Edited version of private ruling

Authorisation Number: 1011729692396

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Subject: Fuel tax credits - electricity generation

Question 1:

Are you entitled to fuel tax credits at the full rate for that portion of diesel fuel that you acquire for use in your vessel to generate electricity?

Answer:

Yes.

Question 2:

Are you entitled to fuel tax credits at the half rate for that portion of diesel fuel that you acquire for use in your vessel to operate dredge pumps and for propulsion?

Answer:

Yes.

Question 3:

Is the method of apportionment you propose to use to determine your fuel tax credit entitlements for fuel acquired and used in electricity generation, considered fair and reasonable?

Answer:

Yes.

Question 4:

Can eligible fuel not already claimed and acquired and used on board your vessel be included in the net fuel amount of your next business activity statement?

Answer:

Yes.

This ruling applies for the following period

2008-09 income year

2009-10 income year

2010-11 income year

2011-12 income year

The scheme commenced on

1 July 2008

Relevant facts

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

In carrying on your enterprise, you operated a trailing suction hopper dredge (dredge).

You acquire all fuel for use in the dredge in your own name and use that fuel in the course of carrying on your enterprise.

The dredge is powered by four engines as follows:

1. Diesel engines one & two

two main engines coupled to generators and drive propellers and dredge pumps directly.

Drive the main dredge pumps, the propellers and the two main generators

The electricity produced by the two main generators is fed into the vessel's main electricity grid via the main switchboard to provide power to a number of items of equipment.

2. Diesel engine three

An auxiliary engine

Directly coupled to the auxiliary generator

The electricity produced by the auxiliary generator is fed into the vessel's main electricity grid via the main switchboard to power a number of items of equipment.

3. Diesel engine four

An emergency engine

Directly coupled to the emergency generator

The electricity produced by this generator is also fed into the vessel's main electricity grid via the main switchboard to power a number of items of equipment

The emergency engine/generator is only used infrequently and in emergencies only.

The main electricity grid on the vessel, which is fed by power from engines one, two, three and four provides power to most equipment operating on the vessel including lighting, hydraulic control system and pumps, various pumps, controls and systems.:

The electricity consumed on board depends on the activity of the vessel. The four main activities which can be distinguished are:

· Sailing: electricity is taken from the two main generators

· Dredging: electricity is taken from the two main generators and the auxiliary generator.

· Pumping ashore: electricity is taken from the two main generators and the auxiliary generator. The electricity taken depends on the pumping speed and the use of dynamic positioning.

· Idling: electricity is fully provided by the auxiliary generator.

Each of the four engines operates from a single diesel fuel supply.

You consider that the portion of diesel fuel used in engines one and two to directly drive the propellers and dredge pumps is not for the purposes of electricity generation.

You have prepared an apportionment methodology to determine your fuel tax credit entitlement. Your explanation of the method is:

· review fuel purchase invoices and determine actual number of litres acquired for use on the dredge

· identify the electricity consuming units and calculate the kilowatts used on the vessel during a specific activity

· calculate fuel burn rates per kilowatt for each of the electricity producing engines (all engines) based on manufacturers specifications or measures during shop trials

· calculate the share of each engines in delivering the amount of kilowatts needed for a specific activity to calculate the average fuel burn per kilowatt hour (kWh) also under that activity

· multiply the hours performed under a specific activity by the average burn rate per kWh also under that activity

· reconcile the amount obtained from steps 1-5 to the total number of actual litres purchased to confirm that the result is fair and reasonable

· apply the relevant fuel tax credit rate to the number of litres consumed for each particular activity.

After calculating your entitlement for the tax period you will then check previously claimed fuel tax credit entitlements to determine if any adjustments need to be made.

You further submit that as you did not claim your fuel tax credit entitlement in an earlier Business activity statement (BAS), you have the option of choosing between revising the earlier BAS under subsection 65-5(1) of the FTA or including the amount in a subsequent tax period in accordance with subsection 65-5(4) of the FTA. You wish to include the additional amount in your next BAS.

