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Environment and Communications Legislation Committee—Senate Standing—Product Stewardship (Oil) Amendment Bill 2020 [Provisions] and the Excise Tariff Amendment Bill 2020 [Provisions]—Report, dated July 2020


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July 2020

The Senate

Environment and Communications Legislation Committee

Product Stewardship (Oil) Amendment Bill 2020 [Provisions] and the Excise Tariff Amendment Bill 2020 [Provisions]

© Commonwealth of Australia 2020

ISBN 978-1-76093-091-2 (Printed Version)

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Members

Chair Senator the Hon David Fawcett LP, SA

Deputy Chair Senator Sarah Hanson-Young AG, SA

Members Senator Nita Green ALP, QLD

Senator Sam McMahon CLP, NT

Senator Marielle Smith ALP, SA

Senator David Van LP, VIC

Secretariat Mr Stephen Palethorpe, Committee Secretary Mr Michael Perks, Research Officer Mr David Pappas, Administrative Officer

PO Box 6100 Phone: 02 6277 3526

Parliament House Fax: 02 6277 5818

Canberra ACT 2600 Email: ec.sen@aph.gov.au

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Contents

Members ............................................................................................................................................. iii

Chapter 1—Introduction .................................................................................................................... 1

Conduct of the inquiry ........................................................................................................................ 1

Reports of other committees ............................................................................................................... 1

Compatibility with human rights ........................................................................................... 1

Background to the bills........................................................................................................................ 2

Product Stewardship for Oil Scheme ..................................................................................... 2

Caltex Petroleum Pty Ltd v Commissioner of Taxation ...................................................... 3

Purpose and overview of the bills ..................................................................................................... 4

Definition of oils ........................................................................................................................ 4

Excise duties .............................................................................................................................. 5

Application and saving provisions ........................................................................................ 5

Financial impact statement ...................................................................................................... 6

Committee view ................................................................................................................................... 6

Labor Senators' additional comments ............................................................................................. 9

Appendix 1—Submissions and answers to questions taken on notice .................................. 11

1

Chapter 1 Introduction

1.1 On 12 June 2020, the Senate referred the provisions of the Product Stewardship (Oil) Amendment Bill 2020 (the PSO Amendment Bill) and the Excise Tariff Amendment Bill 2020 (the Excise Tariff Amendment Bill) to the Environment and Communications Legislation Committee (the committee) for inquiry and report by 30 July 2020.1 Collectively, the PSO Amendment Bill and the Excise Tariff Amendment Bill will be referred to as 'the bills'.

Conduct of the inquiry 1.2 In accordance with its usual practice, the committee advertised the inquiry on its website and wrote to relevant organisations inviting them to make a submission by 29 June 2020.

1.3 The committee received one submission from the Department of Agriculture, Water and the Environment (the department), as well as responses to written questions on notice, which are listed at Appendix 1 of this report and are available on the committee's website at: www.aph.gov.au/senate_ec.

1.4 The committee thanks the department for its contribution to the inquiry.

Reports of other committees 1.5 When examining a bill or draft bill, the committee takes into account any relevant comments published by the Senate Standing Committee for the Scrutiny of Bills (Scrutiny Committee).2 The Scrutiny Committee assesses

legislative proposals against a set of accountability standards that focus on the effect of proposed legislation on individual rights, liberties and obligations, and on parliamentary propriety.

1.6 The bills have been considered by the Scrutiny Committee and the Parliamentary Joint Committee on Human Rights. Neither committee had any comment on the bills.3

Compatibility with human rights 1.7 The Explanatory Memorandum (EM) includes statements on the compatibility of the bills with human rights as required by the Human Rights (Parliamentary Scrutiny) Act 2011.4

1 Journals of the Senate, No. 54, 12 June 2020, pp. 1870-1871.

2 Senate Standing Order 25(2A).

3 Senate Standing Committee for the Scrutiny of Bills, Scrutiny Digest 7 of 2020, 10 June 2020, p. 34; Parliamentary Joint Committee on Human Rights, Report 6 of 2020, 20 May 2020, pp . 21-22.

