The Federal Government announced in its 2010–11 budget that it will introduce a longstanding plan for content-based taxation of alternative fuels. The tax will be applied at a 50 per cent tax discount compared to petrol on an energy equivalent basis to reflect the potential benefits of alternative fuels.

First announced in the 2004–05 Budget released by the Howard Government, the legislation comprises four draft bills which amend existing acts and set up a new piece of legislation.

Overview

Originally the tax was to be implemented on 1 July 2011, however the Government delayed the date to 1 December 2011 to allow the industry more time to ensure that it is ready.

The changes to fuel taxation are being phased in over the period beginning 1 December 2011 and ending 30 June 2015, which the Government says will allow the alternative fuels industry time to adjust to these changes.

A discussion paper on the tax was released in October 2010 and the resulting exposure draft on 24 January 2011. The closing date for submissions to the Alternative Fuels Taxation Exposure Draft was 18 February 2011.

At present, petrol, diesel, biodiesel and ethanol are taxed at a general rate of 38.143 cents per litre, while LPG, LNG, compressed natural gas (CNG) and methanol are not taxed. (A 38.143 cent per litre grant is payable for biodiesel and renewable diesel where it meets relevant fuel quality standards.)

Under the proposed new laws, LNG for transport use would be taxed at a ‘medium content energy rate’ of 66 percent of the petrol and diesel taxation rate, which would then be discounted by 50 per cent. At the end of the phase-in period on 1 July 2015, this would equate to a 12.5 cents per litre tax.

CNG for transport use will be subject to taxation at the ‘high energy content rate’ of 100 per cent of the petrol and diesel rate. When discounted by 50 per cent, this equates to a 19.1 cents per cubic metre tax from 1 July 2015. Under the current draft, CNG for transport use will not be taxed where natural gas is compressed in home refuelling systems for non-business purposes, or where CNG is used in a forklift off-road.

In practice

LNG is typically used as a fuel for heavy-duty long-range transport. CNG is used in a range of vehicles worldwide, however in Australia is more typically used in bus fleets, street sweepers and garbage collection vehicles. At present, there is no significant CNG car market in Australia.

The Government’s stated intention in introducing the tax is threefold. It aims to:

• Introduce consistency in the taxation of transport fuels, and ensure that competition between currently untaxed and taxed fuels does not harm economic efficiency and create distortions;
• Provide certainty to industry; and,
• Phase in the new taxation arrangements while “providing support to the alternative fuels industry in recognition of the potential environmental, fuel security and regional development benefits that these industries can generate.”

The Australian Trucking Association states that under the current proposed form of the excise, trucking businesses will only bring in alternative fuels where there is an altruistic motivation, or on a trial basis. The Truck Industry Council agrees, stating that the excise will act as a disincentive to the uptake of alternatively-fuelled trucks.

Although not opposed to an excise, OES CNG noted in its submission to the Government’s discussion paper on the tax that “At this stage, the [natural gas vehicle] industry in Australia is so miniscule that application of excise from 2011 has the potential to cause serious damage to the industry before it can become established.”

An alternative to the alternative fuel excise?

The Truck Industry Council notes that not only do alternatively-fuelled trucks provide environmental benefits, they are in nature much safer vehicles than older generation trucks.

The Australian Trucking Association believes that the tax is well-structured to promote development of natural gas-powered vehicles, however should be accompanied with government finance to assist with start-up/conversion costs, and potential targeting research to aid technology development.

It suggests additional Government incentives to promote the natural gas-powered vehicle market, including:

• Using financial incentives and taxation arrangements to encourage new purchases and vehicle turnover
• Encouraging and funding research into the development of natural gas fuels for heavy vehicles
• Improving the information available to industry on the environmental attributes of natural gas fuels
• Considering financial incentives for businesses to encourage new investment and engine conversion
• Considering subsidies or industry assistance to assist in high conversion/start up costs and combat increasing tax rates (justified based on environmental considerations).