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ARTHUR ROBINSON &HEDD!RWICK$
LIBRARY
1997
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
CUSTOMS TARIFF (FUEL RATES AMENDMENTS) BILL 1997
EXPLANATORY MEMORANDUM
(Circulated by authority of the Minister for Small Business and Consumer Affairs,
the Honourable GeoffProsser, MP)
88809 Cat.No. 969200 2 ISBN 0644 50480 3
CUSTOMS TARIFF (FUEL RATES AMENDMENTS) BILL 1997
OUTLINE
The Bill is one in a package of 7 Bills to implement the Government's Budget decision
to provide for the addition of chemical markers to concessional petroleum products to
combat revenue loss through the minimisation of fuel substitution and to improve
compliance in the payment of Customs and Excise duty.
In accordance with long standing policy in relation to petroleum products, certain
petroleum products are dutiable at varying rates of duty depending on the type of
petroleum product. Generally, road transport fuels which are for use in internal
combustion piston engines attract the highest rates of excise duty. Other petroleum
products which are generally for use as burner fuels and are burnt to produce heat are
dutiable at concessional rates of duty, for example the products excisable under sub-
item 11 (E)(3) ofthe Schedule. Petroleum products for non-fuel use are dutiable at a
"Free" rate of duty.
The specifications ofthe various petroleum products referred to above can be very
similar, if not identical. From a historical point of view, the use to which certain types
of petroleum products are put has been implied, for example heating oil. However, the
ever increasing differentials in the rates of excise and customs duty on petroleum
products have encouraged the practice whereby a product on which a concessional
rate of duty has been paid is substituted for a product on which the highest rates of
duty are payable in circumstances where the higher duty product would normally be
used.
At present, however, no mechanism exists whereby this revenue leakage which results
from these practice can be contained and the integrity ofthe policy in respect of
petroleum products can be maintained. The proposed legislative package of 7 Bills
will introduce measures which are designed to reduce the incidence ofthese practices
and to minimise the associated revenue leakage.
(1) The Excise Tariff (Fuel Rates Amendments) Bill 1997
This Bill contains the proposed amendments to the Excise TariffAct 1921. This Bill
contains a re-structure ofitem 11 of the Schedule to the Excise Tariff, which sets out
the petroleum products which are subject to duties of excise. This Bill will also
introduce the requirement that petroleum products on which a concessional rate or a
"Free" rate ofexcise duty is payable must contain a chemical marker, which must be
added to the product prior to its entry into home consumption. The addition of the
chemical marker will be the cornerstone of the proposed regime.
The re-structure of item 11 will also bring into the excise regime petroleum products
which are currently not subject to the excise regime but which are potential fuel
substitutes.
Page 2 Customs Tariff (Fuel Rates Amendments) Bill 1997
(2) THIS BILL The Customs Tariff (Fuel Rates Amendments) Bill
- 1997
This Bill contains the proposed amendments to the Customs TariffAct 1995. Similar
to the amendments to the Excise Tariff, this Bill contains a re-structure of those
subheadings of Chapter 27 of Schedule 3 to the Customs Tariff which apply to
petroleum products. This Bill will also introduce the requirement that petroleum
products on which a concessional rate or a "Free" rate ofcustoms duty is payable must
contain a chemical marker, which must be added to the product prior to its entry into
home consumption.
(3) Fuel Misuse (Penalty Surcharge) Bill 1997
This Bill imposes penalty surcharge on the use of marked fuel in an internal
combustion engine. Marked fuel refers to those petroleum products which have been
entered for home consumption at a concessional rate or a "Free" rate of duty and
which, in accordance with the proposed amendments to the Customs Tariffand the
Excise Tariff, have the added chemical marker. The surcharge is payable by the person
owning the fuel at the time of its use and is payable before the fuel is used.
The rate ofthe penalty surcharge per litre is twice the rate applicable to diesel fuel for
use as a fuel in an internal combustion engine.
(4) Fuel Sale (Penalty Surcharge) Bill 1997
This Bill imposes penalty surcharge on the sale of marked fuel for use in an internal
combustion engine. In this Bill, marked fuel also refers to those petroleum products
which have been entered for home consumption at a concessional rate or a "Free" rate
of duty and which, in accordance with the proposed amendments to the Customs Tariff
and the Excise Tariff, have had added to them the chemical marker. The surcharge is
to be paid by the person owning the fuel immediately before its sale.
