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Edited version of your private ruling

Authorisation Number: 1012334523001

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Ruling

Subject: Fuel tax credits - calculation of entitlements

Question 1

Based on your proposed methodology, are you entitled to fuel tax credits at the full rate of 38.143 cents per litre for all fuel used in vehicles which are predominantly used for specified off-road agricultural activities but which you state conduct incidental on-road travel equal to or less than 25% or less of that vehicles total fuel use?

Answer

No.

Question 2:

Is your fuel tax credit entitlement in respect of fuel used in electricity generating activities on your agricultural properties subject to the carbon reduction amount?

Answer:

No.

Question 3:

Is your proposed method of calculating fuel tax credits using your proposed percentage use method considered to be fair and reasonable?

Answer:

No.

Question 4:

Is it fair and reasonable for you to review your fuel tax credit methodology every three years?

Answer:

No.

This ruling applies for the following periods:

2012- 13 income year

2013-14 income year

2014-15 income year

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You are an Australian public company registered for goods and services tax (GST) as an agricultural business. You lodge your business activity statements (BAS) on a monthly basis.

You operate in Australia with operations at a large number of different sites.

You state most of your operations are conducted on large remote properties where a substantial amount of the fuel that you acquire is used in off-road activities. However as most of your properties are located near gazetted public roads (and in many cases the roads run directly through your properties), fuel is sometimes used for travel on those roads by vehicles which are predominantly used off-road for agricultural activities.

At your various sites, you use diesel and petrol in a range of vehicles, plant and equipment in your operations which are detailed at Appendix D of your private ruling application. These include but are not limited to:

You state that where fuel is used in vehicles which predominantly conduct off-road agricultural activities but also conduct a small amount of incidental travel on public roads, you propose claiming fuel tax credits at the rate of 38.143 cents per litre for all fuel used in these vehicles on the basis that they are:

Your business currently keeps daily records for each vehicle and plant item, and these records are recorded on spreadsheets.

Proposed calculation methodology

Your proposed calculation methodology is detailed at Appendix B of your private ruling application. You state that this proposed method will facilitate a more efficient process for future fuel tax credit claims.

You intend to:

You developed a fuel questionnaire which was sent to each of your sites for completion between certain months in the recent year and information was gathered including general site information, fuel supply fuel usage, and what you state were approximate percentages of on-road and off-road use for each and every one of your vehicles.

Using a spreadsheet you then detailed your assessment of what activities were eligible or ineligible uses of fuel for each of your vehicles and broke these into five categories.

You state there are a number of vehicles considered as being used for both on and off-road purposes, that is road transport activities and or off-road agricultural activities. You state you have assessed these vehicles according to the percentage of travel conducted for each activity, that is:

Where those activities were identified as travelling off-road 75% or more of the time you propose any travel on public roads by the vehicles is incidental to its main use.

That is, you contend that where fuel is used in your vehicles which are predominantly used to conduct off-road activities and which are also required to conduct a small amount of incidental travel on public roads, the whole amount of fuel used by those vehicles is entitled to fuel tax credit at the full rate as any fuel use in travelling on public roads is incidental to the vehicle's use off-road.

You then identified vehicles travelling 50-75% of the time off-road and that the on and off-road break down of this was 50/50. However, you have proposed using the following:

In respect of your vehicles you estimate travelling less than 50% of the time on-road, you believe you have adopted a conservative position in calculating fuel tax credits, that is:

As such, you propose that the whole of this amount of fuel is entitled to fuel tax credits at the road transport rate.

You have stated that after the vehicles are categorised as described above, a percentage of total acquisitions for the relevant site will then be calculated based on the six monthly data from 1 January 2012 to 30 June 2012.

On this basis you propose claiming fuel tax credits at the rate of 38.143 cents per litre for fuel used in vehicles which you state are predominantly used for off-road agricultural activities but also conduct incidental on-road use which you state amounts to equal or less than 25%.

You have advised in your ruling application that while as part of your fuel tax credit calculations, you will cross check your calculations to ensure consistency of fuel use and whether any adjustments are required, your method will be reviewed every three years to ensure accuracy of the percentages used in your calculations.

