PXTY and Commissioner of Taxation

[2015] AATA 274

[2015] AATA  274

Division	TAXATION APPEALS DIVISION
File Number(s)	2012/4011
Re	PXTY
APPLICANT
And	Commissioner of Taxation
RESPONDENT

DECISION

Tribunal	Deputy President S E Frost
Date	29 April 2015
Place	Sydney

1. The objection decisions relating to administrative penalty are set aside in accordance with the Commissioner’s concession to that effect, and substituted with a decision that in each case the objection is allowed in full.

2. The objection decisions are otherwise affirmed.

...........................[sgd].............................................

Deputy President S E Frost

CATCHWORDS

TAXATION –– energy grants –fuel tax credits – entitlement to credits when diesel fuel acquired for use for a specified purpose – whether diesel fuel used for a qualifying purpose – objection decisions affirmed

LEGISLATION

Energy Grants (Credits) Scheme Act 2003 (Cth) ss 4, 53, 53(6)(a)(i), 55

Excise Act 1901 (Cth) ss 77H(1)(b), 77G, 77J, 78
Fuel Tax Act 2006 (Cth) ss 41-4, 41-5, 95-5, 95-5(1), 95-5(2), 110-5
Products Grants and Benefits Administration Act 2000 (Cth) ss 9, 20
Energy Grants (Credits) Scheme Regulations 2003 (Cth) reg 10
Energy Grants (Credits) Scheme Amendment Regulations 2003 (No.2) reg 10

SECONDARY MATERIALS

Fuel Tax (Fuel blends) Determination (No.3) cll 8, 9

REASONS FOR DECISION

Deputy President S E Frost

29 April 2015

INTRODUCTION

1. This is a case about diesel fuel tax credits. 

2. The dispute between the parties spans two periods.  The first period is from 1 February 2004 to 30 June 2006 (the grant period).  During the grant period the credits claimed by the applicant were called energy grants; any such grants were payable under the Energy Grants (Credits) Scheme Act 2003 (Cth) (the EGCS Act).  The second period is from 1 April 2007 to 30 June 2009 (the FTC period).  During the FTC period the credits claimed by the applicant were called fuel tax credits; these types of credits were available under the Fuel Tax Act 2006 (Cth) (the Fuel Tax Act).

3. The entitlement to the grants and credits arose when diesel fuel was acquired for use for specified purposes.  The Commissioner claims that the applicant was not entitled to any of the grants that it claimed during the grant period.  He also claims that the applicant was not entitled to the credits that it claimed in respect of dealings with one particular customer during the FTC period.  The applicant claims that it was entitled to all the amounts that it claimed because it used diesel fuel for a qualifying purpose – as a solvent in the manufacture of mould release agents. 

4. The total amount in dispute is almost $14 million, $9.2 million of it relating to the grant period and the remainder relating to the FTC period.

5. The matter comes before the Tribunal as an application to review the Commissioner’s disallowance of the applicant’s objections against the assessments of the disputed amounts. 

6. Originally, administrative penalty was also assessed against the applicant, and upheld on objection.  However, the Commissioner has now indicated that the penalty should be remitted.

7. The hearing of the matter was conducted in private under s 14ZZE of the Taxation Administration Act 1953 (Cth) (TAA). I am obliged by s 43 of the Administrative Appeals Tribunal Act 1975 (Cth), as modified by s 14ZZJ of the TAA, to disguise the applicant’s identity. As a consequence the names of individuals and companies referred to in these reasons are not their real names but pseudonyms.

   THE BROAD BACKGROUND

8. The applicant was incorporated in the early 1980s.  Since then it has carried on an enterprise involving the manufacture and sale of mould release agents, bitumen cutters and fluxes. 

9. The applicant’s customers included many of Australia’s largest brick and tile manufacturers.  They would buy the applicant’s mould release agents (MRAs) for use in their own manufacturing activities.  The applicant’s MRAs enable the manufactured brick or tile to be removed from the mould after manufacture by preventing the product from sticking to the mould. 

10. The MRAs were manufactured by blending diesel fuel with additives, principally oleic acid.  Industry experience is that MRAs containing less than 2.5 per cent oleic acid are ineffective to prevent bricks and tiles sticking to the mould[1].  The applicant sold two types of MRA – one (which I will call Type One) was formulated to contain 3 per cent oleic acid and the other (Type Two) was formulated to contain 4 per cent.

