Edited version of your written advice

Authorisation Number: 1012770716011

Ruling

Subject: Apportionment Methodology

Question 1

Is the apportionment method in calculating fuel tax credit claims for fuel used by auxiliary equipment (i.e. air-conditioning units) across their fleet of buses, considered 'fair and reasonable' by the Commissioner of Taxation (Commissioner)?

Answer

Yes, apportionment methodology in calculating fuel tax credit claims for fuel used by auxiliary equipment is considered 'fair and reasonable'.

Question 2

Can the resulting fuel-use apportionment ratios be used to work out their fuel tax credit entitlement amount in future tax periods?

Answer

Yes, the resulting fuel-use apportionment determined from the apportionment methodology may be applied retrospectively. The apportionment may similarly be applied prospectively where the operational activities or the vehicles and auxiliary equipment remain consistent with those existing at the time of determining the apportionment.

Relevant facts and circumstances

You operate bus services.

You propose undertaking a process for testing the fuel consumption of the vehicles in your fleet. The process is commonly referred to as 'shadow testing'. The results of the shadow testing will be applied in apportioning the fuel used in your vehicles between fuel used to power the vehicle and fuel used to power the auxiliary equipment of the vehicle.

The apportionment will be applied to past and future FTC claims using a constructive method based on the actual fuel use of vehicles within the fleet.

The outline of your proposed testing methodology is a follows:

Testing Methodology

Step 1: Review fleet lists of current and historic vehicles and select vehicles within your fleets for testing that are representative of the entire fleets of your vehicles. Selection of buses to be tested takes into consideration most common combination of engine and air conditioner make and model, activity of bus (route or charter etc) and age of bus.

Step 2: Arrange for pairs of buses with identical engine and air conditioning (AC) unit to operate in tandem, one in front of the other, for a full day of typical operation over a typical route. Both buses to depart for testing with a full tank of fuel. After testing is complete, both buses are filled with fuel with the difference in fuel consumed measured and recorded.

Step 3: Complete the Fuel Test Checklist in respect of each bus in the pair to ensure appropriate record keeping and that the shadowing instructions are followed.

Step 4: Drive the buses in tandem and perform all normal functions, such as opening and closing doors, for a full day of operation. The front bus is to operate as per normal with the air conditioning system active and the rear bus is to have the air conditioning system disengaged. Buses will either be empty or the front bus will be in operation while the rear bus has weights to account for passenger load.

Step 5: Re-fill the tank of both buses with fuel to measure the amount of fuel consumed by each bus during the period in operation. When available, fleet mechanics (as opposed to bus drivers) will perform the fuel refilling to ensure no issues arise which may undermine the testing process such as air locks in the fuel lines or inconsistent refuelling practices before and after testing. Instructions will be given for the refuelling process outlining that the same process for initially filling the vehicles is replicated for re-filling as well to ensure fuel quantities are controlled during the process. Record the fuel consumption in the abovementioned Fuel Test Checklist.

Step 6: Calculate the difference in the amount of fuel used by each bus in the pair based on the results of step 6 and determine what that difference is as a percentage of the total fuel used by the lead bus.

The following explains how the shadow testing methodology will take into account the variables that affect fuel consumption and the measurement of that fuel consumption.

The sample of vehicles tested reflects the broader fleet

Where available, the newest buses within the fleet are to be used for testing as these buses are likely to be the most fuel efficient.

The fleet manager will be consulted in relation to the vehicles tested to confirm that the selected vehicles adequately represented the fleet. Consideration will be given to the split between route and charter buses, as well as the most common engine/AC combination amongst the fleet.

The variables between buses during testing are controlled:

Paired vehicles have identical air conditioning models, vehicle manufacturer, engine types and chassis, and the vehicles are the same year of model.

Where operationally possible, testing of the vehicles will be conducted when the vehicles are empty and not in service. As such, although the buses are travelling on a normal route and engaging in normal route practices (that is, stopping at each stop, opening doors etcetera), the buses will not be collecting passengers to ensure that the weight of the passengers on board does not distort the fuel consumption.

However if, for operational reasons, it is not viable to take two buses out of service for shadow testing, then the testing will be conducted on a day when the route experiences low patronage and the impact of passenger load on fuel consumption will be minimised. In this case the rear bus will be weighted to reflect the average weight of the number of passengers on that route during that time.

In order to further control the variable the rear bus, which will not be collecting passengers, the bus will be weighted to reflect passengers being on the bus. Weighting will be implemented by using water containers filled with the appropriate volume of water. The amount of weight to be put on the rear bus will be calculated based on the average number of passengers on that route during that time multiplied by the average weight of an adult. The average weight of a male and female will be determined after reviewing ABS data and will be used in instructions to fleet managers.

Consistent shadow testing applied at all trials:

A comprehensive testing checklist has been compiled at each trial:

(a) guide each site through the testing process protocols

(b) ensure consistent testing

(c) variables are controlled

(d) the duration, date and fuel consumption are recorded at the time of the trial.

The variables between operational use of buses is taken into account

Both route and chartered services will be included in the testing process.

Variation in temperature is taken into account

Testing is to be conducted on a day where the temperature is the average of the daytime temperature of the location in which you operate.

