House of Representatives

Taxation of Alternative Fuels Legislation Amendment Bill 2011

Excise Tariff Amendment (Taxation of Alternative Fuels) Bill 2011

Customs Tariff Amendment (Taxation of Alternative Fuels) Bill 2011

Customs Tariff Amendment (Taxation of Alternative Fuels) Act 2011

Energy Grants (Cleaner Fuels) Scheme Amendment Bill 2011

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP and the Minister for Home Affairs, the Hon Brendan O'Connor MP)

Taxation of alternative fuels

Outline of chapter

1.1 The four Bills contained in the package are the Taxation of Alternative Fuels Legislation Amendment Bill 2011, the Excise Tariff Amendment (Taxation of Alternative Fuels) Bill 2011, the Customs Tariff Amendment (Taxation of Alternative Fuels) Bill 2011 and the Energy Grants (Cleaner Fuels) Scheme Amendment Bill 2011.

1.2 The Bills amend the Excise Act 1901 , the Excise Tariff Act 1921 , the Customs Tariff Act 1995 , the Fuel Tax Act 2006 , the Product Grants and Benefits Administration Act 2000 and the Taxation Administration Act 1953 (TAA 1953). The Bills extend then revise the operation of the Energy Grants (Cleaner Fuels) Scheme Act 2004 . The Bills include certain alternative fuels used for transport purposes in the fuel taxation regime, and make them subject to excise duty or excise-equivalent customs duty. The taxation rates are based on the energy content of various fuels, and discounted to reflect the potential benefits of alternative fuels. The changes are phased in over a transition period to allow affected parties time to adjust to the changes.

Context of amendments

1.3 The Bills implement the longstanding plan for energy content based taxation of alternative fuels, with some amendments.

1.4 Under the current law the general rate of fuel tax of 38.143 cents per litre (cpl) which applies to petrol and diesel also applies to biodiesel, renewable diesel and ethanol, but not to liquefied petroleum gas (LPG), liquefied natural gas (LNG), compressed natural gas (CNG) or methanol.

1.5 There is currently a grant payable for biodiesel and renewable diesel of 38.143 cpl under the Energy Grants (Cleaner Fuels) Scheme where it meets the relevant fuel quality standards in the Fuel Quality Standards Act 2000 .

1.6 In the case of ethanol, there may be an entitlement to a grant for eligible manufacturers under the existing Ethanol Production Grants Program.

1.7 The intention of the changes is to:

·
introduce greater consistency in the taxation of fuels used for transport purposes and to ensure that competition between untaxed transport fuels and currently taxed fuels does not harm economic efficiency and create distortions;
·
provide certainty to industry; and
·
phase-in the new fuel tax arrangements while providing support to the alternative fuels industry in recognition of the potential environmental, fuel security and regional development benefits that these industries can generate.

Summary of new law

1.8 The Bills include alternative fuels in the fuel taxation regime. These fuels include LPG, LNG and CNG.

1.9 The rates of excise and excise-equivalent customs duty are based on the energy content of the fuels with a 50 per cent discount. The alternative fuels excise rates are discounted to reflect the potential benefits of these fuels.

1.10 The amendments apply to fuel manufactured on or after 1 December 2011. The amendments also apply in the case of fuel imported into Australia before 1 December 2011 where the time for working out the rate of import duty on the goods had not occurred before 1 December 2011. The amendments also apply to fuel on hand at manufacturers' premises on 1 December 2011.

1.11 The amendments are phased in over a transition period to allow affected parties time to adjust to the changes.

Comparison of key features of new and current law

New law Current law
LPG
LPG for transport use is subject to fuel tax at the rate of 12.5 cpl. The application of tax is phased in over the period 1 December 2011 to 1 July 2015. LPG is not subject to fuel tax.
LNG
LNG for transport use is subject to fuel tax at a rate of 26.13 cents per kilogram. The application of tax is phased in over the period 1 December 2011 to 1 July 2015. LNG is not subject to fuel tax.
CNG
CNG for transport use (other than home manufacture for transport use and manufacture for forklift use) is subject to fuel tax at a rate of 26.13 cents per kilogram. The application of tax is phased in over the period 1 December 2011 to 1 July 2015. CNG is not subject to fuel tax.
Biodiesel
The Energy Grants (Cleaner Fuels) Scheme Act 2004 is extended to continue the grant arrangements for biodiesel. Excise or excise-equivalent customs duty for biodiesel continues to be imposed at the point of manufacture or importation. Fuel tax on biodiesel is imposed at the rate of 38.143 cpl, which also applies to petrol and diesel.

Biodiesel producers and importers are eligible for a grant of 38.143 cpl paid under the Energy Grants (Cleaner Fuels) Scheme Act 2004 where the biodiesel meets the relevant fuel quality standard under the Fuel Quality Standards Act 2000 .

Renewable diesel
The Energy Grants (Cleaner Fuels) Scheme Act 2004 is extended to continue the grant arrangements for renewable diesel. Excise or excise-equivalent customs duty for renewable diesel continues to be imposed at the point of manufacture or importation.

Fuel tax on renewable diesel is imposed at the full rate of 38.143 cpl, which also applies to petrol and diesel.

Renewable diesel producers and importers are eligible for a grant of 38.143 cpl paid under the Energy Grants (Cleaner Fuels) Scheme Act 2004 where the renewable diesel meets the relevant fuel quality standard for diesel under the Fuel Quality Standards Act 2000 .

