Roll the Credits

The Federal Government currently raises around $13.7 billion a year from fuel excise on both petrol and diesel but electrification needs to bring about a paradigm change.

The suggestion by the Grattan Institute to abolish, or even halve, the Fuel Tax Credit available to road transport operators created universal condemnation from operators and industry associations who argued that the costs would have to be passed on eventually to consumers which would have a negative result for the Australian economy by adding to the pressure of rising inflation.

Thankfully the Federal Government rejected the suggestion but there are some problems which won’t go away as simply, and reform is inevitable.

The scheme used to fund Australia’s roads through the application of a diesel fuel excise was once described by economist Chris Richardson as a “good tax”, but there are clouds on the horizon.

The expansion of electric and hydrogen powered commercial vehicles is obviously going to lead to a reduction in the amount of Road User Charge (RUC) which is currently remitted to the Commonwealth as fuel excise.

Our ageing population and the increase in the use of ride share services will lead, over time, to a significant reduction in private vehicle ownership and consequently the revenue derived from the vehicle registration fees charged by the states.

The existing system reflects government expenditure that has already occurred and seeks revenue to recompense the expenditure made on establishing new, and maintaining existing, roads infrastructure.

RUC reflects money spent by the states and territories on roads, but not necessarily according to the actual needs, desires and wishes of the people who use the roads.

It’s described as a “rearwards looking” system yet industry has no voice and is just expected to pick up what it has been dealt, often with political overtones.

Expenditure on roads is reported to the National Transport Commission (NTC) on a yearly basis by state and territory road agencies based on what they have spent during the previous year.

The NTC then allocates these costs between light and heavy vehicles using a cost allocation formula which in 2021-22 saw an allocation to heavy vehicles of 46.2 per cent of the expenditure on road rehabilitation and pavement improvements, the logic being that wear on the pavement surfaces is caused more by heavy vehicles than light vehicles.

Ramon Straheli
Ramon Straheli.

“Based on that cost base we traditionally set the combination of yearly registration charges and a RUC on each litre of diesel that effectively should cover the Heavy Vehicle cost base over time,” says Ramon Staheli, Head of Economics at the National Transport Commission.

“In recent years there have been departures from that. There was a time where revenue was higher than the cost base.” Dr Sarah Jones has formerly held senior roles at Toll Group, the National Transport Commission and the Western Australian Department of Transport.

“I describe the way our investment system works as Byzantine,” she told delegates at Trucking Australia in March.

“You almost have to sit down and really devilishly think about something as impractical as what we have. For example, 77 per cent of Australia’s roads are owned and managed by local councils. Local councils spend 20 per cent of the road revenue in Australia.

“They can raise 3.6 per cent of that funding through tax, so where does the rest of it come from? (The answer is) a really complicated and fragmented grant system which operates between the Commonwealth and councils, and the states and the Commonwealth, with actually no central oversight. Isn’t that bizarre? Can you imagine that happening in rail or maritime or aviation?”

Dr Sarah Jones.

For all its faults, until now the system has worked reasonably well with revenue and expenditure facilitating ever-increasing investments in new roads as well as the funds necessary to maintain them as well as existing infrastructure.

“I think that an effective and resilient and sustainable model for the future actually needs to beef up the system as a whole rather than its component parts.” says Sarah.

A revised scheme could take into consideration factors such as time of day charges, regional charges and actual gross weight on each trip.

In early December last year the Infrastructure and Transport Ministers Meeting (ITMM) announced the Ministers had agreed in-principle to a three-year road user charging cycle but had tasked senior officials to undertake further work to establish the right balance between appropriate cost-recovery and operators’ ability to cope with price increases in view of the current economic climate.

Consideration is to be given to the effects of a six per cent per annum rise and a ten per cent increase each year.

“There is a tax problem on the horizon, and it’s really simple: you can’t charge a fuel tax on electric vehicles,” says Chris Sant who is a Principal in the indirect tax team of Ryan’s, global taxation consultancy, and is an Australian Trucking Association councillor and is also a member of the Australian Taxation Office’s Fuel Scheme Stakeholder Forum.

“Diesel currently pays RUC but electric and hydrogen vehicles are not paying the RUC because there is no fuel tax payable on that fuel, so they are not putting in for their share of the use of the roads,” Chris told Trucking Australia attendees.

Chris Sant.
Chris Sant.

“There is a revenue problem looming. At the moment Tesla’s getting away with it, but over time electric heavy vehicles including large bus fleets and light commercials will not be paying their fair share for the usage and the costs associated with roads. The Federal Department of Transport is considering what scheme we can move to as an industry.

“The first problem is the fuel tax is currently collected from six fuel suppliers. Under any new model based around usage you will be the ones paying the tax directly to the Federal Government and your funds will be the ones they take enforcement action on if you’re not paying the right amount of tax. The compliance burden of this tax moves from six fuel companies to you guys [operators].”

The Australian government is currently providing a de facto incentive to purchasers of electric vehicles by not charging them a RUC, but the states are not getting their revenue and are very likely themselves to levy charges on electric vehicles, both passenger and commercial.

The Victorian State Government decided to charge Tesla and other electric sedan drivers 2.5 cents per kilometre which has led to action in the High Court arguing whether there are legal grounds for the tax from a constitutional perspective.

As we wait on the ruling to deliver a precedent it can be expected that other states will follow if the findings are in favour of the Victorian Government.

In New Zealand a direct road user scheme is in place with pre-paid ‘licences’ to travel each 1,000 kilometres instead of fuel-based excise. Critics claim it is administratively unwieldy, but it does appear to treat all commercial vehicles equally regardless of their energy source.

The distanced-based RUC encompasses varying rates based on vehicle classification and weight and the administration requires audits involving hubometers or telematics.

In the last months of the Morrison/Frydenberg administration the road transport industry was caught out when, as a response to the quickly escalating price of fuels, which was attributed to the Ukraine conflict, the excise rate on fuel was temporarily reduced but the associated Fuel Tax Credits were suspended, creating significant cash flow issues for some transport operators. The system has since been reinstated.

Electrification, whether via batteries or hydrogen fuel cells, is inevitable for the road transport fleet to meet the nation’s environmental agenda.

It is crucial for the industry, through its major players and various associations, to be purposefully involved in the process of determining a solution for an equitable user pay road funding system.

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