WAStateGovt 203

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Western Australia believes that in developing a Fuel Taxation Policy it is essentially
about balancing competing and often conflicting interests. These include industry
sectors, metropolitan and country fuel users and achieving a balance in economic
and environmental trade offs.

Several factors make it difficult to achieve a balanced judgement. These include:

   The priorities of government, the community and businesses change over time.
   From an economic development perspective, there are time frame considerations
    – the short-term perspective may be different from strategic, long-term
   Fuel taxation arrangements are complex – economic modelling may be of some
    assistance in assessing the impacts of taxation on the economy but the modelling
    is only as good as the assumptions used.

Western Australia suggests that the following principles should apply when
developing a fuel taxation policy:

   The Australian economy needs to remain competitive – a consideration that, in
    this context particularly, relates to energy-intensive industries such as the mineral
    processing sector.
   The fuel taxation policy needs to articulate short and long term considerations.
   An effectiveness test needs to be applied to measures – so that changes in
    taxation levels for a particular purpose are evaluated against actual outcomes.
   An efficiency test needs to be applied to measures – so that the costs of
    compliance and administration are not disproportionate to benefits being sought.
   Taxation policy should remain competitively neutral between the fuels, suppliers
    and end-users, within the parameters of governments’ economic priorities.

However Western Australia’s large geographical size means that fuel taxation
policies impact particularly on the State.

Part 4, Box 4.1

Role of Fuel in the economy

The community’s view on how the current fuel tax, rebate, subsidy and grant
arrangements influence fuel decisions.

To what extent if any, do these arrangements affect the use of particular fuel
types both now and in the future?

Western Australia believes that from a small business perspective the operations of
the On Road Diesel and Alternative Grants Scheme are principal matters of concern.
The scheme is intended to reduce transport costs to business and particularly to
benefit the regions. It provides for a grant of alternative fuels such as ethanol,
compressed natural gas and LPG to maintain previous prices relativities to diesel.
The scheme is the only direct source of financial assistance to small business users
of petroleum products and LPG.

Currently a business is required to apply to the Australian Tax Office for the grant at
a rate of around 18.5 cents per litre, per eligible kilometre, and per eligible vehicle for
each trip. The business specifies whether it will claim monthly, quarterly or

There are two principal concerns for small businesses in the operations of the
current scheme:

1.     The On Road Diesel and Alternative Grant Scheme must be declared as
       taxable income for the business, which reduces its value; and

2.     The amount of the grant is fixed at around 18.5 cents per litre whereas the
       fuel excise is generally indexed with the rise of the CPI so the value of the
       grant will reduce over time until the scheme disappears on 30 June 2002.

From June 2002, the new Energy Grants (Credit) Scheme will encourage the use of
cleaner fuels by measures additional to those under the two existing schemes while
maintaining entitlements that are equivalent to the existing schemes.

There is concern that few details of the proposed new scheme are available.
Consequently, it is not possible to assess whether small business concerns
regarding the erosion of the value of the current scheme (taxable income and excise
indexed with CPI rises) will be addressed.

The transport industry shares these concerns in relation to lack of detail in the
scheme. Timely information on the scheme and its impact on road transport
industry would give transport operators confidence to formulate their future directions
and investment strategies. The intent of the current scheme to reduce transport
costs for business is supported but attention must be given to the practical
deficiencies in the real dollar value of the scheme for small business operators.

The tax system needs to recognise that biodiesel, whether produced from waste or
purpose grown crops, has benefits for both the environment and the economy. To
stimulate use of alternative fuel it is important that biodiesel is excise free. In the
early stages of development, biodiesel will be more easily marketed if blending is
allowed and not penalised by a tax. As excise is levied at the manufacturer’s gate
and not at the point of retail sale, this policy should be administratively possible,
whether the biodiesel is used in a pure or blended form.
Part 5

Fuel Taxation in Australia

As part of the national tax reform arrangements, from 1 July 2000 the
Commonwealth ceased returning any excise surcharge revenues to the States.
Effectively, that revenue has been replaced by GST revenue.

