Bills Digest No. 119 2002-03
Energy Grants (Credits) Scheme Bill 2003
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
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Energy Grants (Credits) Scheme Bill
13 February 2003
House: House of Representatives
1 July 2003
To replace the
Diesel and Alternative Fuels Grants Scheme and the Diesel Fuel
Rebate Scheme with the Energy Grants (Credits) Scheme.
The Diesel Fuel Rebate Scheme (DFRS) which is
also called the off-road scheme provides a rebate of the excise on
diesel and like fuels used in certain eligible activities.
Legislative authority for the DFRS is contained in section 78A of
Act 1901, section 164 of the Customs
Act 1901, and the regulations under those Acts.
The use of diesel and like fuels in the
following activities is eligible for rebate subject to certain
- mining operations (the use of any vehicle on a public road is
- primary production, including forestry, agriculture and fishing
(the use of a road vehicle on a public road is not eligible)
- at residential premises to generate electricity in the
provision of normal domestic services
- at hospitals, nursing homes, homes for the aged and any other
institution providing medical or nursing care
- rail transport in the course of carrying on an enterprise,
- marine transport in the course of carrying on an
The current rebate rates are:
- for diesel and like fuels that attract the
same excise rate as diesel fuel: 38.143 cents per litre, that is
the full amount of the excise, and
- for like fuels that attract the lower rate of
excise duty: 7.557 cents per litre.
Diesel (and petrol) excise is levied primarily
to raise revenue. But diesel excise is a tax on business inputs.
Excise increases the cost of diesel that businesses use as inputs
particularly in industries that use diesel relatively intensively.
This increases the output prices of such industries relative to the
prices of other industries. This, in turn, lowers demand for the
output of the industries that use fuel relatively intensively,
causing resources to leave. In other words, taxes on inputs such as
diesel 'distort' consumption and production decisions.
This misallocation of resources would be
eliminated if diesel used in business were not subject to excise or
if the excise paid were rebated.(1) The DFRS offsets the
excise but only for selected industries. The Fuel
Taxation Inquiry, which reported in May 2002, noted:
A wide range of off-road activities ineligible
under the DFRS were brought to the Inquiry s attention. They
include construction, manufacturing, quarrying, dredging, local
government road construction and maintenance, extractive
industries, cement, commercial electricity generation for remote
communities, compost makers and organic farmers.(2)
The DFRS thus reduces but does not eliminate the
misallocation of resources. Indeed, the DFRS compounds the
misallocation in that it discriminates among activities
within an industry. For example, in the forestry category,
fuel used in milling timber is eligible but fuel used after that
point in the production process is not.(3) Other
industries bear the cost of favouring the selected industries and
activities. The DFRS is thus inconsistent with the concept of a
'level playing field' among and within industries.
The Diesel and Alternative Fuels Grants Scheme
(DAFGS) also referred to as the on-road scheme was part of A
New Tax System changes. The Government originally intended to
provide a 'diesel fuel credit' for the on-road use of diesel. But
following agreement between the Government and the Australian
Democrats to have the GST legislation passed in the Senate, the
Government introduced the DAFGS. One of the agreed changes was to
apply the scheme to alternative fuels.
The Australian Taxation Office (ATO) administers
the scheme under the Diesel
and Alternative Fuels Grants Scheme Act 1999.
The scheme's purpose is to reduce transport
costs to business and particularly to benefit regional Australia.
It provides grants for diesel and reduces the cost of alternative
fuels such as ethanol, compressed natural gas and liquefied
petroleum gas to maintain previous price relativities with diesel.
The grant rates, effective from 1 February 2001, are:
- diesel: 18.510 cents per litre
- compressed natural gas: 12.617 cents per cubic metre
- liquefied petroleum gas: 11.925 cents per litre, and
- ethanol: 20.809 cents per litre.
Eligibility is for all business-related on-road
use of diesel and alternative fuels in vehicles over 20 tonnes
gross vehicle mass. Eligibility for vehicles between 4.5 and
20 tonnes depends on where the journeys are undertaken and the
type of transport service provided. The grant is not available for
journeys solely within major metropolitan areas. However, journey
restrictions do not apply to vehicles transporting passengers or
goods solely on behalf of a primary production business, buses
using alternative fuels, and emergency vehicles. The eligible
journey restrictions are intended to address concerns about air
quality in large metropolitan areas. Further details of the scheme
can be found in the
guide on the ATO website.