The penalty surcharge per litre is twice the rate applicable to diesel fuel for use as a
fuel in an internal combustion engine.
(5) Fuel Blending (Penalty Surcharge) Bill 1997
This Bill imposes penalty surcharge on the blending of marked fuel and unmarked fuel
which results in a blend that is itself marked fuel. In this Bill, marked fuel also refers to
those petroleum products which have been entered for home consumption at a
concessional rate or a "Free" rate of duty and which, in accordance with the proposed
amendments to the Customs Tariff and the Excise Tariff, have had added to them the
chemical marker. Unmarked fuel refers to products which have been entered for home
consumption and which are fully duty paid. The surcharge is to be imposed on all of
the fuel in the blend. The surcharge is payable by the person owning the fuel
immediately after that blending.
The penalty surcharge per litre is twice the rate applicable to diesel fuel for use as a
fuel in an internal combustion engine.
Customs Tariff (Fuel Rates Amendments) Bill 1997 Page 3
(6) Fuel (Penalty Surcharges) Administration Bill 1997
This Bill contains the administration provisions incidental to the 3 penalty surcharge
Acts. This Bill sets out:
(
(a) the times at which the penalty surcharges will become payable;
(b) the record creation and record keeping obligations which apply to all persons
dealing in petroleum products. As proposed, these requirements will apply to persons
who enter products for home consumption as well as to subsequent dealers in such
products after they have entered into home consumption;
(
(c) the notification requirements in relation to the sale or disposal ofmarked fuel;
(d) the audit powers of authorised officers to ensure compliance with the requirements
in the Administration Act and to obtain evidential material concerning any breaches of
the provisions of the Administration Act, including the authority to obtain monitoring
and search warrants.
The Bill also includes a range of offences and appropriate penalties related to the
failure to comply with the requirements ofthe Administration Act, including penalties
for failing to pay the penalty surcharge when required and failing to comply with the
record creation and keeping obligations.
(7) Customs and Excise Legislation Amendment Bill (No 2)1997
This Bill introduces offences and appropriate penalties that will apply to a person who
enters marked fuel as unmarked fuel and to a person who enters unmarked fuel as
marked fuel. Identical offences will apply to the entry for home consumption under
both the Customs Act 1901 and the Excise Act 1901. This Bill otherwise contains the
consequential amendments to the Customs Act and Excise Act resulting from the
proposed amendments to the Excise Tariff and the Customs Tariff.
REGULATION IMPACT STATEMENT
This Regulation Impact Statement (RIS) has been prepared in consultation with the
Office of Regulation Review.
It conforms with the guidelines adopted for a modified RIS for taxation measures.
1. Specification of policy objective(s)
Transport fuels (gasoline and diesel) attract a far higher rate of duty than other
petroleum products such as fuel oils, heating oils, kerosene and solvents. The duty is
applied on the basis ofthe intended end-use ofthe product.
Specifications of low duty and duty free products are very similar, or identical, to those
for automotive diesel.
Substitution of lower duty products for on road use is feasible and attractive given the
difference in duty. Most of the products being substituted are free of duty or dutiable
Page 4 Customs Tariff(Fuel Rates Amendments) Bill 1997
at 7 2 cents per litre which results in a benefit ofapproximately 27 cents or 35 cents to
the blender.
The major participants in the Petroleum Industry have urged that action be taken to
address and, ifpossible eradicate the problem offuel substitution.
The Government announced in the Budget on 13 May 1997 that it was going to clamp
down on dangerous fuel substitution by introducing chemical tracers for concessional
fuel.
The Government announcement said that legislation would be introduced requiring the
addition ofthe chemical markers to clarify the excise policy intent for a number offuel
products and to ensure that consumers were not exposed to considerable danger by the
operators who avoided tax and sold dodgy fuel.
2. Identification of implementations option(s)
Following full consideration of all the issues, the Government decided that the most
cost effective option was to legislate to treat concessional petroleum products at the
time of entry into home consumption with chemical markers that allow detection of
fuel substitution activities.
It should be noted that the Government had available to it details of the use of similar
legislative processes overseas which had proved to be very successful.
3. Assessment of impacts (costs and benefits) of each implementation option
Impact group identification
This measure will impact upon the major oil companies and the petroleum distribution
industry (wholesale distributors and retailers).
