Bills Digest No. 157  1999-2000Product Grants and Benefits Administration Bill 2000

Numerical Index | Alphabetical Index

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details

Passage History

Product Grants and Benefits Administration Bill 2000

Date Introduced: 12 April 2000

House: House of Representatives

Portfolio: Treasury

Commencement: Royal Assent

Purpose

To introduce an administrative scheme to provide for the payment of grants under the Fuel Sales Grants Bill 2000. In addition to such grants, the Bill also provides a scheme that may be used for the administration of future grants.

Background

The Promise

In the plan for a new tax system, titled Tax Reform: not a new tax a new tax system, released in August 1998, it was stated:

To achieve this promise, it was estimated that the rate of excise would need to be reduced by 7 cents a litre, with the reduction being replaced by the GST payable. Businesses able to claim input tax credits will be able to claim the amount of GST on petrol (for the purposes of this Digest the term petrol should also be read as including retail sales of diesel fuel).⁽²⁾

The promise was repeated a number of times during the campaign for the October 1998 election. For example, the Prime Minister stated:

And

The Problem

The difficulty in implementing this promise arises from the fact that petrol prices are general higher in regional and remote areas than in metropolitan areas. The adding of a 10% GST to a higher base price will result in the final price being greater than adding 10% to a lower base. For example, if petrol in a metropolitan area retails for 77c per litre and excise is reduced by 7c per litre, the addition of a 10% GST will result in the same retail price of 77c per litre. However, if the retail price is 85c per litre in a regional/remote area and excise is reduced by 7c per litre the GST will be added to a base price of 78c per litre leading to a final price of 85.8c per litre, meaning that the retail price has increased by 0.8c per litre due to the replacement of part of the excise payable with the GST. As prices increase in both metropolitan and regional/rural areas it can be expected that the additional amount payable due to the GST will increase.

Variations in the rate of excise between different areas in a State or between States, which may be considered as a method of reducing the base price prior to the application of the GST, is not an option due to paragraph 51(ii) of the Constitution which provides power for the Commonwealth to legislate in regard to taxation, 'but so as not to discriminate between States or parts of States'. As an excise is a method of taxation, this paragraph effectively prevents the Commonwealth from imposing different rates of excise for regional/remote areas compared to metropolitan areas. (The question of whether the Commonwealth can effectively bypass this restriction through a grants scheme direct to the operators of a retail outlet raises many Constitutional issues. Due to payments of grants to individuals rather than through the States it appears that the Commonwealth is relying on the appropriation power contained in section 81 of the Constitution. As the scheme is not restricted to corporations or inter State trade it would appear that neither of these powers will be sufficient to support the entire scheme.)⁽⁵⁾

The Proposal

To ensure that the Government's commitments regarding the price of petrol not increasing due to the introduction of the GST will be met, the Treasurer announced in a Press Release dated 11 April 2000 that a fuel grants scheme would be introduced with a minimum of two levels of grant to ensure that retail prices do not increase due to the introduction of the GST. The first level would be available for non-metropolitan sales and the second for sales in remote areas. The Treasurer has also announced in a Doorstop interview that there may be a third level of grant. In explaining the scheme the Treasurer stated:

The scheme is largely to be implemented through regulation rather than by specific criteria contained in a Bill. The Treasurer's Press Release states:

Regarding which areas are to be included in regional or remote areas, a spokeswoman for the Treasurer is reported as stating: 'You will have to wait and see - closer to the introduction of the GST', and 'If we were to announce it now, there might be a temptation for some to increase prices to take advantage'.⁽⁸⁾

The scheme is estimated in the Treasurer's Press Release to cost around $500 million over 4 years.

The Petrol Industry

The petroleum industry is very complex and involves a large number of steps before petrol is sold at the retail level. There are a number of different possible routes from crude oil to retail petrol, varying from refinery, distribution and retail sale by company owned organisations to independent importation, distribution and sale by unconnected independent operators. The removal of wholesale price control and greater competition from importers has increased competition in the industry and pricing is now largely left to the market rather than government supervision and regulation. The Australian Competition and Consumer Commission (ACCC) oversees competition in the industry and has in the past taken action regarding allegations of price-fixing with, for example, Ampol fined $3.5 million in 1996.⁽⁹⁾ More recently, allegations of price fixing over the recent Easter 2000 holiday are being investigated by the ACCC.⁽¹⁰⁾ Due to the complexity of the industry, the following should be seen as a brief overview of the industry that does not cover all of the possible variations existing in the industry.