In addition, the Commonwealth reduced the rate of excise on petrol and diesel by
6.656 cpl to “make room” for the GST, and introduced a number of new fuel
schemes, including an expanded off-road Diesel Fuel Rebate Scheme (DFRS),
which provides a 100% rebate of the total diesel excise (including the former State
component) for eligible uses. The range of eligible uses includes mining, primary
industry, hospitals, nursing homes, marine use of diesel and diesel used in rail
transport, but only if used in the course of carrying on a business (ie. recreational
use does not qualify). However, under the Commonwealth’s original (August 1998)
tax reform package, all off-road business use of diesel would have qualified for the
100% rebate of diesel excise (including the former State component) from the
Commonwealth. The revised tax reform package – including the changes to the
DFRS – was negotiated with the Democrats to ensure its passage through the

The Commonwealth’s expanded DFRS was introduced to replace the States’
off-road diesel subsidies. Indeed, the States had to abolish these subsidies in order
to remain budget neutral. This is because the Commonwealth’s guarantee
payments to the States (designed to ensure that no State budget is worse off during
the transition to the new tax system) are calculated on the basis that States’ off-road
diesel subsidy schemes are abolished in full.

Given that the former State off-road diesel subsidy applied to all off-road usage of
diesel fuel, its replacement with the less than comprehensive Commonwealth DFRS
as part of the national tax reform has left some users worse off, including those using
diesel in:

   electricity generation other than in the mining industry (this includes Western
    Power’s remote area power stations);

   construction (eg. earth works, site preparation and road construction) and
    manufacturing; and

   recreational boating and four-wheel driving pursuits.

This outcome is inferior to the Commonwealth’s original (August 1998) tax reform
proposal, which would have seen all off-road business use of diesel qualify for a full
(100%) rebate of diesel excise from the Commonwealth. In this regard, there is no
obvious policy rationale for providing a rebate to certain users of off-road diesel, but
not others. Expanding the coverage of the Commonwealth’s DRFS to all business
users of off-road diesel would improve the equity and efficiency of the current
arrangements, and provide a substantial benefit to businesses which are ineligible
for the current scheme.
In 1999-2000, Western Australia’s off-road diesel subsidy scheme                      cost
$156.1 million, while the on-road diesel subsidy scheme cost $5.4 million.

Western Australia’s On-Road Diesel Subsidy

Western Australia was effectively prevented from abolishing its on-road diesel
subsidy – as it originally planned to do from 1 July 2000 – by the Federal Treasurer,
who indicated that the Commonwealth would reduce Western Australia’s guarantee
payments under the Intergovernmental Agreement on tax reform if the State
proceeded with abolishing this subsidy. Western Australia’s on-road diesel subsidy is
currently paid at a rate of 0.71 cpl to fuel suppliers and distributors for all diesel
supplied to fixed site retailers (eg. service stations). In return, the fuel suppliers and
distributors have undertaken to sell diesel to fixed site retailers for 0.71 cpl less than
would be the case in the absence of the subsidy. End users purchasing diesel
direct from a fuel supplier are also able to claim the subsidy for their accumulated
purchases for on-road usage.

The on-road diesel subsidy is indexed in line with indexed movements in the diesel
excise rate. However, following the Prime Minister’s announcement (on 1 March
2001) to abolish indexation of fuel excise, this rate is now effectively fixed at 0.71 cpl.

In 2000-01 Western Australia’s on-road subsidy cost an estimated $3.3 million. The
cost of administering the subsidy scheme by the Office of State Revenue is
estimated to be nearly $100,000 per year.

It is not appropriate for States to be required to continue paying on-road diesel
subsidies when they no longer have any role in the taxation of fuel. These
subsidies are simply a legacy of the section 90 safety net arrangements.
Furthermore, continuing to pay an on-road diesel subsidy creates high administration
and compliance costs, relative to the (low) total value of the subsidy.

Accordingly, Western Australia considers that the provision of fuel subsidies and
rebates should be the sole responsibility of the Commonwealth Government.

The Level of Commonwealth Fuel Excise

One of the key areas that the Inquiry should examine is the level of Commonwealth
fuel excise. At 38.1 cents per litre (cpl) for unleaded petrol and diesel, the
Commonwealth’s fuel excise is the largest single component of petrol pump prices
including the GST, fuel taxation represents around 54% of the cost of fuel (based on
a pump price of 85 cpl).