The Australian Customs Service is responsible for implementing and enforcing this
measure.
Assessment of costs
Government outlays (running costs for the Australian Customs Service) in a full year
are set at $approximately 1 .5m which includes provision for 14 additional staff.
Most (more than 95%) ofthe costs for adding the marker will fall to the Major oil
companies who have agreed that it is their responsibility
Information available to the Government prior to the Budget announcement indicated
the cost ofthe marker would be around 0.004 cents per litre. Industry estimates,
which have not been documented, indicate a cost ofabout 0.15 cents a litre. Final
costs will depend on which marker is chosen but costs will be kept to a minimum by
using only one marker.
Customs Tariff (Fuel Rates Amendments) Bill 1997 Page 5
Capital costs for equipment to add the marker have been estimated (not finalised) as
low as $ Im and up to $ 4 6 m. Final costs will depend upon the methods used by
-
each company to add the prescribed proportion of the marker to the products.
Industry, during post-Budget consultation, have agreed to manage these costs.
The proposed legislation requires manufacturers, importers, wholesale distributors and
retailers to keep records of manufacture, storage, use and sale. These records are
normal business records which already exist and should not cause any additional
compliance costs. It should also be noted that records will not have to be kept by
persons dealing in fuel below a threshold limit which will be set by regulation probably
at a capacity to transport or store 1000 litres or more. This ensures that the
arrangements relate to commercial transactions. Onshore crude oil producers and
recyclers are required to be licensed and keep normal business records of production.
Any increases in compliance costs for these operators is negligible.
Assessment of benefits
The estimated revenue gain in a full year as announced in the Budget is $25 million.
The Industry indicated, during the post-budget consultation, that the figures could be
twice the Budget estimate.
The chemical tracer will enable the Australian Customs Service to verify that
concessionally taxed fuel is being used only for the purpose for which the concession is
intended. This will assist the Australian Customs Service to better collect excise
properly due under the existing legislation.
This measure also protects consumers from purchasing potentially dangerous blends of
concessional and waste fuel products.
Consultation
Following the Government announcement there has been a very full consultation
process across all States and all sectors of the Petroleum Industry. Groups consulted
include the major oil companies; fuel recyclers; and peak bodies representing the
interests of petroleum distributors, retailers, motorists and farming interests.
Consultation has also taken place with State government revenue authorities and state
and federal consumer affairs bodies.
There has been overwhelming support from all sectors for the Government's initiative. (
The Minister for Small Business and Consumer Affairs and Minister responsible for
Customs has announced the formation of an Industry I Customs Technical
Implementation Group to advise the Government on technical aspects.
This body has already met and made important decisions to assist effective
implementation and reduce compliance costs where no risks to revenue are seen to
S
exist (eg. the exemption from marking of packaged products, jetfI.iel and aviation
Page 6 Customs Tariff (Fuel Rates Amendments) Bill 1997
gasoline). Costs will also be kept at a minimum by using only one marker to cover all
concessional products.
This group will determine the nature and proper use ofthe chemical marker during
July 1997. The basic parameters are that the marker must be readily available,
inexpensive, easily added to the products and simply tested.
4. Conclusion and recommended option
) Given the full support that has been provided by industry the Government is confident
that adding a chemical tracer to concessionally taxed fuel and tax free products just
-
prior to their entering the petroleum distribution system- is the most cost effective
solution to the problem of fuel substitution.
It should be noted that the proposed legislation has no impact on the Diesel Fuel
Rebate system. Diesel fuel is sold duty paid for both on and offroad purposes with a
rebate when the fuel is used for eligible off-road purposes. The Government does not
intend to introduce the use ofchemical markers for diesel fuel which is fully duty paid
at the time of entry for home consumption.
FINANCIAL IMPACT STATEMENT
The amendments set out in the legislative package are expected to result in increases to
revenue of $25 million per annum as a result of increased compliance. The
implementation will involved expenditure of $5.97 million over 4 years and $1.54
million per annum in additional running costs.
Customs Tariff (Fuel Rates Amendments) Bill 1997 Page 7
CUSTOMS TARIFF (FUEL RATES AMENDMENTS) ACT 1997
NOTES ON CLAUSES
Clause 1 - Short title
This clause provides for the Act to be cited as the Customs Tariff(Fuel Rates
Amendments) Act 1997.
