House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 3 - Compliance regime for gaseous fuels and blending exemptions

Outline of chapter

3.1 Schedule 3 to this Bill amends the Excise Act 1901 (Excise Act), the Fuel Tax Act 2006 (Fuel Tax Act) and the Taxation Administration Act 1953 (TAA 1953) to provide a robust and sustainable compliance regime for liquefied petroleum gas (LPG), liquefied natural gas (LNG), and compressed natural gas (CNG). As well, this Schedule makes some minor and consequential changes to legislation to ensure that gaseous fuels legislation works as intended.

3.2 Schedule 4 to this Bill amends the Excise Act to broaden and clarify when the Commissioner of Taxation (Commissioner) may, by legislative instrument, specify circumstances when the creation of certain fuel blends is not considered to be excise manufacture with its requirement for excise licensing of the manufacturing premises. It also amends the Excise Tariff Act 1921 (Excise Tariff Act) to remove references to the rules that currently provide exemptions.

Context of amendments

Compliance regime

3.3 The Taxation of Alternative Fuels legislation package of four Bills received Royal Assent on 29 June 2011 and brought the transport use of LPG, LNG and CNG into the excise and excise-equivalent customs duty regime (otherwise referred to as the fuel tax regime).

3.4 The existing liquid fuels regime applies fuel tax to all liquid fuel 'entered for home consumption' (that is, when entering the Australian market), which effectively means when it leaves licensed premises or is delivered under a periodic settlement permission. Fuel tax on fuel used for non-road transport purposes, or in any qualifying transport use, is subsequently removed by use of fuel tax credits. A major component of this regime is licensing of premises that produce, import or store untaxed liquid fuels. This ensures the integrity of the excise regime because untaxed liquid fuels generally do not appear in the marketplace.

3.5 In response to industry concerns about the compliance costs of extending this regime to include non-transport LPG, LNG and CNG, the Government provided automatic exemptions from duty for non-transport LPG and LNG and duty exemption for non-transport CNG.

3.6 As a result, the Australian market now contains both taxed and untaxed gaseous fuel, including on unlicenced premises. This presents different challenges for ensuring the integrity of the excise regime.

3.7 To maintain the integrity of this new system, measures similar to those in the liquid fuels regime are required, but are extended to unlicensed premises because these premises can hold untaxed gaseous fuel. This context underpins the amendments requiring provision of notices when supplying untaxed fuel, keeping and producing records of untaxed fuel stocks and uses, and access provision for Australian Taxation Office(ATO) and Australian Customs and Border Protection Services (Customs)officers to licensed and unlicensed premises. Bringing the gaseous fuels into the fuel tax regime has also been phased in over the period to 1 July 2015 to minimise compliance costs.

3.8 Industry was consulted extensively on the introduction of the system of automatic remissions for non-transport LPG and LNG and on the exemption of non-transport CNG. Industry is aware that the compliance regime for gaseous would have to reflect the new arrangements, especially the issue of dealing with diversion of untaxed fuel into taxable uses.

3.9 The compliance regime includes penalty and offence provisions, requirements for record keeping as well as powers for ATO and Customs officers to access records and enter premises to confirm that gaseous fuels supplied for non-transport purposes have not been sold or used for transport purposes.

3.10 This regime will have lower added compliance costs for the gaseous fuels industry than applying fuel tax to all gaseous fuels that enter the Australian market (with subsequent fuel tax credits where appropriate) because businesses that currently comply with their excise and excise-equivalent duty obligations should already be keeping the required records.

Fuel blending exemptions

3.11 Subsections 77H(2A) and 77H(2B) of the Excise Act provide an exemption for the blending of some 'relevant fuels', as defined in subsection 77H(5) in specified circumstances. Where an exemption applies, the blending will not be treated as excise manufacture and will therefore not require the premises at which the blending takes place to be licensed.

