ATO ID 2011/98: Determining compressed natural gas that is exempt from excise duty
Date of decision: 1 December 2011
Business line: Indirect Tax

Issue
For the purposes of section 77HA of the Excise Act 1901 is a licensed manufacturer able to determine whether a particular quantity of compressed natural gas (CNG) is exempt from excise duty at the time the CNG is delivered into home consumption?

Decision
Yes. For the purposes of section 77HA of the Excise Act, a licensed manufacturer may determine whether a particular quantity of CNG is exempt from excise duty at the time CNG is delivered into home consumption.

Facts
An entity is a licensed manufacturer (manufacturer) of excisable goods namely CNG. Natural gas is compressed and then stored in a bulk tank on the premises. Delivery to clients is effected directly from the bulk tank through metered facilities. The CNG is supplied to clients for three possible uses - exclusively for transport, exclusively for non-transport and mixed transport/non-transport use. For each delivery into home consumption of CNG, the manufacturer determines and records the intended use of that quantity of CNG.

Reasons for decision
Summary: Section 5 of the Excise Tariff Act 1921 provides that excise duty is imposed on goods manufactured or produced in Australia that are classified to the Schedule to that Act. The excise duty is imposed at the time of manufacture or production. Paragraph 10(j) of the Schedule to the Excise Tariff Act excludes from item 10 'goods covered by section 77HA or 77HB of the Excise Act 1901'. Of relevance in this case, is section 77HA of the Excise Act. Section 77HA provides that CNG is exempt from excise duty in a number of circumstances. One circumstance, specified in paragraph 77HA(a) of the Excise Act, is where 'the gas was compressed for use other than as a fuel for a motor vehicle'. Given the exclusion of CNG that is exempt under section 77HA of the Excise Act from paragraph 10(j) of the Schedule to the Excise Tariff Act, the two provisions must be read together in order to determine whether a particular quantity of CNG is specified in the Schedule to the Excise Tariff Act and thereby duties of excise are imposed. Generally, a manufacturer of CNG will be able to determine with certainty at the time of compression that a particular quantity of CNG will be for use other than in a motor vehicle (non-transport use). In many instances, the only CNG manufactured or produced by a manufacturer will be for non-transport use, and the exemption in section 77HA of the Excise Act serves to ensure that the CNG is not covered by item 10 of the Schedule to the Excise Tariff Act. In this instance, the manufacturer operates a single storage tank that supplies CNG for a range of transport and non-transport uses. As a single storage tank is used, the manufacturer is unable to identify at the time of compression that certain quantities of CNG are for use in transport or non-transport applications. Since the manufacturer is unable to establish that a particular quantity of CNG is intended for non-transport use at time of compression of the natural gas, the CNG is included in item 10 and subitem 10.19C of the Schedule to the Excise Tariff Act and is therefore subject to excise. As the entity is manufacturing excisable goods, it is required to hold a manufacturer licence, lodge excise returns and comply with the other requirements of the excise legislation. The key issue then becomes whether a quantity of CNG that is excisable can subsequently be found to be exempt from duty under section 77HA of the Excise Act because it is determined at the time of delivery into home consumption that the CNG was compressed for use other than in a motor vehicle. Paragraph 10(j) and subitem 10.19C of the Schedule to the Excise Tariff Act excludes goods covered by section 77HA of the Excise Act. Section 77HA of the Excise Act uses the words 'exempt from duty' rather than simply removing certain CNG from the ambit of subitem 10.19C of the Schedule to the Excise Tariff Act. The actual rate of duty payable on excisable goods is not determined at the point of manufacture or production but rather in accordance with section 59 of the Excise Act. Section 59 of the Excise Act specifies that the rate of duty payable on excisable goods is the rate in force when the goods are delivered under subsection 61C(2) of the Excise Act or when payment is made whichever is earlier. Section 77HA of the Excise Act can therefore provide that certain CNG is exempt from duty when determining the rate applicable at the relevant point in time. In summary, section 77HA of the Excise Act serves two roles. Firstly, it excludes CNG from paragraph 10(j) and subitem 10.19C of the Schedule to the Excise Tariff Act (and therefore from being excisable in the first place) where the manufacturer is able to ascertain at the time of compression that the CNG is intended for non-transport use (or meets any of the other requirements for exemption under section 77HA of the Excise Act). Secondly, it provides for exemption from duty where, at the time of delivery of CNG into home consumption, it can be ascertained that a particular quantity of CNG is exempt from duty. Therefore, even though at the time of compression section 77HA of the Excise Act may not serve to exclude certain CNG from item 10 of the Schedule to the Excise Tariff Act, the manufacturer is able to determine, at the time of delivery into home consumption, whether particular quantities of CNG are exempt from duty under section 77HA of the Excise Act.

Legislative references: Excise Act 1901 section 59 subsection 61C(2) section 77HA paragraph 77HA(a) section 77HB
Subject references: Excise Excisable goods manufacture