Electricity generation

Given the remote nature of your operations, some fuel is used by you to generate electricity to provide power to a range of equipment in carrying out your agricultural activities (e.g. bore water pumps) and also to meet the domestic requirements of workers in residential premises located on the agricultural properties (e.g. farm houses, camps etc).

All electricity generators are permanently located at residential premises located on a farm and are not used for any other purpose other than meeting the domestic requirements of the farm residents. These residences are located on agricultural properties on which core agricultural activities are carried out.

You contend that your entitlement to fuel tax credits in relation to your electricity generation should not be reduced by the carbon reduction amount as the fuel has been used for the purposes of carrying on an agricultural business on an agricultural property.

Relevant legislative provisions

Fuel Tax Act 2006 section 41-5

Fuel Tax Act 2006 subdivision 41-B

Fuel Tax Act 2006 section 41-20

Fuel Tax Act 2006 division 42

Fuel Tax Act 2006 division 43

Fuel Tax Act 2006 section 43-5

Fuel Tax Act 2006 subsection 43-5(1)

Fuel Tax Act 2006 section 43-8

Fuel Tax Act 2006 subsection 43-8(4)

Fuel Tax Act 2006 subsection 43-10(1)

Fuel Tax Act 2006 subsection 43-10(3)

Fuel Tax Act 2006 subsection 43-10(4)

Fuel Tax Act 2006 section 43-15

Fuel Tax Act 2006 paragraph 43-15(1)(c)

Fuel Tax Act 2006 paragraph 43-15(1)(e)

Fuel Tax Act 2006 section 43-20

Fuel Tax Act 2006 section 43-40

Clean Energy (Fuel Tax Legislation Amendment) Act 2011

Reasons for decision

Section 41-5 of the Fuel Tax Act 2006 (FTA) provides that you are entitled to a fuel tax credit for taxable fuel that you acquire in Australia to the extent you do so for use in carrying on your enterprise, if you are registered for GST.

The disentitlement provisions for fuel tax credits are contained in subdivision 41-B of the FTA. Further, section 41-20 relevantly states that you are not entitled to fuel tax credits for taxable fuel used in a vehicle with a gross vehicle mass (GVM) of 4.5 tonnes or less travelling on a public road.

Calculating fuel tax credits

In accordance with section 43-5 of the FTA, the amount of the fuel tax credit for taxable fuel is the amount of effective fuel tax that is payable on the fuel. However, your fuel tax credit entitlement can also be affected by:

Carbon reduction

Section 43-8 of the FTA sets out the rules for working out the amount of the carbon reduction to fuel tax credit calculations.

Subsection 43-8(4) of the FTA provides for those circumstances where the amount of carbon reduction is nil. That is, where the fuel is acquired for use in:

Road user charge

In accordance with subsection 43-10(3) of the FTA, the fuel tax credit for fuel used in heavy vehicles for travelling on a public road is reduced by the amount of the road user charge (RUC). The amount of the RUC is determined by the Minister for Transport and Regional Services and is subject to change.

Heavy vehicles are those with a gross vehicle mass (GVM) greater than 4.5 tonnes. Diesel vehicles acquired before 1 July 2006 can equal or exceed 4.5 tonne GVM.

Agriculture

Agriculture is relevantly defined in section 43-15 of the FTA.

Paragraph 43-15(1)(c) of the FTA provides that agriculture includes the rearing of livestock and includes in that definition, livestock activities at paragraph 43-15(1)(e).

Section 43-20 of the FTA goes on to relevantly define a livestock activity as including:

That is, where you undertake these activities it is accepted that you are undertaking 'agriculture' for the purposes of the FTA.

Further agriculture, as defined at section 43-15 of the FTA, also includes a sundry agricultural activity. Sundry agricultural activities are provided for at section 43-40 of the FTA and include, but are not limited to the use of taxable fuel at residential premises to provide food, drink, lighting, heating and similar amenities to people conducting agricultural activities on agricultural properties.

We therefore accept that a portion of the fuel you have acquired and used in your business has been used in agriculture. In accordance with subsection 43-8(4) of the FTA, fuel used in agriculture is not subject to the carbon reduction amount and consequently the fuel tax credit calculated in respect to fuel acquired for this purpose will not be reduced by the carbon charge amount.