    [1] Exhibit A1 at [8]

11. Throughout the relevant periods the applicant had two directors, a husband and wife, Mr and Mrs Whiting.  Mr Whiting was in charge of the operational activities of the applicant.  The business was operated essentially from home.  The actual blending of diesel with the additives to produce the applicant’s MRAs was undertaken by fuel distributors engaged by the applicant to blend, store and deliver its products.  There were different distributors in each State.  I will refer to the applicant’s New South Wales distributor as Mixing Company Pty Ltd, or MixingCo. 

12. The Commissioner commenced an audit into the applicant’s tax affairs in 2009.  Some of the information that came to the Commissioner’s attention during the audit suggested that one of the applicant’s customers, which I will refer to as Buying Company Pty Ltd, or BuyingCo, had been selling unblended diesel.  That caused the Commissioner to consider that the applicant may have been selling unblended diesel to BuyingCo.  The Commissioner’s officers interviewed an industry participant, Mr Fisher, who operated a transport company which, until February 2006, had delivered the applicant’s products.  Mr Fisher told the Commissioner’s officers that he was aware of instances of fabrication of paperwork dealing with diesel fuel credits.  He said documents had been created to give the impression that he, Mr Fisher, had delivered product in certain circumstances he knew to be untrue.  It was not suggested that this paperwork had been fabricated by the applicant or either of its directors.  The allegation was that it had been created by a Mr Irving, the owner of MixingCo.

13. Mr Whiting came to believe that MixingCo had been acting in concert with BuyingCo to perpetrate a fraud on the applicant and also on the Commissioner.  The fraud was thought to comprise the selling of unblended diesel to BuyingCo but which was dressed up to look like the selling of blended MRAs. 

14. BuyingCo had been introduced to the applicant by Mr Irving, and all of the applicant’s subsequent dealings with BuyingCo were through Mr Irving.  The applicant had agreed to sell its MRAs to BuyingCo provided the paperwork was completed, blending procedures were adhered to and, at least initially, provided payment was banked before pick-up of the applicant’s product.  All of the applicant’s other customers would order from and pay the applicant directly, but with BuyingCo, Mr Irving would receive the order, blend the product, arrange for delivery and attend to the paperwork.  Mr Irving would also receive the payment from BuyingCo and bank it to the applicant’s bank account.  Plainly, the applicant and Mr Whiting had placed much trust in Mr Irving.  Mr Whiting described Mr Irving in his first affidavit, Exhibit A5, at [99], as “a very good salesman” who could “put out any fires” arising from the odd complaint from customers.

15. Given the allegations that Mr Fisher had raised with the Commissioner, the applicant caused the Tribunal to issue a summons for Mr Fisher to attend and give oral evidence in these proceedings, which Mr Fisher did reluctantly.  He was questioned by the applicant’s counsel but the Commissioner’s counsel considered himself to be in no position to cross-examine him and he did not do so.  After the taking of Mr Fisher’s oral evidence the proceedings were adjourned for several months while the applicant undertook further enquiries and prepared its case for hearing.  When the hearing resumed the applicant’s counsel indicated that there was some doubt about the truth of Mr Fisher’s evidence.  Although Mr Fisher had been asked to attend for further questioning, the Tribunal had not been asked to issue a further summons to require him to attend.  Mr Fisher did not return to the Tribunal and his earlier oral evidence remains unchallenged.

16. It is now appropriate to turn to the relevant law.

    THE LEGISLATION

17. Prior to July 2003, persons who purchased or imported bulk fuels for use in specified circumstances were entitled to claim a refund of the duty paid or obtain a remission certificate under s 78 of the Excise Act 1901 (Cth) (the Excise Act) enabling them to receive the fuel duty free. The relevant remissions, rebates, grants and refunds in respect of diesel fuel were administered under the Excise Act, the Diesel Fuel Rebate Scheme and the Diesel and Alternative Fuels Grants Scheme.

    The grant period

18. The EGCS Act was introduced in 2003 to replace the Diesel Fuel Rebate Scheme and the Diesel and Alternative Fuels Grants Scheme with a single scheme known as the Energy Grants Credits Scheme (the EGCS). Under the EGCS, a person who purchased or imported diesel fuel was entitled to receive an “on-road” or “off-road” credit for specified activities, or “uses”, prescribed by the EGCS Act.