Relevant legislative provisions

Fuel Tax Act 2006 section 41-5

Fuel Tax Act 2006 section 41-5

Fuel Tax Act 2006 section 47-5

Fuel Tax Act 2006 paragraph 47-5(a)

Fuel Tax Act 2006 paragraph 47-5(b)

Fuel Tax Act 2006 section 60-5

Fuel Tax Act 2006 section 65-1

Fuel Tax Act 2006 subsection 65-5(1)

Fuel Tax Act 2006 subsection 65-5(4)

Fuel Tax Act 2006 section 65-10

Fuel Tax (Consequential and Transitional Provisions) Act 2006 Division 2 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

Energy Grants (Credits) Scheme Act 2003 section 36

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

Energy Grants (Credits) Scheme Act 2003 section 53

Taxation Administration Act 1953 section 105-55 of Schedule 1

Taxation Administration Act 1953 subsection 105-55(1) of Schedule 1

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 an entitlement exists are relevantly listed within item 11 of Schedule 3 of the FTCTPA.

The items listed within subitem 11(1) of Schedule 3 of the FTCTPA 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.

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.

This includes fuel used in generating electricity where it is used in a generator to provide power to a business premises (or vessel) and/or a range of equipment.

Diesel engines three and four

Diesel engines three and four are directly coupled to generators for the sole purpose of generating electricity. As this is an eligible activity under subitem 11(1) of Schedule 3 of the FTCTPA, any diesel fuel you acquire and use in these engines would be entitled to fuel tax credits at the full rate. The full fuel tax credit is currently $0.38143 per litre.

Diesel engines one and two

Diesel engines one and two are used for three different activities:

· generating electricity,

· driving the dredge pumps, and

· propelling the vessel.

While the portion of fuel you acquired and used in these engines for generating electricity may be eligible for fuel tax credits under the provisions of subitem 11(1) of Schedule 3 of the FTCTPA, the driving of dredge pumps and propelling the vessel are not.

Therefore it is necessary to consider whether your activities qualify under any other provisions.

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 Energy Grants (Credits) Scheme Act 2003 (EGCSA).

Section 53 of the EGCSA 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 mining operations, primary production (including agriculture, forestry and fishing), marine transport, rail transport, electricity generation, use at certain premises and various other uses.

The meaning of the expression 'use in marine transport' is set out in section 36 of the EGCSA.

Subsection 36(7) of the EGCSA specifically deals with dredges and states:

The expression use in marine transport does not include any use in a dredge or in equipment in or on a dredge.

Accordingly, the use of diesel fuel in your dredge is not a use in marine transport.

Therefore, for the purposes of section 53, you are not entitled to an off-road credit for diesel fuel acquired and used in the vessel or in equipment in or on it, to undertake dredging activities.

Half rate of fuel tax credit

However, subitem 11(6) of Schedule 3 of the FTCTPA provides that from 1 July 2008, an entitlement to a fuel tax credit arises under section 41-5 the FTA, if you would not have been entitled to an on-road or an off-road credit under subitems 11(3) or 11(5) of the FTCTPA. The amount of the credit is half of the amount of the full rate.

It has been determined above that you were not entitled to an off-road credit for the use of diesel fuel on board your vessel the dredge for the purposes of propulsion or dredge pump operation. Therefore, you are entitled to a fuel tax credit at the half rate for that portion of diesel fuel that you acquire for use in your vessel the dredge to operate dredge pumps and for propulsion.

Apportionment

As discussed, a portion of the fuel you acquire and use in your business is to generate electricity on board your dredge, thereby attracting fuel tax credit at the full rate.

However, some of the fuel you acquire and use in your business is to operate pumps and propel the dredge. As we have found, from 1 July 2008, this fuel would attract fuel tax credit at the half rate.

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 you can use when calculating your fuel tax credit entitlements.

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.

You can use any apportionment method that is fair and reasonable in your circumstances to determine the fuel tax credit that is available for the taxable fuel that you acquire.

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

Whichever apportionment method is used by you in a tax period must be applied consistently. Inconsistent methods used 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 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.

You 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:

· the constructive methods (actual use or planned use)

· the deductive methods (actual use or planned use)

· the percentage use method, and

· the estimate use method.