Ethanol
Domestically manufactured ethanol will continue to be subject to excise duty of 38.143 cpl.

The existing contract based Ethanol Production Grants Program will be extended and the rate of the grant maintained.
Excise-equivalent customs duty on ethanol will remain at 38.143 cpl.

The legislated changes from 1 July 2011 to the Energy Grants (Cleaner Fuels) Scheme Act 2004 will not apply to ethanol.

Fuel tax on ethanol is imposed at the full rate of 38.143 cpl, which also applies to petrol and diesel.

Before 1 July 2011, qualifying ethanol producers are entitled to a grant of 38.143 cpl under the Ethanol Production Grants Program.
From 1 July 2011 qualifying ethanol producers are eligible for a grant paid under the Energy Grants (Cleaner Fuels) Scheme Act 2004 where the ethanol meets the relevant fuel quality standard under the Fuel Quality Standards Act 2000 .

Fuel tax credits - end users
An entitlement to fuel tax credits will apply to LPG, LNG and CNG used in carrying on an enterprise for off-road use. No net fuel tax credits will be payable where the fuel is used on-road in heavy vehicles as the road-user charge will exceed the rate of duty payable. There is no entitlement to fuel tax credits for LPG, LNG or CNG as no fuel tax is payable.
Fuel tax credits - LPG unlicensed distributors
Unlicensed distributors of LPG that acquire LPG that is subject to excise will be entitled to fuel tax credits to allow the sale of LPG to be effectively excise-free if:

·
supplied to businesses in tanks of 210 kilograms or less capacity for non-transport use; or
·
supplied to residential premises for non-transport use.

No entitlement to fuel tax credits currently exists for distributors.

Detailed explanation of new law

1.12 The Bills implement energy content based taxation of certain transport fuels, with a 50 per cent discount for alternative fuels.

Ethanol

1.13 Ethanol is a liquid alcohol usually produced through fermentation and distillation from crops rich in sugar or starch. Australia currently produces ethanol from wheat, sorghum and C-grade molasses. There is potential for other feedstocks and technological processes to be used to produce ethanol in the future.

1.14 Ethanol as a fuel is most commonly sold as a blend of up to 10 per cent ethanol and 90 per cent or more petrol (E10) in Australia.

1.15 Currently, the petrol and diesel rate of fuel tax of 38.143 cpl applies to ethanol. A grant of 38.143 cpl is payable under the Ethanol Production Grants Program to qualifying ethanol manufacturers.

1.16 The existing Ethanol Production Grants Program operates on an administrative basis and is entered into contractually by producers. The program was to expire on 30 June 2011, and the Energy Grants (Cleaner Fuels) Scheme Act 2004 was legislated to apply to the manufacture of ethanol from 1 July 2011.

1.17 Under these amendments excise and excise-equivalent customs duty continues to be imposed on ethanol at the point of manufacture or importation.

1.18 The Ethanol Production Grants Program will be extended. The rate of the grant will continue to be 38.143 cpl. The requirements of the contract based Ethanol Production Grants will continue, and qualifying manufacturers will need to comply with these requirements.

1.19 After 30 June 2021, the Government will conduct a review of the taxation arrangements for ethanol. The review is intended to encompass taxation of ethanol under the customs regime as well as the excise regime.

Biodiesel

1.20 Biodiesel is a fuel manufactured by chemically altering vegetable oils or animal fats or oils (or recycled oils from these sources). Biodiesel can also be produced from various non-food crops such as pongamia, jatropha curcas and algae.

1.21 Biodiesel is generally used as a transport fuel and sold as B5 or B20 (comprising diesel together with up to 5 per cent biodiesel or more than 5 per cent and up to 20 per cent biodiesel respectively). Biodiesel is chemically distinct from diesel.

1.22 The petrol and diesel rate of fuel tax of 38.143 cpl applies to biodiesel. Manufacturers and importers of biodiesel (provided they are the last licensed entity for the fuel) are eligible for a grant of 38.143 cpl paid under the Energy Grants (Cleaner Fuels) Scheme Act 2004 where the biodiesel meets the relevant fuel quality standard under the Fuel Quality Standards Act 2000 .

1.23 Excise and excise-equivalent customs duty is imposed on biodiesel at the point of manufacture or importation.

1.24 The Energy Grants (Cleaner Fuels) Scheme Act 2004 is extended to provide an ongoing grant to eligible manufacturers or importers. However, after 10 years a review will be conducted of the taxation and grant arrangements. [ Schedule 1, items 1 and 2 of the Energy Grants ( Cleaner Fuels ) Scheme Amendment Bill 2011 ]

1.25 After 30 June 2021, the Government will conduct a review of the taxation arrangements for biodiesel. The review is intended to encompass taxation of biodiesel under the customs regime as well as the excise regime.

1.26 The amendments also update the rules for working out the amount of fuel tax payable on blended goods such as blends of biodiesel and diesel. [ Schedule 1, item 2 of the Excise Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ]

Renewable diesel

1.27 Renewable diesel is produced by a chemical process which results in the product having the same chemical structure as diesel. Renewable diesel producers and importers are currently eligible for a grant of 38.143 cpl paid under the Energy Grants (Cleaner Fuels) Scheme Act 2004 for renewable diesel which meets the relevant fuel quality standard for diesel under the Fuel Quality Standards Act 2000 .