19. Energy grants of these kinds were available to claimants provided they were registered under s 9 of the Products Grants and Benefits Administration Act 2000 (Cth) (the PGBA Act).  The applicant was registered under that provision.

20. Section 20 of the PGBA Act provided that the Commissioner could amend an assessment of grants or benefits (including off-road credits under the EGCS Act) at any time. The applicant initially argued that the Commissioner’s assessments, to the extent that they sought to disallow credits more than four years after they had been claimed, were out of time but s 20 makes that argument unsustainable.

21. Section 53 of the EGCS Act provided in subsection (1):

    Subject to such conditions and restrictions as are specified in the regulations, you are entitled to an off-road credit if you purchase or import into Australia off-road diesel fuel for a use by you that qualifies (see the following subsections).

22. The expression “off-road diesel fuel” in that provision was defined in s 4 of the EGCS Act to mean “diesel fuel or any other like fuel of a kind that is specified in the regulations”.

23. Particular specified uses were set out in subsections (2) to (5) of section 53, but none of those uses apply to the applicant’s circumstances. Subsection (6) set out “[v]arious other uses that qualify” for the purposes of subsection (1). That subsection was in these terms:

    Each of the following is a use that qualifies:

    (a)   use, other than as a fuel, where the use is:

    (i)    as a solvent; or

    (ii)   as a mould release agent; or

    (iii)  in road construction;

    (b)any other use specified in the regulations.

24. When the Energy Grants (Credits) Scheme Regulations 2003 (Cth) (the EGCS Regulations) were first made, and with effect from 1 July 2003, regulation 10 provided as follows:

    10       Qualifying uses

    For paragraph 53(6)(b) of the Act, the following uses of off-road diesel fuel are specified:

    (a)use as an ingredient in the manufacture of any of the following products:

    (i)a mould release agent;

    (ii)road construction material;

    (iii)ink;

    if the product is not suitable for use as a fuel;

    (b)use, other than as a fuel, in the manufacture of plastics.

25. The EGCS Regulations were amended by the Energy Grants (Credits) Scheme Amendment Regulations 2003 (No. 2) (Cth) (the amending Regulations), which took effect on 23 December 2003, the date of gazettal.  Regulation 10 was repealed, and substituted by a new regulation 10 in the following terms:

    10       Qualifying uses

    (1)Subject to subregulation (2), for paragraph 53(6)(b) of the Act, the use of off-road diesel fuel other than as a fuel is specified.

    (2)If the off-road diesel fuel is used as an ingredient in the manufacture of a blended petroleum product, the use is specified only if the product is an exempt blended petroleum product that is not suitable for use as a fuel.

    (3)…

    (4)In this regulation:

    blended petroleum product has the meaning given by section 77G of the Excise Act 1901.

    exempt blended petroleum product has the meaning given by section 77G of the Excise Act 1901.

    Note   Exempt blended petroleum products are prescribed in the Excise Regulations 1925.

26. Section 77G of the Excise Act gave the following definitions:

    blended petroleum product means:

    (a)the product of the blending of a clean petroleum product … with another substance or other substances …

    …

    exempt blended petroleum product means a blended petroleum product that is exempt under section 77J.

27. Section 77J of the Excise Act provided:

    For the purposes of this Part, the regulations may specify a particular blended petroleum product to be an exempt blended petroleum product.

28. Regulation 176 of the Excise Regulations provided:

    (2)For the purposes of section 77J of the Act, the following blended petroleum products are exempt blended petroleum products:

    …

    (m)a blend of any clean petroleum product … with another substance after the clean petroleum product has been cleared from the CEO’s control, where the blend is not suitable for use as a fuel;

    …

29. The EGCS was structured in such a way as to allow claimants to claim off-road credits in respect of diesel fuel which they had purchased but not yet used, provided the intended use of the fuel was a qualifying use. However, if the fuel was not actually used as intended, the entitlement to the credit was lost, as s 55 of the EGCS Act made clear:

    55  Disqualifying use etc.

    Despite the other provisions of this Part, you are not entitled, and are taken never to have been entitled, to an off-road credit in respect of off-road diesel fuel that you purchased, or imported into Australia, for a particular use if, in fact, you:

    (a)use the fuel for a use (the actual use) other than that particular use, except where you would have been entitled to such a credit if you had purchased the fuel for the actual use; or

    (b)sell or otherwise dispose of the fuel; or

    (c)lose the fuel (whether because of accident, theft or any other reason).

