Following on from the announcements made on Tuesday's budget, the Assistant Treasurer, Senator Nick Sherry, and the Minister for Resources and Energy, Martin Ferguson MP, confirmed that the Rudd Government will complete the long-standing plan for a 50 per cent tax discount on alternative fuels such as ethanol and LPG.

As part of the implementation of the energy content based taxation of all fuels originally announced in the 2003-04 Budget of the Howard Government, the Rudd Government has now announced a new staged phasing in of the regime to address the sudden loss in the relative tax advantage of domestic ethanol compared to imported ethanol that would have occurred under the policy announced by the previous Government.

The Government believes that these initiatives will provide the fuel industry and fuel users with certainty as to the future direction of fuel tax policy so that they have confidence to make future investment decisions and consumption choices. To allow the alternative fuels industries time to adjust, effective excise will be phased in over the period beginning 1 July 2011 and ending 1 July 2015. In addition, the Rudd Government was concerned to ensure that, as part of these new arrangements, the domestic ethanol industry would benefit from an appropriate transition period to the arrangements announced in 2004-05, which the Rudd Government believed was absent from the previous Government's approach.

To achieve this, imported ethanol will face a more gradual decline in excise equivalent customs duty over the transition period compared to the previously announced measure.

As a result of the 2004-05 reforms, alternative fuels, namely the biofuels, ethanol and biodiesel, and the gaseous fuels including liquefied petroleum gas, liquefied natural gas and compressed natural gas, will be brought fully into the tax system by being placed into one of the following three energy content bands:

Effective excise will be phased in for alternative fuels from 1 July 2011, until 1 July 2015. At the end of the transition period, alternative fuels will benefit from a 50 per cent reduction of their full energy content tax rate.

The sudden loss in the relative tax advantage of domestic ethanol compared to imported ethanol that would have occurred under the policy announced by the previous Government will be addressed. Entitlement to the Energy Grants (Cleaner Fuels) Scheme will be removed for ethanol and direct subsidies will be provided to domestic producers and phased down over the transition period. This measure will result in revenue of $275 million over the forward estimates.

The Government has announced that it will consult extensively with key stakeholders on the implementation details of this important policy. This consultation will cover the implementation of support for the domestic ethanol industry, whether offsetting grants are the best mechanism to phase in effective excise over the transitional period for the biofuels and the gaseous fuels, and how to determine the appropriate taxation point for the gaseous fuels.

A discussion paper to this effect will shortly be released by the Assistant Treasurer.