Relevant legislative provisions

Fuel Tax Act 2006

subsection 41-5(1)

Reasons for decision

Subsection 41-5(1) of the Fuel Tax Act 2006 (FTA) provides that an entity is entitled to a fuel tax credit for taxable fuel they acquire or manufacture in, or import into, Australia to the extent that they do so for use in carrying on their enterprise.

The Commissioner has considered the implications of the phrase 'to the extent that' for the purposes of entitlement to a fuel tax credit in 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? (FTD 2010/1)

At paragraph 5 of FTD 2010/1 the Commissioner relevantly states:

The use of the phrase 'to the extent that' in the FT Act contemplates apportionment in the case of:

• section 41-5 of the FT Act between a use that entitles you to a fuel tax credit and one that does not, and between uses that give rise to different rates of fuel tax credits, taking into account the operation of Division 41 of the FT Act…

• …

At paragraph 6 and 7 of FTD 2010/1 it is explained that the 'fair and reasonable' principle applies in determining the extent of your fuel tax credit entitlement.

Practice Statement Law Administration PSLA 2010/3 Apportionment for the purposes of the Fuel Tax Act 2006 (PSLA 2010/3) explains how an entity can satisfy the 'fair and reasonable' requirement in determining a fuel tax credit entitlement. Relevantly, at paragraph 161 of PSLA 2010/3 some of the methodologies for apportioning the fuel used in a vehicle between fuel used to power the vehicle and fuel used to power the auxiliary equipment of the vehicle are explained. Using the data from the vehicle's engine electronic control module download or testing the vehicle's fuel consumption with and without the auxiliary equipment in operation (commonly referred to as 'shadow testing'), are two such methods.

Importantly, at paragraph 155 of PSLA 2010/3, it is explained that in considering whether an apportionment methodology is fair and reasonable in the circumstances of the entity the Commissioner states that:

…regard should be given as to whether the methodology takes into account the type and use of the auxiliary equipment, the variables in the use of the auxiliary equipment, the mechanisms available to measure the fuel usage and the records required to substantiate the amount of fuel apportioned.

You will be undertaking a 'shadow testing' process from a number of vehicles selected from your fleet (refer to your testing methodology as described above). In this process you will account for the variables that may affect the fuel consumption of the vehicle or its auxiliary equipment and in the measurement of the fuel consumption.

The fleet selected for testing is a reasonable representation of the vehicles within your fleet.

The newest buses within the fleet are to be used for testing as these buses are likely to be the most fuel efficient. Given that many of the buses within the your fleet comprise of older models, which are likely to be less fuel efficient, the results of the new bus testing will be conservative in nature.

To ensure the vehicles selected are a reasonable representation of your national fleet, fleet managers of each operational unit are to be consulted to confirm that the selected vehicles adequately represent the fleet.

Approximately 5% of your fleet have been selected for testing, taking into consideration the use of bus, its engine and AC type.

It is considered that the testing proposed is a reasonable representation of the vehicles within your fleet supporting a 'fair and reasonable' apportionment methodology.

The variables between buses during testing are appropriately controlled

Paired vehicles have identical air conditioning models, vehicle makes, engine types and chassis, and the vehicles are the same year model. Controlling the vehicles selected for each pair in such a way ensures that the testing methodology isolates the AC unit as the only significant variable in the test.

The weight of the vehicles will be controlled during the testing.

If it is not viable to take two buses out of service to conduct testing on empty vehicles, the testing will be conducted on a day when the route experiences low patronage and the impact of passenger load on fuel consumption will be minimised. The 'shadowing vehicle' will be weighted to reflect the average weight of the number of passengers (based on Australian Bureau of Statistics data). This ensures that the variation in fuel consumption by the vehicle due to additional load is taken into account.

Both route and charter buses will be tested in fleets which contain a mix of both operations. This ensures the difference in operating conditions are taken into account, for example different stopping and starting and door opening conditions,

Variation in temperature is taken into account

Testing is to be conducted on a day where the temperature is the average of the daytime temperature of the location in which you operate. The weather is a key consideration when selecting the day of the test so that the use of the air-conditioning unit is consistent with normal use. By selecting a testing day for each pair of vehicles in this manner, the trials are conducted under conditions that more accurately represent the typical use of the air-conditioning system.

Conclusion

The Commissioner considers that the shadow testing methodology will provide a fair and reasonable apportionment where the circumstances of the use of the vehicle and auxiliary equipment, and the variables that affect the fuel consumption and its measurement, are taken into account.

The shadow testing to be used by you is a comprehensive approach in ensuring a 'fair and reasonable' apportionment of the fuel used in your fleet. In conducting the shadow testing trials you have taken into account several variables such as, the different types, models and age of the vehicles and the AC units, and the conditions under which they operate. The checklist and the weighting of the vehicles (where required) ensure a consistent environment of the trial that reflects the normal operations of the entities.

On the above shadow testing and fuel consumption variables being considered, it is the view of the Commissioner that the proposed testing method is fair and reasonable. Accordingly, the Commissioner confirms that:

• the apportionment method as outlined in this application is 'fair and reasonable'; and

• the resulting fuel-use apportionment ratios can be used both retrospectively and prospectively.

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