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)
Regulation impact statement
2.1 The regulation impact statement below had been prepared prior to the Government's decision on 11 May 2011 to make changes to its announced alternative fuels policy position. The decision was in response to negotiations with independent members of Parliament. Those negotiations resulted in the following changes:
- a 10 year moratorium applies to the current taxation and grant arrangements for ethanol, biodiesel, renewable diesel and methanol; and
- at the end of this period a review of the taxation and grant arrangements for these fuels would be undertaken.
2.2 Fuel tax consists of excise on certain domestically manufactured fuels, and excise-equivalent customs duty on the relevant imported fuels. These fuels include petrol, diesel, fuel oil, kerosene, benzene, toluene, xylene, biodiesel and fuel ethanol.
2.3 The general rate of fuel tax applying to most fuels is 38.143 cents per litre (cpl).
2.4 Alternative fuels (ethanol, biodiesel and the gaseous fuels) are concessionally taxed. The gaseous fuels including liquefied petroleum gas (LPG), liquefied natural gas (LNG) and compressed natural gas (CNG), are currently outside the fuel tax system.
2.5 The effective fuel tax on domestically produced ethanol and domestically produced and imported biodiesel used in an internal combustion engine is zero. This is because the fuel tax liability is fully offset on ethanol by the ethanol production grants, administered by AusIndustry, and on biodiesel by the Energy Grants (Cleaner Fuels) Scheme, administered by the Australian Taxation Office. Imported ethanol is not offset by a grant and so is taxed at 38.143 cpl (plus an additional 5 per cent customs tariff).
2.6 The 2004-05 Budget included a measure to, from 1 July 2011, bring alternative fuels into the fuel tax net, to tax all fuels on an energy content basis using three energy content bands and to provide alternative fuels with a 50 per cent discount to their energy content rate. Applying fuel tax to alternative fuels was to be phased in over a transitional period from 1 July 2011 until 1 July 2015. Some aspects of this policy have been legislated and some parts have not. The Assistant Treasurer and Minister for Financial Services and Superannuation announced on 24 January 2011 that the start date of the measure would be deferred until 1 December 2011.
Assessing the problem
2.7 The start date for the taxation of alternative fuels has been delayed until 1 December 2011 to allow industry time to prepare for its introduction. Industry also requires certainty about future movements in fuel tax in order to undertake investment decisions.
2.8 Petrol and diesel are currently taxed under the fuel tax system. Alternative fuels are close substitutes for petrol and diesel and their current treatment of no effective fuel tax (except for imported ethanol) distorts consumption and production decisions. It could encourage greater consumption and production of these fuels than optimal resource allocation decisions would dictate, decreasing economic efficiency.
2.9 Fuel tax can be considered as a proxy road-user charge, in the absence of more direct user charging approaches. The consumption of fuel is an indication of how often a vehicle is used, and therefore is one indicator of the contribution of the vehicle to the costs of road congestion, road maintenance and road construction. It is acknowledged there are other factors that contribute to these costs (such as the weight of the vehicle) and factors that determine fuel use that do not impact on these costs (such as the fuel efficiency of the vehicle). However, to the extent that fuel tax can play a role as a proxy road-user charge, the costs that it is reflecting are irrespective of the type of fuel used. If fuel tax is to be effective in reflecting the costs associated with road use, it should apply to all fuels used in an internal combustion engine. The exclusion of alternative fuels from the fuel tax net means that fuel tax is not as effective as it could be in reflecting these costs.
2.10 The current treatment of no effective fuel tax on alternative fuels (except for imported ethanol) recognises arguments that the development of these fuels helps to address environmental, fuel security and regional development issues. As other policy mechanisms are developed that more directly address these issues, there will be less need to have a differential treatment of the alternative fuels in the fuel tax system. The use of ethanol is supported by the mandated addition of ethanol to petrol in New South Wales (NSW) and moves to mandate the addition of ethanol to petrol in Queensland. The conversion of passenger vehicles to use LPG is supported by the LPG Vehicle Scheme. To the extent that alternative fuels emit less carbon, the introduction of a carbon charge will reduce their price compared to other higher emitting fuels. Close consideration will be given to how these other policy mechanisms interact with the fuel tax system.