3.12 Subsection 77H(4)of the Excise Act provides the Commissioner with the power to specify circumstances by legislative instrument where the blending of fuels is not to be classed as excise manufacture and therefore, there is no requirement for the premises where the blending occurs to be licensed. The circumstances in which the Commissioner can exercise this power are uncertain. The clarification of the Commissioner's power to provide an exemption by use of a legislative instrument rather than in primary legislation would provide a more flexible and robust arrangement. It removes the need for specific exemptions and deals more easily with the possible emergence of other fuel blends, where the blending was not intended to be classed as excise manufacture.

Summary of new law

3.13 The measure sets out the elements of a compliance regime necessary to accommodate the modifications to the traditional excise-equivalent customs duties and excise duty made by the Taxation of Alternative Fuels legislation package in response to industry concerns about compliance costs. These elements include record keeping obligations, access powers and extended penalty provisions that apply to all gaseous fuels, as well as powers that enable the recovery of unpaid duty applying to gaseous fuels subject to remission or exemption and used for transport purposes.

3.14 In addition, this measure provides for the better integration of LPG, LNG, and CNG within the fuel tax system by introducing or amending definitions and broadening references to include all the gaseous fuels.

3.15 The measure also removes certain specific blending exemption rules and clarifies when the Commissioner may, by legislative instrument, specify circumstances when the creation of certain blends is not to be treated as excise manufacture.

Comparison of key features of new law and current law

Detailed explanation of new law

Definitions

3.16 The definition of 'excisable LPG use' is repealed and replaced with 'dutiable fuel use', which is a more general term. The definition of dutiable fuel use ensures that the penalty provisions can be applied to all gaseous fuels, not only LPG. [Schedule 3, item 2, subsection 4(1)]

3.17 A definition 'fuel tax relief' is also inserted, which is a more general term than 'remission'. The term refers to gaseous fuels to which a remission, rebate or refund has applied under the excise or customs legislation, or alternatively, where an exemption from duty has applied for CNG for non-transport use or LPG or LNG for certain uses in the manufacturing process on licensed premises. The new definition enables the penalty, record keeping and access provisions to apply to all gaseous fuels. [Schedule 3, item 4, subsection 4(1), item 11]

3.18 The phrase 'short for liquefied petroleum gas' is inserted after LPG in order to make the meaning of the abbreviated term 'LPG' clear. The Excise Tariff Act defines and refers to the term 'liquefied petroleum gas' while the Excise Act uses the term LPG. Accordingly, this change makes clear that LPG and liquefied petroleum gas refer to the same thing. [Schedule 3, item 5, subsection 4(1)]

Gaseous fuels used in a forklift truck

3.19 A vehicle that is designed to be used as a forklift primarily off public roads is treated as a kind of motor vehicle for the purpose of the alternative fuels legislation but this does not align with how these vehicles are treated in practice. The treatment of forklift trucks is clarified to ensure that these vehicles are not treated as motor vehicles so that the use of fuels in a forklift truck is treated as non-transport use of gaseous fuel. This treatment is consistent with other excise legislation and other tax laws where they are not treated as motor vehicles. [Schedule 3, item 7, subsection 4(6)] and item 9

Fuel used in the process of manufacturing fuels

3.20 LPG or LNG used in an internal combustion engine as part of the process of manufacturing petroleum condensate, stabilised crude petroleum, LPG, LNG or other hydrocarbons is subject to excise duty. This is consistent with the treatment of liquid fuels used in internal combustion engines in the manufacture of fuels. [Schedule 3, item 10, section 77HB]

Notice requirements for supplies of LPG subject to fuel tax relief

3.21 Section 77L of the Excise Act previously imposed obligations to give notices when LPG was supplied for non-transport use in certain circumstances. This requirement is extended to include other forms of fuel tax relief and an obligation to give a notice not only by parties holding manufacturing and/or storage licences but also entities holding settlement permissions, issued under section 61C of the Excise Actor section 69 of the Customs Act 1901 . The LPG notice requirement is extended to circumstances where a notice was not received by a supplier but they should reasonably have known that a notice should have been provided to them. As noted in paragraph 3.17, a definition of fuel tax relief has been added to apply where gaseous fuels have been supplied or manufactured for a non-transport use. [Schedule 3, items 12 and 13, subsections 77L(1) and (2)]