1.28 Excise and excise-equivalent customs duty is imposed on renewable diesel at the point of manufacture or importation at a rate of 38.143 cpl. This reflects the high energy content of renewable diesel. After 30 June 2021, the Government will conduct a review of the taxation arrangements for renewable diesel.

1.29 The Energy Grants (Cleaner Fuels) Scheme Act 2004 is extended to continue to provide a grant to eligible manufacturers or importers. [ Schedule 1, items 1 and 2 of the Energy Grants ( Cleaner Fuels ) Scheme Amendment Bill 2011 ]

LPG

1.30 LPG is the generic name for mixtures of light hydrocarbon gas, consisting of mainly propane or propane and butane that have been liquefied through compression. These gases are produced either directly through the processing of crude oil and natural gas or as a by-product of the petroleum refining process.

1.31 LPG is generally supplied as a mixture of propane and butane but it can also be supplied as 100 per cent propane. It may also include a small proportion of other hydrocarbons. In addition to being used as a transport fuel, LPG containing propane only is used for a variety of purposes including commercial and domestic cooking, drying, heating and water heating. [ Schedule 1, item 3 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

1.32 LPG is not currently subject to excise or excise-equivalent customs duty.

1.33 Under these amendments fuel excise and excise-equivalent customs duty is imposed on LPG at the point of manufacture or importation.

1.34 The Excise Regulations 1925 and the Customs Regulations 1926 will be amended to provide an automatic remission of duty where the LPG is supplied for a non-transport use.

1.35 Accordingly, licensed manufacturers and holders of excise storage licences will apply an automatic remission for LPG used or supplied for non-transport use. No remission will apply for LPG used or supplied for a transport use or for a mixed use. [ Schedule 1, items 3 and 5 to 7 of the Excise Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ]

Example 1.1: LPG is excisable but an automatic remission is available Elizabeth manufactures LPG. Elizabeth supplies the LPG to Brian for a non-transport use. The LPG is excisable. However, as Elizabeth supplies the LPG to Brian for a non-transport use, she applies an automatic remission to the LPG. This means that the duty liability on the fuel is extinguished, and Elizabeth does not have to remit excise duty in relation to the LPG supplied to Brian.

Example 1.2: LPG is excisable and automatic remission is not available Aaron manufactures LPG. Aaron delivers the LPG to Christopher in a bulk tank for transport and non-transport use. The LPG is excisable. As Aaron supplies the LPG to Christopher for mixed use, he cannot apply an automatic remission to the LPG. This means that Aaron must remit excise duty in relation to the LPG supplied to Christopher. Christopher may be entitled to a fuel tax credit for his eligible non-transport use.

1.36 LPG is defined in the legislation to include liquid propane, liquid mixtures of propane and butane; liquid mixtures that are either predominantly propane and butane mixtures or predominantly butane with other light hydrocarbons. [ Schedule 1, items 3 and 33 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ; Schedule 1, item 1 of the Excise Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ; Schedule 1, item 2 of the Customs Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ]

1.37 Accordingly, an excisable product does not come into existence until such time as the relevant gases are changed into a liquid form.

1.38 LPG is also not subject to excise where it is used at an excise manufacturer's licensed premises to manufacture petroleum condensate, stabilised crude petroleum oil, LNG, LPG or other hydrocarbons. [ Schedule 1, items 7 and 10, section 77HB of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

1.39 In recognition of the lower energy content of LPG compared to petrol or diesel, excise and excise-equivalent customs duty is imposed on LPG at a lower rate. Consequently, the full rate of taxation on LPG is 25 cpl.

1.40 These amendments impose excise and excise-equivalent customs on LPG at a final rate of 12.5 cpl, reflecting the 50 per cent discount for the alternative fuels. The Government will undertake a review of the taxation arrangements for LPG in 2015.

1.41 The policy intention is to levy fuel tax on LPG only when it is used for a transport purpose. Fuel tax may, for example, apply where an unlicensed party acquires LPG from a licensed party for further sale where the end use of the product is not known.

Example 1.3 The Camille Manufacturing Company supplies LPG that it manufactures to Sebastien LPG, a marketing company which has storage facilities that are excise licensed. Sebastien LPG marketing company then supplies LPG to its distributor, Isobelle LPG. Isobelle LPG is contracted to deliver LPG to tanks for use by households at residential premises. The Tax Office has granted a continuous movement permission for the Camille manufacturing company to move the LPG underbond to Sebastien LPG and for Sebastien LPG to move the LPG underbond to Isobelle LPG.As Isobelle LPG is licensed and is supplying the LPG for a non-transport use, it can apply an automatic remission to the LPG supplied to the residential premises.Isobelle LPG must provide a notice (see the discussion on notices under heading 'Notices and penalties') to the householder that excise duty has not been paid on the LPG, and there are penalties in diverting the LPG to a transport use.

Example 1.4 The same facts apply as Example 1.3 except that Isobelle LPG is not licensed for excise purposes. Sebastien LPG knows that Isobelle LPG only distributes LPG to residential premises for non-transport use. Therefore Sebastien LPG is able to apply an automatic remission to the LPG when it is supplied to Isobelle LPG. Therefore no excise is paid on this LPG.Sebastien LPG must provide a notice (see under heading 'Notices and penalties') to Isobelle LPG and Isobelle LPG must in turn provide a notice to householders advising that excise duty has not been paid on the LPG, and the penalties for diverting the LPG to a transport use.

