House of Representatives

Excise Tariff Amendment (Fuels) Bill 2004

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation Definition
ATO Australian Taxation Office
CASA Civil Aviation Safety Authority

General outline and financial impact

Excise Tariff Amendment (Fuels) Bill 2004

Schedule 1, Parts 1 to 5 to this bill, amends the Excise Tariff Act 1921 to:

·
provide for a differential in the rate of excise duty for high sulphur diesel (sulphur content exceeding 50 parts per million) and ultra low sulphur diesel (sulphur content not exceeding 50 parts per million), and similar products (Parts 1 and 2);
·
increase the excise duty rate by $0.00306 per litre for aviation gasoline and aviation kerosene (Part 3);
·
apply excise duty to biodiesel at the rate of $0.38143 per litre, the same rate that applies to ultra low sulphur diesel (Part 4); and
·
enable previously paid duties to be deducted in the formula for calculating excise duty payable on fuel ethanol/gasoline blends (Part 5).

Schedule 2, Parts 1 and 2 to this bill, provides for minor amendments to references in Parts 1 and 4 to commence only if the Excise Tariff Amendment Bill (No. 1) 2003 commences (Parts 1 and 2).

Excise differential for high sulphur diesel and ultra low sulphur diesel and certain similar products

Parts 1 and 2 alter the classification provisions in the Excise Tariff Act 1921 for diesel and similar products (kerosene, heating oil, stabilised crude petroleum oil and topped crude petroleum oil for use as fuel in an internal combustion engine and certain other uses) to provide for an excise differential based on their sulphur content. This measure gives effect to the Government's decision to encourage the early introduction of ultra low sulphur diesel, which will be mandated by 1 January 2006 under the Fuel Quality Standards Act 2000.

Date of effect: Excise Tariff Proposal No. 1 (2003) imposed a 1 cent per litre differential on high sulphur diesel and similar products from 1 July 2003, and Excise Tariff Proposal No. 2 (2003) imposed a further 1 cent per litre differential from 1 January 2004. These proposals were tabled in the House of Representatives on 24 June 2003. Part 1, incorporating the provisions of the Excise Tariff Proposal No. 1 (2003), is taken to have effect on and from 1 July 2003. Part 2, incorporating the provisions of the Excise Tariff Proposal No. 2 (2003), is taken to have effect on and from 1 January 2004.

Proposal announced: This measure was announced by the Prime Minister on 31 May 1999 in the Measures for a Better Environment package. Deferral of the introduction to 1 July 2003 was announced in Treasurer's Press Release No. 083 of 24 December 2002.

Financial impact: Revenue gain from the increased excise rate for high sulphur diesel is estimated at $135 million for 2003-2004 and $110 million for 2004-2005. High sulphur diesel will be fully phased out by 1 January 2006.

Compliance cost impact: There are minor costs for diesel manufacturers in adjusting systems for recording and reporting diesel production on the basis of sulphur content.

Summary of regulation impact statement

Regulation impact on business

Impact: Diesel manufacturers pay an additional excise duty on high sulphur diesel of 1 cent per litre from 1 July 2003, and a further 1 cent per litre from 1 January 2004 until 1 January 2006. The increased excise duty rate for high sulphur diesel is expected to encourage manufacturers to produce ultra low sulphur diesel before the mandatory date by reducing the price disincentive for the production of ultra low sulphur diesel, which costs more than high sulphur diesel, and increasing the competitiveness of ultra low sulphur diesel in the market.

Main points:

·
The introduction of the excise differential will result in an increase in the excise duty rate for high sulphur diesel and similar products until it is phased out by 1 January 2006.
·
Manufacturers of high sulphur diesel and similar products will be required to record and report their production on the basis of sulphur content.
·
The higher excise duty rate for high sulphur diesel will make ultra low sulphur diesel more competitive in the market, providing an incentive for the production and use of ultra low sulphur diesel prior to the mandatory date.
·
Diesel users eligible for fuel payment grant schemes, other than certain agricultural users, will not be compensated for additional cost resulting from the excise differential.

Increase in excise rates for aviation fuels

Part 3 amends the Excise Tariff Act 1921 to increase excise duty rates for aviation gasoline and aviation kerosene by $0.00306 per litre. The increased excise duty rate provides supplementary funding of $6.5 million for the Civil Aviation Safety Authority in the 2003-2004 financial year.

Date of effect: Excise Tariff Proposal No. 3 (2003), increasing the excise duty rate on aviation gasoline and aviation kerosene from 1 July 2003, was tabled in the House of Representatives on 24 June 2003. Part 3 is taken to have effect on and from 1 July 2003.

