Context

Introduction

The Australian Taxation Office (ATO) is responsible for administering Australian taxation law and collecting taxation revenue. In administering taxation law, the ATO also administers commodity-based revenue (excise) and payment schemes.¹

The Energy Grants Credits Scheme (EGCS) is the most significant of the ATO's four excise transfer schemes.² It provides a credit on excise and customs duty for the off-road and on-road use of diesel fuel and alternative fuels³ used in certain eligible activities.⁴ Compared to total revenue collected from petroleum fuel excise of approximately $13 billion in 2002–03, some $3.1 billion was returned under EGCS' off-road and on-road credits in 2003–04.

EGCS replaced the Diesel Fuel Rebate Scheme (DFRS) and the Diesel and Alternative Fuels Grants Scheme (DAFGS) in July 2003 as part of the Government's May 1999 policy changes in its Measures for a Better Environment. EGCS maintained the entitlements that claimants had under DFRS and DAFGS, its underpinning policy being to reduce costs for key export industries and the cost of transport in regional and rural Australia.

EGCS administration

EGCS is administered under two pieces of legislation. The Energy Grants (Credits) Scheme Act 2003 sets out the eligibility requirements for a grant or credit and the Product Grants and Benefits Administration Act 2000 sets out the framework for the administration of a number of energy grants and benefits administered by the Commissioner of Taxation, including EGCS.

The EGCS administrative process involves: registration of claimants; the principles of self assessment, whereby claimants are responsible for assessing their eligibility in accordance with the rules of the Scheme, and keeping appropriate records to support their claims; and a claiming process. Claims may be submitted at any time within three years of fuel purchase, as long as the claimant has purchased the fuel, and used it (or intends to use it) in an eligible activity. During 2003–04, there were approximately 24 000 registrations for EGCS, and the ATO received almost 450 000 claims.

At the end of June 2004, there were almost 194 000 claimants for EGCS, 91 per cent of which were micro entities.⁵ The agriculture and road transport industries account for the most claimants, over 60 per cent and 36 per cent respectively. The mining and road transport industries account for most payments in value terms, over 34 per cent and 27 per cent of the value of payments in 2003–04, respectively.

Future of EGCS

On 15 June 2004, the Prime Minister announced a range of changes to fuel excise as part of the Energy White Paper.⁶ The White Paper also proposes, as of mid-2006, new eligibility criteria for EGCS (including expanding the Scheme in terms of eligible fuels and activities) and that EGCS be part of the single system of business credits administered through businesses' existing Business Activity Statements.

Audit rationale, objective and scope

EGCS has only been operating since mid-2003. However, it accounts for significant payments and concerns had been raised with the administration of DFRS, a precursor to EGCS.⁷ In light of these factors, and the further changes in EGCS foreshadowed in the Energy White Paper, we considered it appropriate to examine, at this point, whether the ATO has reasonable (comprehensive and dynamic) frameworks underpinning the administration of the Scheme.

The objective of the audit was to assess whether the ATO has established an administratively-effective framework for the management of EGCS. Specifically the audit sought to:

• appreciate the Scheme's policy context and rationale;
•  review the ATO's EGCS planning, compliance management, monitoring, reporting and evaluation frameworks; and
•  assess the Scheme's administrative framework, bearing in mind the administrative difficulties highlighted in the previous ANAO performance audits⁸ of the Scheme's predecessor, DFRS.

Key findings Background and context - Chapter 1

The policy context for EGCS, and indeed its predecessor schemes, has been dynamic. Factors, such as evolving tax and environmental measures and negotiations at the Parliamentary level, have affected EGCS policy.

The legislated policy objectives of EGCS were to: encourage the use of cleaner fuels; replace DFRS and DAFGS with a single payment scheme providing entitlements equivalent to those schemes; and provide a common administrative approach for all clients, as well as simplifying their interactions with the ATO.

There has been an evolution in the manner in which some of the originally-announced goals of EGCS have been met. In particular, the Government's ‘cleaner fuel' policy objectives for EGCS have been addressed, in most part, by measures other than EGCS, notably by subsidies for the production of low sulphur diesel and petrol for two years, prior to the mandating of cleaner fuels standards for these fuels. One result of this evolution is that there is only a partial match between some of the originally-announced goals of EGCS, the purpose stated in the legislation and supporting materials, and what was introduced in EGCS.

New policy objectives and administration for EGCS

The Government's Energy White Paper outlines a complete overhaul of the excise system (of which EGCS is a part). It advocates marked changes in the underlying policy principles for the excise system. It also proposes major changes to EGCS' scope and administration, commencing in mid-2006. Although details are yet to be defined, the proposed changes have substantial implications for EGCS in the future. The formulation of legislative and administrative design to give effect to these changes requires the input of the Treasury, the ATO, and other agencies such as the Department of Transport and Regional Services (DOTARS) and the Department of the Environment and Heritage (DEH).⁹ These development and design tasks require relevant agencies to work together to give effect to the policy objectives of Government. Part of the process will require relevant agencies to clarify some of the policy objectives outlined in the White Paper.

