Accurate vehicle data and robust methodologies to support fuel tax credit entitlement

For businesses operating heavy vehicles, plant and equipment that travel or operate off the public road network, fuel tax credits (FTC) can represent a material reduction in net fuel cost. The full FTC rate generally applies to taxable fuel acquired for use off public roads, while fuel used in heavy vehicles travelling on a public road is reduced by the road user charge under subsection 43-10(3) of the Fuel Tax Act 2006 Cth (the Fuel Tax Act).

The challenge is that most fleets do not operate exclusively on or off public roads (or even when operating on road, fuel may be used to power auxiliary equipment generally entitled to FTC at a higher rate). Where fuel is used for a mix of activities and rates, the entitlement must be worked out by reference to the words "to the extent that" in section 41-5 of the Fuel Tax Act, which the Commissioner of Taxation has confirmed contemplates apportionment between uses that give rise to different FTC outcomes. The Commissioner accepts that any method may be used, provided it is "fair and reasonable" in the entity's circumstances.

That phrase, "fair and reasonable", is deceptively simple. In practice, a majority of ATO disputes and adjustments arise.

Fuel tax credits represent billions of dollars in refunds to Australian businesses each year, and the ATO has long identified FTC apportionment as a priority compliance area, particularly for the energy and resources, transport, construction and waste management sectors. Over recent years that focus has intensified, with the ATO publishing detailed guidance on acceptable methodologies and actively reviewing claims that depart from those parameters.

The core ATO guidance materials taxpayers should be familiar with include:

• FTD 2010/1 - confirms that apportionment is required in calculating total FTC and sets out the "fair and reasonable" principle.

• PCG 2016/8 - the ATO's principal practical compliance guideline on apportioning fuel for FTC, including methods (constructive, deductive, percentage use, estimated use), reliable measures and accepted principles.

• PCG 2016/11 - "safe harbour" percentages for fuel used in auxiliary equipment in or on a heavy vehicle.

• FTR 2008/1 and the Linfox Full Federal Court decision ([2019] FCAFC 131) - on the meaning of "public road" for the purpose of applying the road user charge, which directly affects how on-road and off-road kilometres should be classified.

• FTD 2006/2 - the records taxpayers must keep substantiating an FTC claim.

Recent edited private binding rulings illustrate how rigorously the ATO applies these standards. For example, the Commissioner routinely rejects as not fair and reasonable both a proposed average fuel consumption rate per hour for a heavy vehicle fleet and the broader methodology used to apportion fuel consumed off public roads. The lesson is clear: simply having a methodology, or relying on manufacturer's specifications, is not enough. The methodology must reflect the actual use of the fuel, be documented, be applied consistently, and be supported by reliable underlying data.

For all but the smallest fleets, log-books, sample studies and manufacturer's consumption rates struggle to deliver the precision the ATO now expects. GPS and telematics data, properly captured and processed, can directly evidence:

• where each vehicle was at any given moment, by reference to global navigation system coordinates;

• whether that location is on or off a public road, applying the principles in FTR 2008/1 and the Linfox decision through configured geofences and geotunnels;

• kilometres travelled on and off public roads; 

• idle time on and off public roads; and

• auxiliary equipment operating hours, where a device is connected to the relevant input.

The ATO has accepted, in a series of class and product rulings, that data of this nature can be used as a record for FTC purposes and as a reliable measure within an apportionment methodology. 

However, these rulings should not be misread as a general endorsement of "any" GPS-based claim. The ATO has been explicit that telematics data is a recognised means of reporting data relevant to an FTC claim, but it is not determinative of a fair and reasonable claim. In fact, the Commissioner has confirmed that: 

• data extracted from a tracking device can be used to determine vehicle location for FTC purposes; but

• it is not fair and reasonable to accept, without additional supporting documentation, that the device has correctly classified each location as on or off a public road.