The reason the DAFGS does not refund the entire
amount of diesel excise now 38.143 cents per litre is that part of
the excise (20 cents per litre) is notionally a road use charge for
The commitment to introduce an Energy Grants
(Credits) Scheme [EG(C)S] was part of the Government s Measures
for a Better Environment (MBE) statement in May 1999. The
Government undertook to introduce an energy credit scheme that
would provide price incentives and funding for conversion from the
dirtiest to the most appropriate and cleanest fuels. The scheme's
objectives were later refined, as set out in subsection 4(2) of the
Diesel and Alternative Fuels Grants Scheme Act 1999, which
The purpose of the Energy Grants (Credits)
Scheme will be to provide active encouragement for the move to the
use of cleaner fuels by measures additional to those under this
Act, while at the same time maintaining entitlements that are
equivalent to those under this Act and the Diesel Fuel Rebate
Scheme, including for the use of alternative fuels.
The Government intended to introduce the EG(C)S
by July 2002 but, in August 2001, deferred the start date to 1 July
According to a press report, the Bill has been
criticised because it provides that the specification of grant
amounts and the methods of calculating the quantity of fuel in
certain circumstances will be specified in regulations. On the
other hand, industry groups, notably the Australian Trucking
Association, have welcomed the legislation.(5)
The Fuel Taxation Inquiry whose recommendations
the Government rejected on 14 May 2002 made a number of proposals
as to what an EG(C)S should contain. The Inquiry found, among other
things, that eligibility under the DFRS is arbitrary, inconsistent
and confusing. The Inquiry noted the following about the
submissions it received:
It was generally felt that there was no case for
the Government to use the fuel tax system to advantage some
business activities over others and that the lines of demarcation
were completely arbitrary.(6)
The Inquiry recommended:
That off-road fuel credits should be paid to all
businesses using any excised fuels, except petrol or petrol blends.
The magnitude of these fuel credits to be equal to a full rebate of
the fuel excise levied on these fuels.(7)
It should be noted that the Inquiry made this
recommendation in the context of overall reform of the system of
taxing fuels including the requirement that the Inquiry's
recommendations be revenue-neutral. Adoption of this recommendation
by itself would result in considerable revenue foregone.
With respect to the administrative and
compliance costs of the DFRS and DAFGS:
the Inquiry finds it hard to conceive of a more
cumbersome and arbitrary set of administrative
The Inquiry also questioned whether the eligible
journey restrictions in the DAFGS do much to improve air quality in
large urban areas:
Transport is an integral element of business
activity and businesses have few alternatives to the use of diesel
trucks for the delivery of goods within urban areas. Consequently,
higher diesel prices would be expected to be simply passed on to
consumers. Nevertheless, the Inquiry sought further details from
the Bureau of Transport and Regional Economics (BTRE) on this
issue. The BTRE agreed that the use of diesel by businesses in 4.5
to 20 tonne vehicles was not significantly affected by diesel
prices. It estimated that the increase in emissions from removal of
the urban boundaries would be very small, approximately 0.1 per
cent of road transport emissions.
In short, the DAFGS is doing little to improve
air quality in large urban areas.
Further, contrary to conventional wisdom, the
Inquiry found that:
Fuel taxes are not an appropriate mechanism to
address many of the costs of fuel use, such as the costs of air
pollution, road congestion, noise, road infrastructure and
The Inquiry considers that the Government s EGCS
commitment to provide active encouragement to clean fuels should
not be met through fuel excise but through separate measures
specifically aimed at improving urban air quality. These measures
should have the flexibility to target the most cost effective ways
to improve urban air quality.(10)
On 14 July 2001, the Shadow Minister for
Transport, Mr Martin Ferguson MP, said that the ALP's position is
to retain the benefits for the trucking industry under the
In May 2001, Australian Democrats Senator, Lyn
Allison, issued a draft discussion paper that canvassed several
alternatives for an ECGS. On 26 September 2001, Senator Allison
referred to responses to the discussion paper in a speech
in the Senate.
The Australian Greens support a substantial
reduction in the rebates to the mining and forestry industries in
their transport policy.
Proposed Part 2 deals with
interpretation. Proposed Division 1 of Part 2
contains a list of definitions.
Eligibility for grants under the DAFGS depends
in part on the gross vehicle mass (GVM) of the vehicle.