Record keeping requirements for suppliers and users of LPG

3.22 Records must be kept by all suppliers of LPG for non-transport use, including licensed parties, holders of settlement permissions and all persons who acquire LPG subject to fuel tax relief who carry on an enterprise (within the meaning of the A New Tax System (Goods and Services Tax) Act 1999 ) and receive the LPG into a tank of greater than 210 kilograms capacity. The records must be in English or easily accessible and convertible into English and able to be used to ascertain whether fuel tax relief applied to the LPG that was sold or otherwise supplied or acquired. The records must be retained for a period of five years. Not keeping, retaining or producing records is a strict liability offence. [Schedule 3, item 14, section 77LA]

3.23 This requirement is broadly based on section 382-5 of Schedule 1 of the TAA 1953, which imposes a record keeping obligation and makes failure to do so an offence of strict liability. It is also similar to section 50 of the Excise Act, which imposes obligations on a licensed person to keep records and produce them when demanded, making this an offence of strict liability.

Access to premises

3.24 Licensed parties who deal with gaseous fuels have record keeping and record production obligations imposed on them by section 50 of the Excise Act and by various parts of Parts IVA and V of the Customs Act 1901 . These obligations are complemented by providing for access under section 86 of the Excise Act and section 91 of the Customs Act 1901 to licensed premises for the purposes of accounting for amounts payable for excisable and customable goods. Rights of access provide the means for ensuring compliance with record keeping and payment of duty.

3.25 ATO and Customs officers are entitled to access, at reasonable times, premises and land occupied by a person who is required to keep records under the gaseous fuels record keeping provisions. This includes licensed and unlicensed distributors of gaseous fuel that sell the product for non-transport use and businesses and other entities that carry on an enterprise that acquires gaseous fuels for non-transport use in tanks of more than 210 kilograms capacity. Officers are entitled to remain on the premises and land and have full access at reasonable times to documents and property, including goods. They may inspect, examine and make copies of documents. They may also examine, and determine the physical characteristics of goods, including taking samples. Officers must provide identification when requested to do so by the occupier. This is consistent with the access powers for officers provided for in the TAA 1953. [Schedule 3, item 14, section 77LB]

3.26 Guidance issues by the Attorney-General's Department (AGD) on the application of strict liability has been considered on whether the application of strict liability is justified. The conclusion is that strict liability is appropriate for this case for the following reasons.

•

Keeping and producing records is a fundamental part of the measure, and the use of strict liability is considered necessary to protect the revenue under the gaseous fuels compliance regime. The absence of records would make enforcement of the regime very difficult. This is recognised in the Excise Act, the Customs Act 1901 , and the TAA 1953referred to above, which all have similar record keeping and record production requirements.

•

The records offences relate to facts which are within the gaseous fuel supplier's knowledge and to which they have ready access.

•

The offence is not punishable by imprisonment and the offence is less than the 60 penalty units, as recommended by the AGD for strict liability offences.

Accounting for gaseous fuel and recovery of excise

3.27 An amount equal to the prevailing duty (whether excise duty, customs duty or both) that would have been payable can be recovered by the Commissioner where the person using or supplying the fuel for a non-transport use is unable to satisfy the Commissioner that the fuel is to be or was used for a non-transport use, or that the fuel tax relief did not apply at the time the gaseous fuel was supplied or used. The Commissioner can recover on behalf of the Commonwealth an amount equal to the duty that would have been payable on the gaseous fuel for transport use at the time the Commissioner demands the amount in writing. The Bill provides that a demand by the Commissioner for the amount is not a legislative instrument. This reflects that a demand does not fall within the scope of section 5 of the Legislative Instruments Act 2003as it applies the law to a particular case rather than determining the law. [Schedule 3, item 14, section 77LC]

