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Ruling

Subject: Fuel tax credits - calculation of entitlements

Question 1:

Are you entitled to fuel tax credits at the rate of 38.143 cents per litre for the taxable fuel you acquired and used prior to generate electricity onboard the dredging vessel A for the period 1 July 2010 to 30 June 2012?

Answer:

Yes.

Question 2:

Are you entitled to fuel tax credits at the rate of 38.143 cents per litre for the taxable fuel you acquired and used to generate electricity onboard the dredging vessel B for the period 1 July 2010 to 30 June 2012?

Answer:

Yes.

Question 3:

Are you entitled to fuel tax credits at the rate of 38.143 cents per litre for the taxable fuel you acquired and used to generate electricity onboard the dredging vessel B for the period 1 July 2010 to 30 June 2012?

Answer:

Yes.

Question 4:

Are you entitled to fuel tax credits at the full rate less the carbon charge for the taxable fuel you acquired and used in the dredging vessels A and B for the period 1 July 2012 to 30 June 2014?

Answer:

Yes.

Question 5:

Is it fair and reasonable in your circumstances to calculate the amount of taxable fuel used in electricity generation on board your dredging vessels using the deductive method, subtracting the estimated taxable fuel used by the non-electricity generating engines (calculated by reference to operational hours and average heavy fuel oil (HFO) and diesel burn rates) from the total taxable fuel consumed by all of the engines on board those vessels?

Answer:

Yes.

Question 6:

Are you entitled to claim the additional fuel tax credit for taxable fuel used by your vessels in generating electricity, on your next business activity statement (BAS)?

Answer:

Yes.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commences on:

1 July 2010.

Relevant facts and circumstances:

You are a joint venture registered for goods and services tax (GST) in the construction industry.

The joint venture was established to conduct the dredging operations in Australia.

The scope of the works includes the dredging of various channels, swing basins and bypass channels for the access to various berth pockets, embarkation docks and material offloading facilities.

Dredging commenced during the year ended 30 June 2011 and will be completed in 2014 using a range of machinery including:

· 2 heavy duty cutter suction dredgers - the A and the B

· 1 large trailing suction hopper dredger - the C

· Several backhoe dredgers

· A backactor; and

· A number of other marine vessels, including tug boats, barges and floating pontoons.

You acquire the fuel used on board the A and B which is delivered in bulk by one of two main fuel suppliers. Excise is paid on all fuel purchases at the rate of $0.38143 per litre.

None of the fuel tanks on the vessels are metered, so it is not possible to determine exactly how much fuel is used by each engine.

Vessel A

The A is powered by five engines:

· main generator

· main dredge pump

· two auxiliary generators

· Caterpillar powerpack.

The two main engines primarily operate on HFO but can operate on diesel fuel. The remaining three engines operate solely on diesel fuel.

The main engine is directly coupled to two main generators. The electricity produced by these generators is fed into the vessel's main electricity grid via the main switchboard to provide power to a range of equipment/uses. Some of these uses are:

· lighting

· heating/cooling

· electronic control and navigation

· air compressors

· cranes

· winches

· underwater suction dredge pump

· hydraulic pumps

· cutter motor

· workshop tools

· communications

· fans

· kitchen

· sewage systems.

The main dredge pump engine directly drives the main dredge pump during dredge operations.

The auxiliary generator engines are each directly coupled to an auxiliary generator. The electricity produced by these generators is fed into the vessel's main electricity grid via the main switchboard to provide power to a range of equipment.

The Caterpillar powerpack engine is used to provide power to the main dredge pump engine during dredging operations.

Vessel B

The B is powered by seven engines:

· dredge pumps 1 and 2

· electric dredge pump

· cutter generator

· harbour generator

· emergency generator.

The two dredge pumps directly drive a dredge pump during dredging operation.

The electric dredge pump is directly coupled to two generators. The electricity produced by these two generators is fed into a separate electric circuit specifically for the purpose of powering the electric underwater dredge pump. No other equipment can be powered by these generators.

The cutter generator engine is directly coupled to two generators. The electricity generated by these two generators can be used wholly to drive the cutter drive. However, approximately 30% of the power generated is fed into the main switchboard via a transformer to provide power to the vessel's main electricity grid.

The auxiliary generator is directly coupled to an auxiliary board supply generator. The electricity produced by this generator is fed into the vessel's main electricity grid via the main switchboard.

The harbour generator engine is directly coupled to a harbour generator. This engine was not used prior to 1 July 2012.

