Australia's Future Tax System

Architecture of Australia's tax and transfer system

9.3 Taxation of fuel

The excise and customs duty on fuel raises the largest amount of revenue of all taxes on specific goods. Fuel is both an input to business as well as making up a significant share of household consumption expenditure. Many of the environmental and social policy arguments already discussed are often raised in relation to fuel taxation.

Fuel excise was reduced by 6.7 cents per litre when the GST was introduced in July 2000. It was reduced further, to its current level of 38.143 cents per litre, in March 2001. These reductions were designed to offset the impact of the GST on fuel prices. Since then, fuel excise has not been indexed. Moreover, when the outlays of programs designed to reduce the incidence of fuel tax are taken into account (for example, fuel tax credits), net revenue from fuel tax has been relatively stable (Chart 9.5).

Chart 9.5: Fuel excise revenue over time

Chart 9.5: Fuel excise revenue over time

Source: Australian Government (2008a), Australian Treasury estimates.

The Australian Government has made a number of commitments regarding transport fuel in the Carbon Pollution Reduction Scheme Green Paper, including cutting fuel taxes on a cent‑for‑cent basis to offset the initial price impact on fuel associated with the introduction of the scheme. The Australian Government will periodically assess the adequacy of this measure for three years and adjust this offset accordingly. At the end of the three year period the Australian Government will review this adjustment mechanism. For heavy vehicle road users, fuel taxes will be cut on a cent‑for‑cent basis to offset the initial price impact on fuel associated with the impact of the Carbon Pollution Reduction Scheme. The Government will review this measure after one year. 

In respect of liquefied petroleum gas (LPG), the original rationale behind the exemption from excise was security of supply in the context of the oil shocks of the late 1970s. Over time, the number of vehicles using LPG has grown significantly because of the cost differential between LPG and petrol, which is amplified by the excise free status of LPG. LPG is scheduled to begin incurring fuel tax from 1 July 2011 under a policy announced under the previous government. At the time of the 2007 Federal Election, the changes to the law required to tax LPG had not been legislated. As indicated on Budget night, a final decision in relation to this has not been reached.

Arguments for concessional taxation for currently untaxed fuels include environmental and emissions benefits, increased fuel security, together with regional development and infant industry arguments.

Fuel excise is an effective and administratively simple tax for raising revenue. However, it is less effective as a means of meeting additional social or environmental objectives. For example, fuel excise rates do not substantially change the decision to drive in particular vehicles (to reduce road damage), in particular areas (to reduce noise pollution) or at particular times (to reduce congestion). Fuel excise levied for social or environmental objectives also leads to higher burdens on activities where there may be no costs on others. New technologies (such as 'etag' and the global positioning system) are increasing the viability of more efficient direct charging mechanisms.

Relief from the incidence of fuel excise — fuel tax credits

The main avenue for providing relief from fuel tax is through the fuel tax credits system, which provides credits for certain off‑road uses to consumers, business users and importers of fuels and for on‑road use in heavy vehicles (gross vehicle mass greater than 4.5 tonnes) (Table 9.1).

Fuel tax credits are not a subsidy for the use of fuel. The system is intended to remove or reduce the incidence of fuel tax from business inputs, so that its incidence falls primarily on certain private consumption of fuel. This limits the impact on production decisions. For example, fuel tax credits mean that all electricity generation using liquid fuels is effectively free of fuel tax, in the same way that coal or natural gas inputs to electricity generation are untaxed.

It is difficult to credit business use of all fuels correctly. To the extent that some businesses receive credits while others do not, production decisions are likely to be affected. Similarly, to the extent that credits provided for business use are actually used in consumption, consumption choices will be altered.

Table 9.1: Eligibility for fuel tax credits

Table 9.1: Eligibility for fuel tax credits

Source: Adapted from Fuel Tax Bill 2006, Explanatory Memorandum, page 11.

Use of all fuels on‑road in heavy vehicles is eligible for a partial fuel tax credit equal to the effective fuel tax paid, less the amount of a non‑hypothecated road user charge. The user charge is intended to reflect the damage to roads caused by heavy vehicles. It forms part of the national heavy vehicle charging arrangements.

The road user charge is currently 19.633 cents per litre and the Australian Government has announced its intention to increase it to 21 cents per litre from 1 January 2009 and index the charge according to the National Transport Commission's road funding formula thereafter.

Relief from the incidence of fuel excise — state fuel subsidies

In 1996‑97, the States raised $5.2 billion from business franchise fees on fuel, alcohol and tobacco retailers. However, the 1997 High Court decision in Ha v New South Wales (1997) 189 CLR 465 ruled that state franchise fees on tobacco were unconstitutional and, in doing so, cast doubt on the constitutionality of other state franchise fees. At the request of the States, the Australian government implemented safety net arrangements to effectively collect franchise fee revenue on behalf of the States. This revenue was collected though higher rates of excise and wholesale sales tax on the relevant products, and paid to the States. These payments were subsumed into The New Tax System package from 1 July 2000.

With respect to fuel, many States had previously levied business franchise fees at different rates. However, for constitutional reasons, the Australian government's increase in fuel excise was uniform throughout the country. The Australian government therefore required some States to introduce subsidy schemes to ensure that motorists in lower‑taxing States would not be disadvantaged by the higher rate of Australian government tax.

Over time, some States have withdrawn their subsidy schemes. The largest remaining scheme is the Queensland Fuel Subsidy Scheme, which provides a subsidy of 8.354 cents per litre for eligible fuel purchases, costing the Queensland Government around $525 million in 2006‑07.