2.11 The announcement of the measure in the 2004-05 Budget means that industry is aware of and has been expecting the proposed changes although only certain elements of the announced policy have been legislated. Significant deviations from the announced policy that impact on the tax liability of the affected industries may unsettle investment decision making.
2.12 The first objective is to improve the effectiveness and efficiency of the fuel market. Making alternative fuels liable for fuel tax will address a current distortion that can result in a poor allocation of resources between alternative fuels and petrol and diesel.
2.13 The second objective is to improve the performance of fuel tax as a proxy for a road-user charge. For fuel tax to better reflect the road costs that result from vehicle use, it should apply to all fuels used in a combustion engine.
2.14 The third objective is to recognise the environmental, energy security and regional development benefits that can flow from the use of alternative fuels. This objective needs to be weighed against the first two objectives, that is, the extent to which assisting the alternative fuels industry undermines the efficiency of the fuel market and the effectiveness of fuel tax as a proxy road-user charge.
2.15 The fourth objective is to provide the fuel industry and fuel users with certainty as to the future direction of fuel tax policy so that they have confidence to make future investment decisions and consumption choices. Providing them with certainty also requires that they be given adequate time to prepare for the changes to fuel tax.
2.16 The fifth objective is to provide the alternative fuel industry with an appropriate transition period to be able to adjust to the changes to fuel tax.
Option 1:Energy content based fuel taxation with a 50 per cent discount for alternative fuels to be phased in over a transitional period from 1 December 2011 until 1 July 2015
2.17 This option is to deliver on the policy outcomes announced in the 2004-05 Budget but to consider some simpler implementation options.
2.18 Under Option 1:
- All fuels would fall into one of three energy bands according to their energy content: high (energy content greater than 30 megajoules per litre); medium (between 20-30 megajoules per litre) and low (less than 20 megajoules per litre).
- The tax rate applying to these fuels would be proportional to their energy band at a rate of 100 per cent, 66 per cent and 45 per cent respectively of the excise rate for petrol and diesel.
- Alternative fuel tax rates will be set at a 50 per cent discount to their energy content rate.
- Fuel tax will be levied on the producers or importers of biofuels and ethanol. For the gaseous fuels, the tax will be levied on the marketers, with consultation to occur with the industry on implementation.
- Consultation could occur with industry to determine whether to proceed with the approach adopted in the 2004-05 Budget announcement, that is legislating the final fuel tax rates from 1 December 2011 with the transition to these final rates achieved through phasing out the Energy Grants (Cleaner Fuels) Scheme, or whether another mechanism is preferable.
- Following stakeholder consultation, the best mechanism to deliver these subsidies could be agreed between relevant Ministers.
2.19 A review of the assistance to alternative fuels could be undertaken after 1 July 2015 in light of the outcomes of the taxation measures themselves, broader energy issues, the implementation of a carbon price and also with reference to the Australia's Future Tax System recommendations.
2.20 The Assistant Treasurer and Minister for Financial Services and Superannuation could undertake consultation on implementing the measures together with the Minister for Resources and Energy and the Minister for Sustainability, Environment, Water, Population and Communities.
Option 2:Energy content based fuel taxation with a 50 per cent discount for alternative fuels to be phased in from 1 December 2011 with provisions to address the sudden loss in the relative tax advantage of domestic ethanol due to the previously announced measure, and to tax natural gas (LNG and CNG) on a mass rather than volume basis.
2.21 This option is consistent with Option 1 in terms of the outcomes at the end of the transition period. The proposal is also consistent with Option 1's transitional treatment of the gaseous fuels and biodiesel, the proposed consultation on the delivery mechanism to assist alternative fuels in the transition period, and a review of the overarching policy. Option 2 differs from Option 1 in that firstly, it smooths the change in the relative tax advantage of domestic ethanol vis-à-vis imported ethanol and extends the transition period and secondly, introduces the mass based taxation of natural gas.
