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  • Methodology

    The fuel excise tax gap is the difference between the amount of fuel excise payable if all taxpayers complied with the law (that is, total theoretical excise liability) and the actual excise collected for a defined period, typically a financial year.

    To estimate the total theoretical excise liability in calculating the gap, we must first estimate the volume of fuel sales subject to excise during the year and the average excise rate applicable to those sales. To do this, we use a top-down method based on data from Australian Petroleum Statistics.

    The gap estimate is made on the basis of the law as applicable for the relevant financial year. New or recent law changes will not be reflected in the gap estimates.

    Here we outline the methodology we have selected to estimate the fuel excise gap. We detail our assumptions, limitations, data sources and reliability rating as assessed by our independent expert panel.

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    Selecting the methodology

    In selecting a methodology we considered both ‘top-town’ and ‘bottom-up’ methods. Following consultation with our independent expert panel, we produced this estimate using a top-down approach.

    This approach is considered most suitable given the nature of the market, the design of the tax and the data available.

    We do not observe that these taxpayers participate in the black economy, or related fraud and evasion. Therefore we have not made allowance for the impact of the black economy.

    Applying the methodology

    Estimating an excise tax gap for any financial year requires estimating the volume of fuel sales during the year that were subject to excise and the average excise rate that applied to those sales. The method we use focuses on the estimation of excise and customs duty on petrol, diesel, ethanol, biodiesel and associated blends, using a top-down approach. The data is based largely on information available in Australian Petroleum Statistics, produced by the Department of the Environment and Energy.

    Excise only applies on fuel products when they are delivered into home consumption. Any that are put in storage prior to being delivered will not be subject to excise until they are removed from storage. This increases or decreases the amount available for consumption depending on how stocks change. If stocks close higher for the year in net terms, as stocks can rise and fall over the year, then some of what is currently available for consumption will be excisable in a future year. If stocks close lower for the year, some of what was available for consumption in a prior year will be excisable in this year.

    There is an extra layer of complexity in calculating the compliance outcomes from our interventions. We calculate these outcomes by taking our compliance case results (which are recorded on a cash basis). We then allocate results to specific financial years on an economic transactions method (ETM) accruals basis.

    The ETM approach requires taxation revenue to be recognised in the reporting period in which the underlying economic transaction occurs. This is, for example, when the taxpayer earns the income that is subsequently taxed. We apportion petroleum and diesel excise compliance outcomes from total excise compliance outcomes. We do this by using the proportion of excise revenue attributable to petrol, diesel, ethanol, biodiesel and associated blends.

    We use production estimates in the Australian Petroleum Statistics to estimate the volume of fuel sales subject to excise. After we have estimated the volume of fuel sales during the year that are subject to excise, we ascertain the average excise rate that applies to those sales. We use this rate to estimate the theoretical excise amount. We then compare the theoretical excise amount to the actual excise or duty that has been reported and paid to us.

    We estimate the gaps for the combined petrol fuels and combined diesel fuels separately. We then bring them together to give the combined gap estimate.

    Steps to estimate the gap

    The five steps to estimate the gap are summarised in Figure 3 and then described in detail.

    Figure 3: Steps to estimate the fuel excise gap

     This image is a pictorial representation of the five calculation steps outlined in the text following this image. This image provides the names of the steps only

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    Step 1: Estimate the total volume available

    We estimate the excisable volume available in this order:

    • estimate the volume imported
    • add the volume produced in Australia
    • remove the volume exported from Australia
    • add the volume held in inventory at the end of the previous financial year
    • remove the volume held in inventory at the end of the current financial year
    • remove the volume not subject to excise.

    Step 2: Estimate average excise rates each year

    Next, we estimate average excise rates.

    Step 3: Estimate theoretical excise liability amounts

    We multiply the final volume available by the average excise rate to calculate the total theoretical liability excise amount.

    Step 4: Calculate the fuel excise tax net gap

    We subtract ATO fuel excise revenue on an accrual basis using an ETM from the total theoretical excise liability to yield the net gap.

    Step 5: Calculate the fuel excise tax gross gap

    We calculate the fuel excise tax gross gap by adding ATO compliance results to the net gap. Compliance outcomes are calculated by taking ATO compliance case results and allocating them to specific financial years on an accrual basis. The total excise compliance outcomes are apportioned using the percentage of total excise revenue attributable to petrol, diesel, ethanol, biodiesel and associated blends. We will review this assumption in future releases.