Proposal announced: This measure was announced in the 2003-2004 Federal Budget on 13 May 2003.

Financial impact: This amendment is estimated to raise $6.5 million in the 2003-2004 financial year.

Compliance cost impact: Nil.

Introduction of excise duty on biodiesel

Part 4 amends the Excise Tariff Act 1901 to impose excise duty on biodiesel as fuel for use in an internal combustion engine at the rate of $0.38143 per litre.

Date of effect: Excise Tariff Proposal No. 4 (2003) was tabled in the House of Representatives on 17 September 2003 and took effect on and from 18 September 2003. Part 4 is taken to have effect on and from 18 September 2003.

Proposal announced: This measure was announced in the 2003-2004 Federal Budget on 13 May 2003.

Financial impact: Net revenue gain from biodiesel excise (and customs) duty, allowing for displacement of diesel, is estimated at $5 million for 2003-2004 and $10 million for 2004-2005. Excise payable on biodiesel will be offset by the biodiesel subsidy estimated at $15 million for 2003-2004 and $44 million for 2004-2005.

Compliance cost impact: Compliance cost for biodiesel manufacture or storage depends on the adjustment required to existing arrangements to meet excise licence conditions such as security of premises and adequate recording and reporting systems. For commercial operations the additional cost should not be significant but may be significant for a small/medium scale manufacturer.

Summary of regulation impact statement

Regulation impact on business

Impact: Manufacture and storage of biodiesel and biodiesel blends must be licensed under the excise legislation. Manufacturers will pay excise duty at the rate of $0.38143 per litre. The excise duty is offset by the availability of a grant at the same rate for producers of final biodiesel fuels or final fuels containing biodiesel, effectively maintaining a zero excise rate.

Main points:

·
The introduction of excise duty on biodiesel, with the provision of an equivalent grant, provides industry certainty and time to establish markets before effective excise duty applies with the gradual reduction of the grant by five even annual instalments commencing from a date that may be specified under the Energy Grants (Cleaner Fuels) Scheme Bill 2003.
·
Manufacturers of biodiesel for use as fuel in an internal combustion engine will be required to pay excise duty at the rate of $0.38143 per litre.
·
Manufacture and storage of biodiesel and biodiesel blends must be licensed under the excise legislation.
·
There is only a small number of commercial scale manufacturers, blenders and distributors of biodiesel at this stage.
·
There are around 12 medium scale manufacturers. The viability of medium and small scale manufacturers will be affected by availability of feedstock and ability to meet excise licensing requirements and national fuel standards for biodiesel.

Other amendments

Part 5 amends the provisions of the Excise Tariff Act 1921 that set out the method of determining the duty payable on excisable blended petroleum products to allow previously paid duties to be deducted in the formula for calculating duty on gasoline/fuel ethanol blends. This is consistent with the formulae for other fuel blends.

Chapter 1 - Excise differential for high sulphur diesel and ultra low sulphur diesel and certain similar products

Outline of chapter

1.1 Schedule 1, Part 1, amends the Excise Tariff Act 1921 to introduce on and from 1 July 2003 an excise differential of 1 cent per litre for diesel and certain similar products, based on their sulphur content, and alters the formula for determining the excise duty payable on blended petroleum products to reflect this differential. Part 2 increases the excise duty differential by a further 1 cent per litre on and from 1 January 2004.

Context of amendments

1.2 This measure, announced by the Prime Minister in the Measures for a Better Environment policy initiatives on 31 May 1999, gives effect to the Government's decision to encourage the early introduction of ultra low sulphur diesel, which will be mandated by 1 January 2006 under the Fuel Quality Standards Act 2000.

1.3 Low sulphur fuels provide environmental and health benefits through reduced emissions of hydrocarbons and oxides of nitrogen that affect air quality and particulate emissions known to cause respiratory problems. The measure also facilitates the broader adoption of greenhouse friendly engine technologies that depend on low sulphur fuels.

1.4 In Measures for a Better Environment, the Government made a commitment to apply an excise differential of an additional 1 cent per litre on high sulphur diesel from 1 January 2003 and a further 1 cent per litre from 1 January 2004. The Government deferred the introduction of the differential until 1 July 2003 because of concern at the possibility of raising costs for diesel users at a time when the farming sector was facing serious drought conditions.

1.5 Fuel products with similar chemical properties and that can readily be used as substitutes for diesel in internal combustion engines attract the same excise differential as diesel as a revenue protection measure. These products are heating oil, kerosene, stabilised crude petroleum oil, and topped crude petroleum oil, for use as fuel in an internal combustion engine and certain other uses.