Taxes on fuel have increased more than twice as fast as consumer prices generally
over the past 20 years. In this regard, taxes on petrol have increased from around
6 cpl in 1980 to around 45 cpl today, which is an increase of 650%. By comparison,
general prices have increased by around 300% during this time.
While the Commonwealth’s decision to cease automatic indexation of fuel excise is
welcome, Western Australia believes more needs to be done to address the current
high level of fuel taxation. Any reduction in fuel taxation would be of particular
benefit to Western Australia, given the large distances (and associated high
consumption of fuel) involved in this State.

In this regard, Western Australia consumes more fuel per annum on a per capita
basis than the national average (1,363 million litres compared to 1,287 million litres),
and ranks second only to Victoria (which consumes around 1,435 million litres per

There are strong arguments to suggest that the current fuel tax does not promote
efficient use of the road networks. The fuel excise does not vary in relation to
different users and vehicle types and the associated external costs (social costs). to
society of using the road such as congestion, road damage, pollution, noise and
accidents. In reviewing the current fuel tax rebate, subsidy and grant arrangements,
external cost associated with fuel tax should be considered.

Box 5.3

Options to reduce the cost or improve the effectiveness of the administration
of existing or proposed arrangements.

The paper refers to the Renewable Remote Power Generation Program (RRPGP)
stating that although the terms of reference exclude fuel used for electricity
generation, the Inquiry will consider how this program is funded because of the
requirement to have regard to any proposed changes on the welfare of regional,
rural and remote communities.

Western Australia expects to pay some $85 million in excise on diesel used for
power generation in four years of the RRPGP, beginning June 2000. This $85
million should be available to Western Australia. This State has argued that the
RRPGP funds should pay for energy efficiency measures in remote areas, which can
give better greenhouse reductions and are often more cost effective than renewable
energy. The Commonwealth has responded that RRPGP funds can only be used
for renewable electricity generation, replacing diesel.

The main environmental outcomes from the use of transport fuels are the emission
of pollutants leading to degradation of urban air quality. The use of excise and other
taxation mechanisms to influence environmental outcomes could be considered to
encourage the earlier introduction of cleaner transport fuels or new vehicle
technologies aimed at reducing emissions.

The Measures for a Better Environment (MBE) statement includes an increase in
excise payable on diesel fuels of greater than 50 parts per million (ppm) sulphur by 1
cent per litre (cpl) from I January 2003 and 2 cpl from 1 January 2004, in order to

1   Source: ABS Catalogue No.9208.0, 3101.0.
encourage introduction of 50 ppm sulphur diesel prior to 1 January 2006 as set out
by the National Fuel Standards.

From an air quality point of view the excise payable on petrol of higher than 150 ppm
sulphur could be increased to encourage the earlier (prior to 1 January 2005)
introduction of lower sulphur petrol. Sulphur in petrol leads to the gradual poisoning
of catalytic converters, reducing their performance and increasing emissions for
motor vehicles.

With the introduction of the Environment Protection (Diesel and Petrol) Regulations
in 1999, Western Australia legislated the cleanest transport fuels in the country.
These regulations were introduced without significant increase in the cost of petrol
and diesel fuels, and has led to a reduction in emissions. Western Australia has
regulated sulphur content of 150 ppm sulphur in all grades of petrol

The emission standards for heavy vehicle diesel engines have already been
determined through to 2008. No diesel engines are manufactured in Australia and
all new engines imported either in, or for use in, trucks and buses meet the
European standard or the Japanese or American equivalent. Australian buyers of
new trucks and buses are getting the latest technical developments in emission
reductions. To allow these engines to achieve the optimum reduction in emissions,
however, they need to run on low sulphur diesel fuel. The Commonwealth and
other States should be moving to ensure low sulphur diesel becomes the standard
throughout Australia.

Higher quality transport fuels are available in Western Australia (to Euro IV
standard), with a sulphur content of 50ppm and higher octane, although at a
premium price. An increase in excise for lower octane, higher sulphur petrol may
further enhance the uptake of Euro IV specification fuels.

With regard to liquefied petroleum (LPG) conversions the benefits of promoting LPG
conversions are unclear, and depending on the technology used in the conversion,
emissions for various fuel types are important, particularly with regard to greenhouse

Part 6 – 6.1

Efficient resource allocation

Environmental issues, particularly greenhouse gas emissions, will become a more
important international concern and one of particular concern for the Australia and
the Western Australian economy. Optimum outcomes in competitiveness could be
achieved through the following measures that would complement a fuel taxation

   Increasing the level of R&D funding into renewable and alternative energies with
    a view to reducing Australia’s reliance on fossil fuels and to the creation of new
    export-orientated industries that increase the competitiveness of the national
     Promoting eco-efficient policies and programs so that the energy intensity of
      Australian industries is reduced while competitiveness of the economy is

     Continuing to develop fuel taxation policies based on sending out market signals
      to modify the behaviour of fuel users towards cleaner fuels and lower greenhouse
      gas emissions.

