Edited version of your private ruling

Authorisation Number: 1012463279487

Ruling

Subject: Fuel tax credits - Non fuel use

Question 1:

Are you entitled to a fuel tax credit for taxable fuel you acquire and use to blend with 4% of an additive which you state contains oleic acid and other fatty acid esters in producing mould release agents?

Answer:

Yes.

This ruling applies for the following periods:

1 July 2011 to 30 June 2015

The scheme commences on:

1 July 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You manufacture mould release agents (MRAs) which are used by your customers.

You state that typically, your customers use your products to coat their moulds so that manufactured products are easily released from those moulds.

You use standard diesel and diesel B20 as a raw material in the production of your MRAs. B20 refers to a blend containing 80% standard diesel and 20% biodiesel.

You acquire and own the diesel and diesel B20 used in the manufacture of four MRAs which each contain 96% diesel (or diesel B20 in some instances) and 4% of an additive which you state contains oleic acid and other fatty acid esters.

All of these products are marketed/sold as mould release agents. They are not marketed/sold for use as fuel in an internal combustion engine.

You have supplied information regarding your products that state that if these products were used in an internal combustion engine they would cause material damage within a short period and have

Relevant legislative provisions

Fuel Tax Act 2006 section 41-5

Fuel Tax Act 2006 subsection 41-10(2)

Fuel Tax Act 2006 section 43-5

Fuel Tax Act 2006 section 43-8

Fuel Tax Act 2006 subsection 43-8(4)

Fuel Tax Act 2006 section 95-5

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

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

Fuel Tax (Consequential and Transitional Provisions) Act 2006 schedule 3 subparagraph 11(1)(b)(iv)

Fuel Tax (Consequential and Transitional Provisions) Act 2006 schedule 3 subparagraph 11(1)(b)(v)

Excise Act 1901

Excise Tariff Act 1921 the Schedule Item 10

Excise Tariff Act 1921 the Schedule Subitem 10.10

Excise Tariff Act 1921 the Schedule Subitem 10.12

Excise Tariff Act 1921 the Schedule Subitem 10.25

Excise Tariff Act 1921 the Schedule Subitem 10.26

Excise Tariff Act 1921 the Schedule Subitem 10.27

Excise Tariff Act 1921 the Schedule Subitem 10.28

Excise Tariff Act 1921 the Schedule Subitem 10.30

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 or manufacture in, or import into Australia to the extent that you do so for use in carrying on your enterprise and are registered for goods and services tax (GST).

For the purposes of section 41-5 of the FTA, the term 'use' means 'expend or consume in use', which in turn requires that the fuel be expended or consumed, such that it no longer exists as fuel, by putting it into service in carrying on your enterprise.

Therefore, fuel that is acquired, manufactured in, or imported into, Australia would be used in carrying on your enterprise if, in the course of carrying on that enterprise:

· it ceases to exist after an action to use it (for example, in burner applications, internal combustion engines, or as a solvent or cleaning agent) or

· it is used in the production of another thing that no longer constitutes a fuel (this covers the blending of fuel with other products to create a blend that no longer constitutes a fuel).

There is a legislative intent to attribute a narrower meaning to 'use' which is further supported by the Revised Explanatory Memorandum of the Fuel Tax Bill 2006 which provides for the following explanation on the meaning of the term 'use':

2.34 Fuel is 'used' if it ceases to exist after an action to use it, either as a fuel or in the production of another thing. As such, a sale of fuel is not a use of the fuel and a taxpayer will not be considered to have used fuel if they sell the fuel to another entity...

2.35 The term 'use' is also intended to cover the blending of fuel with other products to create a fuel blend that no longer constitutes a fuel that can be used as a fuel in an internal combustion engine. Where a fuel blend cannot be used as a fuel in an internal combustion engine, the manufacturer of the blend, and not the end user, is entitled to claim a credit for any fuel tax paid on the constituents of the blend...

Fuel for the purposes of section 41-5 of the FTA is taken to have been used if it is blended as specified in a determination made under section 95-5 of the FTA which provides for blends that no longer constitute fuels.

In your case, Fuel Tax (Fuel Blends) Determination 2006 (No. 3) does not apply. This determination only applies to certain blends containing fuels listed in the Schedule to the Excise Tariff Act 1921 (the Schedule) at subitems 10.25, 10.26, 10.27 and 10.30 where the blend is not marketed or sold for use as a fuel in an internal combustion engine.

Diesel is classified to sub item 10.10 of the Schedule whilst a B20 blend of diesel and biodiesel is classified to subitem 10.12 of the Schedule. You then blend these fuels with another substance (4% Palmac 750) in the production of four products (MRAs).