    The FTC period

30. In July 2006 the EGCS was replaced by the Fuel Tax Credit Scheme (the FTC Scheme) under the Fuel Tax Act. The FTC Scheme introduced a single system of fuel tax credits to remove or reduce the incidence of fuel tax levied on fuel and to replace the various concessions, refunds and remissions that had been available under the previous excise and customs regime. The Fuel Tax Act was also accompanied by consequential amendments to the Excise Act.

31. Under the FTC Scheme, business taxpayers claim fuel tax credits (FTCs) by submitting Business Activity Statements in the same way that they claim input tax credits under the GST system. The basis of a claimant’s entitlement to FTCs is found in s 41-5 of the Fuel Tax Act, which provides relevantly in subsection (1) as follows:

    You are entitled to a fuel tax credit for taxable fuel that you acquire or manufacture in, or import into, Australia to the extent that you do so for use in *carrying on your *enterprise.

    Note 1:Other provisions can affect your entitlement to the credit. (For example, see Subdivisions 41-B and 45-A of this Act and Part 3 of Schedule 3 to the Fuel Tax (Consequential and Transitional Provisions) Act 2006.)

    Note 2:Fuel is taken to have been used if it is blended as specified in a determination made under section 95-5.

32. The term “taxable fuel” is defined in s 110-5 of the Fuel Tax Act to mean, relevantly:

    fuel in respect of which duty is payable under:

    (a)       the Excise Act 1901 and the Excise Tariff Act 1921; or

    (b)the Customs Act 1901 and the Customs Tariff Act 1995;

    …

33. Unblended diesel is subject to duty under item 10 in the Schedule to the Excise Tariff Act 1921 (Cth) and is therefore “taxable fuel” for the purposes of the Fuel Tax Act. Also subject to duty under item 10 are specified blends of diesel, unless, by s 77H(1)(b) of the Excise Act, the product of the blending is “covered by a determination in force under subsection 95-5(1) of the [Fuel Tax Act]”.

34. In June, July and August 2006 the Commissioner issued three determinations under s 95-5 of the Fuel Tax Act. The one that is relevant to these proceedings is the Fuel Tax (Fuel blends) Determination 2006 (No. 3) (Cth) (the Fuel Tax Determination). 

35. Clause 9 of the Fuel Tax Determination provides as follows:

    Where a blend is not a fuel

    9.A blend of a taxable fuel and another product or other products is not a fuel for the purposes of the fuel tax law where:

    (a)the blend is not marketed or sold for use as fuel in an internal combustion engine and

    (b)it can be demonstrated that the blend contains either:

    (i)    a product listed in the Schedule at a concentration equal to or greater than the specified minimum; or

    (ii)   more than one product listed in the Schedule and the total concentration of those products is equal to or exceeds 10% by volume,

    whether or not the blend contains other substances.

36. Clause 8 of the Fuel Tax Determination provides that the term “taxable fuel” when used in the Determination means:

    taxable fuel as defined in section 110-5 of the Fuel Tax Act but only if they are classified to subitem 10.25, 10.26, 10.27 or 10.28 of the Schedule to the Excise Tariff Act 1921.

37. Diesel fuel is not classified to any of the specified subitems, but instead to subitem 10.10 in the Schedule to the Excise Tariff Act 1921 (Cth). As a result, it is not a “taxable fuel” for the purposes of the Fuel Tax Determination. It follows that clause 9 does not apply to a blend of diesel fuel and other products. Such a blend is therefore not “covered by a determination in force under subsection 95-5(1) of the [Fuel Tax Act]”.

    MR WHITING’S EVIDENCE

38. Mr Whiting swore two affidavits, one (Exhibit A5) on 30 July 2013 and the other (Exhibit A6) on 14 April 2014.  He also provided an extensive body of documentary material, much of it in electronic form, including many of the applicant’s business records of purchases and sales covering both the grant period and the FTC period.  He explained the documentary material in his examination-in-chief and he was also cross-examined on the content of his affidavits and his oral evidence.