1.6 The excise differential of 1 cent per litre from 1 July 2003 was implemented by the Excise Tariff Proposal No. 1 (2003) and the further 1 cent per litre differential from 1 January 2004 was implemented by the Excise Tariff Proposal No. 2 (2003).

Summary of new law

1.7 The amendments repeal the classification provisions in the Schedule to the Excise Tariff Act 1921 for diesel and similar products and substitute new descriptions that refer to sulphur content, provide an excise rate based on the sulphur content, and amend the formula for determining excise duty payable on blended petroleum products to reflect the excise differential.

1.8 Ultra low sulphur diesel and similar products retain the excise rate of $0.38143 per litre while diesel and similar products with high sulphur content attract excise duty at the rate of $0.39143 per litre on and from 1 July 2003 and $0.40143 per litre on and from 1 January 2004.

Comparison of key features of new law and current law
New law Current law
Diesel and similar products that are for use as fuel in an internal combustion engine and 'other' (where they may be used as fuel) have separate item classifications for products with sulphur content exceeding 50 parts per million and sulphur content not exceeding 50 parts per million. Diesel and similar products that are for use in an internal combustion engine and 'other' (where they may be used as fuel) are not classified with reference to sulphur content.
The excise duty rate is $0.39143 per litre on and from 1 July 2003 where sulphur content of the product exceeds 50 parts per million. On and from 1 January 2004 the excise duty rate is $0.40143 per litre.
The excise duty rate is $0.38143 per litre where sulphur content of the product does not exceed 50 parts per million.
The excise duty rate is $0.38143 per litre.
The formulae for calculation of excise duty payable for diesel blends provide for the applicable diesel rate based on sulphur content. The 'maximum diesel rate' is used in calculations of excise duty payable on diesel blends, without reference to sulphur content.

Detailed explanation of new law

1.9 The Schedule to the Excise Tariff Act 1921 classifies diesel and similar products, (heating oil/kerosene, stabilised crude petroleum and topped crude petroleum, for use as fuel in an internal combustion engine and 'other' uses) as items with an excise rate of $0.38143 per litre. The amendments repeal each of the existing item references and substitute two items for each product, referring to the product with a sulphur content exceeding 50 parts per million, and with sulphur content not exceeding 50 parts per million. [Schedule 1, Part 1, items 7 to 14]

1.10 The amendments repeal item references to diesel classified on the basis of packaging above and not exceeding 210 litres and substitute:

·
diesel with a sulphur content exceeding 50 parts per million at an excise duty rate of $0.39143 per litre; and
·
diesel with a sulphur content not exceeding 50 parts per million at an excise duty rate of $0.38143 per litre.

[Schedule 1, Part 1, item 10]

On and from 1 January 2004 the excise duty rate for diesel with sulphur content exceeding 50 parts per million increases to $0.40143 per litre [Schedule 1, Part 2, item 18].

1.11 The amendments repeal item references to heating oil/kerosene, for use as fuel in an internal combustion engine, in packages both above and not exceeding 210 litres, and 'other' and substitute:

·
heating oil and kerosene, for use as fuel in an internal combustion engine, in packages both above or not exceeding 210 litres and 'other', having a sulphur content exceeding 50 parts per million, at an excise duty rate of $0.39143 per litre; and
·
heating oil and kerosene, for use as fuel in an internal combustion engine, in packages both above and not exceeding 210 litres and 'other', having a sulphur content not exceeding 50 parts per million, at an excise duty rate of $0.38143 per litre.

[Schedule 1, Part 1, items 7 to 9]

On and from 1 January 2004 the excise duty rate for these heating oil/kerosene items with sulphur content exceeding 50 parts per million increases to $0.40143 per litre [Schedule 1, Part 2, items 15 to 17].

1.12 The amendments repeal item references to stabilised crude petroleum oil for use in an internal combustion engine and 'other' and substitute:

·
stabilised crude petroleum for use as fuel in an internal combustion engine and 'other' respectively, having sulphur content exceeding 50 parts per million at an excise rate of $0.39143 per litre; and
·
stabilised crude petroleum for use as fuel in an internal combustion engine and 'other' respectively, having sulphur content not exceeding 50 parts per million at an excise duty rate of $0.38143 per litre.

[Schedule 1, Part 1, items 11 and 12]

On and from 1 January 2004 the excise duty rate for these stabilised crude petroleum items with a sulphur content exceeding 50 parts per million increases to $0.40143 per litre [Schedule 1, Part 2, items 19 and 20].

