAMPBELL —Is the practice itself of fuel substitution dangerous? Are there any potential hazards involved in it?

Mr Kevin —Certainly with the mixing of toluene, which is now shut down, there were some problems. There were problems with the effect on cars and probably some health problems too. When you start talking toluene and benzene they are pretty nasty products to be fiddling around with. Sure there are effects on the vehicles and some implications for health but the big one is the lack of excise that the government is avoiding and also legitimate operators like us having to compete with illegal operators. All we are saying here is that this goes on. It has gone on for years and years. Now is the opportunity to shut the thing down. I am sure the tax office would be happy to shut it down because it must take a lot of their time to try to police all this because it is a moving target. As soon as one specific rort is shut down, then these people move on to other schemes. If you put an excise on everything, then the vast role in policing this would be fixed.

Senator GEORGE CAMPBELL —I understand that your organisation wrote to the Assistant Treasurer and the customs minister in about the middle of 1999 regarding instances of fuel substitution. Is that correct?

Mr Kevin —That is right.

Senator GEORGE CAMPBELL —What was the reaction you received from the government at that time?

Mr Kevin —It was not as quick as we would like. We started talking to the tax office well over 18 months ago and then we started writing to Senator Vanstone and then Assistant Treasurer Kemp. That was about April of last year. The reaction was too slow for us. As I say, we are very close to what is happening in the industry. We got letters back from the government saying that they were looking into it, that they were trying to do things about it. It was too slow. All we are saying is that these people are breaking the law. We can provide them evidence as to how and when they were breaking the law. It is not our job to police the law but it is the job of the government and therefore of Customs and the Taxation Office to police it. We suffer a lot of frustration because we wanted them to police what they are in charge of, and that is the law. We were quite frustrated.

Senator GEORGE CAMPBELL —Did you put any measures in place yourself to detect this fuel substitution?

Mr Kevin —Yes. We came across it because we were coming up against prices which were just not logical, prices that were just too low and therefore we realised that this was not real petrol, real product. So we started testing the product and we found quite a few irregularities.

Senator GEORGE CAMPBELL —Did you draw the attention of these irregularities to the Taxation Office or Customs, whichever is the appropriate body?

Mr Kevin —Yes, we did.

Senator GEORGE CAMPBELL —What response did you get?

Mr Kevin —We got the response: `Yes, we are looking into it. We will do something about it. Yes, we are on to the problem.' We did not get the response we wanted. In fairness to the Taxation Office and Customs, I gather they have other things on, but it seems quite sensible to us that people are breaking the law quite openly and the people who are charged with fixing it or policing the law should do that. We were frustrated at the lack of action. It was not moving as quickly as we would have liked.

Senator MURPHY —With regard to naptha, have you been able to ascertain any legitimate uses for naptha? Have you been able to ascertain the site at which you believe it is being refined?

Mr Kevin —We do not think there is a legitimate use for naptha. It is a product used in the refining process. It is not as if you can get naptha and stick it in your car because it will not work. We have had people in the west of Queensland trying to find where this naptha is coming from. In fact, we have people out there at the moment west of Quilpie, which is near the South Australian border. We believe that is one of the sources of naptha. We are conducting our own investigation to try to get the evidence that this is happening and how it is happening, and then we want to present that to the tax office to help shut this rort down. You can see our frustration. This is costing us a lot of money. It is not our business to go and be private eyes, but we are forced to find the source of all these products so that we can get a bit of action from the tax office.

Senator MURPHY —If it is your understanding that there is no legitimate use, then if it is being sold and then subsequently mixed with unleaded fuel or something else, then, in effect, the refinery is actually selling something it should not be selling in the first place. Wouldn't that be the case?

Mr Kevin —That is right. We believe naptha is coming out of a small refinery in the west of Queensland. If that product is coming out and going into fuel, yes, you are right. That is the case.

Senator MURPHY —Is there any information that you are aware of that relates to the volumes of the use of naptha in the refining process nationally? Is that something we can get from the major oil refiners?

Mr Kevin —The major oil companies would be able to provide that sort of information and work out what is the legitimate use of the stuff and therefore get into the volumes and see how much use is there legitimately and how much is being produced and sold. We could not answer that but the major oil companies certainly could.

CHAIR —Mr Kevin, you said earlier that you believe this substitution has cost your company $5 million to $7 million in profit. Could you explain for the committee, firstly, what is the annual revenue of your company and, secondly, what is the profit level of the company?

Mr Kevin —I could tell you the revenue. I would not like to get into our profit. We are a private company. I can tell you in camera, if you would like. We turn over about $850 million a year in an industry that has pretty slim margins. The money I mentioned—$5 million to $7 million—is significant as far as our profit is concerned. More importantly, it is not just us but every other legitimate company that is in this industry trying to compete with this illegal product. I am sure there are a lot of small service stations in Melbourne and Sydney that have probably gone out of business because they have been playing by the law and have not been able to compete with this illegal product.

CHAIR —Thank you very much. If there are no further questions, thank you very much for your evidence, Mr Kevin.

[11.26 a.m.]