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  • 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 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 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 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.

    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 the combined petrol fuels and combined diesel fuels 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.

    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, diesel, ethanol, biodiesel and associated blends.

    Summary of estimation process ($ million)

    Step

    2011-12
    ($'m)

    2012-13
    ($'m)

    2013-14
    ($'m)

    2014-15
    ($'m)

    2015-16
    ($'m)

    2016-17
    ($'m)

    Steps 1 to 3

    Total theoretical excise liability

    16,097

    16,644

    16,728

    16,830

    17,216

    17,747

    Step 4

    Less actual excise reported

    16,006

    16,228

    16,378

    16,662

    16,891

    17,416

    Equals fuel excise net gap

    91

    416

    350

    168

    325

    330

    Step 5

    Add compliance outcomes and taxpayer adjustments

    0

    5

    9

    3

    4

    1

    Equals fuel excise gross gap

    91

    421

    359

    171

    329

    331

    Gross and net gap ($ million)

    Gap

    2011-12
    ($'m)

    2012-13
    ($'m)

    2013-14
    ($'m)

    2014-15
    ($'m)

    2015-16
    ($'m)

    2016-17
    ($'m)

    Gross gap

    91

    421

    359

    171

    329

    331

    Net gap

    91

    416

    350

    168

    325

    330

    Gross and net gap (Percentage)

    Gap

    2011-12
    (%)

    201-13
    (%)

    201-14
    (%)

    2014-15
    (%)

    2015-16
    (%)

    2016-17
    (%)

    Gross gap

    0.6

    2.5

    2.1

    1.0

    1.9

    1.9

    Net gap

    0.6

    2.5

    2.1

    1.0

    1.9

    1.9

    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). Note for the purposes of this document, fuel excise will include both excise and customs duty.

    Limitations

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

    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:

    • Australian Petroleum Statistics
    • Excise rates for fuel 

    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: 10 Jan 2020QC 61079