Electricity generation

You also acquire and use fuel in the generation of electricity for residents of your agricultural properties on those properties.

Therefore, the fuel you acquire and use to produce electricity to supply water and other amenities to your agricultural residents would be considered a sundry agricultural activity and consequently the fuel tax credit calculated in respect to fuel acquired for this purpose will not be reduced by the carbon charge amount.

Road transport

Some of the fuel you acquire and use as part of your agriculture business has been used in heavy vehicles operating on a public road. As discussed, any fuel tax credit calculated in respect to this fuel is reduced by the RUC unless, in accordance with subsection 43-10(4) of the FTA, the vehicle's travel on a public road is incidental to the vehicle's main use.

As part of your proposed methodology you identified vehicles that you state were travelling 75% or more "off-road". You state in the case of these vehicles it was determined that the vehicle was used predominantly used for off-road agricultural activities and the on-road portion of the vehicles travel was incidental to its main use. As such you consider you are entitled to the full rate for the whole amount of fuel used by these vehicles as outlined above.

That is, you propose claiming fuel tax credits at the rate of 38.143 cents per litre for all fuel used in these vehicles on the basis that they are:

In Fuel Tax Ruling FTR 2008/1, Fuel tax: vehicle's travel on a public road that is incidental to the vehicle's main use and the road user charge the Commissioner explains when a vehicle's travel on a public road is 'incidental to the vehicle's main use' for the purposes of subsection 43-10(4) of the FTA.

In Fuel Tax Ruling FTR 2008/1, Fuel tax: vehicle's travel on a public road that is incidental to the vehicle's main use and the road user charge the Commissioner explains when a vehicle's travel on a public road is 'incidental to the vehicle's main use' for the purposes of subsection 43-10(4) of the FTA.

In paragraphs 80 to 85 of FTR 2008/1 the Commissioner explains the imposition of the RUC. The RUC, along with the State and Territory heavy vehicle registration charges, are imposed by government to recover heavy vehicles' share of the costs of providing and maintaining the public road network. It would therefore not be fair and reasonable to waive these charges for some users of public roads under normal circumstances.

Incidental use

In paragraph 47 of FTR 2008/1 the Commissioner states that a vehicle's 'main use' is the vehicle's primary or principal use.

The Commissioner goes on to say that a vehicle's 'main use' is a question of fact, to be decided on the facts and circumstances of each case by a process of evaluation and after weighing a range of factors including:

At paragraph 49 of FTR 2008/1 the Commissioner states that:

The main use of a vehicle will usually be self-evident and indicated by the vehicle's design. However, it is also necessary to consider the way in which the vehicle is actually used.

Where a vehicle is purpose-built or permanently modified to carry out a specialised function and is used to carry out that function, the main use of that vehicle may be that specialised function even though the vehicle does not spend the majority of its operating time carrying out that function. This is because other activities that the vehicle carries out, such as travelling to and from work sites, serve that specialised function rather than dictate the vehicle's main use.

In determining whether a vehicle's travel is incidental to its main use, a practical commonsense approach needs to be taken in weighing and evaluating a range of factors having regard to the facts and circumstances of each case.

Where a special purpose vehicle, such as a mobile crane, concrete pump, mobile elevated working platform or drilling rig uses a public road to travel, for example, to or from a work site, it is considered such vehicles are designed to travel on a public road. Further, they are often (but not always) over mass vehicles having a substantial impact on roads. Travel by such vehicles in the course of its relocation from one site (for example, depot) to another (for example, work site) is similar in nature to road transportation.

As such, it is reasonable to consider that travel on a public road is never incidental because it is so integral to the use of the vehicle so as to become part of or inseparable from its main use.

However, travel on a public road by a vehicle that is designed primarily for off-road use and which is used mainly in off-road activities will be considered incidental where it occurs in the course of the vehicle's off-road use and:

Incidental travel by these vehicles is minor in extent. However, travel on a public road by a vehicle of this kind is not incidental where the vehicle uses the road to travel to or from an off-road work site or to and from the depot to where they are stored.