Explanatory Memorandum, pp. 3-6. 4

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1.8 In relation to the PSO Amendment Bill, the EM notes that the bill engages the right to an effective remedy under the International Covenant on Civil and Political Rights (ICCPR), as the bill would amend the types of recycled oil benefit payments that can be claimed.5

1.9 However, the EM explains that as decisions of the Commissioner of Taxation under the Product Stewardship (Oil) Act 2000 (the PSO Act) may be subject to review under the provisions of the Taxation Administration Act 1953, the bill would not limit the right to an effective remedy in Article 2(3) of the ICCPR.6

1.10 The committee notes that the Parliamentary Joint Committee on Human Rights made no comment on the bill and is satisfied that the bill does not raise any other human rights issues.

Background to the bills

Product Stewardship for Oil Scheme 1.11 The Product Stewardship for Oil Scheme (the PSO Scheme) was established by the PSO Act to encourage the environmentally sustainable management and re-refining of used lubricant and fluid base oils and greases by providing an

incentive for oil and grease recyclers to collect and recycle these used oils and greases in Australia.7

1.12 Under the PSO Scheme, a person is entitled to a product stewardship (oil) benefit for the sale or consumption of recycled oil that the person has recycled in Australia or for the consumption in Australia of gazetted oil for a gazetted use.8 The PSO Act sets out the type of oils covered by the PSO Scheme, including petroleum-based oils and their synthetic equivalents.9

1.13 The benefits paid under the PSO Scheme are funded through the collection of duties from manufacturers and importers of lubricant-based oils and greases, under the Excise Tariff Act 1921 (the Excise Tariff Act) and the Customs Tariff Act 1995 (the Customs Tariff Act).10

5 Article 2(3) of the ICCPR ensures that any person whose rights or freedoms are violated shall have

an

effective remedy, and that a person in claiming such a remedy shall have his or her rights determined by a competent judicial, administrative or legislative authority.

6 Explanatory Memorandum, pp. 3-4.

7 Explanatory Memorandum, p. 2.

8 Gazetted oils and gazetted uses are set out in the Product Stewardship (Oil) Declaration 2003.

9 Product Stewardship (Oil) Act 2000, ss. 6(1).

10 Explanatory Memorandum, p. 2.

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1.14 Since the PSO Scheme's introduction, the 'collection and recycling of oil has risen from essentially nil to over 320 megalitres of base lubricating oil, more than half of the total volume sold each year'.11

Caltex Petroleum Pty Ltd v Commissioner of Taxation 1.15 In the 2019 case of Caltex Petroleum Pty Ltd v Commissioner of Taxation (the Caltex case), the Federal Court of Australia (the Court) broadly interpreted the definition of petroleum-based oils in the PSO Act to include diesel used in

refinery operations. The applicant in the case, Caltex Australia Petroleum Pty Ltd (Caltex), used diesel in connection with its refinery operations, which it then recycled and sold as fuel grade diesel in Australia. Caltex's claim for benefits under the PSO Act were subsequently disallowed by the Commissioner of Taxation on the basis that the definition of 'oils' as expressed in the PSO Act excluded petroleum-based oils that are primarily used as fuel.

1.16 However, the Court rejected the Commissioner of Taxation's construction of the term 'oils' to exclude diesel and found that the Parliament did not intend the list of products within the definition of 'petroleum-based oils' in the PSO Act to be an exhaustive list that excluded recycled diesel because its primary use was as a fuel. 12

1.17 The department commented on the implications of the Court's decision on the effectiveness and sustainability of the PSO Scheme:

This decision allows PSO Scheme benefit payments to be claimed for recycling or re-refining of diesel fuel; for example, the re-refining of diesel fuel after it is used in connection with refinery operations as a solvent to flush crude oil and petroleum products through shipping tanks and pipelines. The Federal Court's decision potentially makes the duty collected under the Excise Tariff Act, to fund the PSO Scheme, applicable to diesel fuel.13