The price of petrol to a retailer can be broken into a number of major components, some of which are relatively constant regardless of the place where retail petrol is purchased and sold and others which are variable. The major components of retail price can be seen as:

• the price of crude oil which is determined by international prices which are reflected in the import parity price (where the price increases and production costs remain the same. The Petroleum Resource Rent Tax, which generally applies to Australian production areas, requires a proportion of the increase to be paid in additional tax while the remainder will be additional profit for the producer)
• where petrol is purchased directly from overseas rather than from an Australian refinery, the purchase price plus transport costs to Australia
• the profit margin for the refiner/importer
• excise payable to the Commonwealth which is a constant rate regardless of the source of the petrol (44.137c per litre for unleaded petrol and 46.381c per litre for leaded petrol)
• transport costs from the refiner/distributor to the retailer
• retail profit margin, and
• any State/Territory concessions.

Of these components, the only one that can be regarded as totally transparent is the amount of excise charged by the Commonwealth (although this is proposed to be changed by this Bill). The price of the basic inputs, ie. crude for refiners and petrol bought from overseas for distributors, is principally dependent on the world price of crude oil and can be seen as being in the same category as excise as it is the same regardless of where the petrol is sold.

While it would initially appear that the profit margin of the refiner/importer should also be equal regardless of where the petrol is sold such an assumption would ignore the effect of a refiner/importer being able to sell larger volumes where there is a short term over supply of petrol. As it takes time to alter production/importation schedules, and for refiners there is a large component of fixed cost relating to the investment in the refinery, situations will arise where a refiner/importer will have a surplus of petrol and will be willing to accept lower cents per litre profit so long as an increased volume is sold. Similarly, if importers wish to clear stocks they will be willing to reduce their profit margin to sell in high volume.

Similar actions will apply through the chain, so that if an independent distributors have a high turnover they should be able to secure lower prices from the importer/refiner and distributors tied to a refiner can be expected to receive lower prices if they have a high volume compared to low volume distributors. Conversely, in times when demand is greater than supply it can be expected that refiners/importers will be able to charge a premium for their product so that prices will rise for the distributor and retailer. The above can help explain reports of wholesalers (refiners/importers) offering a standard price for distributors and then discounting this price for certain distributors who, presumably, can offer a higher volume of sales. Discounts may also be offered where it is necessary to protect sales due to the action of a competitor. For example, if an independent distributor is able to supply an independent retailer at a lower price due to the high volume sold by the retailer, a competing retailer tied to a refinery may also be offered petrol at a price that will allow the tied retailer to compete with the independent retailer. Where the converse exists and a tied, or other, retailer is offered cheaper fuel to undercut an independent, or other, operator and so drive them out of business breaches of competition legislation will apply.

While the above may apply in a reasonably competitive market, usually found in areas of higher population density and hence demand and total turnover, the situation can change dramatically where there is little or no competition. With the abolition of a maximum wholesale price and general deregulation of the industry, retailers in remote locations with a relatively low turnover are likely to be faced with a higher wholesale price than would otherwise apply when there is a general shortage of petrol and it is unlikely that they will benefit from discounts due to their relatively small volumes.

It would be desirable to be able to be examine actual wholesale prices to various consumers to determine if the above theories are reflected in actual movements in prices. However, data on general wholesale prices is not available, let alone the detail needed to actually determine how the market is reacting to various changes. Such information is regarded, with some justification, as highly sensitive by those involved in the industry.

In the absence of data on wholesale prices, it is appropriate at this stage to examine data relating to retail prices while remembering that transport costs and State/Territory concessions have yet to be examined. In relation to retail prices, it is worthwhile noting not only that there are differences between areas, but also variations in prices for the same area over a short period, to gain an understanding of the volatility of retail petrol prices.

Informed Sources - Australian Petrol Pricing Reports: provides information on prices in metropolitan areas and various regional centres for all States and the Northern Territory. The figures referred to below are taken from their survey for the month of March 2000. Rather than looking at the lowest and highest prices in an area during a month, the movement in the monthly average price for an area and its variation from the metropolitan average will be considered. If price changes are due to an increase in one of the factors that is constant for all petrol, principally a change in the price of crude oil and government excise, a relatively constant change in monthly movements could be expected. However, it must also be noted that different delivery dates may effect any expected constant change. Similarly, if variations from the metropolitan area are due to transport costs, it can be expected that the variation from the metropolitan price for areas a similar distance from the capital city which contains the major refinery/storage/shipping facilities for the State will be relatively constant.⁽¹¹⁾

Examining these figures, some variations do not reflect possible changes due to alterations in input costs or transport. For example, travelling down the South Coast from Sydney, prices in Berry had a variation (with figures in brackets reflecting the monthly movement in price) from the metropolitan of -0.2c (5.1), Wollongong 0.5c (7.0) and Batemans Bay 7.9c (5.5). Further examples of the variations from metropolitan prices and monthly movements are grouped according to their approximate distance from the capital city and are given as an indication only, (figures immediately after the name of the centre reflect variations from metropolitan prices while those in brackets show monthly variations in price at the location).

