Issue
Is diesel fuel used to generate electricity for the purposes of sub item 10(1)(b)(iii) of Schedule 3 to the Fuel Tax (Consequential and Transitional Provisions) Act 2006 (the Transitional Act) when it is used in the internal combustion engine of a machine which provides power to the components of the machine?
Decision
No, diesel fuel is not used to generate electricity for the purposes of sub item 10(1)(b)(iii) of Schedule 3 to the Transitional Act when it is used in the internal combustion engine of a machine which provides power to the components of the machine.
Facts
An entity uses a machine in its enterprise.
The machine is powered by an inbuilt internal combustion engine. Diesel fuel is used in the engine to drive a small internal generator which supplies power to the components of the machine. This enables the machine to perform its designed use without relying on an external power supply.
No electricity is generated by the machine for any other use.
Reasons for Decision
Item 10 of Schedule 3 to the Transitional Act restricts an entity's entitlement to a fuel tax credit for fuel acquired, manufactured or imported for use in carrying on its enterprise during the period 1 July 2006 and 30 June 2008. However, these restrictions do not apply in the circumstances set out in paragraph 10(1)(b) of the Transitional Act. One circumstance is where fuel is used by an entity in generating electricity.
In the context of the fuel tax provisions, it is the purpose for which the fuel is acquired that is important when deciding whether it was acquired to generate electricity.
Fuel is used for the purpose of generating electricity where the electricity is an end in itself and can in turn be used for any purpose for which electricity is required. For example, fuel is used in generating electricity when it is used in a generator so as to make power available to business premises. Similarly, the use of fuel in a generator to provide power to a range of external equipment (such as electrically powered machinery in a factory) would constitute use in generating electricity.
The above uses of fuel can be contrasted with the use of fuel within the actual equipment that is to be powered by the fuel. For example, fuel acquired for use in the internal combustion engine of a vehicle is for the purpose of driving or propelling the vehicle. Similarly the use of fuel in the internal combustion engine of a machine where the power generated by the machine is for use by that machine is for the purpose of operating the machine.
The entity acquires diesel fuel to use in the machine's internal combustion engine to drive or propel the machine enabling it to fulfil its designed use. Although the versatility of the machine is enhanced, as it can perform without an external power supply, the generation of electricity is only incidental to the purpose of using the fuel to operate the machine's engine. Further, the machine does not generate electricity for any other use.
Accordingly, diesel fuel is not used to generate electricity for the purposes of sub item 10(1)(b)(iii) of Schedule 3 to the Transitional Act when it is used in the internal combustion engine of a machine which provides power to the components of the machine.