39. Included among the electronic material, at page 81, is a remission certificate of the kind referred to in [17] of these reasons.  That certificate, issued by the Commissioner on 19 September 2003 and to remain in force until 31 January 2004, entitled the applicant to purchase, free of duty, up to 50,000 litres of a specified petroleum product from a major oil company, on condition that the product be “used as solvent in the manufacture of mould release agents, process oils and additives” (emphasis in the original).  It will be noted that the certificate would remain valid until the very last day before the commencement of the grant period.  It will also be noted that the applicant’s case is that from the next day onwards, it continued to use (presumably similar) product for the very same purpose, but since it was now acquiring the product duty paid, it would have to rely on grants under the EGCS to restore it to the same, pre-EGCS position.

40. Mr Whiting explained the applicant’s business as follows.  The applicant’s distributors would generally have the applicant’s pre-blended product in their storage tanks.  Deliveries of the applicant’s MRAs to the applicant’s customers would be fulfilled by drawing on the material stored.  The distributors would also keep a stock of the “additives”, typically oleic acid and other fatty acid methyl esters, to blend further product in the storage tanks as the stock of blended MRAs was reduced.  When further additives were needed the distributor would notify Mr Whiting how much more was needed, and Mr Whiting would arrange to purchase that quantity of additives and have them delivered to the distributor.

1. Sometimes the blending would take place in-truck, as part of the delivery process.  In these cases the distributor would fill a delivery tank with base product, add the additives, and then transport the product to the customer.

2. The arrangement with respect to sales was that (with the exception of BuyingCo) the customer would place an order direct with the applicant, by contacting Mr Whiting.  Mr Whiting would communicate the order to the distributor, who would then either draw down a sufficient quantity of pre-blended product for delivery, or alternatively draw down sufficient quantities of base product and additives and carry out the blending activity in-truck.

3. The BuyingCo arrangements were different.  The order would come from BuyingCo to Mr Irving, at MixingCo.  Mr Irving would notify Mr Whiting by email or by phone that the order had been placed.  Mr Irving had an ongoing permission from Mr Whiting to place an order on the refinery for diesel, and Mr Irving would order the diesel on the basis of that permission.  Mr Whiting knew what price the refinery would be charging for the diesel because each refinery gave him either weekly or monthly prices.  Mr Whiting would set the selling price for the blended product to be sold to BuyingCo and would tell Mr Irving the price he had set.  He would generally aim to strike a selling price which was about 15 per cent below the purchase price of the diesel.  Although that looks as though he was selling at a loss, the arithmetic makes sense once the grant or credit of 38 cents per litre is added.

4. The Commissioner’s counsel took Mr Whiting to an example of the paperwork that was generated for such a transaction.  It is page 170 of the electronic materials, a pre-printed document describing itself as a combined “Purchase Order”, “Delivery Docket” and “Invoice” of the applicant, but which I will refer to, for convenience, as a Delivery Docket.  It contains handwritten transaction information including date (28/04/06), customer name (BuyingCo) and quantity and description of product (34,125 litres of Type One MRA), but not the price.  Mr Whiting confirmed that he was not the person who provided the handwritten material on the Delivery Docket; he said it was created by someone from MixingCo.  Most likely it was Mr Irving.

5. Page 171 of the materials is a document describing itself as a “Tax Invoice” of the applicant.  It bears the same document identification number as the Delivery Docket at page 170, and while it is dated 11 May 2006, it refers to the delivery to BuyingCo on 28 April 2006.  Page 171, unlike page 170, has its transaction information typed on it, or printed from a computer.  Once again it includes the quantity and description of the product delivered, as 34,125 litres of Type One MRA, but it declares a price of $1.00 per litre, producing (inexplicably) an extended price of $32,727.27 plus GST, totalling $36,000. 

6. Mr Whiting explained that it was Mr Irving’s practice to bundle up the BuyingCo Delivery Dockets at the end of the week and send them to Mr Whiting, who would use them as the basis for creating tax invoices.  However, after questioning from the Commissioner’s counsel about the shortcoming in the arithmetic, Mr Whiting said (transcript, page 55):

   This is a record for accounting purposes of the receipt of payment of the product.  At the time I would not have placed too much stress on the other part of the docket; I would think that’s what has happened there.

   COUNSEL:  The other part being the volume?---Yes.

7. In other words, the starting point for the tax invoice was the amount received from BuyingCo – $36,000, including GST – not the volume of product sold.  If the true selling price was $1.00 per litre (which roughly equalled the purchase price of the diesel, less 15 per cent – page 169), then only 32,727 litres had been sold, not 34,125.