The emergency generator engine is directly coupled to an emergency generator. The electricity produced by this generator is fed into the vessel's main electricity grid via the main switchboard.

You have not asked for a ruling in respect of fuel used in Vessel C.

Relevant legislative provisions

Fuel Tax Act 2006 section 41-5

Fuel Tax Act 2006 subsection 43-5(1)

Fuel Tax Act 2006 section 60-5

Fuel Tax Act 2006 Division 65

Fuel Tax Act 2006 subsection 65-5(1)

Fuel Tax Act 2006 subsection 65-5(4)

Fuel Tax (Consequential and Transitional Provisions) Act 2006 Division 2 of Part 3 of Schedule 3

Fuel Tax (Consequential and Transitional Provisions) Act 2006 subitem 11(1) of Schedule 3

Fuel Tax (Consequential and Transitional Provisions) Act 2006 subitem 11(5) of Schedule 3

Fuel Tax (Consequential and Transitional Provisions) Act 2006 subitem 11(6) of Schedule 3

Fuel Tax (Consequential and Transitional Provisions) Act 2006 subparagraph 11(1)(b)(iii) of Schedule 3

Energy Grants (Credits) Scheme Act 2003 subsection 36(7)

Energy Grants (Credits) Scheme Act 2003 section 53

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.

However, this entitlement is affected by Division 2 of Part 3 of Schedule 3 to the Fuel Tax (Consequential and Transitional Provisions) Act 2006 (FTCTPA) which operates to restrict this entitlement to specific activities for fuel purchased between 1 July 2008 and 30 June 2012.

For the period 1 July 2008 to 30 June 2012, the specific activities for which a fuel tax credit entitlement exists are relevantly listed within subitem 11(1) of Schedule 3 of the FTCTPA and are:

(i) for use in a vehicle travelling on a public road

(ii) for incidental use in relation to a vehicle travelling on a public road

(iii) for use in generating electricity

(iv) for use other than as a fuel

(v) for use other than as a fuel in an internal combustion engine

(vi) for use as heating oil.

Generation of electricity

Fuel is used for the purpose of generating electricity where the electricity is an end in itself and can in turn be used for any purpose for which electricity is required. For example, fuel is used in generating electricity when it is used in a generator so as to make power available to business premises (vessel). Similarly, the use of fuel in a generator to provide power to a range of external equipment (such as electrically powered machinery in a factory) would constitute use in generating electricity.

The above uses of fuel can be contrasted with the use of fuel within the actual equipment that is to be powered by the fuel. For example, fuel acquired for use in the internal combustion engine of a vehicle/vessel is for the purpose of driving or propelling the vehicle/vessel. Similarly the use of fuel in the internal combustion engine of a machine where the power generated by the machine is for use by that machine is for the purpose of operating the machine.

Vessel A

The A utilises five separate engines. Of these, the main generator engine, and the two auxiliary generator engines are coupled directly to generators for the sole purpose of generating electricity for a range of activities on board the vessel.

As electricity generation, is an eligible activity under subparagraph 11(1)(b)(iii) of Schedule 3 to the FTCTPA, fuel used for that purpose is an eligible use of fuel. Consequently, you are entitled to a fuel tax credit at the rate of 38.143 cents per litre for the proportion of diesel you acquired and used in the main generator engine and the two auxiliary generator engines to generate electricity on the vessel A.

Vessel B

The B utilises seven separate diesel engines. Of these seven engines, five (electric dredge pump engine 3, cutter generator engine, auxiliary generator engine, harbour generator engine and the emergency generator engine) are directly coupled to generators for he sole purpose of generating electricity for a range of activities on board the vessel. Like similar engines on board the A, fuel you acquire and use in these five engines is to generate electricity and you would therefore be entitled to fuel tax credits at the full rate for that fuel.

Half-rate

Subitem 11(5) of the FTCTPA provides that you are entitled to a fuel tax credit if you would have been entitled to an off-road credit under the EGCSA.

Section 53 of the EGCSA relevantly provides that you are entitled to an off-road credit if you purchase fuel for a use by you that qualifies. Uses that qualify include use of fuel in marine transport.

However, subsection 36(7) of the EGCSA specifically excludes any use of fuel in a dredge or in equipment in or on a dredge as a use in marine transport. Therefore you do not meet the requirements of subitem 11(5) of the FTCTPA.