1.13 The amendments repeal item references to topped crude petroleum oil for use as fuel in an internal combustion engine and 'other' and substitute:

·
topped crude petroleum oil for use as fuel in an internal combustion engine and 'other' respectively, having a sulphur content exceeding 50 parts per million, at an excise duty rate of $0.39143 per litre; and
·
topped crude petroleum oil for use as fuel in an internal combustion engine and 'other' respectively, having a sulphur content not exceeding 50 parts per million, at an excise duty rate of $0.38143 per litre.

[Schedule 1, Part 1, items 13 and 14]

On and from 1 January 2004 the excise duty rate for these topped crude petroleum items with sulphur content exceeding 50 parts per million increases to $0.40143 per litre [Schedule 1, Part 2, items 21 and 22].

Application and transitional provisions

1.14 Schedule 1, Part 1 commences on 1 July 2003 and Part 2 commences on 1 January 2004.

1.15 Schedule 2, Part 1 provides for minor drafting amendments to incidental references to fuel ethanol in Schedule 1, Part 1, to reflect the terms of the Excise Tariff Amendment Bill (No. 1) 2003 if it commences.

Consequential amendments

1.16 The introduction of two rates for diesel affects the calculations in section 6G that sets out the manner of determining the duty payable on excisable blended petroleum products. The amendments alter section 6G by:

·
providing for the appropriate diesel rate to be applied in calculating duty on blends in subsection 6G(1) [Schedule 1, Part 1, item 2] ;
·
repealing the definition of 'maximum diesel rate' under the current subsection 6G(1A) [Schedule 1, Part 1, item 3] ;
·
inserting as subsection 6G(2B) a formula for diesel/ethanol blends to reflect the duty applicable to each product. The formula includes any other substances at the applicable diesel rate and defines 'volume of other substances' [Schedule 1, Part 1, item 4] ;
·
altering the diesel/water blend formula in subsection 6G(3) to enable the appropriate diesel rate to be applied to the diesel component [Schedule 1, Part 1, item 5] ; and
·
inserting into subsection 6G(3) a definition of 'diesel rate' [Schedule 1, Part 1, item 6].

Regulation Impact Statement

Policy objective

1.17 Introduction of an excise differential for high and ultra low sulphur diesel was announced by the Prime Minister in the Measures for a Better Environment package on 31 May 1999. The measure is intended to provide an incentive for production and use of ultra low sulphur diesel before it is mandated from 1 January 2006 under the Fuel Quality Standards Act 2000.

1.18 The production cost of ultra low sulphur diesel is higher than for high sulphur diesel. Without the differential, ultra low sulphur diesel would be uncompetitive in the market place as users generally regard high and low sulphur diesel as interchangeable and would not be prepared to incur the additional cost of ultra low sulphur diesel. The imposition of a penalty excise duty rate for high sulphur diesel is intended to even up the price between high and ultra low sulphur diesel and reduce the price disincentive for the production of ultra low sulphur diesel.

1.19 The measure provides support for industry in the transition phase from 1 July 2003 until ultra low sulphur diesel becomes the mandated fuel standard on 1 January 2006 and brings forward the benefits from the early production and use of ultra low sulphur diesel.

Implementation

1.20 The excise differentials were implemented by Excise Tariff Proposals, a longstanding mechanism for implementation of government policy introducing new items or altering excise duty rates for items classified in the Excise Tariff Act 1921 pending introduction of a validation bill amending that Act.

Assessment of impacts

1.21 The introduction of the excise differential increases the excise duty rate paid by manufacturers producing high sulphur diesel and similar products and requires manufacturers to record and report on production of high and ultra low sulphur products separately.

1.22 A major impact of the higher excise duty rate for high sulphur diesel is that it provides incentive for manufacturers to invest in the production of ultra low sulphur diesel prior to 1 January 2006. A significant factor in manufacture of ultra low sulphur diesel is the global strategy of diesel manufacturers' parent companies. The excise differential may influence the investment strategy of refiners operating in Australia after 2006 to bring forward the introduction of ultra low sulphur diesel before 1 January 2006.

Impact group identification

1.23 Identified below are the main groups affected by the introduction of the excise differential.

Diesel fuel manufacturers

1.24 Manufacturers of high sulphur diesel and similar products are required to pay an additional 1 cent per litre from 1 July 2003 and a further 1 cent per litre from 1 January 2004. As a consequence of the different rates for high and ultra low sulphur products, manufacturers are required to adjust business systems to include new excise tariff items and statistical codes on relevant accounting systems to record and report products on the basis of sulphur content.

1.25 There would be a price incentive for manufacturers who blend diesel fuels to purchase ultra low sulphur diesel where this is available.