In your case, you use fuel in a number of heavy vehicles on a public road including but not limited to the following:

None of these vehicles have been denoted as having any modifications indicating that their main use is off-road. While, clearly, vehicles such as tractors and graders have been designed and built primarily for off-road use, the main use of unmodified road transport vehicles such as the trucks and prime mover would be most appropriately considered to be road transport.

Moreover, while it is acknowledged that a large portion of the kilometres travelled by these road vehicles would be considered to be on private roads on your agricultural properties, their travel on public roads is common and expected in your business, especially in the transport of passengers or livestock to places such as abattoirs or sale yards off the farm.

Whilst it may be your view that some of your vehicles, plant and equipment have been designed for, and are mainly used off-road for activities (that is, agricultural purposes) they are also vehicles that travel on public roads. That is, they are required to travel on public roads at their own propulsion for travel between sites.

Further, as highlighted above we must consider the ordinary pattern of use of the vehicle and the time spent or distance travelled (as appropriate) by the vehicle in carrying out a particular operation, compared to the time or distance spent in carrying out other operations.

It is accepted that the use of your special purpose vehicles (such as tractors and graders) would be analogous to example 15 in FTR 2008/1 as these vehicles are designed and built primarily for off-road use and some of their travel on a public road may be incidental to their use off-road i.e. for short distances between properties/sites for example. Consequently, the whole of the fuel they use would attract fuel tax credits at the full rate.

However, your generic road vehicles such as the trucks and prime mover are not designed and built specifically for off road use. Therefore, their use is more correctly analogous to example 19 in FTR 2008/1 where the use of public roads is integral to their main use. In respect of the fuel used in these vehicles, in your circumstances, a portion of the fuel would be considered to be for use off-road in agriculture and a portion would be considered to be for use on-road in road transport.

In this case, apportionment between the various activities and fuel tax credit rates is necessary.

Apportionment

Of the fuel you acquire and use in your business:

Section 60-5 of the FTA provides that in working out your net fuel amount your total fuel tax credits is the sum of all fuel tax credits to which you are entitled in a tax period. The sum of all fuel tax credits to which you are entitled is determined with reference to Divisions 41, 42 and 43 of the FTA.

In Fuel Tax Determination FTD 2010/1 Fuel tax: is apportionment used when determining total fuel tax credits in calculating the net fuel amount under section 60-5 of the Fuel Tax Act 2006? the Commissioner sets out his views on the methods claimants can use when calculating their fuel tax credit entitlements in circumstances such as yours.

The use of the phrase 'to the extent that' in the FTA contemplates the apportionment of fuel between multiple uses as well as allocation of the fuel to a specific use to ensure that fuel tax credits are only claimed for fuel that is acquired for use or actually used in carrying on your enterprise.

A claimant can use any apportionment method that is fair and reasonable in their circumstances to determine the fuel tax credit that is available for the taxable fuel that they acquire.

Where there is more than one fair and reasonable way of apportioning, claimants may choose any method as long as it is fair and reasonable in their circumstances.

In practical terms, the 'fair and reasonable' concept is merely a way of saying that the method chosen must be justifiable.

In Pope v Lawler (1996) 41 ALD 127 at 135 Nicholson J adopted the New Shorter Oxford Dictionary 4th ed (1993) definitions of "fair" and "reasonable" in that case. His Honour said "fair" meant "just, unbiased, equitable, impartial"; and "reasonable" meant "within the limits of reason; not greatly less or more than might be thought likely or appropriate". Sundberg J agreed with these interpretations in National Mutual Life Association of Australia Ltd v Jevtovic (unreported, Federal Court, 8 May 1997). These definitions were also referred to by Merkel J in Collins v AMP Superannuation Fund Limited & Ors 97 ESL 6, (1997) 147 ALR 243.

Therefore in calculating your fuel tax credit entitlements, the Commissioner expects you to use a method which produces a value which is a close approximation of your entitlement without prejudicing either your operations or the credibility of the tax system.

Whichever apportionment method is used by an entity in a tax period must be applied consistently. Inconsistent methods used by an entity in the same tax period are likely to make the quantities of fuel worked out unreliable in calculating the fuel tax credit entitlement of the entity for the period.

Need for separate calculations

Section 60-5 of the FTA states that in working out your net fuel amount, regard must be had to the sum of all fuel tax credits to which you are entitled in each tax period.