Proposed section 4 of Division 1 extends the
definition of GVM to encompass situations where the manufacturer
does not specify a vehicle's GVM or where the vehicle has been
modified such that the manufacturer's specification is no longer
relevant. Under section 4, when the vehicle is registered for use
on public roads, the GVM is what the relevant vehicle registration
authority determines is the vehicle's GVM (or gross combination
mass). If the vehicle is not registered, the GVM is, in essence,
the road weight or the sum of the weight of the vehicle and its
Proposed Division 2 covers
definitions used only in relation to on-road credits.
Proposed section 8 defines incidental use, which
relates to fuel used in powering the vehicle or auxiliary
- while goods or passengers are loaded and unloaded
- while the vehicle is moved to or from a place where loading or
- to maintain the quality of goods
- to maintain the vehicle or auxiliary equipment, and
- for use in training operators.
This provision extends somewhat the range of
eligible activities. Its purpose is to redress anomalies in
eligibility. The Fuel Taxation Inquiry identified many such
anomalies. For example:
Other eligibility concerns related to the
definition of road transport. For example, diesel used to power a
refrigerated transport container carried on a truck is not eligible
under the DAFGS because the container is not considered to be a
vehicle. In contrast, a refrigerated trailer ¾ which
performs the same function as a refrigerated container ¾ is
classed as a vehicle and may qualify for a grant under the DAFGS.
This is another anomaly which defies rational explanation and
should be terminated.(11)
To qualify as an incidental use, the use must be
integral to normal transport operations.(12) Time will
tell how the proposed definition will be applied in practice.
Incidental use is a concept that could well be 'stretched'
resulting in an unintended widening of the term.
Proposed Divisions 2 and
3 contain definitions used for the purpose of
determining eligibility for on-road and off-road credits
respectively. These Divisions largely replicate existing
eligibility provisions under the DFRS and DAFGS. That is consistent
with the Government's stated intent that the EG(C)S retain existing
entitlements. There are, however, a number of changes notably in
Division 3. They include:
- proposed subsection 28(2): includes certain
operations in the definition of 'agricultural activity' when a
subcontractor undertakes those operations for a person contracted
to carry out the activity
- proposed subsection 34(1)(c): provides that
the construction of ponds, tanks and other structures needed for
fish farming is an eligible activity
- proposed subsection 34(2): extends the
definition of 'fish' to include freshwater resources by adding the
words 'of freshwater or below freshwater'
- proposed sections 36 and 37:
define 'use in marine transport' while proposed sections
38 and 39 deal with 'use in rail
transport'. According to paragraph 1.41 of the Explanatory
Memorandum, these sections have been inserted to remove uncertainty
as to which activities are eligible and to align the administration
of the marine and rail transport categories. Proposed
subsection 36(5) includes forward and return journeys in
'use in marine transport' but proposed subsection
36(7) excludes dredging operations.
Dredging is presumably excluded on the grounds
that dredging is not transport even though part of dredging usually
entails moving dredged material from one place to another.
Proposed Part 3 deals with
entitlement to on-road credits.
'Entitlement' refers to: the requirement that
claimants must be registered under the Product
Grants and Benefits Administration Act 2000 (proposed
section 41); the category of vehicle; and vehicle use (the
transport of goods and passengers and the carrying on of a primary
production business). Paragraph 2.2 of the Explanatory Memorandum
Part 3 of the Energy Grants (Credits) Scheme
Bill 2003 reproduces the entitlement provisions from the Diesel
and Alternative Fuels Grants Scheme Act 1999 for the purposes
of the new scheme. Except for the changes the Government's
intention is that the scope of the on-road credit will be the same
as that of the DAFGS.
The major change aligns the point of entitlement
under the on-road with the off-road point of entitlement. Paragraph
2.4 of the Explanatory Memorandum explains:
The major change to entitlement for an on-road
credit in comparison with the DAFGS is that it will become
prospective that is claimants will be able to make a claim for an
on-road credit in relation to fuel they have purchased or imported
into Australia, that they propose to use in an eligible activity,
but which may not have been used. Currently under the DAFGS the
fuel must have been used before a claim for the on-road grant can
be made. This will align the on-road credit with the situation as
it currently stands for the DFRS, which will continue under the
off-road credit. (Clauses 42 to 47)
Alignment is accomplished by the use of the
words 'if you purchase, or import into Australia for use' that
appear in proposed sections 42 to
This change should streamline administration. It
should also ease cash-flow problems for businesses that had to wait
until they had used the fuel before claiming a grant.