Previous reviews

We reviewed how the ATO's framework for EGCS administration deals with the concerns identified in relevant previous performance audits¹⁰ , particularly the concerns in the later audit. These issues included the clarity of scheme objectives, IT systems for scheme support, staff training, risk management, the application of administrative penalties, performance review, quality assurance, and cost of administration.

The ATO's frameworks and systems deal with most of the themes of concern, but the clarity of Scheme objectives and evaluation of performance against Scheme objectives remain outstanding issues. When looking at changes to the Scheme in the context of the Energy White Paper, Treasury, the ATO and other relevant agencies should consider:

• the clarity of objectives;
• the ways the design of the new Scheme addresses these objectives; and
•  sources of data to evaluate performance against the stated objectives.

Consultations

We consulted with industry groups and government bodies represented on the ATO's Fuel Schemes Advisory Forum (FSAF), individual claimants and the Commonwealth Ombudsman's Special Tax Adviser about the ATO's administrative frameworks and processes for EGCS. Stakeholders were supportive of the ATO's administration of EGCS, including consultation and information provision mechanisms, Scheme processing and compliance activities.

Planning, monitoring and reporting - Chapter 2

The ATO has established robust planning, monitoring and reporting frameworks. These involve: structured approaches to planning; extensive processes; active bodies for performance monitoring; and well structured and timely performance reports, despite the reporting framework being complex.

The inclusion of explicit targets for performance in EGCS planning, monitoring and reporting documents would strengthen the overall planning, monitoring and reporting framework for EGCS administration. Targets provide benchmarks against which to assess activity and performance.

The ATO assesses its performance in undertaking activities in administering the Scheme (for example, processing registrations and timeliness of claims processing). It performs these administrative activities well, meeting or exceeding its forecasts and service standards. However, the ATO does not consolidate these performance views, to articulate or monitor what these aspects mean for the ATO's overriding Scheme objectives (that is, to reduce the cost of compliance for clients and the cost of administration for the ATO).

Framework to evaluate EGCS performance against objectives

The ATO's performance review focus, to date, has been on its administrative tasks in devising and managing EGCS in its early stages. These tasks relate to Scheme design, practices and mechanisms to implement and operate the single payment scheme replacing the two previous schemes, and provision of equivalent entitlements to those schemes. The ATO's performance monitoring framework does not include ways to monitor in a formal, collective and ongoing way, performance against its overriding Scheme administrative objectives. However, the ATO monitors activities that provide indications of performance against these administrative objectives. There would be benefit in the ATO developing its performance monitoring framework by bringing together its current relevant, though partial, views of administrative performance and articulating these in plans and performance reports in a consolidated way.

Although the ATO does not have a formal framework to assess EGCS performance against its administrative objectives, the ATO has ‘achieved' its objectives in key areas. The ATO introduced and administers EGCS. In doing so the ATO:

• replicated, in one scheme, the entitlements under the previous two separate schemes;
• introduced some common provisions; and
•  applied a common legislative framework for administration.

These administrative changes allow the ATO to streamline administration and permit clients to simplify their interactions with the ATO.

There is a divergence between the formal objectives of EGCS as originally framed (including in legislation) and subsequent policy and administrative developments. This divergence should be resolved for a greater measure of transparency in Government operations.

The Government intends to reshape EGCS at both the policy and administrative levels as part of the Energy White Paper proposals. In the development phase, agencies, such as Treasury, the ATO, DOTARS and DEH, have roles in the development of detailed operational policy and the legislative and administrative design of the new Scheme. In undertaking these development tasks, it would be prudent for relevant agencies to document their considerations of how the design of the new Scheme aligns with the objectives Government has specified.

EGCS compliance management - Chapter 3

EGCS intelligence and risk management

The ATO uses a range of intelligence and risk management approaches to assist it target its compliance activities to areas of highest risk. The ATO largely focuses on the identification, assessment and treatment of risks at an individual claim and claimant level, and risk management analytical work largely has an operational/tactical focus. The continued development and documentation of the ATO's analytical work, and consideration of potential strategic risks and their management, would improve Scheme administration at the strategic level.

EGCS compliance program

Key elements of the well-developed EGCS compliance framework include: marketing and education; interpretative advice; and active compliance.¹¹ The compliance framework also includes debt management and penalties and specific measures to deal with more serious non-compliance, for example, where fraud is suspected.

The ATO does not clearly document how the EGCS compliance program targets identified compliance risks as opposed to responding to non-compliance at the case level. The ATO's apparent focus on individual claims or clients, limits its ability to address, through its compliance program, industry-specific and whole-of-Scheme compliance risks.