8. Counsel explored further (transcript, pages 55-56):

   COUNSEL:  If you go back to page 170 please we see there - I perhaps just remind the tribunal - this is the docket created by [MixingCo] about this same transaction and it records a quantity of a little over 34,000 litres of quantity supplied?

   MR WHITING:  I think there's a bit of process you need to know because when an order comes in and they've said, "We want a tanker load" and that particular tanker that they were going to send in would take 34,000 litres of product, okay, so [Mr Irving] has organised to blend that amount of product or ensure that his blending vessel which contains 42,000 litres of blended product on-site is full.  What this tells me is that in fact they drew off whatever amount I worked out - 33,000 litres - and I was paid for that amount. 

   COUNSEL:  Is what you're saying, [Mr Whiting], that the quantities ordered - just talk about this particular document at the moment - but you read that quantity supplied as being roughly one truckload?

   MR WHITING:  Yes. 

   COUNSEL:  If you go to page 174 we see another delivery docket generated, may we take it, by [Mr Irving] for a quantity of 34,129 litres of product?

   MR WHITING:  That's right. 

   COUNSEL:  May we take it, having regard to the answers you gave about the previous docket, that that order in the amount of 34,129 should really be understood as an order for a truckload of [Type One MRA]?

   MR WHITING:  I always talked in tanker loads, you know?

   COUNSEL:  I see, so the specificity that we see here about litres supplied is not a detail that mattered from day to day when you were filling orders in relation to [BuyingCo]?

   MR WHITING:  A tanker load, we got paid for a tanker load.

   COUNSEL:  You did it by the tanker load, and whether or not that tanker load came to 32,000 litres or 34,000 it was of no consequence to you at the time?

   MR WHITING:  Well, they drew the volume of product out of the blending tank, whatever volume they drew out they paid for.

   COUNSEL:  You never had any other correspondence with [MixingCo] about the volume of product that was ordered by [BuyingCo] other than what we see here, did you?

   MR WHITING:  No. 

9. Pages 166-167 of the materials show a comparison, for the month of April 2006, between litres of diesel purchased from the refineries and litres of product sold to BuyingCo.  Mr Whiting confirmed that, in formulating that comparison, as well as the corresponding comparisons that he prepared for all the other months during the disputed periods, he used the volume figures from the Delivery Dockets as representing the number of litres sold to BuyingCo.  He concluded that, since the volumes of product recorded as having been sold to BuyingCo exceeded the volumes of diesel purchased from the refineries, the difference must be made up of the oleic acid added by MixingCo in the blending process.  Curiously, and although he had access to the volumes of additives actually purchased by the applicant, he did not perform an analysis comparing actual volumes of additives purchased with volumes of product sold.  Ultimately he had to concede that the information on the Delivery Dockets was unreliable.  Counsel for the Commissioner suggested the figures were “rubbery” but Mr Whiting preferred the label “not exact”.

10. MixingCo charged the applicant for blending services.  Generally the blending fee was $0.04 per litre plus GST (pages 93, 94, 156, 158 and 159).  However, when the customer was BuyingCo, the blending fee was only $0.01 per litre plus GST (page 157; transcript, page 42).

11. Samples of the blended product were also, from time to time, sent for laboratory testing, usually to determine the Total Acid Number (TAN) for the product.  Mr Whiting said in his first affidavit, Exhibit A5, at [26] that a TAN of no less than 6.0 would indicate that the product was suitable for use by the applicant’s customers as a mould release agent.

    THE EXPERT EVIDENCE

12. Two experts in chemistry gave evidence. 

13. Professor Scott Kable provided a report (Exhibit A7) saying:

    ·a “solvent” is the liquid component of a solution, in which the substance that is dissolved is the “solute”;

    ·in the mould release agent provided to him by the applicant, comprising 3 per cent oleic acid in diesel by volume, the diesel was the solvent; and

    ·diesel is not being used as a fuel in the manufacture of mould release agents.

14. Dr Duncan Seddon provided a report (Exhibit R2) saying:

    ·all of the applicant’s products were suitable for use as a fuel; and

    ·all of the applicant’s products could be used in an internal combustion engine.

15. I accept both experts’ evidence and make findings accordingly.

    THE APPLICANT’S CASE

16. The applicant’s case is a very straightforward one.  It is that during both the grant period and the FTC period, it used diesel as a solvent, and its use as a solvent was a use other than as a fuel.  The applicant relies on Professor Kable’s evidence that diesel is a solvent for the oleic acid added to it, and that the diesel was not being used as a fuel. 