Penalties for using gaseous fuels subject to excise relief in dutiable uses

3.28 The section of the legislation that formerly provided for an offence of using excise-free LPG for an excisable purpose and specified penalties is repealed and replaced with a new section that applies to all gaseous fuels. The new section widens excisable use to dutiable use, and makes it clear that using gaseous fuel for a dutiable fuel use, where fuel tax relief applied to the fuel at the time of use, will require users to pay an amount equal to two times the duty that would have been payable had fuel tax relief not applied to the fuel. The Commissioner may remit all or part of this amount. [Schedule 3, item 15, sections 77M and 77N]

3.29 The Commissioner will have the power to remit, in whole or part, penalties imposed under section 77M. This is consistent with the Commissioner's powers to remit administrative penalties imposed under income tax and indirect tax legislation. The Commissioner will exercise this power where it is appropriate, in the particular circumstances, for the penalty to be remitted.

Legal professional privilege

3.30 The record keeping requirements and the ability to demand access to records may compromise legal professional privilege regarding client confidentiality. To ensure this does not occur, the Bill provides that these powers do not affect legal professional privilege. [Schedule 3, item 15, section 77P]

Supply of gaseous fuels for a dutiable use

3.31 Section 117BA of the Excise Act makes it an offence to unlawfully sell LPG that is subject to a remission for an excisable use and specifies penalties for this offence. This section has been replaced by one that extends coverage to the supply of gaseous fuel subject to fuel tax relief for a dutiable use and specifies the penalties for this offence as two years imprisonment or the greater of 500 penalty units and five times the amount of duty avoided. These penalties are consistent with section 117B of the Excise Act, which applies to parties that sell excisable goods on which duty has not been paid. [Schedule 3, item 16, section 117BA]

Possessing gaseous fuel that is used for a dutiable fuel use

3.32 The Bill also makes it an offence to possess gaseous fuel subject to fuel tax relief where the person who has custody or control of the fuel either knows or is reckless as to whether the gaseous fuel will be used for a dutiable fuel use. The penalty for this offence is the greater of 500 penalty units and five times the amount of duty avoided. These penalties are consistent with section 117 of the Excise Act. [Schedule 3, item 16, section 117BB]

Fuel blending exemptions

3.33 In general, in the Excise Act, blending of excisable fuel products is treated as excise manufacture with the manufactured product subject to excise. Such blending can only occur at licensed premises. However, section 77H and subsections 77H(2A) and 77H(2B) of the Excise Act provides exemptions from these requirements. Paragraph 77H(1)(a) provides an exemption where duty (excise or customs) has been paid at the same rate on all the constituents of the blend(LPG and LNG for non-transport use receive automatic remissions of fuel tax at the time of entry to the market or delivery when non-transport use can be identified. CNG receives an exemption from duty when it is manufactured for a non-transport use. As a result, the possibility of diversion of untaxed non-transport gaseous fuel into dutiable transport uses occurs at any point in the gaseous fuel, non-transport use supply chain. Paragraph 77H(1)(b) provides an exemption where a determination is made under the Fuel Tax Act. Subsection 77H(2A) provides an exemption where gaseous fuels not subject to any remission, gasoline for use in an aircraft or kerosene for use in an aircraft are blended with the same fuel and relevant duty (even if the amounts differ) has been paid on all components of the blend. Subsection 77H(2B) exempts the blending of quantities of LPG or quantities of LNG where each quantity is either subject to a remission (either part or full)on the grounds that it is not intended for use in an internal combustion engine in a motor vehicle or a vessel, or not subject to duty because it was manufactured, produced or imported before 1 December 2011.

3.34 The blending exemption for certain blends of 'relevant fuels' in paragraphs 77H(2A) and 77H(2B) and the definition of 'relevant fuel' in subsection 77H(5) are repealed [Schedule 4, items 1 and 5] . These exemptions will instead be able to be specified by the Commissioner by legislative instrument. This power is currently available to the Commissioner under subsections 77H(3) and (4). However, the extent to which blends can be covered by a legislative instrument is uncertain. These amendments clarify (by way of a note) that the provisions have a more general operation and are not restricted to incidental blending where small amounts are added to larger amounts. In addition, a note has been added to the definition of 'eligible goods' in subsection 77H(5), which clarifies that the Commissioner can make a legislative instrument where the blend of fuel includes imported fuels. [Schedule 4, items 2 to 4]