In Law Administration Practice Statement PS LA 2010/3 (PS LA 2010/3), 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 proposed method includes:

· calculating the kW used on the vessel during specific activities

· calculating the burn rates per kWh for each of engines based on manufacturers specifications or measures during trials/testing

· calculating the share/portion of each engine in delivering the amount of kW required for a specific activity to calculate the average burn rate per kWh during that activity

· multiplying the hours performed for each activity by the average burn rate per kWh for that activity, and

· reconciling the amount obtained from the total number of actual litres purchased to confirm that the amount is fair and reasonable, and

· applying the relevant fuel tax credit rate to the number of litres consumed for each particular activity.

This method is known as the constructive - actual use method whereby you calculate the fuel used in the four discrete dredging activities (sailing, dredging, pumping and idling) using the manufacturers specifications as a measure. This is a method and a measure that the Commissioner discusses at paragraphs 19 and 80 of PS LA 2010/3.

As determined above, you are entitled to fuel tax credits at the half rate and the full rate therefore any method of calculation you use must apportion the fuel between these rates.

Therefore, based on the information you have provided, your method can be considered as fair and reasonable.

Attribution of fuel tax credits

Section 65-1 of the FTA provides that a fuel tax credit is attributable to the same tax period as the input tax credit for the fuel under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

However, subsection 65-5(4) of the FTA provides that, if you do not claim a fuel tax credit in an activity statement for the tax period to which the fuel tax credit is originally attributable and you choose to claim the fuel tax credit in an activity statement for a subsequent tax period, the fuel tax credit ceases to be attributable to the earlier tax period and instead becomes attributable to the tax period in which the entity ultimately lodges an activity statement that includes the fuel tax credit.

Section 65-10 of the FTA provides that fuel tax adjustments are attributable to the tax period in which you become aware of the adjustment.

Accordingly, if you have omitted to account for a fuel tax credit in respect to eligible fuel acquired and used on board the vessel you can choose to either:

· revise the 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.

Application of the four year rule

We note that your private ruling application also asks that the Commissioner accept it as notice of your entitlement to fuel tax credit in relation to your fuel usage in relation to the activities of the vessel.

Section 47-5 of the FTA states that you cease to be entitled to a fuel tax credit to the extent that you have not taken it into account in working out your net fuel amount for:

(a) the tax period of fuel tax return period to which the fuel tax credit would be attributable under subsection 65-5(1), (2) or (3); or

(b) any other tax period or fuel tax return period, for which you give to the Commissioner a return under section 61-15 during the period of 4 years after the day on which you were required to give to the Commissioner such a return for the tax period or fuel tax return period referred to in paragraph (a).

In addition, subsection 105-55 of Schedule 1 to the Taxation Administration Act 1953 (TAA) places a time limit on refunds and credits to which subsection 105-55(1) applies.

Subsection 105-55(1) of Schedule 1 to the TAA provides that if you are registered for GST you are not entitled to a refund or fuel tax credit in respect of a tax period unless, within four years after the end of the tax period, or importation:

· you notify the Commissioner of your entitlement to the refund or credit; or

· the Commissioner notifies that you are entitled to the refund or credit.

The four year time limit is designed to provide certainty and finality in the tax affairs of taxpayers and the administration of the tax system.

The Commissioner's view regarding the requirements that a notification needs to satisfy for it to be valid under section 105-55 in Schedule 1 to the TAA is expressed in Miscellaneous Taxation Ruling MT 2009/1. The requirements for the notification are that it:

· must identify an entitlement

· must assert an entitlement

· must identify tax period or importation

· does not need to quantify an amount

· must not be speculative in nature; and

· can be for more than one entity.

Paragraph 48 of MT 2009/1 states that if correspondence is speculative it will not be considered a notification for the purposes of section 105-55 in Schedule of the TAA.

At paragraph 51 of MT 2009/1 the Commissioner goes on to say that where an entity does not formalise their fuel tax credit entitlements within a reasonable period of time and does not provide any reasonable explanation for the delay, this may be indicative of the original notification being speculative.

You have advised that your fuel tax credit entitlements in relation to the activities of the vessel commence 1 July 2008.

As you therefore have until 31 July 2012 to review your BAS for the fuel tax credit entitlements in the July 2008 tax period and that the Commissioner expects taxpayers to finalise their fuel tax credit entitlements within three months of becoming aware of them, any request for an extension of time beyond this would not be valid based on the information you have presented.