2.22 The smoothing of the transition path for domestic ethanol will occur through: removing entitlements to the Energy Grants (Cleaner Fuels) Scheme for ethanol; setting the excise rate for ethanol at its full energy content rate from 1 December 2011 (25 cpl) falling to 12.5 cpl on 1 July 2015; and providing direct subsidies to domestic producers and phasing them down over the transition period until 1 July 2020 (see Tables 2.1 to 2.4 for more details on the transition path).
2.23 Option 2 also removes natural gas (LNG and CNG) from the volumetric based three tax bands and sets the tax rate unit of measure as the kilogram as this is the unit used in commercial transactions. Natural gas will be subject to a 26.13 cents per kilogram tax rate which is consistent with the excise rate for petrol and diesel after adjusting for the energy content differential and providing the 50 per cent discount.
Option 3:Full taxation of alternative fuels
2.24 Option 3 is the same as Option 1 except that no discount would be provided to the alternative fuels. This option would be phased in over 10 years from 1 December 2011 to 1 July 2020.
2.25 There would be two phases to this option. Phase one would be identical to Option 1. In phase two, full energy content based fuel tax would be phased in by even steps from 1 July 2016 until 1 July 2020 through changes to legislated fuel tax rates.
Option 4:Maintain current taxation arrangements
2.26 This option would maintain existing taxation arrangements for alternative fuels.
- Petrol and diesel would be taxed at the rate of 38.143 cpl.
- Ethanol would be taxed at the rate of 38.143 cpl with this tax liability fully offset by ethanol production grants for domestically produced ethanol.
- Biodiesel would be taxed at the rate of 38.143 cpl with the full tax liability offset by Energy Grants (Cleaner Fuels) Scheme grants.
- Gaseous fuels would not be subject to fuel tax.
Assessment of impacts
Use of alternative fuels
2.27 Overall, alternative fuels make up less than 7 per cent of the transport fuels used in Australia. LPG is the main alternative to petrol and diesel as a transport fuel and it accounts for 6 per cent of Australia's fuel consumption.
Production of alternative fuels
2.28 Australian fuel ethanol production was estimated at 112 million litres in 2007. There are currently three ethanol producers in Australia.
2.29 Biodiesel production was estimated at 59 million litres in 2007. In 2010, there were seven biodiesel plants in Australia.
2.30 In 2008-09 Australia produced a total of 5.4 billion litres of LPG, of which domestic sales were approximately 4.0 billion litres. Of this 56 per cent was used for automotive use.
2.31 Under Option 1 the final fuel tax rate for LNG, LPG and ethanol when fully phased would be 12.5 cpl (50 per cent of the medium energy content band rate of 25 cpl). Therefore, the maximum possible change in fuel tax imposed on E10 will be 1.25 cpl. For biodiesel, renewable diesel and CNG the final fuel tax rate would be 19.1 cpl, (50 per cent of the high energy content band rate of 38.143 cpl).
2.32 Under Option 2 the final fuel tax rate for LPG and ethanol when fully phased would be 12.5 cpl (50 per cent of the medium energy content band rate of 25 cpl). For biodiesel and renewable diesel the final fuel tax rate would be 19.1 cpl (50 per cent of the high energy content band rate of 38.143 cpl). Natural gas (LNG, CNG) will be taxed on a mass based rate of 26.13 cents per kilogram.
2.33 Under Option 3 the final fuel tax rate for LPG, LNG and ethanol when fully phased would be 25 cpl (100 per cent of the medium energy content band rate). For biodiesel, renewable diesel and CNG the final fuel tax rate would be than 38.143 cpl (or per cubic metre in the case of CNG, 100 per cent of the high energy content band rate).