NSW:

• Canberra 4.4c (6.1c), Batemans Bay 7.9c (5.5c), Cowra 5.1c (5.6c), Orange 6.8c (5.4c), Taree 3.9c (6.1c);
• Armidale 4.9c (5.3c), Dubbo 6.4c (6.0c), Narrabri 2.6c (5.4c), Wagga Wagga 5.3c (5.6c).

Victoria:

• Ballarat 2.6c (6.0), Bendigo 3.4c (5.0c), Moe 5.8c (6.6c)
• Echuca 6.3c (4.7c), Sale 5.1c (5.9c), Shepparton 5.2c (5.2c), Wangaratta 6.8c (4.2c), Warrnambool 5.2c (7.3c).

Queensland:

• Toowoomba 3.9c (5.7c), Warwick 0.4c (4.7c)
• Gladstone 6.6c (6.0c), Roma 12.8c (4.7c)

Western Australia:

• Albany 8.4c (5.3c), Geralton 10.0c (6.0c)
• Esperance 6.9c (5.2c), Kalgoorlie 8.9c (5.6c)

South Australia:

• Port Augusta 6.4c (6.2c), Whyalla 7.2c (7.1c)

The above illustrates inconsistencies both in the:

• variation in movements in monthly prices at a particular location (March 2000 is not typical in the level of variations as increases in international crude oil prices increased the amount of change). However, variations in monthly movements by 4.7c at both Warwick and Echuca compared to monthly movements of 7.3c at Warrnambool, 7.1c at Whyalla and 6.1c at both Canberra and Taree cannot be explained by movements in the price of crude which, in theory, should be relatively constant for all retailers, and
• variations from metropolitan prices. If the cost of transport was a major contributor to generally higher prices outside the metropolitan area, it could be expected that areas roughly the same distance from the metropolitan area would be similar, allowing for a small difference depending on the nature of terrain. However, variations such as those between Gladstone (6.6c) and Roma (12.8c) cannot be explained by transport costs (many other examples can be found above).

The conclusion that may be reached is that variations in retail prices are more dependant on the market, rather than the actual costs involved, including whether costs will be increased in regional and remote areas due to a difference in the amount of GST payable. While the difference in the amount of GST payable between regional/remote and metropolitan areas is a consequence of the generally higher prices initially paid in regional/remote areas, the final price paid will, even after the proposed uniform reduction in excise, depend more on the market conditions prevailing at the time rather than on whether a 1 or 2 cents per litre grant is paid. In its 1994 report on Petroleum Products, the Industry Commission identified the lack of competition as a major reason for the differences between 'country and city' retail prices.⁽¹²⁾

However, factors other than price are often included in a decision as to whether to buy petrol at a particular location even though it may be economically rational behaviour to purchase at a lower price elsewhere, for example willingness to pay a higher price due to convenience, desire to utilise a particular outlet through reasons such as loyalty or vehicle repairs. Such behaviour, evident in metropolitan as well as regional/remote areas, could mean that a person is willing to pay a higher price for petrol than is otherwise available.

Transport Costs

While the cost of transporting petrol from refineries or places of importation must be added to costs before retail prices are determined, and these costs will increase as the distance from the source of petrol increases, it should be expected that the increase would be relatively constant for locations a similar distance from the source. The above figures indicate that this is not the case and that while transport costs can be considered a general reason for regional/remote area being greater than metropolitan areas, this alone is not a decisive factor in price differentials.

Retail Margin

It is very difficult to find information on the amount that goes to the service station, largely due to the highly sensitive competitive nature of the information. There are approximately 9 000 retail outlets in Australia, with only approximately 330 owned and operated by the major oil companies. However, many more are operated by franchisees of the oil companies or distributors and they are tied to one source of wholesale fuel so that they cannot 'shop around' for the best wholesale price. There are a relatively small number of independent operators who may choose the source of their fuel or, in the case of larger independents such as Woolworths, have a source for imported fuel. Retailers may also be willing to lower their margin on petrol if this increases sales of other goods, such as food and convenience goods, where the additional profit from those goods offsets the lower margin on petrol. For these reasons the retail margin is not constant.