Example 1.5 Barbeque Co buys filled LPG barbeque cylinders directly from a licensed LPG manufacturer. As the LPG is not going to be used for a transport application, the LPG manufacturer can apply an automatic remission to the LPG sold to Barbeque Co.The LPG manufacturer must provide a notice to Barbeque Co that excise duty has not been paid on the LPG and that there are penalties for diverting the LPG to a transport use.

Fuel tax credits

1.42 Distributors of LPG on which excise duty has been paid will be entitled to claim a fuel tax credit in relation to the LPG they supply in the following circumstances:

·
the LPG has been acquired to make a supply;
·
the LPG is supplied to a tank at residential premises or a tank that supplies two or more residential premises and may include business premises; and
·
the tank is not for use in supplying LPG for transport use.

[ Schedule 1, items 16 to 21 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

1.43 It is expected that the availability of fuel tax credits to the supplier will be passed on to the end user in the form of a lower price.

1.44 A new definition of 'residential premises' has been inserted into the Fuel Tax Act 2006 . [ Schedule 1, item 34 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

1.45 Packagers of LPG on which excise duty has been paid will be entitled to claim a fuel tax credit in relation to the LPG that is packaged if:

·
the LPG has been acquired for packaging;
·
the LPG is packaged in containers with a capacity of 210 kilograms or less; and
·
the LPG is not supplied for a transport use;

[ Schedule 1, items 16 to 21 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

Example 1.6 DistroCo is not licensed for excise purposes and acquires bulk LPG for both transport and non-transport use. Accordingly, the LPG they acquire has been subject to duty. DistroCo packages and sells a range of LPG products for transport and non-transport use. DistroCo packages and sells 9 kilogram LPG gas bottles for sale to a service station. The service station then on-sells these gas bottles to customers.Steve is a customer of the service station and on 24 December 2011, he buys two of the gas bottles. He uses one of the gas bottles for his BBQ and the other for his patio heater.Because DistroCo packaged the LPG in containers of 210 kilograms capacity or less and the other requirements are met, DistroCo is entitled to a fuel tax credit for the excise or excise-equivalent customs duty that it paid on the LPG.It is expected that DistroCo and the service station will sell the gas bottles at a price that reflects the availability of fuel tax credits.

1.46 Where LPG is delivered excise paid to a distributor's business customer for end use and the business customer has a tank capacity of greater than 210 kilograms, a fuel tax credit is available to the business customer under the existing operation of the Fuel Tax Act 2006 for eligible use of the fuel.

Notices and penalties

1.47 Sellers of LPG are required to provide a notice to buyers where they supply LPG on which excise has not been paid because an excise remission applies in relation to the LPG at the time of the supply. This requirement applies to sellers that are excise licensed, holders of excise storage licences, holders of permissions issued under section 61C of the Excise Act 1901 , or unlicensed sellers who acquire the LPG from a licensed seller and receive such a notice. [ Schedule 1, item 11, subsections 77L(1 ) and ( 2 ) of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

1.48 The notice must set out that excise has not been paid on the LPG supplied and explain the penalties that apply for unlawful sale or use of the LPG. A regulation-making power enables rules concerning the manner and form of the notice to be prescribed as well as circumstances in which a notice is not required to be given. This will enable retailers that sell LPG camping and barbeque bottles and similar small LPG cylinders to be excluded from the notice requirements. A person commits an offence if they are required to give notice and fail to do so. [ Schedule 1, item 11, subsections 77L(3 ) to ( 5 ) of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

1.49 Penalties may apply where LPG has not been subject to excise and it is later used or sold for a transport use.

1.50 Firstly, where LPG is supplied to a person, a penalty equal to twice the amount of duty payable on the LPG is payable by the user of LPG if:

·
they acquired the LPG and used the fuel for a transport use (other than a forklift or similar vehicle used off-road); and
·
the fuel was subject to an excise remission at the time of use.

[ Schedule 1, item 11, section 77M and item 14 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

1.51 The term 'excisable use' is used to refer to use of LPG for a transport use in an engine in a vehicle or vessel by filling the fuel tank or another tank connected to the engine. The supply of fuel to a forklift used mainly off-road or a similar vehicle prescribed by regulations does not constitute an excisable use. [ Schedule 1, item 2 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

1.52 A penalty of two years imprisonment or the greater of 500 penalty units and five times the excise duty avoided applies to a seller of LPG if:

·
the seller intentionally sells the LPG knowing it will be used for a transport use (other than a forklift or similar vehicle off-road) or is reckless as to whether the LPG will be used for such a purpose; and
·
the LPG is used for such a purpose at the time at which an LPG remission applies.

[ Schedule 1, items 12 and 13 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

1.53 The penalty is the same as that imposed by section 117B of the Excise Act 1901 that applies to the sale of excisable goods on which excise has not been paid. The penalty applies to deter both licensed and unlicensed sellers making financial gains from unlawfully selling LPG that has not been subject to excise for transport use. For example, LPG sellers will commit an offence where LPG is delivered, under remission, to a bulk tank at a retail service station, or other premises where the fuel will clearly be used for a transport purpose, such as where it can been seen that the facility has vehicle refuelling equipment connected. The presence of such equipment evidences an intention to use the LPG for a transport purpose (other than use in a forklift or similar vehicle off-road).