2.34 Under Option 4 there will be no changes to the fuel tax rates and so there will be no influence on prices from changes to fuel tax.
2.35 The extent to which a higher fuel tax will be reflected in retail prices will depend upon the seller's ability to pass the tax on, conditional upon the competitive pressures in the industry. There are a range of other factors that also influence the price of fuels, including international prices and exchange rates, that make it difficult to separately identify any price impact from the imposition of excise.
2.36 Other policies may also impact on alternative fuels post-2011.
2.37 In the case of ethanol, the current and potential state mandates may have some impacts on the alternative fuel market.
2.38 Any price impacts will be felt by those who bear the incidence of the tax, that is, final consumers and businesses who are not eligible for fuel tax credits. Fuel tax credits offset fuel tax liability and are available for fuel used by businesses off-road and by businesses in vehicles used on-road that are greater than 4.5 tonnes.
2.39 Options 1, 2 and 3 will enhance competition between types of fuels in the fuel product market. The taxation-based advantage of alternative fuels will be reduced, enhancing market efficiency, economic choice and the consequent allocation of resources.
2.40 Moving to energy bands as the basis for taxing fuel will also improve the efficiency of the fuel market. The energy density of fuels - which translates into the number of kilometres each litre of the fuel will drive a vehicle - varies for different fuels. The energy content based taxation of fuels will ensure that, as all fuels are brought into the tax system, fuels with a lower energy content are not placed at a competitive disadvantage vis-à-vis higher energy content fuels. The lower energy content fuels will have a lower tax rate to reflect that, litre for litre, they do not represent the same level of energy consumption as the high energy content fuels.
2.41 In the case of the market for ethanol, competition will be improved under Options 1, 2 and 3 over the current arrangements through the removal of the current taxation-based advantage domestic producers have over ethanol importers. Currently the ethanol production grant offsets the excise on domestically produced ethanol to effectively zero. As there is no corresponding offset for excise-equivalent customs duty, importers are currently subject to the full 38.143 cpl duty (as well as a 5 per cent customs tariff).
2.42 Both Options 1 and 3 result in a sudden loss in the relative tax advantage of domestic ethanol (from 38.143 cpl to zero) compared to imported ethanol from 1 December 2011. Such a sudden change in competitiveness may impact on the viability of the ethanol industry in Australia, particularly as it is still a developing industry. This has implications for the environmental, energy security and regional development benefits that can flow from the use of alternative fuels. Option 2 addresses this key risk by phasing out the tax differential over the transition period.The adoption of Option 4 would lose the competitive benefits from the comprehensive application of taxation to the fuel market.
Impact group identification
2.43 All four options will have a minimal impact on families, regional communities and small businesses. The major fuels used by these groups are petrol and diesel.
2.44 This proposal will not directly impact on the retail price of petrol or diesel, and thus families will not be impacted in their use of these fuels.
2.45 However, families who use alternative fuels will be affected by any price impacts of the fuel tax changes. More families in NSW can be expected to use ethanol due to the ethanol mandate. Individual consumers have also been encouraged to convert their vehicles to LPG through the LPG Vehicle Scheme which is managed by AusIndustry. The scheme offers grants to individuals who, subject to certain program eligibility criteria, convert existing vehicles to LPG or purchase new vehicles and convert them to LPG prior to registration. As at 31 January 2011, AusIndustry had paid a total of 279,220 LPG Vehicle Scheme grants at a cost of $544,242,500.
2.46 The regions producing ethanol may be affected as competition from importers is expected to increase with the removal of the tax advantage enjoyed by the domestic ethanol producers under Options 1, 2 and 3. The three main ethanol production plants are in NSW (Manildra Group in Nowra) and Queensland (Sucrogen BioEthanol in Sarina and Dalby Bio-Refinery Ltd in Dalby). However, there is also likely to be an increase in demand as a result of the ethanol mandate in NSW and proposed mandate in Queensland.
