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Fuel Price Subsidy Schemes
Richard Webb
Economics, Commerce and Industrial Relations Group
27 February 2001
The Commonwealth has three schemes that subsidise
the price of petrol and diesel to certain users. The schemes are the Diesel
Fuel Rebate Scheme (DFRS), the Diesel and Alternative Fuels Grants Scheme
(DAFGS) and the Fuel Sales Grants Scheme (FSGS).
While the rise in fuel prices has focused public comment on the role
of taxes in prices,(1) attention to the subsidy schemes has
also increased, particularly with respect to eligibility and subsidy amounts.
To assist Parliamentarians improve their understanding of the schemes,
this Note describes their main features and effects.
Diesel Fuel Rebate Scheme
The DFRS provides a rebate(2) of the excise (or customs) duty
paid on diesel and like fuels(3) used in certain businesses
and other activities. Eligible business activities are rail and marine
transport, mining, agriculture, forestry and fishing. Other eligible activities
are electricity generation for residences, and the operation of hospitals,
nursing and aged care homes and other medical institutions.
The DFRS is often described as the 'off-road' scheme because, to be eligible,
diesel used in mining and primary production must not be used in a vehicle
on a public road. But the DFRS is activity-based and the legislation specifies
the activities that are eligible. Hence not all activities in an industry
are eligible. For example, mining does not include quarrying.
Until 31 December 2000, the rebates varied by activity. For example,
in December 2000, the rebates for diesel were: $0.37623 per litre for
agricultural, fishing, forestry, rail and marine industries; $0.37225
for mining operations; and $0.362 for residential and other eligible activities.
However, since 1 January 2001, the rebate has been the same for all
eligible activities.
Fuel excises are indexed each February and August, and the 'declared'
rebate rate is the same as the indexed excise rate. Thus on 1 February
2001, the indexed excise rate and the declared rebate rate were both $0.39643
per litre. However, the amount paid in February was $0.38118 per litre.
The difference between the declared rebate and the amount paid is the
result of averaging. Increases in the amount paid are phased in over six
months through averaging provisions. Hence it will not be until August
2001 that the amount paid will equal the February 2001 declared rate of
$0.39643 per litre. Averaging was introduced partly to discourage claimants
from delaying lodging claims in the hope that the rebate would exceed
the amount of excise they had paid.
The rebate is an Assessable Government Industry Payment and is therefore
assessable income for income tax purposes if received in relation to carrying
on a business.(4)
The DFRS is, in effect, an industry subsidy scheme, with agriculture
and mining the main beneficiaries. Subsidising selected industries distorts
resource use towards the favoured industries at the expense of other industries,
resulting in a loss of aggregate economic efficiency. The discrimination
among activities within an industry further distorts resource use.
Diesel and Alternative Fuels Grants Scheme
Under this scheme, grants are paid for business-related on-road use of
diesel (and alternative fuels)(5) in all vehicles over 20 tonnes
gross vehicle mass (GVM), and in vehicles weighing between 4.5 and 20
tonnes GVM that are used to transport goods and passengers in regional
areas.
Eligibility for vehicles between 4.5 and 20 tonnes GVM depends on where
the journeys are undertaken. Eligible journeys are those outside metropolitan
areas; between a point inside a metropolitan area and a point outside
that particular metropolitan area and vice versa; and journeys between
different metropolitan areas. The grant is not available for
journeys solely within metropolitan areas. The 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 grant amount is $0.1851 per litre. The grant rate is adjusted each
February and August to reflect changes in the consumer price index. Like
the DFRS rebate, DAFGS grants are assessable income.
The Scheme's origins lie in A New Tax System in which the Howard
Government announced its intention to introduce the Diesel Fuel Credit
Scheme (DFCS), which would be delivered through the GST system.(6)
But under the terms of the agreement between the Government and the Australian
Democrats to change the tax reform package, the Government converted the
DFCS to the DAFGS.(7)
DAFGS is, in effect, a subsidy to transport businesses in regional areas,
and to Tasmania and the Northern Territory where all journeys are eligible.
DAFGS also subsidises primary production since only this industry in metropolitan
areas is eligible. Thus DAFGS, like the DFRS, distorts resource use.
The Government intends to replace the DFRS and DAFGS in mid-2002 with
an Energy Grants (Credits) Scheme. The new scheme will maintain benefits
equivalent to those available under the DFRS and DAFGS, and will encourage
the use of cleaner fuels. No details of the proposed scheme are yet available.
Fuel Sales Grants Scheme
The FSGS subsidises end-use consumers of petrol and diesel in regional
and remote areas by providing grants to fuel retailers.(8)
The grant is paid for sales in defined non-metropolitan zones after 30 June
2000. These include sales by distributors of bulk fuel to end-users such
as farms and mines where the sale occurs in a non-metropolitan zone. Retailers
must be registered for the scheme before they can claim grants. The Australian
Competition and Consumer Commissioner is responsible for monitoring petrol
and diesel prices to ensure that retailers are passing the subsidy to
consumers. The grant is also an Assessable Government Industry Payment.
The grant for the non-metropolitan zone is one cent per litre and two
cents per litre for the remote zone. These amounts are not indexed so
that their real value will fall with inflation.
The scheme is, in effect, a subsidy to fuel users in regional areas.
As such, it does not address the reasons fuel prices are higher in regional
than metropolitan areas.(9)
Estimated expenditure on the Schemes is shown in the Table.
Table: Estimated Expenditure on Fuel Price Subsidy Schemes 2000-01
($m)
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DFRS
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1 992
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DAFGS
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639
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FSGS
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115
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Sources: Treasury Portfolio Budget Statements 2000-01, p. 170 and MYEFO
2000-01, p. 102.
- For a review of mechanisms and policies regarding excise on petrol
and diesel, see http://www.aph.gov.au/library/pubs/rp/2000-01/01RP06.htm
- The rebate is payable under section 164 of the Customs Act 1901
and section 78A of the Excise Act 1901.
- Like fuels include heavy fuel oil, light fuel oil and all fuels that
attract the same rate of duty as diesel (except for gasoline, coal tar
and coke oven distillates).
- Rebates are assessable income because registered businesses can claim
the cost of fuel as a tax deduction. Rebates reduce the amount paid
for fuel and hence the amount claimable as a deduction.
- Alternative fuels are compressed natural gas, liquefied petroleum
gas, recycled waste oil, ethanol, canola oil, and other fuel specified
by regulation.
- Tax Reform: not a new tax, a new tax system, p. 86.
- Prime Minister, 'Changes to the Goods and Services Tax', press release,
31 May 1999.
- Eligible fuels are leaded and unleaded petrol and diesel, including
light fuel oil, two stroke, premium unleaded and Shell Optimax.
- For a discussion of some of these causes, see Productivity Commission,
'Inquiry into the Impact of Competition Policy Reforms on Rural and
Regional Australia'. Draft report, 18 May 1999, pp. 289-94.
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