1.54 The amendments introduce a definition of 'apply' into the Excise Act 1901 and also a definition of 'excisable LPG'. These definitions are used in the penalty and notice provisions to identify situations in which an automatic remission of LPG has been applied by an excise licensed party and where LPG has been used in circumstances in which excise ought to have been payable. [ Schedule 1, items 1, 2, 4 and 5 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

1.55 Transitional rules phase in the application of excise and excise-equivalent customs duty for LPG as follows. [ Schedule 1, items 7 to 11 of the Excise Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ; Schedule 1, Parts 1 and 3 to 6 of the Customs Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ]

Table 1.1 : Rate of excise and excise-equivalent customs duty for LPG during the transitional period (cpl )

1 Dec 2011 to 30 June 2012 2012 - 13 2013 - 14 2014 - 15 From

1 July 2015

Final rate

2.5 5.0 7.5 10.0 12.5

1.56 The final rate of excise and excise-equivalent customs duty of 12.5 cpl applies to LPG from 1 July 2015. [ Schedule 1, item 11, subitem 10 . 19A in the table of the Excise Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ; Schedule 1, Part 6, Division 2 of the Customs Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ]

1.57 The ordinary rules of licensing for manufacturing excisable goods and importing goods subject to customs duty apply and manufacturers of alternative fuels need to be licensed under the excise system. However, special transitional provisions provide additional time for manufacturers of gaseous fuels who are not currently licensed to obtain manufacturer's licences. The transitional arrangements also provide permission to deliver goods for home consumption without entry. [ Schedule 2, items 1 to 4 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

1.58 Under the transitional licensing rules manufacturers of LPG have until 31 January 2012 to apply for a manufacturer's licence.

LNG

1.59 LNG is produced from natural gas that is cooled to the point that it condenses to a liquid (approximately -161°C). LNG is typically exported but is also used as a transport fuel, generally in heavy-duty long range road transport.

1.60 LNG is not currently subject to excise or excise-equivalent customs duty.

1.61 Under these amendments fuel excise and excise-equivalent customs duty is imposed on LNG at the point of manufacture or importation. [ Schedule 1, items 4 and 7 of the Excise Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ; Schedule 1, Part 1, item 10 of the Customs Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ]

1.62 Given that most LNG that is produced is not for transport use, automatic remissions of excise and excise-equivalent customs duty on LNG are available where it is used for purposes other than in an internal combustion engine for use in a vehicle.

1.63 LNG is also not subject to excise where it is used at an excise manufacturer's licensed premises to manufacture petroleum condensate, stabilised crude petroleum oil, LNG, LPG or other hydrocarbons. [ Schedule 1, item 10, section 77HB of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

1.64 The automatic remission for prescribed classes of LNG removes the obligation to remit duty by an entity that is a licensed manufacturer or the holder of licensed storage facilities, where the LNG is for a non-transport use. An automatic remission will be included in the excise and customs regulations.

1.65 Excise and excise-equivalent customs duty is imposed on LNG that is used in an internal combustion engine for transport use. The appropriate unit of measurement for LNG and CNG is cents per kilogram, rather than cpl as with the other alternative fuels. The final rate of 26.13 cents per kilogram that applies from 1 July 2015 reflects the energy content of LNG, with a discount of 50 per cent because it is an alternative fuel. [ Schedule 1, item 11, subitem 10 . 19B in the table of the Excise Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ; Schedule 1, Part 6, Division 1 of the Customs Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ]

1.66 Transitional rules phase in the application of excise and excise-equivalent customs duty for LNG as follows. [ Schedule 1, items 7 to 11 of the Excise Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ; Schedule 1, Parts 1 and 3 to 6 of the Customs Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ]

Table 1.2 : Rate of excise and excise-equivalent customs duty for LNG during the transitional period (cents per kilogram )

1 Dec 2011 to 30 June 2012 2012 - 13 2013 - 14 2014 - 15 From

1 July 2015

Final rate

5.22 10.45 15.67 20.9 26.13

1.67 The ordinary rules of licensing for manufacturing excisable goods and importing goods subject to customs duty apply and manufacturers need to be licensed under the excise and customs systems. However, special transitional provisions provide additional time for manufacturers of gaseous fuels who are not currently licensed to obtain manufacturer's licences. The transitional arrangements also provide permission to deliver goods for home consumption without entry. [ Schedule 2, items 1 to 4 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

1.68 Under the transitional licensing rules manufacturers of LNG have until 31 January 2012 to apply for a manufacturer's licence.

CNG

1.69 CNG is produced from natural gas, which is compressed. CNG is used in some bus fleets, street sweepers and garbage collection vehicles. There is no significant use of CNG in cars in Australia at this stage.

1.70 CNG is not currently subject to excise or excise-equivalent customs duty.

1.71 Under these amendments fuel excise is imposed on CNG at the point of manufacture, which is when the natural gas is compressed for use in a vehicle, or when it is imported for use in a vehicle. [ Schedule 1, item 4 of the Excise Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ; Schedule 1, Part 1, item 11 of the Customs Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ]

1.72 Excise is imposed on CNG at a final rate of 26.13 cents per kilogram. This reflects that the appropriate unit of measurement for natural gas, including LNG and CNG, is cents per kilogram, rather than cpl that is used for the other alternative fuels. The final rate of 26.13 cents per kilogram reflects the energy content of CNG, with a discount of 50 per cent because it is an alternative fuel. [ Schedule 1, item 11, subitem 10 . 19C in the table of the Excise Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ; Schedule 1, Part 6, Division 3 of the Customs Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ]

1.73 Similar to LNG, this rate reflects the energy content of CNG with the discount for alternative fuels.

1.74 Excise and excise-equivalent customs duty is imposed on the manufacture or importation of CNG where it is manufactured or imported for use in vehicles. However, excise does not apply:

·
where CNG is used or intended for use for something other than as a fuel for a vehicle;
·
to the extent the process of manufacture is not part of the activities of the enterprise, for example, excise is not imposed where natural gas is compressed in home refuelling systems for non-business purposes; or
·
where CNG is used in a forklift off-road or other vehicles prescribed by regulation.