Consumers

1.26 Production and distribution of ultra low sulphur diesel is determined by the production capacity of manufacturers and their distribution networks rather than consumer demand. At this stage of the transition phase ultra low sulphur diesel is not generally available separately from high sulphur diesel at retail outlets, but will become increasingly available closer to 1 January 2006. The market price for diesel will reflect market forces, such as competition, in addition to taxation effects.

1.27 Diesel users in the agricultural sector who are eligible for an off-road grant under the Energy (Grants) Credits Scheme will receive an increased grant to compensate for the additional excise duty on high sulphur diesel. This is a one-off measure for the agricultural sector because of the specific circumstances of the drought. The additional grant amount is based on a weighted average of the differences between the excise applying to high and ultra low sulphur diesel, calculated on the basis of the projected market share of each fuel.

1.28 Other users of diesel fuel eligible for grants under fuel payments schemes will not be compensated for the additional cost of the excise differential. This is consistent with the general principle that fuel users should not be compensated for measures designed to encourage cleaner fuels.

Analysis of costs/benefits

1.29 The cost of administration is minimal, requiring only minor adjustment to the existing Australian Taxation Office (ATO) excise administration system.

1.30 The compliance cost to manufacturers in recording and reporting on the basis of sulphur content is low.

1.31 Revenue gain from the high sulphur diesel differential is estimated at $135 million for 2003-2004 and $110 million for 2004-2005.

Consultation

1.32 Prior to the introduction of the measure consultation was carried out with oil refining industry representatives and other relevant stakeholders through a forum and meetings with major oil refining and importing companies. Consultation indicated that an excise differential would contribute to both air quality and refining industry objectives of an internationally competitive refining industry by encouraging refiners to produce ultra low sulphur diesel ahead of its mandatory introduction.

1.33 The ATO consulted with diesel fuel manufacturers concerning the administrative arrangements before the implementation of the first step of the excise differential on 1 July 2003 and the necessary arrangements were in place by that date.

Conclusion

1.34 The introduction of the excise differential on diesel delivers on the commitment in Measures for a Better Environment to encourage the production and use of cleaner fuels in a manner that assists industry to make the transition to the production of these fuels.

Chapter 2 - Increase in excise rates for aviation fuels

Outline of chapter

2.1 Schedule 1, Part 3, amends the Schedule to the Excise Tariff Act 1921 by increasing excise duty rates applicable to aviation kerosene and aviation gasoline by $0.00306 per litre.

Context of amendments

2.2 The increase in excise duty rates for aviation fuels was announced in the 2003-2004 Federal Budget to raise an additional $6.5 million to be applied to the Civil Aviation Safety Authority (CASA) to address a funding shortfall. The revenue from aviation fuel duty is estimated to be 11% lower than forecast as a consequence of cessation of Ansett operations, world-wide reduction in air travel demand and introduction of larger, more fuel-efficient aircraft. This measure will assist CASA to continue carrying out its safety regulatory responsibilities with adequate resources.

2.3 Excise Tariff Proposal No. 3 (2003) implemented the measure from 1 July 2003.

Summary of new law

2.4 The amendments increase the excise duty rates for aviation gasoline and aviation kerosene by $0.00306 per litre, resulting in rates of $0.03151 per litre for aviation kerosene and $0.03114 per litre for aviation gasoline.

Detailed explanation of new law

2.5 Kerosene for use as fuel in an aircraft is classified to subitem 11(A) of the Schedule to the Excise Tariff Act 1921 with a current excise duty rate of $0.02845 per litre. Gasoline for use as fuel in aircraft is classified to paragraph 11(H)(1)(a) for packages not exceeding 210 litres and paragraph 11(H)(2)(a) if it is other than in packages not exceeding 210 litres. The current excise duty rate for both classifications is $0.02808 per litre.

2.6 The new rate for aviation kerosene is $0.03151 per litre. [Schedule 1, Part 3, item 23]

2.7 The new rate for aviation gasoline is $0.03114 per litre. [Schedule 1, Part 3, items 24 and 25]

Application and transitional provisions

2.8 Schedule 1, Part 3, is taken to have effect on and from 1 July 2003.

Chapter 3 - Introduction of excise duty on biodiesel

Outline of chapter

3.1 Schedule 1, Part 4, amends the Excise Tariff Act 1921 to include biodiesel as an excisable good in the Excise Tariff Schedule, defines biodiesel, and imposes excise duty at a rate of $0.38143 per litre. A formula is also inserted into the Excise Tariff Act 1921 for the calculation of excise duty payable on biodiesel blends.

Context of amendments

3.2 This measure was announced by the Government in the 2003-2004 Federal Budget and is part of the Government's policy of long term fuel tax reform arrangements that will bring all currently untaxed fuels into the excise and customs duty systems. The reform establishes a broad sustainable taxation framework and provides increased certainty for investors.