17. That is enough, the applicant submits, to attract grants under s 53(6)(a)(i) of the EGCS Act during the grant period since the use so characterised is a “use, other than as a fuel, where the use is as a solvent”.

18. The applicant’s submission with respect to the FTC period is fundamentally the same. It used diesel in carrying on its enterprise. That use was use as a solvent. That entitles it to credits under s 41-5 of the Fuel Tax Act.

19. In respect of each period the applicant says that the Commissioner’s view of the law is a mistaken one.  The Commissioner’s view, according to the applicant, has the effect of restricting entitlements in a way that is not provided for in the law.  For example, in respect of the grant period, the applicant says that contrary to the argument put by the Commissioner, there is no qualification that when diesel is used as a solvent it cannot be used as a fuel.  In respect of the FTC period, the applicant says that there is no qualification that the MRAs produced cannot be used as a fuel.  The applicant submits that these further qualifications do not exist; its use of the diesel in each period is a qualifying use and the assessments are excessive.  The objections in each case should be allowed in full.

    FACTUAL FINDINGS

20. I accept that the product sold by the applicant to its customers, with the exception of BuyingCo, was a mould release agent and was suitable for use as such.  I base that conclusion on the fact that the applicant’s customers, among them some of Australia’s largest brick and tile manufacturers, did not at any stage indicate that the applicant’s products were not up to standard or that they did not perform the role that they bought them for.

21. Included in that finding is an acceptance that the mould release agents sold to the applicant’s customers, with the exception of BuyingCo, contained not less than 2.5 per cent oleic acid or other similar additive, and probably at least 3 per cent and in some cases 4 per cent.

22. As far as the sales to BuyingCo are concerned, I am not satisfied that all of the product sold was a mould release agent.  It may be that some of it was; it may be that none of it was.  I cannot make any more precise finding than that because the applicant’s approach to the case has been on an all-or-nothing basis.  There is no room for me to find that some specified amount sold, less than the total claimed, was a mould release agent.

    CONSIDERATION

    The grant period

23. There is no doubt that diesel in which oleic acid is dissolved acts as a solvent in that dissolving process. But that is not the end of the matter. The real question is whether the applicant’s use of the diesel in that way constitutes a qualifying use within the concept embraced by s 53(6)(a)(i) of the EGCS Act.

24. The applicant’s case places its activities squarely within the language of regulation 10 of the EGCS Regulations both before the 2003 amendment – “use as an ingredient in the manufacture of … a mould release agent” – and after the amendment – “used as an ingredient in the manufacture of a blended petroleum product”. Under both formulations of regulation 10, there is a qualification that must be met. The qualification is that the product, the mould release agent, must not be suitable for use as a fuel.

25. Plainly enough, the mould release agent is suitable for use as a fuel.  Dr Seddon’s evidence was clear on that point.  He said in his report, at paragraph 54:

    I understand the Applicant’s MRA product, in the main contained less than 5% oleic acid.  At this level there would be no problems in using the MRA as a diesel fuel in a wide variety of engines.

26. And so, having failed to satisfy the specific provision, can the applicant rely on the general provision to justify the grants?  No, it cannot.  If it could, then the qualification about suitability for use as a fuel would be meaningless.  As the Commissioner noted, on the applicant’s argument it would be entitled to a credit if it used diesel as a solvent by dissolving a thimbleful of oleic acid in a full tanker of straight diesel.  That would be an absurd outcome. 

27. The words “use … as a solvent” in s 53(6)(a)(i) are not as broad as they seem. The “use” of diesel to which the words apply must be a use that resulted in either a change in the character of the diesel, from a product that is suitable for use as a fuel to one that is not, or a use that resulted in the consumption, or using up, of the diesel. An example of such a use is use as a degreaser, to remove (by dissolving) grease from machinery, or from an engine, or from a driveway. A use for that purpose is “use … as a solvent”. But a use that does not change the character of the diesel, or does not result in its consumption, is not a use covered by s 53(6)(a)(i) of the EGCS Act.

28. I agree with the Commissioner’s submission that, in circumstances where the applicant’s products were suitable for use as a fuel, the applicant was not entitled to the grants. However, if the applicant’s customers actually used the applicant’s products as mould release agents, then the customers would have been entitled to grants under s 53(6)(a)(ii) of the EGCS Act.