However, if you would not have been entitled to an on-road or an off-road credit under the EGCSA for a quantity of fuel you acquire and use in your business, subitem 11(6) of Schedule 3 of the FTCTPA provides that for the period 1 July 2008 to 30 June 2012 an entitlement to a fuel tax credit arises under the FTA. The amount of the credit is half of the amount of the full rate.

Vessel A

You have acquired and used fuel in the main dredge pump engine and Caterpillar engines that has not been used to generate electricity and nor has it been used for one of the specific activities provided for under section 53 of the EGCSA. This fuel would therefore be entitled to fuel tax credit at the half rate in accordance with subitem 11(6) of Schedule 3 of the FTCTPA during the period 1 July 2008 to 30 June 2012.

Vessel B

The fuel you acquire and use in the remaining two engines on board the B has been used in dredging operations rather than electricity generation. Consequently, in respect of the fuel used in those two engines, you would be entitled to fuel tax credit at the half rate in accordance with subitem 11(6) of Schedule 3 of the FTCTPA during the period 1 July 2008 to 30 June 2012.

Carbon Charge

Subsection 43-5(1) of the FTA provides that the amount of your fuel tax credit is the amount of effective fuel tax less the road user charge.

Therefore the fuel tax credit for all fuel used in your dredging vessels, i.e. for electricity generation and other uses, is reduced by the amount of the carbon charge. The amount of the carbon charge is fixed for the first three years of the clean energy measures. For the period 1 July 2012 to 30 June 2013 the rate of fuel tax credit for HFO and diesel is 31.933 cents per litre and for the period 1 July 2013 to 30 June 2014 the rate will be 31.622 cents per litre.

Apportionment

Of the fuel you acquired and used in your business during the period 1 July 2008 to 30 June 2012, a portion was used:

· to generate electricity attracting fuel tax credits at the full rate; and

· a portion was used in dredging and would attract fuel tax credits at the half rate.

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 under them unreliable in calculating the fuel tax credit entitlement of the entity for the period.

In Practice Statement Law Administration PS LA 2010/3, the Commissioner provides guidance to (ostensibly) 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

During the period 1 July 2008 to 30 June 2012 you acquired and used taxable fuel on board the A and the B for two specific activities:

· generating electricity which attracts fuel tax credits at the fuel rate; and

· dredging which attracts fuel tax credits at the half rate.

However, as none of the fuel tanks on the two vessels are metered, it is not possible for you to determine exactly how much fuel is used by each engine.

You therefore propose to use a deductive method to determine the amount of fuel used for the above uses.

Your proposed method involves deducting the amount of fuel used by the two engines on each vessel used in dredging operations from the total fuel you acquired and allocating the balance to the electricity generating fuel use.

You propose to calculate the fuel used in dredging operations by reference to each of those four engines' hours of operation and their average hourly burn rates.

This method is similar to the one used by the Commissioner in examples 12 and 13 of PS LA 2010/3 and is considered to be a fair and reasonable method of calculating fuel tax credit entitlements in your circumstances.

However, 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.

Attribution of fuel tax credits

Division 65 of the FTA sets out the attribution rules for fuel tax credits and fuel tax adjustments.

Subsection 65-5(1) of the FTA provides that a fuel tax credit is attributable to the same tax period to which the input tax credit for the fuel is attributable under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). If, in relation to the acquisition of a quantity of fuel, your associated input tax credit was attributable to an earlier tax period, the associated fuel tax credit for that quantity of fuel is also attributable to the earlier tax period.

However, subsection 65-5(4) of the FTA provides for the later attribution of a fuel tax credit in certain circumstances and states:

If your return for a tax period or fuel tax return period states a net fuel amount that does not take into account a fuel tax credit that is attributable to the period mentioned in subsection (1), (2) or (3), then the credit:

(a) ceases to be attributable to that period; and

(b) becomes attributable to the first period that does take it into account.

The effect of this subsection is that an entity can choose to include a fuel tax credit in a subsequent activity statement in which case the fuel tax credit will then become attributable to that tax period.

Accordingly, where an entity has omitted to claim a fuel tax credit, they can choose to either:

· revise their activity statement for the tax period in which the fuel was originally attributable under subsection 65-5(1) of the FTA, or

· include the fuel tax credit in an activity statement for a subsequent tax period under subsection 65-5(4) of the FTA.

Accordingly you are entitled to claim the additional fuel tax credit for taxable fuel used by your vessels in generating electricity, on your next business activity statement (BAS).

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