One of the ATO's specific compliance tools is to assess Scheme revenue leakage (that is underpayments and overpayments), based on a statistical sample of randomly-selected claims in the review period. EGCS claims have not been included in the revenue leakage assessments so far as the Scheme only commenced in mid-2003. However, the leakage assessment work is relevant to EGCS compliance management, as many of the claimants examined in the preceding schemes have become EGCS claimants. The ATO's revenue leakage assessments estimate leakage for DFRS at 1–2 per cent of claims paid. The ATO considers this to be an acceptable rate. We agree, given the numbers of claims and payments made.

The revenue leakage review results may not be reported for up to two years after the period in which the ATO payments were made. The latest revenue leakage assessment (relating to 2002–03 claims), was completed in 2004–05. The ATO's ability to adjust claims retrospectively and recover any overpayments, mean lags in finalising the review do not affect the overall amounts paid. However, lags do bear on the timeliness of risk and compliance management activity. ATO compliance management would be improved by the ATO improving the timeliness of the revenue leakage review processes.

Cost of compliance and cost of administration

The activities that the ATO undertakes to manage compliance, translate, for clients, into compliance activities bearing on them and, therefore, cost of compliance. The compliance and processing activities translate for the ATO into the cost of administration. The ATO's estimates of the cost of administering EGCS and its predecessors since 2000–01, show that its administrative costs per claim have declined. The ATO's consultative and complaint monitoring mechanisms, and our discussions with claimants and their representative organisations, show that claimants are broadly supportive of the ATO's administrative processes and compliance efforts.

Scheme processes and controls - Chapter 4

The ATO has established an appropriate and comprehensive framework for EGCS processing. This framework is supported by automated and manual controls such as: business rules to detect incorrect EGCS information; procedures documentation; staff skilling; and quality assurance processes.

Overall conclusion

Overall, we consider that the ATO has comprehensive and administratively-effective frameworks relating to the management of EGCS.

The policy and administrative environments have evolved and continue to do so. The foreshadowed, further changes in policy and administration present an opportunity to enhance the transparency of Scheme objectives and ways to evaluate performance against these objectives.

The frameworks are reasonable (and deal with most of the themes of concern in DFRS administration). The planning, monitoring and reporting framework is structured and appropriate. The risk and compliance management framework is generally well-developed and the processes and controls framework is comprehensive. Moreover, there are positive indications about the administrative effectiveness of the frameworks in practice, with the achievement of ATO processing standards (where these have been defined), the reduced cost of Scheme administration compared to its predecessors, and broad support about ATO administration from stakeholders and claimants.

The ATO's future management of EGCS could be improved in the following areas:

• performance monitoring;
•  strategic management of EGCS risks;
•  revenue leakage assessment processes as part of compliance management; and
•  the links between risk management and compliance management activity.

Recommendations and ATO response

The ANAO has made five recommendations aimed at improving the ATO's administration of EGCS.

The Department of the Treasury agrees with the recommendation directed to it.

The ATO has advised that it welcomes the report and agrees with all four recommendations. While the ANAO has concluded that the ATO has a comprehensive and administratively-effective framework for managing EGCS, the ATO accepts that improvements can be made as the Scheme moves from its first year of operation.

Footnotes

1 The ATO assumed responsibility for excise collection and payments from the Australian Customs Service in February 1999.

2 The other excise transfer schemes are the Fuel Sales Grants Scheme (FSGS), Product Stewardship (Oil) Scheme (PSO), and the Cleaner Fuels Grants Scheme (CFGS).

3 Alternative fuels (in the case of on-road use) include ethanol, compressed natural gas, and liquefied petroleum gas. Although alternative fuels are eligible under EGCS, they are not widely used; approximately 99 per cent of all EGCS claims are for diesel.

4 Eligible EGCS activities include: road, rail and marine transport; agriculture; fishing; forestry and mining.

5 For the ATO, micro-businesses are entities with an annual turnover of less than $2 million.

6 Australian Government, 2004, Securing Australia's Energy Future.

7 See, especially, Audit Report No.20 1995–96 Australian Customs Service–Diesel Fuel Rebate Scheme.

8 Audit Report No.20 1995–96 Diesel Fuel Rebate Scheme–Australian Customs Service, which followed up on the earlier report, Audit Report No.27 1990–91 Australian Customs Service–Diesel Fuel Rebate Scheme.

9 DOTARS has responsibilities in relation to fuel emission standards. For EGCS it will have responsibilities in administering the criteria that allow excise credits for heavy diesel vehicles that meet one of five emission performance criteria. DEH has responsibilities in relation to the Greenhouse Challenge Program which will apply to certain categories of EGCS beneficiaries (namely, businesses receiving fuel excise credits of more than $3 million per year).

10 ibid.

11 Active compliance activities include checking registration, eligibility and some claims; undertaking audits; and assessing overall revenue leakage.