For the purpose of on-road grants, vehicles fall
into two categories:
- vehicles with a GVM of 20 tonnes or more, and
- those with a GVM of 4.5 tonnes or more but less than 20
The general rule for the first category is that
they are entitled to on-road credits if they are used in a business
to transport goods or passengers on a road.
Proposed sections 42 to 47 define the
circumstances under which vehicles in the second category are
entitled to on-road credits. In essence, these circumstances are
the transport of goods or passengers:
- in non-metropolitan areas (proposed section
- for the purpose of primary production (proposed section
- on behalf of primary producers (proposed section
(The issue of metropolitan areas is discussed
below under 'Constitutional Issues').
Entitlement is also available to:
- buses using alternative fuels (proposed section
- emergency vehicles (proposed section 47).
Under the so-called 'stationary use' provisions
of the DAFGS regulations, stationary use activities are generally
ineligible for a grant where the stationary use is more than 20 per
cent of total fuel use in a grant period.(13) The
following example of stationary use is from the Fuel Taxation
The Australian Pre-mixed Concrete Association
was also critical of the administrative complexity and unfairness
of the DAFGS requirement to quantify the amount of diesel used when
a vehicle is stationary, where this exceeds 20 per cent of the
diesel used. Concrete vehicles may consume more than 20 per cent of
fuel while unloading concrete at the delivery destination and while
stopped in traffic in the course of their journey on a public road.
The Association stated in their submission:
The combined effect of not providing a grant for
off-road transport and the need to reduce the grant claim for
stationary fuel use where that exceeds the 20 per cent
threshold delivers an extremely complex compliance regime. In fact
the compliance requirements are so complex that more than 21 months
after the introduction of the DAFGS neither the APMCA s largest
members nor the Australian Taxation Office has been able to devise
an accurate method of quantifying the fuel that is claimable under
the existing legislation.(14)
Proposed sections 42 to 47 entitle stationary
use activities to on-road grants for both categories of vehicle by
means of incidental use provisions such as proposed
paragraph 45(b)(ii) which refers to 'incidental use in
relation to such a vehicle'. However, under proposed section 42,
for vehicles over 20 tonnes to be entitled to an on-road credit for
all operations, they must be used to transport goods and
passengers. If such vehicles are not thus used, entitlement is
limited under subsection 42(b) and
subsection 42(c) to the movement to or from the
place where the vehicle is used. The example given in the
Explanatory Memorandum is special purpose vehicles such as mobile
Paragraph 2.9 of the Explanatory Memorandum
notes that the Bill removes the requirement that DAFGS activities
be conducted on a public road. Removing this requirement
allows certain activities that are part of normal transport
operations, such as those conducted on private access roads to mine
sites, to be eligible for an on-road credit.
Proposed section 49 complements
the change from actual use to proposed use of fuel. It provides
that claimants are not entitled to a grant if the fuel they bought
was (a) used for a purpose other than the particular use for which
it was bought, (b) sold or disposed of or (c) lost. The Explanatory
Memorandum (at paragraph 2.12) states that proposed section 49
reproduces the current arrangement in the DFRS.
Proposed Part 4 deals with
entitlement to off-road credits.
Proposed subsections 54(1) to
(4) transfer the eligibility of various activities
under the DFRS, for example, mining operations and primary
production, to the EG(C)S.
Under Customs Regulations 1926 and Excise
Regulations 1925, there are a number of excise concessions and
remissions that eliminate or reduce excise on petroleum products
used in specific off-road activities, for example, furnaces,
boilers or when used as a solvent in manufacturing processes.
Proposed subsections 53(5) to (6) transfer these
concessions and remissions to the EG(C)S. Proposed
subsection 53(7) also provides for eligibility of certain
diesel fuel for use other than in an internal combustion engine.
The kind of fuel is to be specified by regulation.
The Fuel tax Inquiry recommended bringing the
concessions and remissions into the EG(C)S.
Proposed Part 5 deals with
entitlements to an energy grant.
Proposed section 56 provides
that entitlement to an on-road credit or an off-road credit
entitles the claimant to be paid an energy grant.