The Australian Institute of Petroleum estimates that amount shared between oil companies, distributors, administration and marketing and retailers is around 6.5c per litre.⁽¹³⁾ Another estimate is that at a retail price of 76c per litre the amount for these tasks is approximately 13c per litre⁽¹⁴⁾, while the executive director of the ACT Motor Trades Association has been reported as stating that retail margin is approximately 2.2c to 3c per litre.⁽¹⁵⁾

State/Territory Concessions

Several States and Territories provide subsidies which place downward pressure on retail prices. For unleaded petrol the concessions per litre are: 8.2c in Queensland, 2.0c in Tasmania, 1.1c in the Northern Territory and 0.4c in Victoria.⁽¹⁶⁾

Enforcement

The Treasurer's Press Release states that the Australian Consumer and Competition Commission (ACCC) will be responsible for ensuring that grants are passed on to the retail customer. This will be in addition to the ACCC's tasks in ensuring that there is no price exploitation during the introduction of the GST.

Main Provisions

The Bill forms part of a package that includes this Bill and the Fuel Sales Grants Bill 2000 and the Fuels Sales Grants (Consequential Amendments) Bill 2000.

The Bill establishes an administrative scheme that could be used for many grant schemes, and is not specifically addressed to the petrol grant scheme discussed above. In relation to the proposed petrol grant scheme, the package of Bills is most interesting in its absence of specific conditions for grants (also refer to the Concluding Comments section below).

A list of grants that may be dealt with under the Bill is contained in clause 8. Currently only grants proposed under the Fuel Sales Grants Bill 2000 are listed and the addition of further schemes will need an amendment to clause 8.

Eligibility for registration in respect of grants is dealt with by clause 9. The requirements are:

• the applicant has an ABN (Australian Business Number and is therefore registered for purposes of the GST)
• any specific conditions for the grant are met (subclause 9(3) specifies that conditions are to be prescribed by regulation), and
• the prescribed conditions are satisfied.

(While the second and third points listed above both allow for conditions to be prescribed, they can be seen as having different functions. The second may allow specific conditions for additional schemes introduced under clause 8 to be prescribed, while the third would apply to all grants and, presumably, largely deal with further administrative matters. For petrol, grants eligibility conditions, other than sales after 30 June 2000, are also to be prescribed by regulation under the Fuel Sales Grants Bill 2000).

Grants will not be payable unless proper records are kept that enable a claim to be substantiated (clause 25). Records must be kept for a period covered by a claim if a claim is subsequently made (clause 26) and must be kept for at least a further 5 years (clause 27).

A person may be disqualified from making a further claim for a maximum of 2 years (plus the period to which the fraudulent claim relates) if they knowingly or recklessly make a statement for claim that is materially false or misleading and results in a greater amount of grant being paid than would be payable if such a statement was not made (clause 29). If an entity aides or abets, in similar circumstances, the making of a fraudulent claim, it may be disqualified from making a claim for a period determined by the Commissioner (clause 30). An entity may not make a claim for a:

• corporation, a director, the Secretary or a person who otherwise is concerned in or takes part in the management is under a disqualification
• partnership, a partner, or an employee who is concerned with or takes part in management, is disqualified
• trust, a trustee, or individual or company described above, is disqualified (clauses 31 to 33).

(It may be noted that the conditions for disqualification do not refer to a conviction but rather to the occurrence of an act or omission. It is not clear how whether such an action/omission occurred is to be determined.)

If a false statement is made in a claim to a person exercising power or performing a function in relation to the Bill and this results in an entitlement greater than that otherwise payable, the person making the claim will be liable for a penalty equal to double the excess entitlement, plus any applicable general interest charge. The penalty will apply whether the person knows that the statement is false or not (clause 36). However, the Commissioner will have power to remit all or part of the penalty (clause 38).

The information gathering powers of the Commissioner are dealt with in clause 42 and provide that if the Commissioner has reason to believe that a person has information relevant to the operation of the Bill or is capable of providing such information, the person may be required to:

• provide any information requested by notice
• produce any document requested by notice, or
• attend to give evidence and produce documents.

It will not be an excuse to fail to comply with such a requirement on the grounds that it may incriminate the person, however any documents or evidence given may not be used in criminal proceeding, other than taxation administration offences (clause 43).

Information or documents provided under this or a related entitlement Bill in the package will be protected information. Such information is not to be copied or disclosed except: for a purpose under the Bill, in official duty, to the Australian Statistician for statistical purposes, for the performance of functions under another tax law or to the Administrative Appeals Tribunal in connection with proceedings under a tax law. These grounds for disclosure are specifically stated not to authorise disclosure to a Minister. The maximum penalty for a breach of the confidentiality of protected information will be 2 years imprisonment (clause 47).