2.47 The impact on small business will depend upon the extent to which they are entitled to full tax credits to offset the fuel tax. A fuel tax credit is available for business vehicles used off-road, or on-road vehicles greater than 4.5 tonnes. The fuel tax credit is reduced by the amount of the road-user charge for on-road vehicles.
2.48 Options 1, 2 and 3 will have a small impact on those small businesses with a heavy dependence on alternative fuels, for example small businesses in the transport sector such as taxi services that are not eligible for fuel tax credits.
2.49 The taxi industry in Australia has been one of the major business consumers of LPG, with most Australian city-based taxi fleets moving to dedicated LPG or dual LPG/petrol fuelled vehicles.
2.50 The Australian Taxi Industry Association (ATIA) estimates that over 15,000 (or approximately 85 per cent) of the approximate 18,000 taxis in Australia operate on LPG. The Association further estimates that taxis comprise approximately 2.5 per cent of the total stock of LPG vehicles in Australia, and account for approximately 20 per cent of LPG (Autogas) sales in Australia.
2.51 The effect of including LPG in the excise system on taxi fares depends on decisions by State and Territory regulators - if the excise is passed on in full it could add approximately 3.5 cents to the average metro taxi fare trip on the introduction of a 2.5 cpl excise on 1 December 2011. This will increase to approximately 19.0 cents to the average metro taxi fare trip when the final excise of 12.5 cpl is introduced on 1 July 2015. Assumptions: This price estimate assumes the cost of the excise is passed on in full to the customer; that the average mileage of a taxi is 18.0 litres of LPG per 100 kilometres (ATO taxi benchmarks guide for LPG use in the taxi industry; and the average metro taxi trip in Australia is 8.4 kilometres (based on Australian Taxi Industry Association Statistics).
2.52 Biodiesel, LNG and CNG are predominantly used in heavy vehicles such as metropolitan bus fleets, garbage trucks and line haulage. The extent to which they will bear the incidence of the tax will depend upon their entitlement to fuel tax credits.
2.53 Currently, to legally manufacture ethanol, a person must hold an excise manufacture licence. This will not change under any of the options. Currently, the excise payable is offset by an ethanol production grant that is paid separately by the Department of Resources, Energy and Tourism after the excise return is lodged and based on evidence such as bank statements. Options 1, 2 and 3 recommend that direct assistance continue to domestic ethanol producers over the phase in period, through the provision of grants to offset a proportion of the excise paid. Options 1 and 3 extend the assistance to ethanol importers so that the tax differential between imported and domestically produced ethanol would cease on 30 November 2011. Option 2 does not extend the transitional assistance to importers so that the tax differential would phase out over the transition period. All three options propose that consultations be undertaken with stakeholders to determine whether a lower compliance cost approach can be adopted.
2.54 Option 4 will maintain the current arrangements and will, therefore, not impact on compliance costs for these producers unless they have made commercial arrangements based on the announced policy.
2.55 Currently, in order to legally manufacture biodiesel, a person must hold an excise manufacture licence. This will not change under any of the options. Provided the fuel meets the Biodiesel Fuel Standard, any excise payable is currently offset by an Energy Grants (Cleaner Fuel) Scheme entitlement which is made available at the same time as they lodge their excise return. Options 1, 2 and 3 phase out the Energy Grants (Cleaner Fuel) grants for biodiesel and therefore, at the end of the phase out period, there will be reduced complexity for affected businesses. All options include a provision to consult on whether there is a more efficient mechanism to deliver assistance to biofuels during the transition period than the Energy Grants (Cleaner Fuel) Scheme grants. Option 4 maintains current arrangements and therefore will not reduce compliance costs.
2.56 Gaseous fuels are currently outside the fuel tax system. In order to tax gaseous fuels, an appropriate taxing point needs to be determined. Both Options 1, 2 and 3 consider that the appropriate point is the marketer or supplier. The marketer or supplier is in a better position to know if the fuel is to be used in a combustion engine or for another (untaxed) use. This approach minimises the compliance costs in distinguishing between taxed and untaxed fuels.