For the period 1 July 2008 to 30 June 2012, entitlement to a fuel tax credit is affected by Division 2 of Part 3 in Schedule 3 to the Fuel Tax (Consequential and Transitional Provisions) Act 2006 (FTCTPA) which operates to restrict this entitlement to specific activities and continues the previous entitlement provisions of the Energy Grants (Credits) Scheme Act 2003 (EGCSA).

Due to the tax periods covered, the below reasons for decision cover the first tax period of
1 April 2012 to 30 June 2012 and the second covering the tax period of 1 July 2012 to
30 June 2015.

1 April 2012 to 30 June 2012

For this tax period the specific activities for which an entitlement exists are relevantly listed within subitem 11(1) of the FTCTPA.

Subparagraph 11(1)(b)(iv) of Schedule 3 to the FTCTPA relevantly states that if you acquire taxable fuel for use other than as a fuel, you are entitled to a fuel tax credit under section 41-5 of the FTA. In addition, subparagraph 11(1)(b)(v) of Schedule 3 to the FTCTPA states that if you acquire taxable fuel for use other than as a fuel in an internal combustion engine, you are entitled to a fuel tax credit under section 41-5 of the FTA.

Fuel for use other than as a fuel in an internal combustion engine

Subitem 10.30 of the Schedule to the Excise Tariff Act 1921 covers blends of one or more fuels (with our without other substances), not covered elsewhere in item 10, that can be used as fuel in an internal combustion engine (other than goods covered by section 77J of the Excise Act 1901).

The expression 'can be used as fuel in an internal combustion engine' does not appear anywhere else in the Excise Tariff Act or related Acts.

Nor is the expression defined in the FTA. It therefore takes its ordinary meaning.

The expression 'can be used as fuel in an internal combustion engine' may be contrasted with the expressions 'for use as fuel in an internal combustion engine' and 'otherwise than for use in an internal combustion engine', both of which appeared frequently in the Excise Tariff Act prior to the 1 July 2006 amendments.

While the phrase 'for use in' suggests a connection with the intended use of the product, the phrase 'can be used as fuel' suggests an objective test based on the physical properties of the product. This view is supported by the Explanatory Memorandum which explained the amendments to the Excise laws that apply from 1 July 2006. Paragraph 1.113 of the Explanatory Memorandum to the amending Excise laws and Excise tariff bills explains the intent behind subitem 10.30 of the Schedule as follows:

Subitem 10.30 in the excise tariff applies to blends that can be used as fuel in an internal combustion engine [Schedule 1, item 45, subitem 10.30 in the table]. This test is a practical, objective test of whether the blend can be used in an internal combustion engine, not whether the blend is designed or intended to be used in that way. For example, paint can be manufactured by blending toluene (subitem 10.25) with other substances including pigments. An objective test says that paint cannot be used in an internal combustion engine. Paint is therefore not classified to subitem 10.30 (or any other item).

The difficulty is that not all blends are as clear-cut as paint.

In the case Mobil Oil Australia Limited v. David Read (Commissioner of Taxes) (Unreported, NT Supreme Court, Thomas J, 28 February 1996), the court considered the meaning of the phrase 'capable of use' which is similar in meaning to 'can be used'.

The Court considered the meaning of the following phrase which appeared in subsection 3(1) of the Business Franchise Act (NT) ('BFA') (now repealed):

"petroleum products" means -

(a) a petroleum or shale product used or capable of use in propelling a diesel engined road vehicle; or ....

The plaintiff, Mobil Oil, sought a declaration from the court that the expression 'capable of use in propelling a diesel engined road vehicle' did not apply to one of its imported products, LFO-12, and therefore the product was not a 'petroleum product' for the purposes of the BFA. If LFO-12 had been found to be a petroleum product, Mobil Oil would have been liable to pay an additional licence fee of about $252,400.

In his reasons for decision, Thomas J makes the following findings of fact (at paragraph 23):

(1) There is no evidence LFO-12 has been used in the Northern Territory or anywhere else in Australia to propel a diesel engined road vehicle.

(2) The reason it is unsuitable is not because of local conditions but because of the nature of the composition of LFO-12.

(3) LFO-12 can be used to start a diesel engined road vehicle, however, on the affidavit evidence I have already accepted it will damage the engine if used for more than short periods.

(4) If LFO-12 is blended with other substances and then actually used as distinct from being capable of being used to propel a diesel engined road vehicle, then it will be subject to the application of the Business Franchise (Tobacco) Amendment Act under the first part of the definition of petroleum products, because it has been used in propelling a diesel engined road vehicle.

(5) LFO-12 is, on the evidence, unsuitable to use to propel a diesel engined road vehicle because of the long term damage it causes to those vehicles.