[ Schedule 1, item 10, section 77HA of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

Example 1.7:CNG manufacture in an enterprise A taxi driver compresses CNG in a home refuelling system for use in their taxi. Excise applies to the CNG as it is used as fuel in a vehicle in the course of carrying on an enterprise.

Example 1.8:CNG manufacture for private purposes David has CNG compression equipment installed at his residence and he uses it solely to fill the tank of his own privately used CNG powered car. Excise does not apply as the CNG has not been manufactured in the course of carrying on an enterprise.

1.75 Transitional rules phase in the application of excise and excise-equivalent customs duty for CNG as follows. [ Schedule 1, items 7 to 11 of the Excise Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ; Schedule 1, Parts 1 and 3 to 6 of the Customs Tariff Amendment (Taxation of Alternative Fuels)Bill 2011 ]

Table 1.3:Rate of excise and excise-equivalent customs duty for CNG during the transitional period (cents per kilogram)

1 Dec 2011 to 30 June 2012 2012-13 2013-14 2014-15 From

1 July 2015

Final rate

5.22 10.45 15.67 20.9 26.13

1.76 The final rate of excise and excise-equivalent customs duty of 26.13 cents per kilogram applies from 1 July 2015. [ Schedule 1, item 11, subitem 10 . 19C in the table of the Excise Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ; Schedule 1, Part 6, Division 3 of the Customs Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ]

1.77 The ordinary rules of licensing for manufacturing excisable goods and importing goods subject to customs duty apply and manufacturers need to be licensed under the excise and customs systems. However, special transitional provisions provide additional time for manufacturers of gaseous fuels who are not currently licensed to obtain manufacturer's licences. The transitional arrangements also provide permission to deliver goods for home consumption without entry. [ Schedule 2, items 1 to 4 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

1.78 Under the transitional licensing rules manufacturers of CNG have until 31 January 2012 to apply for a manufacturer's licence.

Fuel tax credits

1.79 Fuel tax credits are available to eligible businesses to provide a credit for the fuel tax included in the price of fuel used in business activities, machinery, plant, equipment and heavy vehicles. Fuel tax credits remove or reduce the incidence of fuel tax from business inputs.

1.80 The purpose of fuel tax credits is to avoid distorting business investment decisions and behaviour that would occur through taxing business inputs.

1.81 The result is that fuel tax is only effectively collected from fuel consumed in:

·
vehicles for private use and for other private purposes;
·
business use on-road in motor vehicles with a gross vehicle mass of more than 4.5 tonnes but only to the extent of the road-user charge;
·
business use in vehicles of 4.5 tonne gross vehicle mass or less used on public roads; and
·
certain industry use (for example, quarrying, manufacturing and construction industries) in off-road applications. These activities are currently entitled to a fuel tax credit of 19.0715 cpl (which is 50 per cent of the full rate of 38.143 cpl). The full rate applies to these activities from 1 July 2012.

1.82 These amendments result in entitlement to fuel tax credits being extended to include excise and excise-equivalent customs duty payable on LPG, LNG, and CNG used in carrying on an enterprise. No specific amendment is required to achieve this as fuel tax credits apply in general terms to taxable fuels, that is, fuels to which excise or excise-equivalent customs duty has been imposed.

1.83 The amount of fuel tax credits is reduced in certain circumstances including grants or subsidies payable by the Commonwealth and by the amount of any road-user charge for heavy vehicles determined by the Transport Minister. From 1 July 2010, the road-user charge is 22.6 cpl. Only off-road use of the fuels potentially qualifies for fuel tax credits as the road user charge exceeds the rate of duty that applies for on-road use of LPG, LNG and CNG.

1.84 The amendments include provisions for working out the rate of fuel tax, grant or subsidy. Entitlement to fuel tax credits for fuel acquired in a financial year during the transition period are determined (subject to the road-user charge) based on the excise or excise-equivalent customs duty rate applicable at the date of acquisition, manufacture or import. [ Schedule 1, items 25, 26 and 32 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

1.85 In working out the fuel tax payable on blended fuels, the amendments include a mechanism which sets the entitlement for fuel tax credits for blends directly in the legislation. A regulation-making power exists to allow specific fuel blends to be prescribed which qualify for a full fuel tax credit based on the petrol or diesel rate of excise paid. The regulations will include blends that currently qualify for fuel tax credits at the petrol and diesel rate. This includes B5, B20 and E10. [ Schedule 1, items 27 and 28 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

1.86 Where the specific blends are not prescribed in the regulations, the fuel tax credit entitlement is based on the amount of duty payable on the individual fuels that make up the blend. The ratio of the alternative fuel and the petrol or diesel in the blend is based on the minimum percentage of the petrol or diesel that is set out in the terms and conditions for the sale of the fuel. Where evidence is held of the specific ratios of the fuels in the blend purchased, then that ratio can be used to determine the fuel tax credit entitlements of the fuel blend. [ Schedule 1, item 28 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

1.87 This removes any uncertainty in claiming fuel tax credits for blends that can contain different proportions of fuels to make up the blend. For example, E85 is a blend containing ethanol and petrol, however it can contain between 70 per cent and 85 per cent ethanol. In terms of calculating the fuel tax credit, E85 is treated as containing 85 per cent ethanol and 15 per cent petrol. Similarly, this rule also applies to biodiesel blends that contain greater than 20 per cent biodiesel.