Clause 2 Commencement
-
This clause provides that subject to subsections (2) and (3), this Act commences on the
day on which the Excise Tariff(Fuel Rates Amendments) Act 1997 commences.
Clause 3 Schedule(s)
-
This clause is the formal enabling provision for the Schedule to the Amendment Act,
providing that each Act specified in the Schedule (in this case the Customs Tariff Act
1995 only) is amended in accordance with the applicable items of the Schedule. The
clause also provides that the other items ofthe Schedules have effect according to their
terms. This is a standard enabling clause for transitional, savings and application items
in amending legislation.
I
Page 8 Customs Tariff (Fuel Rates Amendments) Bill 1997
SCHEDULE~ AMENDMENTS TO THE CUSTOMS TARIFF ACT 1995
1-
Item 1 - Subsection 4(1)
This item inserts into subsection 4(1) ofthe Customs Tar?ffAct 1995 (the TariffAct)
the definition of marker. For the purposes of the Tariff Act, the marker is the
chemical additive which is ofa kind prescribed in the regulations made under new
section SC ofthe Excise TariffAct 1921 (the Excise Tariff) to be a fuel marker for the
purposes of that Act. New section SC is to be inserted in the Excise Tariffby item 7
of Schedule 1 to the Excise Tariff (Fuel Rates Amendments) Act 1997.
The use of a marker in petroleum products which are free ofduty (for use otherwise
than as a fuel), or, at the low rate of duty (for use as a fuel otherwise than in an
internal combustion engine) is the cornerstone ofthe measures proposed to prevent the
avoidance and evasion of Customs duty where such concessional products are
substituted for higher taxed transport fuels. The presence of the marker in transport
fuel will be evidence of substitution and will be the criterion of liablility for penalty
surcharge under the Fuel Misuse (Penalty Surcharge) Act 1997, the Fuel Sale
(Penally Surcharge) Act 1997 and the Fuel Blending (Penally Surcharge) Act 1997
Item 2 - Subsection 19(1)( TABLE)
This item contains consequential changes to the Table of Customs Tariff subheadings
and their equivalent Excise Items which have been created and deleted as a result of
the amendments contained in this Bill. Section 19 ofthe Tariff Act prescribes the
application of Consumer Price Index adjustments to goods covered by the subheadings
and items in this Table.
Item 3 - The heading "Additional Note" and Additional Note 1 to Chapter 27 in
Schedule 3
Additional Note I in Chapter 27 describes the technical specifications of fuel oil. This
item contains a consequential change to Additional Note 1 resulting from the
reclassification of fuel oil from subheading 2710.00.3 to 2710.00.6. This change also
removes specificity for fuel oil distilled from topped crude oil ofsubheading 2710.00.1.
In future, the chemical marker will provide the classification criterion to be applied to
this product.
This item also inserts new Additional Note 2 in Chapter 27 to prescribe the proportion
of marker required to be used in marked fuel.
Items 4, 5, 6 and 7
These items contains the new Customs Tariff structure for petroleum products covered
by this legislative package. This item amends subheadings 2707 and 2710 of Schedule
3 to the Tariff Act and replaces current heading 2709 of Schedule 3. The new
structure generally provides a three-tiered Customs Tariff rate system within each
sixlseven digit classification based on the intended use of the products.
Customs Tariff (Fuel Rates Amendments) Bill 1997 Page 9
Products for use otherwise than as fuels and containing at least the prescribed
proportion of marker are duty free. Products for use as a fuel otherwise than in an
internal combustion engine and containing the prescribed proportion of marker are
dutiable at concessional rate of duty. Products containing no marker are dutiable at
the highest transport rates applying to leaded gasoline and diesel fuel.
Certain petroleum products in containers not exceeding 210 litres are exempted from
the need to insert the marker.
Item 8 - Application clause (
This item sets out the application clause for the amendments to the Tariff Act and
provides that this Act applies to all goods falling to a classification in subheading 2702,
2709 or 2710 of Schedule 3 to the Tariff Act that are:
(a) entered for home consumption under section 71 A ofthe Customs Act 1901; or
(b) delivered into home consumption in accordance with a permission granted
under section 69 of that Act; or
(c) taken into home consumption in accordance with a permission granted under
section 77D of that Act
on or after the day on which this Act commences.
S
Printed by Authority by the Commonwealth Government Printer
Page 10 Customs Tariff (Fuel Rates Amendments) Bill 1997
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