Thomas J concluded that 'capable of use' must include fitness for use, on the basis of the ordinary meaning of the words in the definition. Thomas J rejected the argument of counsel for the NT Commissioner that the test was intended to be an objective one and therefore did not import any considerations of suitability or fitness which are subjective and liable to uncertainty. His Honour states (at paragraph 34):

On the facts as found in this case I am not satisfied on the balance of probabilities that LFO-12 is fit for use in a diesel engined road vehicle. It is not practical for use in a diesel engined road vehicle without adversely affecting the performance and condition of the diesel engine.

We can infer from the reasoning of Thomas J that an objective test does not exclude considerations of fitness for use. This is a reasonable position, as fitness for use as fuel in an engine can be established on the basis of objectively observable criteria, such as performance and engine damage.

We also find support for interpreting the expression 'can be used as fuel in an internal combustion engine' as meaning that the product must be at least suitable for use as fuel for more than a limited period of time without causing engine damage. Thomas J did not refer to engine modifications in his findings of fact or his conclusions.

Thomas J did not elaborate on the meaning of a 'short period' in this context. The affidavit evidence of expert witnesses also uses the expressions 'short period' and 'extended period' without further elaboration. It is reasonable to infer that 'extended period' refers to a period of service rather than merely a test period - a period of service might be measured in terms of days or hundreds of kilometres. A 'short period' would be considerably less - perhaps less than a day or a hundred kilometres.

Given the wording of subitem 10.30 of the Schedule, its purpose as outlined in the Explanatory Memorandum to the amending provisions, and the abovementioned views of Thomas J. in interpreting a similar phrase, it may be concluded that a blend of fuel with other substances cannot be used as fuel in an internal combustion engine if it is likely to cause material damage to the engine within a short period.

You produce four products which contain 96% diesel (or diesel B20 in some instances) and 4% of an additive which you state contains oleic acid and other fatty acid esters. As the four products you produce:

· are not marketed as fuel for use in an internal combustion engine and

· as you have supplied independent, expert advice that the products are unsuitable for use in an internal combustion engine

the Commissioner therefore considers you have acquired taxable fuel (diesel or B20) for use other than as a fuel in an internal combustion engine for the purpose of subparagraph 11(1)(b)(v) of Schedule 3 to the FTCTPA.

As such, you are entitled to a fuel tax credit for taxable fuel you acquire and use to blend with 4% of a additive which you state contains oleic acid and other fatty acid esters in producing mould release agents.

Section 43-5 of the FTA provides that for periods until 30 June 2012 the amount of your fuel tax credit for the fuel is amount of effective fuel tax that is payable on the fuel. The amount of effective fuel tax that is payable on the fuel is the fuel tax amount less any applicable grant or subsidies.

The fuel tax amount means the amount of fuel tax that was or would be payable on the fuel at the rate in force when you acquired the fuel. For diesel and blends of diesel and B20 the amount of effective fuel tax is 38.143 cents per litre.

1 July 2012

From 1 July 2012 the entitlement provisions provided for under item 11 of Part 3 of Schedule 3 to the FTCTPA were repealed. From this date, entitlement to fuel tax credits under section 41-5 of the FTA are no longer affected by the EGCSA or FTCTPA, except in limited circumstances.

Also, from 1 July 2012, there were changes to the FTA resulting from the Clean Energy (Fuel Tax Legislation Amendment) Act 2011. Some of these changes included:

· how the amount of your fuel tax credit for the taxable fuel is calculated, taking into account the amount of carbon reduction, and

· the inclusion of circumstances where the amount of carbon reduction to apply to fuels will be nil.

The term 'use' for the purposes of section 41-5 of the FTA as discussed above means 'expend or consume in use' which in turn requires that the fuel be expended or consumed, such that it no longer exists as fuel, by putting it into service in carrying on your enterprise such as where it is used in the production of another thing that no longer constitutes a fuel (which covers the blending of fuel with other products to create a blend that no longer constitutes a fuel).

Therefore, from 1 July 2012 you are entitled to a fuel tax credit for taxable fuel you acquired and use to blend with 4% of an additive which you state contains oleic acid and other fatty acid esters in producing mould release agents where the blend cannot be used in an internal combustion engine.

However, section 43-5 of the FTA provides that the amount of your fuel tax credit for taxable fuel is the amount worked out based on the amount of effective fuel tax less amount of carbon reduction (if applicable).

However, subsection 43-8(4) of the FTA provides the amount of carbon reduction that applies to the fuel is nil to the extent that:

…

you acquire…the fuel for use otherwise than by combustion of the fuel.

As you acquire taxable fuel (diesel or B20) for the purpose of blending them with 4% of a additive which you state contains oleic acid and other fatty acid esters in producing mould release agents, this is fuel used by you for use otherwise than by combustion of the fuel and your fuel tax credit amount is not reduced by an amount of carbon reduction.