1.88 In the case of ethanol, the fuel tax credit is calculated taking into account any grant paid under the contractually based Ethanol Production Grant Program. This ensures that both domestically produced and imported ethanol is treated as having been domestically manufactured for fuel tax credit purposes with a grant applying of 38.143 cpl, other than for any blends for which fuel tax credits apply, at the petrol or diesel duty rate for the whole blend. The change reflects that claimants of fuel tax credits for ethanol are unlikely to know the source of ethanol purchased and accordingly, are able to apply a standardised approach to claiming fuel tax credits. The fuel tax credit rate applicable is the relevant rate determined on the day of purchase. [ Schedule 1, item 28 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

1.89 A determination-making power has been provided which will allow the Commissioner to determine in writing the proportions of fuel blends that do not meet the above rules. This would include situations in which fuel blends include three or more different fuels. [ Schedule 1, item 28 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

1.90 An amendment is made to ensure that the denial of an entitlement to a fuel tax credit applies if another entity was previously entitled to a fuel tax credit, regardless of whether the fuel tax credit relates to an entitlement for an enterprise or a fuel tax credit for a non-business taxpayer. [ Schedule 1, items 22 to 24 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

Amendments to the Customs Tariff Act 1995

1.91 The amendments to the Customs Tariff Act 1995 contained in the Customs Tariff Amendment (Taxation of Alternative Fuels) Bill 2011 provide rates of duty for imported fuels at rates that are equivalent to the excise duty set out in the Excise Tariff Amendment (Taxation of Alternative Fuels) Bill 2011, for these goods.

1.92 The amendments to the Customs Tariff Act 1995 also include the creation, in Schedule 3, of new subheadings to separately identify blends of ethanol and gasoline and blends of diesel and other substances. This enables the calculation of customs duty for such blends based on the appropriate duty rate for each component, equivalent to the provisions of section 6G of the Excise Tariff Act 1921 . [ Schedule 1, Part 1, Customs Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ]

1.93 The international Harmonized Commodity Description and Coding System, commonly referred to as the Harmonized System, forms the basis of Australia's Customs Tariff. The World Customs Organization administers the Harmonized System with reviews approximately every five years. Signatory parties, including Australia, are required to implement changes resulting from the fourth review of the Harmonized System on 1 January 2012.

1.94 A number of the amendments contained in the fourth review impact on the Customs Tariff Act 1995 provisions relating to fuels. In particular, these amendments create a new subheading 2710.20.00 for certain biodiesel blends, renumber subheading 2710.11 (light oils and preparations) as 2710.12 and create a new heading 3826 for biodiesel and other biodiesel blends.

1.95 Consequently, the Customs Tariff Amendment (Taxation of Alternative Fuels) Bill 2011 contains amendments effective from 1 January 2012, that reflect the new subheadings that enter into force from that date, as a result of the fourth review of the Harmonized System. [ Schedule 1, Part 2 of the Customs Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ]

1.96 The amendments contained in the Customs Tariff Amendment (Taxation of Alternative Fuels) Bill 2011 create a new Additional Note 11 to Chapter 22 to clarify the classification of ethanol denatured with gasoline. The Note provides that if the proportion of gasoline (or other petroleum products) is greater than 1.5 per cent by volume, such goods are classified as mixtures in headings 3824 or 2710. [ Schedule 1, Part 1, item 1 of the Customs Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ]

1.97 The amendments contained in the Customs Tariff Amendment (Taxation of Alternative Fuels) Bill 2011 also impose excise-equivalent rates of duty for certain gaseous fuels. The rates of duty are the same as the rates provided under the Excise Tariff Amendment (Taxation of Alternative Fuels) Bill 2011. The products are:

·
LNG classified to subheading 2711.11.00;
·
LPG classified to subheadings 2711.12.10 and 2711.13.10; and
·
CNG classified to subheading 2711.21.10.

[ Schedule 1, Part 1 of the Customs Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ].

1.98 In the case of LPG, the amendments create a new Additional Note 2 to Chapter 27 to define this product as:

·
liquid propane;
·
a liquid mixture of propane and butane;
·
a liquid mixture of propane and other hydrocarbons that consists mainly of propane; or
·
a liquid mixture of propane, butane and other hydrocarbons that consists mainly of propane and butane.

[ Schedule 1, Part 1, item 2 of the Customs Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ]

1.99 The amendments provide for new domestic subheadings 2711.12.10 and 2711.13.10 that refer to the above definition and apply the excise-equivalent rates. Other products classified in these subheadings that fall outside the definition continue to be free of customs duty (subheadings 2711.12.90 and 2711.13.90). [ Schedule 1, Parts 1 to 7 of the Customs Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ]

1.100 Schedules 5 to 8 to the Customs Tariff Act 1995 specify rates of customs duty for certain goods, including petroleum based fuels, that are defined as US, Thai, Chilean or Association of South East Asian Nations (ASEAN) originating goods, under the Australia-US Free Trade Agreement, the Thailand-Australia Free Trade Agreement, the Australia-Chile Free Trade Agreement and Australia's regional agreement with ASEAN and New Zealand, the ASEAN-Australia-New Zealand Free Trade Agreement, respectively. The Customs Tariff Amendment (Taxation of Alternative Fuels) Bill 2011 creates new items in each of these Schedules and imposes rates of duty that reflect the changes in Schedule 3. [ Schedule 1, Parts 1 to 7 of the Customs Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ]

1.101 The new rates of duty in Schedules 5 to 8 are in accordance with the relevant Free Trade Agreements.

1.102 The amendments to the Customs Tariff Act 1995 (Schedules 3 to 8) ensure that the new rates of duty applicable to fuels applies to goods imported from all sources. These amendments also ensure that the same rate of customs duty applies to imported goods as the excise duty imposed under the Excise Tariff Act 1921 on those goods when domestically produced.