29. The applicant’s use of the diesel during the grant period is not a qualifying use.  As a result, the Commissioner’s assessment for the grant period is not excessive, and the Commissioner’s objection decision must be affirmed.

    The FTC period

30. To be entitled to a fuel tax credit under s 41-5 of the Fuel Tax Act you must acquire a taxable fuel (including diesel) for use in carrying on your enterprise[2].  “Use” in this context does not, of course, include “sale” or “supply”; so much is made clear by the content of s 41-10, which provides an alternative mechanism for a credit to an entity that acquires the fuel “to make a taxable supply of the fuel to an entity”, but only subject to specified conditions.

    [2] There are “disentitlement rules” in Subdivision 41-B of the Fuel Tax Act, but these can be put to one side for the purposes of this discussion.

31. In other words, s 41-5 is aimed at providing credits to the end user of the taxable fuel, provided that entity uses the fuel in carrying on an enterprise.

32. One way, and perhaps the most common way, to “use” taxable fuel in carrying on your enterprise is to consume it. So, for example, an entity that acquires taxable fuel to use it (in the sense of consuming it) in generating electricity in carrying on its enterprise will satisfy s 41-5. Similarly, an entity that acquires taxable fuel to use it (by consuming it) in mining operations will satisfy s 41-5.

33. Another way to “use” taxable fuel in carrying on your enterprise is provided in Note 2 to s 41-5. That says that fuel is “taken to have been used if it is blended as specified in a determination made under section 95-5”. Section 95-5 provides relevantly as follows:

    95-5  Determination of blends that no longer constitute fuels

    (1)For the purposes of the *fuel tax law, the Commissioner may, by legislative instrument, determine that a blend of a fuel and another product does not constitute a fuel.

    (2)An entity that blends that fuel and that other product to produce that blend is taken to have used that fuel.

    …

34. Subsection 95-5(2) and Note 2 to s 41-5 provide an exhaustive statement of the circumstances in which blending of fuel will be taken to be a use of the fuel. Fuel that is blended other than as specified in a determination under s 95-5 will not be taken to have been used for the purposes of s 41-5.

35. In [35]-[36] of these reasons I have set out the relevant parts of the Fuel Tax Determination made by the Commissioner. The blending of straight diesel with oleic acid is not a blend of a kind specified in the Fuel Tax Determination. That means that, even if (contrary to my finding) all the products sold by the applicant to BuyingCo during the FTC period were blends of diesel and oleic acid, the applicant’s blending of those ingredients did not constitute a “use” of the diesel for the purposes of s 41-5. If the applicant did indeed sell MRAs to BuyingCo, and BuyingCo consumed those MRAs in carrying on an enterprise, then BuyingCo, not the applicant, would have been entitled to credits under s 41-5.

36. If my interpretation of s 41-5 is wrong, and the blending of diesel with oleic acid is a “use” of the fuel, nevertheless the applicant’s claim must fail. This is because it has failed to establish the extent to which the diesel it acquired was used in such a blending process. It has therefore not shown that the assessment is excessive for the purposes of s 14ZZK of the TAA.

37. The remaining possibility is that the applicant actually sold straight diesel to BuyingCo. If that is the case, then the applicant is not entitled to credits under s 41-5 because the sale of diesel is not a “use” for the purposes of that provision.

38. On any view the applicant has failed to establish that the Commissioner’s assessment for the FTC period is excessive.  The Commissioner’s objection decision must be affirmed.

    DECISION

39. The objection decisions relating to administrative penalty will be set aside in accordance with the Commissioner’s concession, and substituted with a decision that in each case the objection is allowed in full.

40. The objection decisions will otherwise be affirmed.

I certify that the preceding 80 (eighty) paragraphs are a true copy of the reasons for the decision herein of Deputy President S E Frost

..........................[sgd]..............................................

Dated 29 April 2015

Date(s) of hearing	9 May 2013, 25 and 26 August 2014
Counsel for the Applicant	Mr A.H. Rider
Solicitors for the Applicant	Mr I Congdon, Solicitor
Counsel for the Respondent	Mr J.O Hmelnitsky SC, Mr R. Jedrzejczyk
Solicitors for the Respondent	Maddocks Lawyers