These factors are seen by Western Australia as priorities for the Commonwealth
Government when reviewing the role of fuel taxation in Australia’s economic


Environmental outcomes

The main environmental outcome from the use of transport fuels is the emission of
pollutants leading to degeneration of urban air quality. The use of excise and other
taxation mechanisms to influence environmental outcomes could be considered to
encourage the earlier introduction of ‘cleaner’ transport fuels or new technologies
aimed at reducing emissions.

Emissions can be reduced by factors external to the vehicle engine. A shift of
freight from road to rail can lead to a total reduction in fuel usage and emissions.
Efficient freight networks that minimise congestion can also lead to reduced
emissions. For example CO2 emissions can be reduced by 20-30% with free
flowing of traffic compared to congested traffic. An investment in bus lanes to
encourage the use of public transport is likely to lead to a reduction of on road car


    Regional, rural and remote communities’ welfare

The introduction of the GST has had considerable impact on rural and remote
communities. It has added to the price differential between city and country
petroleum outlets by its calculation on the higher margins required by country
retailers and the cost of freight of fuel. It is recommended that the Commonwealth’s
suite of rebates, subsidies and grants should be reviewed to better compensate
country retailers with the caveat that lower prices to consumers will occur. For
example the biannual CPI adjustment that was returned to retailers in February 2001
appeared to have been quickly absorbed into costs without ongoing benefit to
motorists or rigorous investigation by the ACCC.

Under the Fuel Sales Grant Scheme a subsidy is paid to fuel retailers. This scheme
contains a number of anomalies. For example retailers serving in the remote
communities of Kalgoorlie and Esperance receive differing payments of 1 and 2
c/litre payments respectively even though Esperance feeds Kalgoorlie with its fuel
There appears to be difficulties with the Commonwealth’s lack of consistency with
the administration of the State’s petroleum pricing laws. For example the definition
of zones and non-metropolitan areas in the Scheme conflicts with the State’s
Metropolitan Regional Planning Scheme 1959. Certain metropolitan suburbs such
as Kwinana (the site of the BP refinery) and Wanneroo receive the same 1c/litre
subsidy as retail outlets in country areas such as Albany and Geraldton. In addition
there is little evidence of consistent flow-on benefits to consumers (through lower
pricing) even though the ACCC is responsible for investigating these matters.

The Commonwealth Fuel Sales Grant Scheme requires review with appropriate
consultation with State jurisdictions to ensure more consistency with State law and a
redistribution of payments for country retailers.

The importance of the Diesel and Alternative Fuel Grants Scheme cannot be
overlooked. The reduction in the cost of fuel for heavy vehicle operators has meant
significant savings for regional Western Australia. The movement of livestock with
the recent drought conditions in the South West of the State would have come at a
much greater cost to farmers than was the case because of the reduction in diesel
fuel costs. Transport is a significant input cost for most of the large exporters in
Western Australia and the ability to maintain or lower costs will have served to
improve their competitiveness.


In conclusion, the principles and priorities outlined in Western Australia’s response
are important considerations in developing a strategic direction for an Australian fuel
taxation policy. However they may be insufficient to overcome difficulties that an
energy-intensive economy faces in reducing dependence on fossil fuels at a rate fast
enough to accommodate demanding new environmental standards.

In this context, the Commonwealth Government may need to look outside the
framework of Australian fuel taxation policy to minimise the potential for future
energy price shocks while maximising new opportunities for the economy. These

   Recognising the importance of LNG as a relatively cleaner fossil fuel than coal or
    oil and actively promoting its use internationally based on exports from Australia.
   Facilitating practical international arrangements on greenhouse gas emissions,
    including the development of a workable framework for Emissions Trading, Clean
    Development Mechanism and Joint Implementation.
   Incorporating programs and policies that support the development of emerging
    new business opportunities associated with a knowledge economy rather than an
    industrial economy, including the promotion of green industries into an industry

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