Application and transitional provisions

Application provisions

1.103 These amendments apply to fuel:

·
acquired, manufactured or imported on or after 1 December 2011;
·
imported into Australia before 1 December 2011 where the time for working out the rate of import duty on the goods had not occurred before 1 December 2011; and
·
on hand at licensed (or deemed licensed) premises on 1 December 2011.

[ Schedule 1, items 22 and 29 and Schedule 2, item 2 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ; Schedule 1, item 12 of the Excise Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ; Schedule 1, Part 7 of the Customs Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ]

Commencement provisions

1.104 The four Bills contained in the package are the Taxation of Alternative Fuels Legislation Amendment Bill 2011, the Excise Tariff Amendment (Taxation of Alternative Fuels) Bill 2011, the Customs Tariff Amendment (Taxation of Alternative Fuels) Bill 2011 and the Energy Grants (Cleaner Fuels) Scheme Amendment Bill 2011.

1.105 The Bills commence on Royal Assent, however, the operative provisions of the Energy Grants (Cleaner Fuels) Scheme Amendment Bill 2011 do not apply unless the other Bills in the package commence prior to 1 July 2011. Each of the other Bills in the package also do not have operative effect unless all the other Bills in the package commence on or before 1 December 2011. [ Clause 2 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ; clause 2 of the Excise Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ; clause 2 of the Customs Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ; clause 2 of the Energy Grants ( Cleaner Fuels ) Scheme Amendment Bill 2011 ]

1.106 The conditional commencement provisions in the Bills reflect that the Bills form a package and if some parts of the package are not enacted then unintended outcomes may arise.

Transitional provisions

1.107 Transitional licensing arrangements are available from 1 December 2011 for manufacturers that have excise obligations as a result of this measure. The arrangements deem a manufacturer to have a manufacturer licence, and also deem the manufacturer to have permission under section 61C of the Excise Act 1901 under the transitional licensing arrangements to deliver LPG, LNG or CNG into home consumption after 1 December 2011. [ Schedule 2, items 1 to 4 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

Consequential amendments

1.108 The Energy Grants (Cleaner Fuels) Scheme Act 2004 is amended from 1 July 2011. Amendments are made to the Act to continue the operation of the Act to grants for biodiesel and renewable diesel. Amendments are also made to remove redundant references to LPG, LNG, CNG, ethanol and methanol because the Act will not apply to these fuels, and to update the taxation arrangements for biodiesel and renewable diesel. [ Schedule 1, items 1 to 15 of the Energy Grants ( Cleaner Fuels ) Scheme Amendment Bill 2011 ; Schedule 1, item 27 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

1.109 References in the Fuel Tax Act 2006 to the intention for gaseous fuels to be assessed under that Act from 2011 are repealed. In line with the existing excise and excise-equivalent customs duty arrangements that apply, petrol, diesel, ethanol and biodiesel and renewable diesel continue to be taxed under the relevant excise and customs legislation while, LPG, LNG and CNG commence to be taxed under the relevant excise and customs legislation [ Schedule 1, items 15 and 31 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]. A technical correction has also been made [ Schedule 1, item 30 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ].

1.110 A minor amendment is made to the Product Grants and Benefits Administration Act 2000 to remove a redundant heading. The information gathering powers under Part 9 of the Product Grants and Benefits Administration Act 2000 continue to operate in relation to the Energy Grants (Cleaner Fuels Scheme) Act 2004 . [ Schedule 1, item 35 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

1.111 Section 58 in the Excise Act 1901 refers to LPG. This remains in place from a previous taxation arrangement that resulted in LPG being subject to excise. This reference is redundant and is removed to ensure that there is no conflict between the taxation of alternative fuel provisions and the redundant provision. The amendment ensures that, as with other goods which are exported, LPG which is exported is not subject to excise. [ Schedule 1, items 6 and 7 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

1.112 The Commissioner has the power to determine rules for working out the energy content of excisable goods. [ Schedule 1, items 8 and 9 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]

1.113 As part of the fourth review of the Harmonized System, a change to the customs definition of 'biodiesel' is expected to be made on 1 January 2012. This will result in a number of subheadings in Schedule 3 to the Customs Tariff Act 1995 being repealed and new subheadings being inserted dealing with biodiesel and with mixtures of biodiesel and other substances respectively. [ Schedule 1, Part 2 of the Customs Tariff Amendment ( Taxation of Alternative Fuels ) Bill 2011 ]

1.114 The TAA 1953 is amended to add the LPG penalty in new section 77M of the Excise Act 1901 to the index of tax-related liabilities under other Acts. [ Schedule 1, item 36 of the Taxation of Alternative Fuels Legislation Amendment Bill 2011 ]


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