Application and transitional provisions

3.35 The amendments in Schedule 3 Part 1 to this Bill come into effect in relation to gaseous fuel sold or supplied after this item commences. [Schedule 3, item 19]

Consequential amendments

3.36 Because this measure inserts additional definitions into the Excise Act, amendments are required to other provisions to modify their application:

•

The definition of 'apply' is amended to broaden its application from LPG to include CNG and LNG, and to include forms of fuel tax relief in addition to remissions, such as an exemption for CNG for non-transport purposes [ Schedule 3, item 1, subsection 4(1 )].

•

The definition of 'excisable LPG' use is repealed as it will be covered by the new definition 'dutiable fuel use', which is a more general term. The definition of dutiable fuel use ensures that the penalty provisions can be applied to all gaseous fuels, not only LPG [ Schedule 3, item 3 ].

•

The definition of LPG remission is repealed as it is included in the definition of fuel tax relief [ Schedule 3, item 6 ].

•

Section 4(5) is amended so that the term 'LPG' is replaced with the broader term 'gaseous fuels' while the term 'excise duty' is replaced with 'excise duty or duty of Customs'. This makes it clear that the later payment of duty on any gaseous fuel to which fuel tax relief applied previously results in the fuel being treated as not being subject to relief from duty. This ensures that the penalty and record keeping provisions only apply as intended to cases in which no duty has ultimately been paid [ Schedule 3, item7, subsection 4(5 )].

3.37 Paragraph 162C(1)(c) of the Excise Act is amended to replace the reference to section 77M with 77LC or 77M to reflect the changes to section 77M and the inclusion of section 77N. [Schedule 3, items17 and 18]

3.38 Section 41-10(4) of the Fuel Tax Act is repealed and replaced with a rule that allows the Commissioner to prescribe by regulation the kind of motor vehicle or vessel using LPG that is not denied a fuel tax credit under paragraph 41-10(3)( c). [Schedule 3, Part 2, item 20, subsection 41-10(4) of the Fuel Tax Act]

3.39 The penalties provisions are included in the table in Division 250 of Schedule 1 of the TAA 1953 that cross references tax related liabilities in a range of tax legislation. [Schedule 3, Part 2, item 21, table items 24CA and 24CB of the TAA 1953]

3.40 An amendment is made to remove references to sections 77H(2A) and (2B) in paragraph (g) of the cell at table item 10 in the Schedule to the Excise Act as these sections in the Excise Act have been repealed. [Schedule 4, item 6]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Compliance regime for gaseous fuels and blending exemptions

3.41 These Schedules are compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

3.42 Schedule 3 provides a robust and more sustainable compliance regime for LPG, LNG and CNG. It also makes some minor and consequential changes to legislation to ensure the gaseous fuels legislation works as intended.

3.43 The amendments in Schedule 3 introduce an offence of strict liability where a person is required to keep, retain and produce records and does not do so.

3.44 Schedule 4 clarifies when the Commissioner may, by legislative instrument, specify circumstances when the creation of certain fuel blends is not intended to be considered as excise manufacture for the purpose of the excise legislation.

Human rights implications

3.45 Schedule 3 may raise human rights issues because it contains an offence of strict liability in relation to keeping, retaining and producing records, which may raise concerns with respect to the presumption of innocence. The reasons for inserting an offence of strict liability has been assessed in light of guidelines provided by the Attorney General's Department and is consistent with those guidelines.

3.46 The strict liability offence is regulatory in nature and it is justifiable to expect individuals who participate in a regulated activity to be deemed to have accepted certain conditions and to show why they are not at fault for infringements. Moreover, the reverse burden of proof relates to facts which are within the defendant's own knowledge and to which they have ready access and, finally, the penalty falls at the lower end of the scale.

3.47 The remainder of Schedules 3 and 4 do not engage any other applicable rights or freedoms.

Conclusion

3.48 These Schedules are compatible with human rights.