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  • Fuel excise tax gap 2015-16

    This information is for historical purposes only.

    The fuel excise tax gap is the difference between the estimated value of excise raised from specific fuel products according to the law and the value actually raised for a financial year.

    Excise duty is a tax on fuel products produced or manufactured in Australia, predominantly consisting of petrol and diesel. Entities that manufacture or store excisable goods must hold an appropriate excise licence. They must pay excise duty on goods delivered into the domestic market.

    Imported fuel products are subject to customs duty at a rate equivalent to excise duty. This ensures they are treated consistently with goods manufactured in Australia. These imported goods are called excise equivalent goods (EEGs).

    Fuel excise duty is a significant source of revenue with a relatively low cost of collection. Consumption is considered to be relatively inelastic.

    The fuel industry is highly regulated with a small number of large clients responsible for the majority of collections. The industry is generally viewed as compliant. The mostly harmonised rates of duty limit the opportunity for fuel substitution.

    Risk management activities are focused on early identification of compliance issues. We apply an appropriate tailored response depending on the degree of non-compliance and level of risk.

    Infrastructure requirements for handling fuel make tax evasion on a large scale difficult.

    This estimate covers the excise gap related to petrol, diesel and associated blends only.

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    See also

    Measuring the gap

    Estimating the fuel excise gap requires first estimating the total theoretical excise liability. This involves calculating the volume of fuel sales subject to excise during the year and applying an estimated average excise rate to those sales.

    We then compare the theoretical liability to the actual revenue reported and adjust for ATO compliance results to derive the gap. We estimate the petrol and diesel gaps separately, and then combine them to form the overall fuel excise gap.

    We use a top-down approach to estimate the fuel excise gap. We use data from Australian Petroleum Statistics (APS) published by the Department of the Environment and Energy and ATO data.

    Our gap estimates have been updated and differ from the estimates published in 2014–15. This is primarily due to changes in the underlying datasets and some changes to assumptions.

    There is a high concentration of participants in the fuel production and importing industry. This means that a small number of clients account for the majority of excise and duty collections. Monitoring strategies identify large-scale non-compliance, which helps to keep the gap small.

    Changes in policy (such as the recent reintroduction of excise on ethanol and biodiesel) are unlikely to significantly affect revenue or the gap. And there are no known administrative or policy challenges that will affect the gap in a material way.

    The reliability of the estimate is assessed as medium.

    Trends and latest findings

    The net gap for fuel excise is very small.

    The gap is estimated to be $325 million in 2015–16 or 1.9% of total theoretical tax. Over the period from 2010–11 to 2015–16, the estimated net fuel excise gap ranges from 0.6% to 2.5%.

    In recent years, the gap has been on an overall downward trend, albeit showing a rebound in 2015–16. In 2012–13, the gap was 2.5% of the total value of the excise and duty, before the most recent trough of 1.1% in 2014–15. In 2015–16, the gap has risen to 1.9%.

    While there has been no change to the methodology, updates to the underlying data have resulted in minor changes to previously published estimates. There are also some limitations in the methodology used to estimate the gap, which will introduce a margin of error.

    The following table shows the excise and duty reported, compliance activity adjustments and the gross and net fuel excise gap estimates for the period 2010–11 to 2015–16.

    Fuel excise gap ($ millions), 2010–11 to 2015–16(a)(b)(c)(d)

    Gap

    2010–11

    2011–12

    2012–13

    2013–14

    2014–15

    2015–16

    Excise and duty reported

    15,129

    16,006

    16,228

    16,378

    16,662

    16,891

    Gross gap

    86

    91

    418

    355

    180

    330

    Adjustments

    0

    0

    2

    5

    2

    4

    Net gap

    86

    91

    416

    350

    178

    326

    Gross gap (%)

    0.6%

    0.6%

    2.5%

    2.1%

    1.1%

    1.9%

    Net gap (%)

    0.6%

    0.6%

    2.5%

    2.1%

    1.1%

    1.9%

    (a) Amounts and percentages may not reconcile due to rounding.
    (b) Changes from previously published estimates are due to revisions to APS data, updated ATO data and a modified approach to determining liabilities reported but not paid.
    (c) Amounts are rounded to the nearest $1 million.
    (d) Zero results are rounded to $0 as a result of nearest $1 million rounding. Actual results are higher than zero.

    The graph below shows the trend in excise and duty reported and the net fuel excise gap over the same period.

    Amount reported and net gap –fuel excise 2010–11 to 2015–16

    This graph provides a visual representation of the trend of the fuel excise reported and the net fuel excise gap in dollar terms. This information is provided in the table listed earlier in this document. Data sources: Department of Industry, Innovation and Science, Department of the Environment and Energy, various industry data sets, and ATO data.

    ATO action to reduce the gap

    Regulation through licensing and permission regimes is a significant control over the fuel industry.

    Compliance with lodgment, payment and reporting is a key risk. Our relationship managers monitor these risks for the large market and liaise with excise payers to explain variations and co-ordinate compliance action where necessary.

    New entities entering the fuel market can increase the risk of error if existing control systems are inadequate. They can also pose a risk if they do not understand their obligations.

    Biannual indexation on all fuels (except aviation fuel) and changes in policy changes such as the reintroduction of excise on ethanol and biodiesel are unlikely to increase the risk of error significantly. Meanwhile, we have strategies in place to detect and monitor non-compliance in these areas.