Clause 48 allows an authorised officer to enter premises on which the officer has reason to believe are documents, goods or any other property that are relevant to the operation of the Bill. The officer will also have power to examine, measure, gauge, analyse or copy such documents or goods.

The Bill will operate for a partnership as if it is a person, however obligations will be imposed on each partner individually, although penalty provisions will only apply if the partner is knowingly involved (clause 51). Clause 52 provides similar rules for unincorporated associations except that the obligations will be placed on each member of the association's committee of management.

Concluding Comments

The Scheme: With the relevantly small amounts per litre to be provided under the scheme in relation to the total and, more importantly, the current variations, in the price of petrol it is difficult to see it having more than a marginal effect on the price a motorist pays for petrol. As noted above, there seems to be no current pattern behind the variations in petrol prices within or between regions other than competitive decisions. It may be contended that, due to the margins involved, price differentials are usually due to activities prior to retail.

However, whether prices have been reduced at the pump by the amount of the grant will depend on prices charged throughout the supply chain which could involve a number of decision makers. For example, if a wholesaler decides to increase their price, or reduce a current discount, to a particular outlet in an area, or all outlets in an area, it will be very difficult, in the absence of any contrary evidence, to determine that this is due to the grant being offset. While the ACCC may be successful in determining where prices have increased to make a windfall gain of the grant amount, the matter must be in doubt given the current relatively much greater variations in price. With regional prices currently varying from the metropolitan price by large amounts, for example, -0.2c in Berry to 7.9 c in Batemans Bay, ensuring that the grant is not exploited in the future would appear to be a difficult task.

Other than the fulfilment of what has become a highly sensitive commitment, it is difficult to see any aim in the scheme. If petrol prices rise generally in the future to exceed $1 per litre in an area covered by the 1c grant, as can be expected through inflation if for no other reason, the amount of the grant will not be sufficient to offset the additional cost of the GST, presuming that prices increase by a full 10% due to its introduction. (Even if a lesser rate is credited to the GST the same point will be reached at a higher per litre price.) If the rate of the grant is increased to keep pace with petrol, additional expenditure will be involved and the scheme will become an increasing strain on the Budget.

Finally, given the relatively large sums involved in the scheme, the question must be asked as to whether the funds could be used in a more effective way to assist people in remote and regional areas, such as road works to reduce petrol consumption.

The Bills: The package of Bills is interesting in that basic eligibility conditions and the rate of grant are to be prescribed by regulation rather than contained in the principal legislation. While regulations may be made to quickly adapt to changing circumstances, these conditions do not seem to apply to in relation to the petrol grants scheme where eligibility and rate of grant will depend on the location of an area. An example of differing zones for taxation that are contained in legislation relate to remote area rebates where the definitions of different zones is contained in the Income Tax Assessment Act 1936.

While both principal legislation and regulations are subject to disallowance by either House of the Parliament, it should be noted that whereas regulations may only be disallowed principal legislation may be amended.

Endnotes

2. Tax reform not a new tax a new tax system, August 1998, p. 86.

3. ibid.

4. Transcript of the Prime Minister the Hon John Howard MP Bass Luncheon with Premier Rundle Launceston, 20 August 1998.

5. Transcript of the Prime Minister the Hon John Howard MP television interview Midday Show, 26 August 1998.

6. For further information refer to the Current Issues Brief No. 14 Dairy Industry Adjustment Bill 2000 - Constitutional Issues, by Mr. Bernard Pulle.

7. Transcript of the The Hon Peter Costello MP Doorstop Canberra 11 April 2000.

8. ibid.

9. The Canberra Times, 14 April 2000.

10. ACCC, Media Release, 12 March 1996.

11. The Age, 21 April 2000.

12. The actual distribution network is quite complex involving bulk storage and distribution centres at a number of sites. However, refineries and major storage facilities are located in or adjacent to capital cities and distribution centres may be seen as a means of ensuring that demand can be met, rather than reducing the cost of delivery.

13. Industry Commission, Petroleum Products, Report no. 40, July 1994, Chapter 5.

14. Australian Institute of Petroleum, see www.aip.com.au

15. The Age, 7 August 1999.

16. The Canberra Times, 5 August 1999.

17. Australian Institute of Petroleum, see www.aip.com.au

Contact Officer and Copyright Details

Chris Field
8 May 2000
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

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ISSN 1328-8091
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