Fuel taxation in Australia

Budget explainer, 21 September 2022

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Executive summary

  • In Australia fuel tax is collected as a tax on the production or importation of fuel, offset by a system of fuel tax credits for business users of fuel. This explainer sets out the key features of what is a complex system of taxation and tax credits that impacts both the revenue and expenditure sides of the budget.
  • The excise and customs duty on petroleum fuel (referred to here as fuel tax) is one of the oldest taxes in Australia, applying since Federation in 1901. For some of that time there has been a link between the amount of excise raised and road funding. The formal link to road funding most recently ceased in 1992. Since then, fuel tax has been a general revenue-raising tax with only a minor link with the Australian Government’s overall level of road funding.
  • Australia has a relatively low fuel tax rate compared with most other OECD countries.
  • There are two main parts to the fuel tax system. First, fuel tax is collected from the producers or importers of fuel when fuel leaves their depot or terminal (the terminal gate); and second, a system of fuel tax credits (FTCs), which refund fuel tax to eligible businesses so they are not taxed on fuel used as a business input.
  • FTCs are worth around 39% of the total tax collected.
  • Three quarters of FTCs are paid to businesses in the mining industry; the transport, postal and warehousing industry; and the agriculture, forestry and fishing industry. 
  • The fuel tax and FTC systems are used together as a means of charging heavy vehicle operators for their share of the cost of road infrastructure. This is done by reducing the FTCs they receive so that they ultimately pay a net amount of fuel tax that represents a Road User Charge (RUC).
  • The FTC system means that fuel tax is mostly paid by household users of fuel.
  • Adjustments to the fuel tax arrangements have been used to address cost of living pressures associated with rising fuel prices. The most recent instance was the 2022‑23 Budget measure Addressing Cost of Living Pressures – temporary reduction in fuel excise, which halved excise rates for the six-month period from 30 March 2022 to 28 September 2022.
  • – this measure provided temporary relief from high fuel prices for households, but the operation of the FTC system means that it provided limited relief to businesses.