1.18 The department noted that the Court's decision to include diesel fuel was 'outside the current policy intent of the legislation and would have significant and unintended implications for the PSO Scheme, its participants and potentially the petroleum industry'.14

11 Department of Agriculture, Water and the Environment, Submission 1, p. 2.

12 Caltex Petroleum Pty Ltd v Commissioner of Taxation [2019] FCA 1849.

13 Department of Agriculture, Water and the Environment, Submission 1, pp. 1-2.

14 Department of Agriculture, Water and the Environment, Submission 1, p. 2.

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Purpose and overview of the bills 1.19 As outlined in the EM, the purpose of the bills is to address the implications of the Caltex case by:

 amending the definition of 'oils' in the PSO Act to apply to lubricant oils, fluid oils and other manufactured oils and greases to reflect the original intention of the PSO Scheme, which excludes diesel and other fuels; and

 amending the Excise Tariff Act to narrow the scope of petroleum-based oils and synthetic equivalents for which excise duties are imposed for the purposes of the PSO Scheme to exclude diesel and other fuels.15

1.20 The rationale for the introduction of the bills was outlined by the Minister for the Environment, the Hon Sussan Ley MP, in her Second Reading Speech:

The Product Stewardship for Oil Scheme was intended to be self-funding by offsetting the benefit payments using revenue collected through the Excise Tariff Act 1921 and Customs Tariff Act 1995 from refineries and oil importers.

The Federal Court's decision in Caltex Petroleum Pty Ltd v Commissioner of Taxation [2019] FCA 1849 gave a broad interpretation of the definition of oils in the Product Stewardship (Oil) Act that included diesel.

This decision allowed for the payment of benefits for re-refined diesel for which no excise or excise-equivalent duty had been imposed. Another potential consequence of the Caltex case is that duty collected under the Excise Tariff Act to fund the scheme could apply to diesel.16

Definition of oils 1.21 The PSO Amendment Bill would repeal the definition of 'oils' in the PSO Act and substitute a new definition that would provide an exhaustive list of petroleum-based oils and their synthetic equivalents intended to be covered by

the PSO Scheme.17 The proposed amendments would also provide for the regulations to prescribe additional kinds of oils to be covered by the PSO Scheme.18

1.22 In addition, the proposed amendments would definitively exclude diesel, blends of diesel with other goods, and goods ordinarily used as fuels from the definition of oils, as well as provide flexibility for the regulations to prescribe additional goods that are excluded from the definition of oils.19

15 Explanatory Memorandum, p. 2.

16 Second Reading Speech, House of Representatives Hansard, 14 May 2020, p. 3440.

17 Proposed paragraphs 6(1)(a) and (b), Product Stewardship (Oil) Amendment Bill 2020.

18 Proposed paragraph 6(1)(c), Product Stewardship (Oil) Amendment Bill 2020.

19 Proposed paragraphs 6(1)(d), (e), (f) and (g), Product Stewardship (Oil) Amendment Bill 2020.

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1.23 A note to the definition of 'oils' would also be inserted to clarify that the amendments to the PSO Act are in response to the decision of the Court in the Caltex case.20

Excise duties 1.24 The Excise Tariff Amendment Bill would amend the Schedule to the Excise Tariff Act to exclude diesel and other goods ordinarily used as fuels from the excise tariff item that applies to oil and grease:

The effect of the amendment is to ensure that diesel, blends of diesel and other products for use as a fuel or that are ordinarily used as a fuel are not subject to excise duty under item 15 [which defines petroleum-based oil and grease products] but rather are exclusively subject to duty under item 10 [which defines fuel and petroleum products] of the Schedule unless an exclusion applies.21

1.25 Under the proposed amendments to the Excise Tariff Act, all lubricant/fluid/oil products and greases, other than fuels, listed under item 15 would continue to be subject to excise duty at a rate of $0.085 cents per litre or $0.085 cents per kilogram for greases. This would apply to:

 Petroleum-based oils that are lubricant/fluid/oil products and the synthetic equivalents of such oils but not greases;  Petroleum-based oils that are lubricant/fluid/oil products or greases or synthetic equivalents of such oils that are recycled for use as oils that are

lubricant/fluid/oil products but not recycled for use as greases;  Petroleum-based greases and their synthetic equivalents; and  Petroleum-based oils that are lubricant/fluid/oil products or greases and

synthetic equivalents of such oils recycled for use as greases.22

Application and saving provisions 1.26 The proposed amendments to the PSO Act would apply to claims for a product stewardship (oil) benefit in relation to the sale or consumption of recycled oil, or the consumption of gazetted oil that occurs on or after the day

of introduction of the PSO Amendment Bill into the House of Representatives (the House).23 Equally, the proposed amendments to the Excise Tariff Act

20 Explanatory Memorandum, p. 8.

21 Explanatory Memorandum, p. 9.

22 Explanatory Memorandum, p. 9.

23 Subitem 2(1), Product Stewardship (Oil) Amendment Bill 2020. See also, Explanatory

Memorandum, p. 8.

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would apply to goods entered for home consumption24 on or after the day the Excise Tariff Amendment Bill was introduced into the House.25

1.27 The EM notes that as the 'benefit payments under the PSO Scheme are funded by collected excise duties, the proposed amendments to both Bills should apply simultaneously to ensure the financial stability of the PSO Scheme.'26

1.28 The PSO Amendment Bill would also clarify that claims for a product stewardship (oil) benefit would not apply to claims that were determined by the Commissioner of Taxation before the commencement date.27 Similarly, the proposed amendments to the Excise Tariff Act would apply to goods entered for home consumption on or after the bill's introduction despite the operation of subsection 5(2) of the Excise Tariff Act.28

1.29 In addition, the proposed amendments to the PSO Act would not affect the validity of a declaration of gazetted oil or gazetted use under the PSO Act that was in force before the commencement date.29

Financial impact statement 1.30 The proposed amendments outlined in the bills would have a minor financial impact on the Commonwealth:

The Bills are estimated to reduce the Commonwealth's underlying cash balance by $4 million over the forward estimates to 2023-24. This is based on a reduction in payments of benefits resulting in a saving of $21 million and a reduction in excise collections of $25 million.30

Committee view 1.31 The establishment of the PSO Scheme was an important initiative of the Australian Government to encourage the environmentally sustainable management and re-refining of contaminated oil and greases in Australia.

The PSO Scheme has 'increased the recovery of used lubricant oils, recycling them into useful products and avoiding potential environmental harm from waste oils at a very low overall cost to the community'.31

24 This term refers to completing a Customs Import Declaration for import consignments to obtain

release of goods from customs control.

25 Subitem 2(1), Excise Tariff Amendment Bill 2020. See also, Explanatory Memorandum, pp. 9-10.

26 Explanatory Memorandum, p. 8.

27 Subitem 2(2), Product Stewardship (Oil) Amendment Bill 2020.

28 Subitem 2(2), Excise Tariff Amendment Bill 2020.

29 Subitem 2(3), Product Stewardship (Oil) Amendment Bill 2020. See also, Explanatory

Memorandum, p. 8.

30 Explanatory Memorandum, p. 2.

31 Department of Agriculture, Water and the Environment, Submission 1, p. 2.

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1.32 The committee acknowledges that the Court's decision in the Caltex case would allow benefit payments for the recycling of goods for which excise and excise equivalent custom duties have not been imposed, and that duty collected under the Excise Tariff Act and the Customs Tariff Act to fund the PSO Scheme could, without amendment, potentially apply to diesel.

1.33 In the committee's view, the PSO Scheme should reflect the original policy intent of the legislation which did not consider diesel fuel to be petroleum-based oil for the purposes of the PSO Act and should not qualify for a benefit under the PSO Scheme. The committee believes these amendments would provide necessary certainty and allow the PSO Scheme to continue to operate successfully and sustainably into the future.

1.34 The committee notes that no submissions were received which opposed the amendment bills.

1.35 The committee therefore supports amending the PSO Act to clarify the definition of oils to definitively exclude diesel and other fuels, as well as to narrow the scope of petroleum-based oils and synthetic equivalents for which excise duty is paid under the Excise Tariff Act to exclude diesel and other fuels.