    Summary of the estimation process

    Table 2 displays the methodology and dollar amounts for the steps used to estimate the fuel excise tax gap, and the percentage figures for the gross and net gaps.

    Table 2: Applying the methodology – fuel excise tax gap

    Step

    Description

    2012–13

    2013–14

    2014–15

    2015–16

    2016–17

    2017–18

    1 to 3

    Total theoretical excise liability ($m)

    16,644

    16,728

    16,830

    17,216

    17,747

    18,696

    4.1

    Less actual excise reported ($m)

    16,228

    16,378

    16,662

    16,891

    17,416

    18,457

    4.2

    Equals fuel excise tax net gap ($m)

    416

    350

    168

    325

    330

    239

    5.1

    Add compliance outcomes and taxpayer adjustments ($m)

    5

    9

    3

    4

    1

    2

    5.2

    Equals fuel excise tax gross gap ($m)

    421

    359

    171

    329

    331

    241

    5.3

    Gross gap (%)

    2.5

    2.1

    1.0

    1.9

    1.9

    1.3

    5.4

    Net gap (%)

    2.5

    2.1

    1.0

    1.9

    1.9

    1.3

    Limitations

    Although the gap methodology is fairly robust, it doesn’t account for variations due to temperature correction, timing and certain adjustments.

    There could be errors stemming from non-standard measurement practices for the volumes of fuel products. Given that the volumes of fuel products would vary with temperature, they should always be measured at 15 degrees celsius to maintain a consistent benchmark. However, Australian Petroleum Statistics volumes may be measured at different temperatures. Survey respondents are not given instructions to correct fuel volumes to 15 degrees celsius.

    A timing difference could arise between when product sales data are reported for compilation in the Australian Petroleum Statistics and when excise data enters ATO systems.

    Assumptions around related volumetric calculations may also have an impact.

    Updates and revisions to previous estimates

    While there has been no change to the methodology, updates to the underlying data have resulted in minor changes to previously published estimates.

    Figure 4: Current and previous net fuel excise tax gap estimates, 2014–15 to 2017–18

     This graph provides a visual representation of the previous and current net gap estimates provided at Table 3

    Table 3 displays the net gap from our current model compared to the previous estimates we have measured.

    Table 3: Summary of published net fuel excise tax gap percentages

    Gap release year

    2010–11
    (%)

    2011–12
    (%)

    2012–13
    (%)

    2013–14
    (%)

    2014–15
    (%)

    2015–16
    (%)

    2016–17
    (%)

    2017–18
    (%)

    2016

    0.8

    0.0

    1.9

    1.6

    na

    na

    na

    na

    2017

    0.6

    0.6

    2.5

    2.1

    1.1

    1.9

    na

    na

    2018

    0.6

    0.6

    2.5

    2.1

    1.1

    1.9

    1.9

    na

    2019

    na

    0.6

    2.5

    2.1

    1.0

    1.9

    1.9

    1.3

    Data sources

    To estimate the gap, we use a top-down approach that relies on the following data sources:

    • Australian Petroleum Statistics from the Department of the Environment and Energy
    • fuel excise tariff rates published on our website
    • internal ATO data on excise amounts paid and compliance results.

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    Reliability

    The ATO estimate of the fuel excise tax gap has been assessed by an independent expert panel. The process is described in our Principles and approaches to measuring gaps document.

    Based on advice from the independent expert panel, the reliability rating for the fuel excise tax gap estimate is medium.

    The main data source is an external survey of large scale petroleum and diesel producers. Small producers are not covered through this survey. Their market share is negligible given the low number of overall participants in the fuel industry.

    Our activities confirm high levels of compliance overall. However, assumptions around the volumetric calculations may have an impact. Although there are some reservations about the data, the methodology employed is robust.

    Figure 5: Reliability rating scale from very low to very high – fuel excise tax gap

     This image is a graphical representation of the reliability rating for the current Fuel excise gap estimate. It graphically represents a rating of medium, which is a score between 16 and 20. The maximum score is 30

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      Last modified: 17 Oct 2019QC 57193