2.57 Under Options 1, 2 and 3, the introduction of excise on gaseous fuels will require the relevant entity to be subject to the provisions of the excise system. As this is likely to increase compliance costs for gaseous fuel distributers, the costs may be reduced through simplification of excise requirements for these producers and marketers, through specific excise reform. This may include allowing payment of fuel tax on a Business Activity Statement.
2.58 To further address compliance costs concerns, industry has been closely consulted on implementation.
2.59 Option 4 does not increase compliance costs for gaseous fuel users as it maintains the status quo.
2.60 Consumers will face no change in compliance costs as a result of any of the options.
2.61 Taxis and other sectors that are dependent on LPG are unlikely to face increased compliance costs as they will not be required to enter the excise system.
2.62 Buses and heavy transport that use gaseous fuels will become eligible for fuel tax credits under Options 1, 2 and 3. Fuel tax credits are designed to offset the impact of fuel excise on business inputs. However in the case of buses and heavy transport used on public roads, fuel tax credits are reduced by a road-user charge (currently 22.6 cpl). As the reduction cannot result in a negative number, and as the fuel tax credit entitlement for gaseous fuels will be less than the current road-user charge, alternative fuel users will pay a lower road-user charge than petrol or diesel users. The different rates may create some complexity for industry, particularly if fleets are using multiple fuels. As part of the legislative process, they have been consulted on how best to manage this interaction.
2.63 A carbon price, if implemented, will increase the price of high carbon emission activities relative to low carbon emission activities. To the extent that alternative fuels emit lower amounts of carbon than other fuels, alternative fuels will have a price advantage acting to encourage the use of low emission fuels.
2.64 The application of tax to alternative fuels is consistent with capturing the emissions-based environmental advantages of the alternative fuels through any future carbon price mechanism. Options 1 and 2 will reduce the degree of distortion by limiting the tax advantage offered to alternative fuels. Option 3 will not distort the price signals generated by a carbon price.
2.65 Overall compliance costs for Options 1, 2 and 3 are medium. The total potential cost of the regulation principally relates to once off transitional compliance costs upon implementation of the options.
Conclusion and recommended option
2.66 Option 2 is the best option to achieve the five key objectives of improving the operation of the fuel market, improving the effectiveness of fuel tax as a proxy for road-user charging, providing certainty to industry and allowing sufficient time to implement the fuel tax changes while providing support to the alternative fuels industry in recognition of the environmental, fuel security and regional benefits that these industries can generate.
2.67 Options 1, 2, and 3 all recommend a review at the completion of the phase-in period to allow the policy's effectiveness to be addressed against the recommendations from the Australia's Future Tax System Review, the outcomes of the tax forum to be held in 2011, the interaction with the proposed carbon price and broader energy issues. Options 1, 2 and 3 allow for consultation with industry on the details of implementing the measure to ensure compliance costs are minimised. Compliance costs are medium for Options 1, 2 and 3.
2.68 Options 1, 2 and 3 may result in a small price change for consumers, while some businesses will have the cost of the tax offset to the extent of their eligibility for fuel tax credits. The higher tax rates will be phased in, minimising any disruption to consumers or producers from any price impacts.
2.69 Option 2 explicitly recognises the environmental, energy security and regional development benefits that can flow from the use of ethanol through addressing the adverse economic implications for the domestic industry of a sudden cessation of the tax-based price advantage over imports. Option 2 smooths the change in the tax advantage over a longer transition period so that the ethanol industry is best placed to adjust to the new tax framework. Under Option 2, excise and excise-equivalent customs duty only apply to LPG Autogas. All other LPG for other uses is subject to an automatic remission of excise and excise-equivalent customs duty. This approach benefits LPG marketers and distributors by lowering business compliance costs, compared to a model in which duty is levied on all LPG, and fuel tax credits are provided to ensure that ultimately only LPG Autogas is effectively taxed. The approach ensures that no compliance costs are imposed on the distribution of LPG that is not for a transport use, thereby benefiting consumers of LPG including householder users of LPG such as for home heating and cooking and bottled gas for barbeques and business use of LPG for commercial purposes (other than transport use).