Proposed subsection 57(1) sets
out the 'basic rule' for calculating grant amounts. In essence,
this is the amount of fuel multiplied by the relevant grant rate,
where the grant rate is specified in or calculated in accordance
with regulations. Proposed subsection 57(2)
provides that the regulations may specify different amounts for
different types of fuel. Proposed subsection 57(4)
provides that if actual use differs from proposed use, actual use
is deemed to be proposed use. Proposed subsection
57(5) provides that the regulations may prescribe one or
more methods of calculating (whether by measurement, estimate or
any other means) the quantity of fuel that it is proposed will be
used or actually used. Further, proposed subsection
57(5) provides that the methods may differ depending on a
number of factors including how the fuel is used.
Readers are referred to the Bills Digest for the
companion Energy Grants (Credits) Scheme (Consequential Amendments)
Bill 2003 (Bills Digest No. 120, 2002 03), which amends various
related Acts including the repeal of the DAFGS Act.
The Government undertook to adopt measures to
encourage the use of cleaner fuels, while maintaining entitlements
in the EG(C)S that are equivalent to those under the DFRS and
DAFGS. These schemes contain, among other things, incentives for
the use of fuels other than petrol and diesel. But the EG(C)S Bill
does not contain any new measures to adopt cleaner fuels. This
seems to contradict the undertaking to introduce measures
additional to those under the DAFGS Act.
With respect to the maintenance of entitlements,
a key feature of the Bill is that it carries over, largely intact,
entitlements under the DFRS and the DAFGS. The EG(C)S thus does not
differ greatly from the DFRS and DAFGS.
The Fuel Taxation Inquiry in its proposals for
an EG(C)S concluded:
Taxing all fuels on a consistent basis early in
the fuel production and distribution chain, and providing taxation
relief to business through a single fuel payment scheme, is the
best way to promote the efficiency of the excise system as a
revenue raising instrument. Such a system would also address
administrative issues, such as excise evasion through fuel
The Bill goes some way to meeting these
criteria. For example, it eliminates the distinction between the
points of entitlement under the DFRS (prospective) and the DAFGS
(retrospective), and brings excise concessions and remissions that
eliminate or reduce excise payments into the EG(C)S. In doing so,
the Bill also simplifies administrative and compliance
On the other hand, while the Bill extends
eligibility to some additional activities including incidental use,
it does not address the underlying problems of those schemes. In
particular, the DFRS discriminates against non-favoured activities
that bear the cost of diesel excise. The EG(C)S therefore does
little to reduce the misallocation of resources resulting from the
imposition of excise of business inputs. The EG(C)S also retains
most of the administrative and compliance complexity of the two
Finally, given the Bureau of Transport and
Research Economics finding that the increase in emissions from the
removal of the urban boundaries would be very small approximately
0.1 per cent of road transport emissions it is doubtful whether the
benefits exceed the costs of the DAFGS and hence the proposed
on-road credits under the EG(C)S.
Digest for the Diesel and Alternative Fuels Grants Scheme Bill
1999 examined (in the 'concluding comments' section) various
aspects of the constitutionality of that Bill. In particular, it
examined whether the discrimination in favour of Tasmania in the
definition of 'metropolitan areas' may breach the requirement of
section 51(ii) of the Constitution that laws dealing with taxation
shall not discriminate between States or parts thereof. The
definition of metropolitan areas is the Energy Grants (Credits)
Scheme Bill 2003 is the same as in the Diesel and Alternative
Fuels Grants Scheme Act 1999.
- Fuel Taxation Inquiry. Report, p. 130.
- ibid., pp. 121-2.
- Additional examples can be found in chapter five of the
Fuel Taxation Inquiry. Report, op. cit.
- See Richard Webb, Petrol
and Diesel Excises, Department of the Parliamentary Library,
Research Paper No. 6, 3 October 2001.
- Allesandro Fabro, 'Fuel grant lacks detail, fume experts',
Australian Financial Review, 21 February 2003, p. 8.
- Fuel Taxation Inquiry. Report, op. cit., p. 121.
- ibid., p. 147.
- ibid., p. 125.
- ibid., p. 130.
- ibid., p. 131.
- ibid., p. 124.
- Explanatory Memorandum, paragraph 2.7.
- Explanatory Memorandum, paragraph 2.7.
- Fuel Taxation Inquiry. Report, op. cit., p. 126.
- Explanatory Memorandum, paragraph 2.8.
- Fuel Taxation Inquiry. Report, op. cit., p. 130.
28 February 2003
Bills Digest Service
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