Claimants are generally required to perform separate calculations to ensure a fair and reasonable basis of apportionment is relevantly applied.

The following methods are examples of commonly used methods that the Commissioner considers a fair and reasonable basis for apportionment:

Methods of apportionment

In Practice Statement Law Administration PS LA 2010/3, Apportionment for the purposes of the Fuel Tax Act 2006 the Commissioner provides guidance to tax officers in determining whether a method of apportionment used to calculate an entity's fuel tax credit entitlement is fair and reasonable in the entity's circumstances.

Whilst PS LA 2010/3 discusses commonly used methods, an entity is not limited to the particular methods set out in it and, the examples used in PS LA 2010/3 are simply to illustrate the 'fair and reasonable' principle in the application of apportionment methods.

Your method of apportionment

Your proposed method involves claiming fuel tax credits at the time the fuel is acquired and by placing your vehicles and plant into one of 5 categories:

You will then apportion the fuel you have acquired to each of these categories based on use for the six month period 1 January 2012 to 30 June 2012 for each of your activities.

The estimated use was derived from answers to a fuel questionnaire developed by your agent and sent to each of your sites and covered each and every one of your vehicles over a period of 4 months.

You also propose to claim fuel tax credits at the rate of 38.143 cents per litre for fuel used in vehicles which you state are predominantly used for off-road agricultural activities but which are also used 25% or less incidentally, on-road.

We consider that this proposed method of calculating your fuel tax credits is not fair and reasonable in your circumstances. The agriculture industry is subject to seasonal fluctuations such as market forces and the weather. Therefore, claiming fuel tax credits based on past use in a discrete six month period reviewed every three years, would not produce a consistent result within reasonable tolerances.

Furthermore, your proposed breakdown of activities described above, is based on the assumption that where fuel has been used in vehicles and plant mostly on agricultural properties, that we would accept that this is the vehicles main use.

However, as we have highlighted above the travel on a public road by vehicles designed primarily for off-road use and which are used mainly in off-road activities, would only be considered incidental where it occurs in the course of the vehicle's off-road use and is insubstantial in extent; or is so interspersed with the vehicle's off-road use (its main use) so as to be part of that off-road use.

From the information provided in your proposed methodology, we are not satisfied that this aspect has been considered in your calculations and therefore we cannot be certain of the significance of the travel on the roads versus time spent undertaking other activities.

As such, you are not entitled to fuel tax credits at the full rate of 38.143 cents per litre for all fuel used in vehicles which are predominantly used for off-road agricultural activities but which are also used less than 25% of the time for travelling on public roads.

Furthermore, whilst you have correctly identified the fuel tax credit entitlements for fuel used in heavy vehicles travelling on public roads for agriculture, you have suggested the use of an alternative rate to calculate fuel tax credits for those heavy vehicles which you believe operate both on-road and off-road. You propose using a rate midway between the full rate and the rate less RUC based on averages with no reference to how any future changes to the RUC would be treated.

Further, you propose using a rate of 19.0715 cents per litre for your light vehicles based again on averages. This is not a rate for fuel tax credit purposes and averages cannot be accepted in this context.

Therefore, for the reasons explained above, your proposed method of calculating fuel tax credits using your percentage use method is not considered to be fair and reasonable.

Furthermore, you are not entitled to fuel tax credits at the full rate for all fuel used in vehicles which are predominantly used for off-road agricultural activities but which are also used less than 25% of the time for travelling on public roads.

Your review of method

Your business keeps daily vehicle and fuel usage records perpetually. Therefore, calculating your entitlements with reference to these records every three years would not produce a result that would be considered reasonable.

As your business keeps daily records for each vehicle and plant item, and these records are recorded on spreadsheets, it would not be fair to disregard this information in the calculation of your fuel tax credit entitlements.

In addition, caution should be exercised when estimating fuel usage. In paragraphs 90 to 100 of PS LA 2010/3 the Commissioner highlights some of the errors which may occur when estimates are used. Implicit in these examples is the need for regular reviews of any methods of calculation of fuel tax credits.

Given the general need for regular review of methods of fuel tax credit calculation, and the nature of the industry in which you operate, the Commissioner does not consider three years to be a fair and reasonable interval of review.

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