NO.031

FUEL TAX REFORM FOR THE FUTURE

An efficient and competitive energy sector is a key priority for the Government’s strategic policy agenda. With advances in technology producing cleaner vehicle engines and with the continued emergence of alternative fuels, it is clear that Australia must have a more consistent and sustainable fuel tax regime. The existing arrangements have created taxation distortions in the fuel market leading to inefficient investments in fuel production and equipment and uncertainty for users of fuels.

Accordingly, today I am announcing important long term reforms to the excise treatment of fuels. The reforms establish a broad sustainable taxation framework for fuels, by addressing a number of anomalies in the current fuel tax system and providing increased long term certainty for investors, while meeting Government commitments and providing time for industry to adjust.

The Government will reform the existing fuel tax arrangements to bring all currently untaxed fuels used in internal combustion engines into the excise (and customs) duty system by 1 July 2008.

Fuels that will become excisable from 1 July 2008 will include liquefied petroleum gas (LPG), liquefied natural gas (LNG) and compressed natural gas (CNG). The final excise rates to apply to fuels will be determined later this year, and will take into account factors such as the energy content of fuels.

The introduction of excise for currently untaxed fuels will be accompanied by the use of subsidies that will reduce the effective excise (that is, excise less grant) for those fuels for a transitional period. These subsidies will be progressively reduced, raising the effective excise for untaxed fuels from zero, before 1 July 2008, to their final rates in five even annual instalments beginning 1 July 2008 and ending 1 July 2012. The broad reform framework will be fully implemented by 1 July 2012, when all fuels used in internal combustion engines will be subject to excise (and customs) duty based on factors including energy content, providing tax neutrality between fuels.

Ethanol producers now receive a production subsidy, which was due to end on 18 September 2003, to offset the excise of 38.143 cents per litre applying to ethanol. The Government will continue this existing excise and grant arrangement for ethanol producers until 30 June 2008. From 1 July 2008, both domestically produced and imported ethanol will receive a grant which will be reduced in five even annual instalments from 1 July 2008 to 1 July 2012.

From 18 September 2003, the Government will apply excise duty to biodiesel at the current rate of the excise duty on diesel fuel – 38.143 cents per litre. Grants will then be provided for production or importation of biodiesel, such that the current effective excise rate of zero for pure biodiesel is continued, with this being extended to the biodiesel component of blends, until 30 June 2008. These grants will be reduced in five even annual instalments from 1 July 2008 to 1 July 2012.

The reforms will establish a fairer and more transparent fuel excise system with improved competitive neutrality between fuels. They will provide the opportunity for currently untaxed fuels to establish their commercial credentials in the market place. The reforms fulfil the Government’s existing commitments concerning the tax treatment of fuels and deliver on the Measures for a Better Environment commitment to encourage the production of alternative and renewable fuels.

13 May 2003

CANBERRA

Contact: David Alexander

02 6277 7340