In other words, the integrity of the methodology depends not only on the raw data but on how the data is calibrated, validated, classified against geofences, and reconciled with fuel acquisitions and fleet records. Common deficiencies the ATO scrutinises include inaccurate geofence boundaries, untested assumptions around idling and auxiliary use, gaps in telematics coverage, inconsistent application of the methodology across periods, and inadequate documentation of how on/off-road classifications were verified.

An FTC methodology that is well placed to withstand ATO review will generally exhibit the following features:

1. Reliable measurement. High-frequency, second-by-second GNSS data, with quality controls (such as horizontal dilution of precision and minimum satellite thresholds) that exclude unreliable data points.
2. Defensible classification. Geofences and geotunnels constructed and reviewed in accordance with the principles in FTR 2008/1 and the Linfox decision, with administrator review of client-defined boundaries.
3. Reconciliation. Telematics-derived activity reconciled to actual fuel acquisitions (typically a deductive method starting with bulk fuel and card data), so that the litres claimed match the litres acquired.
4. Auxiliary and idling treatment. Either application of the ATO accepted percentages in PCG 2016/11 or a measured approach supported by appropriate sensor connections and consumption rates.
5. Substantiation. Records sufficient to satisfy section 382-5 of Schedule 1 to the Taxation Administration Act 1953 retained for at least five years, including how each step of the methodology was applied.
6. Consistency and review. The same methodology applied across the period, with periodic review when fleet composition, sites or activities change.

PwC Australia has decades of experience advising Australia's largest fuel users on FTC strategy, methodology design, ATO engagement and audit defence. We assist clients to:

• review and benchmark existing FTC apportionment methodologies against current ATO guidance, recent rulings and emerging compliance themes;

• design and document fair and reasonable methodologies tailored to specific operations, fleet profiles and data environments;

• quantify potential under or over-claims and manage retrospective adjustments within the four-year time limit in section 47-5 of the Fuel Tax Act 2006; 

• prepare private ruling applications and engage with the ATO on bespoke methodologies; and

• support clients through ATO reviews, audits and objections.

Our Joint Business Relationship with Fuel Tax Advisers

To complement our advisory capability, PwC has a Joint Business Relationship (JBR) with Fuel Tax Advisers, a specialist firm with over 20 years' experience in FTC technologies.  

Fuel Tax Advisers is the Administrator of Teletrac Navman’s FTC Manager system, which uses real-time, high-definition, second-by-second GPS location data from telematics installed in vehicles and equipment to calculate off-road and auxiliary fuel use, with the apportionment methodology tested and confirmed by the ATO via the relevant class and product rulings. 

FTA has also recently designed a new agnostic system, which can process GPS data from any provider and is currently undergoing assessment for an ATO Class Ruling. For clients who rely on those rulings (and who satisfy the conditions set out in them), this provides a high level of certainty around the technology and the methodology.

Through our JBR, our clients can access:

• Robust telematics platform supported by ATO rulings, administered by Fuel Tax Advisers; 

• PwC's tax technical, controversy and data analytics capabilities, integrated with those platforms; and

• a single, coordinated team able to address the full lifecycle of an FTC program - from data capture and methodology design through to ATO engagement and audit support.

If your business uses fuel off the public road network, now is a good time to revisit how that fuel is being measured and apportioned. Areas worth testing include the accuracy of geofences and on/off-road classification rules, how idling and auxiliary use are treated, the reconciliation between telematics data and actual fuel acquisitions, and the documentation supporting each link in the chain.

Please reach out to your PwC indirect tax contact to arrange an initial conversation about your FTC profile and the methodology that supports it. We are well placed to help you maximise your entitlement, manage ATO risk, and bring greater certainty to one of the more technically demanding areas of indirect tax.

^{This article provides general information only and does not constitute tax advice. Outcomes will depend on a taxpayer's specific facts and circumstances, including the nature of its operations, fleet, data environment and existing methodology. Tax laws, rulings and ATO compliance positions are subject to change. Specific advice should be obtained before acting on any of the matters discussed.}