3.3 Grants are provided under the Energy Grants (Cleaner Fuels) Scheme Bill 2003 for the production of pure biodiesel and the biodiesel component in blends that will offset the excise duty. Grants are similarly provided for imported biodiesel to offset customs duty. The result is that biodiesel meeting the fuel standard is effectively free of duty prior to the gradual reduction of the grant by five even annual instalments commencing from a date that may be specified under the Energy Grants (Cleaner Fuels) Scheme Bill 2003.

3.4 These amendments validate Excise Tariff Proposal No. 4 (2003) that imposed excise duty on biodiesel from 18 September 2003.

Summary of new law

3.5 The amendments alter the Schedule to the Excise Tariff Act 1921 by inserting biodiesel as an excisable product, at a rate of $0.38143 per litre and inserting a formula for determining the duty payable on petroleum blends containing biodiesel.

Comparison of key features of new law and current law
New law Current law
Subsection 3(1) in the Excise Tariff Act 1921 defines biodiesel as fuel for use in an internal combustion engine and manufactured by chemically altering vegetable oils or animal fats (including recycled oils from these sources) to form mono-alkyl esters.
Subsection 6G(2C) in the Excise Tariff Act 1921 provides a formula for calculating duty payable on an excisable blended petroleum product containing a blend of biodiesel and ethanol and any other substance.
Item 11 of the Schedule to the Excise Tariff Act 1921 contains an additional paragraph, paragraph (f) biodiesel.
Subitem 11(L) of the Schedule to the Excise Tariff Act 1921 prescribes the excise duty rate for biodiesel as $0.38143 per litre.
No equivalent.

Detailed explanation of new law

3.6 Biodiesel is brought into the Schedule to the Excise Tariff Act 1921 as an excisable product with an excise rate of $0.38143 per litre as subitem 11(L). [Schedule 1, Part 4, items 29 and 30]

3.7 A definition of 'biodiesel' is inserted into the Excise Tariff Act 1921 as subsection 3(1). Biodiesel is defined as fuel for use in an internal combustion engine and that is manufactured by chemically altering vegetable oils or animal fats (including recycled oils from these sources) to form mono-alkyl esters. [Schedule 1, Part 4, item 26]

3.8 Blends of excisable petroleum products are dealt with under section 6G of the Excise Tariff Act 1921 and subsection 6G(2C) provides a formula for calculating the duty payable on blends including biodiesel and ethanol. The formula takes into account the 'volume of biodiesel', 'biodiesel rate', 'volume of ethanol', 'ethanol rate', 'volume of other substances', 'diesel rate' and 'previously paid duties'. These terms are defined in the subsection. [Schedule 1, Part 4, item 28]

3.9 As a consequence of the insertion of subsection 6G(2C), subsection 6G(1) is amended to encompass the inserted subsection. Subsection 6G(1) is intended to provide a formula for calculating duty on blends not included in the other subsections and the amendment will exclude the blends addressed in subsection 6G(2C). [Schedule 1, Part 4, item 27]

Application and transitional provisions

3.10 The amendments are taken to have effect on and from 18 September 2003.

Regulation Impact Statement

Policy objective

3.11 This bill brings biodiesel into the excise system from 18 September 2003 as part of a broader fuel tax reform package. The intention of the reforms is to provide a more certain, sustainable, consistent and neutral tax regime for all fuels used in internal combustion engines. The Government is also committed to the introduction of a commercially viable renewable fuels industry.

3.12 The introduction of excise duty on biodiesel, with the provision of an equivalent subsidy, is intended to bring biodiesel into the excise regime and provide industry certainty while allowing time for industry to adjust and establish markets prior to the introduction of effective excise for biodiesel. The final excise duty rate for biodiesel and other alternative fuels entering the excise system will be 50% of the excise duty rate applying to fuels with similar energy content. The final excise duty rate for biodiesel will be $0.191 per litre.

Implementation

3.13 This measure was announced on 13 May 2003 to take effect on 18 September 2003. The excise duty was introduced by means of an Excise Tariff Proposal, a longstanding mechanism for implementation of government policy introducing new items or altering excise duty rates for existing items classified in the Schedule to the Excise Tariff Act 1921 pending introduction of a validation bill amending that Act. The addition of biodiesel to the Excise Tariff Schedule is consistent with the treatment of other fuels for use in an internal combustion engine.