    We focus our activities on early identification of compliance issues. Our compliance activities have not identified any new issues or areas for concern.

    Key activities include:

    • monitoring of available data to identify changes in behaviour or trends
    • assurance activity on key parts of the industry
    • relationship management support and engagement with large market clients and new entrants.

    The fuel market is dominated by a small number of clients. We support them with relationship managers who provide assistance and assurance for compliance obligations.

    Monitoring strategies are in place to identify possible larger scale non-compliance with obligations. We tailor our treatments to the level of non-compliance and risk.

    Methodology

    The fuel excise 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 income 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.

    Selecting the methodology

    In selecting a methodology we considered both ‘top-town’ and ‘bottom-up’ methods. Following consultation with our independent expert panel, this estimate was produced 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 used focuses on the estimation of petrol and diesel excise 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 released into the domestic market. Any that are put in storage 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 ATO 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 economy 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 and diesel.

    Steps to estimate the fuel excise gap

    The five steps to estimate the fuel excise tax gap are: Step 1: Estimate the total volume available (adjust for inventory changes and remove domestic consumption not subject to duty) Step 2: Estimate yearly average excise rate Step 3: Multiply Steps 1 and 2 to determine theoretical excise amount Step 4: Subtract actual revenues to determine the fuel excise net gap Step 5: Add compliance outcomes to Step 4 to determine the fuel excise gross gap.

    After we have estimated the volume of fuel sales during the year that were subject to excise, we ascertain the average excise rate that applied to those sales. We compare production estimates to the quantities reported to us on which excise or duty has been paid.

    We estimate the gaps for petrol and diesel separately, and then bring them together to give the combined gap estimate. A detailed step-by-step process is outlined as follows.

    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 income year
    • remove the volume held in inventory at the end of the current income year
    • remove the volume not subject to excise.

    Step 2: Estimate average excise rates each year

    Next, we estimate average excise rates. We use two excise rates:

    • For years prior to 2014–15 – a standard excise rate of 0.38143 cents per litre applies for petrol and diesel.
    • With indexation restored from 10 November 2014, for 2014–15 and future years – we estimate the average excise rate for the year 2014–15 onwards. This is done by taking actual revenue for the year and dividing it by actual reported volumes.

    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 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 gross gap

    We calculate the fuel excise 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 and diesel.

    Fuel excise net gap as a percentage of total theoretical liability, 2010–11 to 2015–16

    Graph: This graph provides a visual representation of the trend of the net fuel excise gap as a percentage. This information is provided in the table listed after this graph.

    Table 2: Gross and net gap percentages (amounts in $ millions)

    Gap

    2010–11

    2011–12

    2012–13

    2013–14

    2014–15

    2015–16

    Gross gap

    86

    91

    418

    355

    180

    330

    Net gap

    86

    91

    416

    350

    178

    326

    Gross gap (%)

    0.6%

    0.6%

    2.5%

    2.1%

    1.1%

    1.9%

    Net gap (%)

    0.6%

    0.6%

    2.5%

    2.1%

    1.1%

    1.9%

    Table 3: Summary of estimation process ($ millions)

    Step

    2010–11

    2011–12

    2012–13

    2013–14

    2014–15

    2015–16

    Steps 1 to 3

    Total theoretical excise liability

    15,216

    16,097

    16,644

    16,728

    16,839

    17,217

    Step 4

    Less actual excise reported

    15,129

    16,006

    16,228

    16,378

    16,662

    16,891

    Equals fuel excise net gap

    86

    91

    416

    350

    178

    326

    Step 5

    Add compliance outcomes and taxpayer adjustments

    0

    0

    2

    5

    2

    4

    Equals fuel excise gross gap

    86

    91

    418

    355

    180

    330

    Definitions

    Top-down approaches

    Top-down approaches use externally-provided aggregated data sources to estimate the size of the tax base. From this we estimate theoretical tax liability. The difference between the theoretical tax liability and the amount we receive is the estimated tax gap. A top-down approach is typically used for indirect taxes.

    Bottom-up approaches

    Bottom-up approaches involve a detailed examination of data sources. These include tax returns, audit results, risk registers or third-party data-matching information. We then extrapolate the results to establish the extent of non-compliance across the whole population. From this we estimate the tax gap. This approach generally involves applying statistical techniques to estimate the incidence and value of non-compliance. A bottom-up approach is typically used for direct taxes.

    Fuel excise

    Fuel excise is a tax on fuel products produced or manufactured in Australia (excisable goods).

    Limitations

    Australian Petroleum Statistics data are based on a voluntary survey and are generated independently of the ATO. They may suffer from coverage and classification issues, and are subject to revisions which can result in changes to the size of the estimated fuel excise gap.

    There may be timing differences. 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.

    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, as survey respondents are not given instructions to correct fuel volumes to 15 degrees celsius. Assumptions around related volumetric calculations may have an impact.

    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
    • excise tariff rates published on our website
    • internal ATO data on excise amounts paid and compliance results.

    See also:

    Reliability assessment

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

    ATO 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.

    The fuel excise gap estimate is assessed to be of medium reliability.

      Last modified: 26 Oct 2018QC 53165