Recommendation 1

1.36 The committee recommends that the bills be passed.

Se

nator the Hon David Fawcett Chair

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Labor Senators' additional comments

1.1 The long and short of this inquiry is that legislative reform is required to close a loophole that has allowed Caltex to seek and receive a windfall payment of taxpayer's funds under a scheme that was never intended to operate in this way. Indeed, the scheme involves a duty-and-benefit-payment structure designed to encourage the proper recycling of non-combustible oils, whereas Caltex has sought and received the benefit payment without having paid any relevant excise duty in relation to diesel that it was already in the habit of 'recycling' for sale.

1.2 There is no real question therefore that the loophole should be closed.

1.3 During this inquiry, Labor Senators sought to understand the relevant departmental and government considerations on the question of whether it was possible to avoid the loss of $8 million from the taxpayer to Caltex. The bills themselves were presented on the basis that the Federal Court's interpretation of the existing law meant it was possible to collect duty under item 15 of the Excise Tariff Act 1921 in relation to the diesel fuel for which Caltex was seeking the never before paid and broadly unjustified benefit.

1.4 The financial impact assessment of the bills reinforces the view that the excise duty under item 15 could be applied to the diesel fuel that Caltex recycled, saving taxpayers $8 million in a payment that is not within the intended scope or spirit of the PSO Scheme.

1.5 This appears to offer the prospect of recouping monies otherwise lost, but this approach was not taken and it's not clear why.

1.6 In order to understand this approach, Labor Senators put questions on notice to the Department of Agriculture, Water and the Environment and to the Australian Taxation Office (ATO), as follows:

(1) Either in anticipation of, or following the result of the Federal Court ruling of the 'Caltex Case', what consideration did the Commonwealth give to determining whether to impose on Caltex an excise duty for oils as outlined under item 15 of the Excise Tariff Act 1921 in order to recoup the benefit payment that was being claimed? If no such approaches were considered, why not?

(2) What legal or other advice was provided to the Commonwealth that led to the decision to not seek to apply such a levy, or otherwise recoup the benefit payment to Caltex?

(3) At any point in the course of this matter did any communication (written or otherwise) take place between Caltex or its representatives and the Commonwealth or its representatives in relation to corporate social responsibility, particularly in relation

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to Caltex's decision to seek an $8 million benefit payment from the Commonwealth through the Product Stewardship for Oil Scheme in circumstances when it knew the scheme was not intended to function in that way, and when it ought to have known the pursuit of the benefit payment was in effect the pursuit of a windfall, the technical entitlement to which was of questionable moral basis?

1.7 In each case, but for different reasons, the Department of Agriculture, Water and the Environment and the ATO responded by saying these questions could not be answered, essentially as a matter of jurisdiction (Department of Agriculture, Water and the Environment) and for legislative obligations in relation to privacy (ATO).

1.8 In light of the Department's evidence that the Federal Court decision means the relevant excise duty under the PSO Scheme could be applied to diesel fuel, it is not clear why the ATO has not chosen to apply the duty to the fuel for which Caltex has received the benefit payment. If this occurred it would at least mean that both sides of the PSO Scheme equation had been applied to the diesel fuel in question, and it would save the Commonwealth and the taxpayer $8 million.

1.9 Labor Senators remain unsure as to why no attempt has been made to apply the relevant excise duty under the scheme to Caltex in order to recover the $8 million in taxpayer's funds that have been lost through the use of the technical loophole that these bills must now seek to close.

Se

nator Nita Green Committee member

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Appendix 1

Submissions and answers to questions taken on notice

Submissions 1 Department of Agriculture, Water and the Environment

Answers to Questions on Notice 1 Department of Agriculture, Water and the Environment - Answers to written questions taken on notice, 14 July 2020 (received 20 July 2020) 2 Australian Taxation Office - Answers to written questions taken on notice,

21 July 2020 (received 27 July 2020)