3.14 The excise duty of $0.38143 per litre on biodiesel will be offset by the availability of a grant for biodiesel, at an equivalent rate, to producers of final fuels containing biodiesel, subject to certain conditions. These conditions include that the fuel meets the relevant fuel quality standards under the Fuel Quality Standards Act 2000. Standards for biodiesel have been established as inferior quality biodiesel potentially has negative environmental and health impacts and may lead to vehicle operation problems.

3.15 Under the fuel tax reform package the final excise duty rates applying to fuels for use in an internal combustion engine are based on the energy content of the fuel, banded as high, medium and low. The final excise duty rate for alternative fuels entering the excise regime, including biodiesel, will be discounted by 50% on the full energy content rate. The final excise duty rate for biodiesel, a high energy content fuel in the same energy content band as petrol and diesel (with an excise duty rate of $0.38143 per litre), will therefore result in a final rate of $0.191 per litre.

Assessment of impacts

3.16 The major impacts of the imposition of excise duty on biodiesel are:

·
the liability of manufacturers of biodiesel to pay the excise duty. This duty will be offset by the availability of an equivalent subsidy for producers of biodiesel in final fuels; and
·
the requirement that manufacture (including blending of biodiesel and other fuels, which is treated as manufacture under the Excise Act 1901) and storage of biodiesel and fuels containing biodiesel must be licensed under the excise legislation.

Impact group identification

3.17 Australia currently has limited commercial biodiesel production. As the biodiesel industry is in early stages of development for product development, operations and markets, the size of the market and the participants in that market are difficult to establish with certainty. The Australian Taxation Office (ATO) estimates that at present about 2 million litres are produced annually, compared to 14 billion litres of diesel.

Biodiesel manufacturers

3.18 There is a small number of large scale commercial manufacturers of biodiesel, and some production by small/medium scale and small-scale personal use producers.

Large manufacturers

3.19 The ATO has identified three commercial scale manufacturers with biodiesel production capacity ranging in size from around 50,000 litres to 1.5 million litres per year. The ATO consultation with industry participants indicates that up to eight additional large manufacturers may enter the industry over the next 12 to 18 months, with maximum output capacity estimates ranging from 1 million litres to 60 million litres per year, and the majority around 40 million litres per year. Entry to the industry will be influenced by factors such as the availability and cost of feedstock, market demand and ability to service that demand on a viable commercial scale.

Small/medium producers

3.20 There is a number of small/medium scale manufacturers and small-scale personal use producers. It is difficult to assess the number of these and the quantity and quality of biodiesel produced. The ATO has estimated that there may be around 12 small/medium scale manufacturers, producing around 50,000 litres each per year. These producers range from operators who collect and recycle waste oil and fats as biodiesel for on-selling and persons who produce biodiesel for their own use. To date five of these have been licensed.

3.21 The viability of small/medium scale manufacturers will be affected by factors such as the availability of feedstock, and the ability to meet the requirements for licensing under the excise legislation and the fuel standards applying to biodiesel, in order to receive the biodiesel subsidy. Further development of the commercial sector of the biodiesel industry may result in greater competition for waste oil and fuel standards may provide a significant barrier to small/medium scale manufacturers.

Personal use manufacturers

3.22 In addition there are an estimated 500 to 1,000 small-scale personal use producers. The Government's announcement does not include an excise exemption for the production of biodiesel for personal use. This accords with the general principle that excisable fuel production is subject to the provisions of the excise licensing regime in which the criteria to be satisfied is normally directed to commercial scale production. It is unlikely that such producers would readily be able to demonstrate compliance with fuel standards. In addition, the nature of the chemicals used in the process of producing biodiesel from waste oils and fats is such that they are potentially toxic for both the producer and the environment.

Blenders of biodiesel and other fuels

3.23 Commercial blending of biodiesel with other fuels requires a manufacturer's licence as blending is treated as manufacture under section 77H of the Excise Act 1901. Three companies have informed the ATO that they are currently blending, or intend to blend, biodiesel on a commercial scale and excise licences have been issued to these companies.

Storage of biodiesel

3.24 Storage of biodiesel fuels, for example, for blending or distribution requires an excise storage licence.

Analysis of costs/benefits

3.25 The excise legislation concerning licensing for manufacture and storage provides for a number of criteria to be satisfied, including suitability of applicants, the physical security of the premises, and adequate recording systems to enable satisfactory auditing for protection of the revenue.

3.26 The cost to apply for a licence to manufacture or store excisable goods and provide the information required by the ATO for determination whether to grant a licence should not be significant. Licences are free and the information to be provided covers matters such as the 'fit and proper' nature of the applicant person or company; the proposed area to be covered by the licence; details of the construction of the premises; details of equipment, such as the capacity of storage tanks; and physical security, such as alarm systems; details of the type and quantities of the products to be manufactured or stored; information on the proposed arrangements for paying the excise liability; intention to move excisable product to and from the premises while the excise duty remains unpaid; the method of determining the amount of duty payable, and details of the recording system to be used.

