• Fuel tax credits

    Australia’s fuel tax credits system provides taxpayers with a credit for fuel tax (excise or customs duty) included in the price of fuel they use for machinery, plant, equipment and heavy vehicles. To be eligible for a fuel tax credit, an entity must be registered for fuel tax credits at the time it acquires, manufactures or imports taxable fuel for use in carrying on a business. Differing rates of fuel tax credits apply depending on the type and use of the fuel.

    Methodology

    The fuel tax credit (FTC) gap is the difference between the estimated value of fuel tax credits business are entitled to claim according to the law and the value of fuel tax credits actually claimed by businesses for a financial year.

    As the fuel tax credits system is a voluntary system, there is over-compliance by taxpayers – that is, taxpayers who have not lodged claims they are entitled to. This results in a negative FTC gap.

    Our gap relates to both the over- and under-claiming of fuel tax credits. As an administered expense, the FTC gap arises from:

    • being incorrectly registered to claim fuel tax credits
    • failure to lodge an fuel tax credits claim (resulting in over-compliance)
    • incorrect reporting of fuel tax credits claims – the behaviours vary from unintentional mistakes, complexity, tax avoidance activities, fraud, and the over-claiming of fuel tax credits due to rate changes
    • non-payment of fuel tax credits liabilities raised from our audit activities. As an expenditure item, debt manifests where a taxpayer has overclaimed fuel tax credits and is required to pay back the over-claimed amount to us
    • any clawback from income tax for over-paid amounts.

    The key data source is the ATO fuel tax credits random enquiry program. This program randomly selects taxpayers with FTC obligations and conducts reviews of their reporting to detect issues and identify non-compliance. To minimise the impact on compliant taxpayers, these enquiries were phone-based initial contacts, followed by written requests for information and desk-based reviews as necessary.

    We assume that:

    • the sample is representative of the population
    • the incidence and magnitude of non-compliance found in the random sample is representative of the population
    • the final changes to liabilities as a result of compliance activities are correct at law and not subject to further change.

    The FTC gap estimate is calculated using a bottom-up approach. For the 2014–15 estimate, we use data derived from the ATO random enquiry program undertaken in 2015–16. For prior years, we use the results obtained from the statistically-based random audit program of 2006–07 fuel tax credits undertaken in 2007–08.

    The components required to calculate the FTC gap estimate amount are:

    • fuel tax credits registrant population statistics – numbers and proportions of fuel tax credits claimants for the 2014–15 income tax year.
    • random enquiry program results – the proportion of non-compliance, the standard deviation of the proportion, the average amount of non-compliance, and the standard deviation of the average amount for fuel tax credits claimants
    • compliance outcome – the final result of fuel tax credits review and audit cases for the fuel tax credits claimants in the 2014–15 income year.

    The core of the approach is to determine the proportion of non-compliant claimants in the sample and apply this to the fuel tax credits registrant population. We do this as follows:

    1. Determine the incidence of non-compliance in the fuel tax credits registrant population.
    2. Calculate the average amount of non-compliance per claimant in the sample.
    3. Estimate the gross FTC gap. We multiply the number of claimants in the population by the corresponding average amount of non-compliance per claimant in the sample to yield the gross FTC gap for the population.

    Limitations

    The gap estimates are derived from the randomly selected sample. Although it is assumed that the sample is representative of the population, there may be isolated instances of fuel tax credits non-compliance present outside the sample, which have not been captured in this analysis.

    The sample size for this random enquiry program is small. In general terms, the larger the sample the more reliable the results.

    The extent of non-detection is unknown and is extremely challenging to measure. The random enquiry program is subject to uncertainty around the impact of non-detection error.

    This estimate does not include the population that may be entitled to fuel tax credits, yet has not registered or lodged a claim to receive fuel tax credits. This population would represent over-compliance in not claiming fuel tax credits to which they would otherwise be entitled.

    Reliability of estimates

    The FTC gap estimate is assessed to be of medium reliability. It is in its first year of use and its robustness is yet to be fully established. The random enquiry sample size is small.

    Future directions

      Last modified: 27 Oct 2016QC 50394