2.70 Option 3 achieves the objectives of improving the operation of the fuel market and improving the effectiveness of fuel tax as a proxy for road-user charging to a higher degree than Options 1 and 2. Also, Option 3 does not distort the price signals that can be delivered through a carbon pricing mechanism. However, it does not meet the objective of supporting the alternative fuel industry. It could also create uncertainty in the industry as it delivers different policy outcomes than those the industry has been expecting since the 2004-05 Budget.
2.71 Option 4 will result in no price impacts and no change to compliance costs.
2.72 Following an announcement in the 2010-11 Budget, consultation with industry and relevant agencies was undertaken to ensure the effective and efficient application of the new tax arrangements. In particular, consultation has established mechanisms that will ensure compliance costs for industry are minimised.
2.73 A discussion paper was released on Treasury's website with invitations for submissions. Written submissions on the policy were received from 47 stakeholders. Twelve submissions were received on the exposure draft legislation. A number of submissions also included more detailed implementation information.
2.74 Treasury held meetings on the discussion paper with stakeholders in five capital cities during the week commencing 25 October 2010. Separate sessions were held for: biodiesel, ethanol and methanol; and gaseous fuels (LPG, LNG and CNG). Further consultation was carried out on the exposure draft legislation in Sydney and Melbourne on 31 January 2011 and 1 February 2011 respectively.
2.75 The key issues that were raised during the consultation period were:
- the tax policy for the alternative fuels should not be developed in isolation to broader energy policy for alternative fuels. There was concern that the changes are not part of a broader government energy strategy to encourage emerging fuels such as CNG and LNG and do not address future transport applications such as electrically powered cars;
- the broader road transport recommendations from the Australia's Future Tax System are not reflected in Government policy;
- the excise rate does not take into account carbon emissions of the various fuels;
- concern about favourable treatment for some fuels that does not apply to other fuels, particularly the ethanol concessions but also electricity (which is not included in the fuels to be taxed). Domestic biodiesel producers have sought similar treatment to ethanol producers;
- ethanol and biodiesel producers are concerned about imports and the impact they will have on the domestic industry;
- the changes are likely to bring many gaseous fuel distributors into the fuel tax system and accordingly submissions suggested that significant compliance cost savings could be achieved for marketers and distributors of LPG by extending the automatic remission model for duty to LPG under which duty is only applied to LPG Autogas and other LPG is sold free from excise or excise-equivalent customs duty;
- there is only limited transport use of LNG, CNG and methanol in Australia and the industry is concerned that, as it is at the very early stages of commercialisation, the tax changes will prevent them from developing; and
- there is only limited time for businesses to implement the tax changes. While the changes were first announced a number of years ago, the start date is near, and the industry argues that it will not have certainty until Royal Assent.
2.76 As a result of consultations, several changes were incorporated into the draft legislation:
- The excise and excise-equivalent customs duty rates for all alternative fuels (except ethanol and renewable diesel) will be set using net excise rates and not phased down using the Energy Grants (Cleaner Fuels) Scheme.
- There will also be carve outs for CNG for home refuelling systems and for forklifts (or like vehicles which are not used on-road) so that these will not be taxed.
- An automatic remission of excise and excise-equivalent customs duty will be available for non-transport use of LPG and LNG.
- The appropriate unit of measurement for the gaseous fuels is in cpl for LPG and cents per kilogram for LNG and CNG.
- The draft legislation widens the definition for 'ethanol' to incorporate future feedstocks and technologies.
- The existing taxation point will apply for renewable diesel for both excise and excise-equivalent customs duty purposes.
- A rebate of excise duty and excise-equivalent customs duty will apply for the production of renewable diesel.