3.27 The cost of meeting the requirements for security of premises, adjusting recording and reporting systems and arranging excise remission are difficult to assess as they vary depending on companies' existing arrangements. It is expected the costs would be minor to moderate for a large commercial scale operation that would already have adequate security and production records and needs only to adjust systems to allow for appropriate recording for excise purposes and payment of duty. For a small/medium manufacturer, the cost may be more significant.

3.28 Net revenue gain from biodiesel excise (and customs) duty, allowing for displacement of diesel, is estimated at $5 million for 2003-2004 and $10 million for 2004-2005. The estimated biodiesel subsidy is $15 million for 2003-2004 and $44 million for 2004-2005.

Consultation

3.29 Prior to the announcement of the excise duty on biodiesel government consultations with industry stakeholders around biodiesel fuel standards indicated that one of the barriers to the market uptake of biodiesel was uncertainty around the biodiesel excise arrangements. The policy announcements in the 2003-2004 Federal Budget were intended to address that uncertainty.

3.30 The ATO has consulted extensively with biodiesel industry participants affected by the imposition of excise on biodiesel. Through industry groups, associations and relevant internet sites the ATO has identified current and potential commercial and non-commercial producers. Members of these associations and additional contacts developed from those members were advised of an Information Forum for the Biodiesel Industry held in Sydney in July 2003. In addition, a Consultative Forum for biodiesel industry participants was held in Sydney in October 2003.

Conclusion

3.31 The introduction of excise duty on biodiesel, with the provision of an equivalent subsidy, assists the biodiesel industry to develop with certainty regarding taxation arrangements prior to the introduction of effective excise for all fuels for use in internal combustion engines.

Chapter 4 - Other amendments

Outline of chapter

4.1 Schedule 1, Part 5, amends the provisions of the Excise Tariff Act 1921 that set out the method of determining the duty payable on excisable blended petroleum products to allow previously paid duties to be deducted in the formula for calculating duty on gasoline/fuel ethanol blends.

Context of amendments

4.2 Blending of excisable petroleum products is treated as manufacture under the Excise Act 1901 and must be carried out with an excise manufacturer's licence. Since 1994 certain blending has been prescribed as exempt from these requirements, generally where the blending is incidental, non-commercial and does not represent a revenue risk. Blends of duty paid petrol and fuel ethanol have been exempt under these arrangements. However, this treatment of duty paid petrol and fuel ethanol blending is now inconsistent with the treatment of other commercial fuel blending and the prescribed exemption is to be removed. When the exemption is removed, the excise duty payable on these blends will be calculated under the provisions of the Excise Tariff Act 1921 formula. As these blends involve duty paid petrol it will be necessary to allow for previously paid duties to be deducted. This is consistent with the formula for calculating duty on other fuel blends.

Detailed explanation of new law

4.3 The amendments repeal the subsection 6G(2) formula that provides for the excise duty to be determined on gasoline/ethanol blends as the sum of the volume of gasoline at the gasoline rate and the volume of ethanol at the ethanol rate and substitute a similar formula with the addition of the capacity to deduct previously paid duties. [Schedule 1, Part 5, item 31]

The amendments define 'previously paid duties', which includes both customs and excise duties. [Schedule 1, Part 5, item 32]

Application and transitional provisions

4.4 Schedule 1, Part 5, commences on the day on which this bill receives Royal Assent. If the Excise Tariff Amendment Bill (No. 1) 2003 commences, or has commenced, the provisions do not commence and are taken never to have commenced.

Index

Schedule 1: Amendment of the Excise Tariff Act 1921

Bill reference Paragraph number
Part 1, item 2 1.16
Part 1, item 3 1.16
Part 1, item 4 1.16
Part 1, item 5 1.16
Part 1, item 6 1.16
Part 1, items 7 to 14 1.9
Part 1, items 7 to 9 1.11
Part 1, item 10 1.10
Part 1, items 11 and 12 1.12
Part 1, items 13 and 14 1.13
Part 2, items 15 to 17 1.11
Part 2, item 18 1.10
Part 2, items 19 and 20 1.12
Part 2, items 21 and 22 1.13
Part 3, item 23 2.6
Part 3, items 24 and 25 2.7
Part 4, item 26 3.7
Part 4, item 27 3.9
Part 4, item 28 3.8
Part 4, items 29 and 30 3.6
Part 5, item 31 4.3
Part 5, item 32 4.3


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