2.77 The start date of the policy was delayed until 1 December 2011, to allow industry further time to implement systems to deal with the new taxation arrangements.
Implementation and review
2.78 During the consultation process draft legislation was prepared for introduction in time for Royal Assent of the legislation by 1 December 2011. The Australian Tax Office and the Australian Customs and Border Protection Service will prepare to administer the law from 1 December 2011.
2.79 It is recommended that a review of the assistance to alternative fuels be undertaken after 1 July 2015. This review will examine the taxation-based assistance measures in light of the outcomes of the taxation measures themselves, broader energy issues, implementation of a price on carbon and with reference to any recommendations of the Australia's Future Tax System Review, and the outcomes of the tax forum to be held in 2011.
Table 2.4 : Option 1 - Relative fuel tax rates for alternative fuels under the previously announced measures (assuming a full fuel excise rate of 38.143 cpl )
|Fuel type||Energy Content Band||1 July 2010||1 Dec 2011||1 July 2012||1 July 2013||1 July 2014||1 July 2015|
|Renewable diesel cpl||High||0||3.8||7.6||11.4||15.3||19.1|
|Domestic ethanol cpl||Mid||0||2.5||5.0||7.5||10.0||12.5|
|Imported ethanol cpl||Mid||38.1||2.5||5.0||7.5||10.0||12.5|
Table 2.5 : Option 2 - Fuel tax rates for domestic and imported ethanol and for natural gas (other rates as per Option 1 )
|1 July 2010||1 Dec 2011||1 July 2012||1 July 2013||1 July 2014|
|Ethanol - legislated tax rate cpl||38.1||25||21.87||18.74||15.61|
|Domestic grant cpl||38.1||23.75||19.4||15.05||10.6|
|Domestic ethanol - effective tax rate cpl||0||1.25||2.5||3.75||5|
|LNG and CNG cpkg||0||5.22||10.45||16.67||20.9|
|1 July 2015||1 July 2016||1 July 2017||1 July 2018||1 July 2019||1 July 2020|
|Ethanol - legislated tax rate cpl||12.5||12.5||12.5||12.5||12.5||12.5|
|Domestic grant cpl||6.25||5||3.75||2.5||1.25||0|
|Domestic ethanol - effective tax rate cpl||6.25||7.5||8.75||10||11.25||12.5|
|LNG and CNG cpkg||26.13||26.13||26.13||26.13||26.13||26.13|
This is the excise payable by imported ethanol. Option 3 : Full taxation of alternative fuels
2.80 There are two phases to this option: phase one is identical to Option 1; in phase two, full energy content based fuel tax is phased in by even steps from 1 July 2016 until 1 July 2020 through changes to legislated fuel tax rates.
Table 2.6 : Phase 1 - Relative fuel tax rates for alternative fuels under the previously announced measures (assuming a full fuel excise rate of 38.143 cpl )
|Fuel type||Energy Content Band||1 July 2010||1 July 2011||1 July 2012||1 July 2013||1 July 2014||
|Renewable diesel cpl||High||0||3.8||7.6||11.4||15.3||19.1|
|Domestic Ethanol cpl||Mid||0||2.5||5.0||7.5||10.0||12.5|
|Imported Ethanol cpl||Mid||38.1||2.5||5.0||7.5||10.0||12.5|
Table 2.7 Phase 2 - changes to legislated fuel tax rates
|Fuel type||Energy Content Band||1 July 2016||1 July 2017||1 July 2018||1 July 2019||1 July 2020 ( final rate )|
|Renewable diesel cpl||High||22.9||26.7||30.5||34.3||38.1|
|Domestic Ethanol cpl||Mid||15.0||17.5||20.0||22.5||25.0|
|Imported Ethanol cpl||Mid||15.0||17.5||20.0||22.5||25.0|
Notes : Rates rounded to 1 decimal place; cpl (cents per litre); cpm3 (cents per cubic metre); 'nil' rates for LPG, LNG, methanol and CNG are for years where these fuels are not in the fuel tax system.