RSM experts unpack: EV road charges, fuel excise reform and Australia’s transport future.

Introduction

Andrew Sykes (00:04)

Is a road user charge fairer than a fuel tax? And could this inadvertently discourage sustainable practices by individuals and businesses? Back in August, Federal Treasurer Jim Chalmers held an Economic Forum roundtable where, among other things, they discussed a new road tax to raise revenue from those not paying fuel excise: EVs or electric vehicles.

While it's clear the federal government intends to move forward with the new tax, we're missing a lot of details on who it will apply to, whether it will be weighted and how it will be paid. 

Hello, I'm Andrew Sykes. I've been a business accountant for over 25 years. I talk about business, money and the economy to help you get ahead. Welcome to talkBIG. 

Today, we're going to talk about why the government wants a road user charge to tax EVs, how it might be implemented and whether this is the best way forward for Australia. When we consider the government's announcement of a new 2035 emissions reduction target of 62% to 70% below 2005 levels, is this charge another step towards achieving that goal or will it actually discourage road users from adopting more sustainable practice?

Joining me from Brisbane, I have RSM Australia's National Head of Tax, Sam Mohammad, and RSM Australia's National Sustainability Lead, Nicole Mohan. Welcome both Sam and Nicole, how are you today?

Sam Mohammad (01:38)

Lovely to be here. Thanks, Andrew.

Nicole Mohan (01:40)

Good thanks as well.

Andrew Sykes (01:42)

Joining from sunny warm Brisbane. So, a little bit about Sam. Sam has close to 20 years’ experience advising on indirect taxes like GST and the fuel tax levy. He's a prior member of the ATO's fuel tax liaison group and a regular presenter at the Tax Institute and other seminars and conferences. Sam's a current member of the Tax Institute of Queensland's state taxes subcommittee, so well qualified to talk to us today. 

And from the sustainability angle, Nicole has over 15 years of experience working for RSM in both Australia and Los Angeles. As RSM's National Sustainability Lead, she plays a key role in driving RSM sustainability goals and is a registered greenhouse and energy auditor.

Nicole's managed numerous engagements for the Clean Energy Regulator under the National Greenhouse and Energy Reporting Safeguards Mechanism, Renewable Energy Targets and Emission Reduction Fund.

So that's quite a mouthful there, Nicole. They're big jobs too.

Nicole Mohan (02:49)

Yes, I was surprised they didn't use the acronyms.

Andrew Sykes (02:51)

Too many acronyms.

Nicole Mohan (02:53)

Always a lot in ESG.

Why is there a need for a road user charge on electric vehicles in Australia?

Andrew Sykes (02:56)

So Nicole, first question to you. Why does the government want to introduce an electric vehicle road user charge in Australia?

Nicole Mohan (03:06)

Okay, so I guess this is really about equity. So, it's ensuring that all road users contribute to road maintenance, as currently users of EVs avoid that fuel excise. We've seen that as vehicles become either more fuel efficient or don't need fuel at all, as in the case of EVs, the revenue collected from the fuel tax is dropping.

There are some interesting facts in regards to the fuel excise. Fuel excise represents about 38% of all road-related revenue. Registration is about 30% and stamp duty 14%, while tolls and council rates make up the difference. 

Some other interesting facts: total road-related revenue from all levels of government in 2023 was $31bn, and total road expenditures from all levels of government in 2023 was $38.6bn. This leaves about $7.7bn in roads expenditure to come out of other taxes. 

There are details still missing on how this charge will be structured and who it will apply to and how it will be collected, which I guess we'll talk through it for the rest of the session.

Sam Mohammad (04:28)

And if I could just jump in, sorry, Andrew, if I could just jump in with a couple of additional figures, which might go towards, I guess, the impetus as to why a road user charge and why now. And as Nicole kind of touched on, we're at a point where the revenue from road user or from excises is declining in real terms or staying roughly steady. And part of the reason is there is an ongoing shift towards EVs, but there is also a shift towards more fuel-efficient vehicles. 

Leave aside the fact that we have vehicles that actually pay no excise. You also have greater distances being travelled. You have more damage being done to roads, but you actually have less revenue being generated. 

So, the current excise model is being seen as effectively broken or at least not fit for purpose. Now that doesn't necessarily create the business case for a road user charge, but it creates the need to consider an alternative to the current excise model because in relative terms, as a percentage of total revenue that can be used towards more and more expensive roads, it's not generating anywhere near enough to be able to cover the entire reason it exists, which is for road maintenance.

So that's part of the reason why we're having this conversation is simply the excise model itself is not fit for purpose.

What does the fuel excise really pay for?

Andrew Sykes (05:46)

Now, how does that figure in, Sam, when we have the Australian Automobile Association asserting that over the decade to 2023, only 57% of fuel excise was reinvested in land transport projects. They're essentially saying we're paying the excise and it's not actually going back into roads. Is that correct in your experience?

Sam Mohammad (06:15)

It's probably a fair comment, but it's a portion of the whole truth. So, the money that's raised, despite the fact that the way the government's presented is this is money that is raised to then go into road projects, legally that's not how it works. 

Legally, the money is collected and it goes straight into consolidated revenue, which sits at the federal government level, which is then allocated towards road projects. So, it's not dollar for dollar that that money has to go towards road transport products.

What we then have is, as Nicole touched on, is we actually have a range of different sources of revenue that go towards constructing and then maintaining roads. But we also have different levels of governments who are responsible for different types of roads. So, the way you slice and dice these numbers is… it's quite a difficult exercise to say. If you're traveling, say for instance, on the Pacific Highway, how much of that is maintained by the federal government? You then take an off-road, how much of that is the state government? You then take a side road, how much of that is local government? So coming up with the numbers to maintain the entire road network and who's responsible for it is tricky.

Andrew Sykes (07:19)

Yeah, so as a road user and somebody who's not an expert in this area, I would have thought that the fuel excise all just goes to maintain the roads. does it more correctly go towards building new roads or is it for maintenance of old existing roads?

Sam Mohammad (07:36)

Well, in theory, it's supposed to go towards maintaining the existing road network. But the way the money goes is it just goes into a big pot for government. And so it can be spent — that money that is raised from excise can be spent building a hospital. It can be spent on any of the government priorities. It's not allocated constitutionally towards road projects. That's just, I guess, a notional way of thinking about why we're raising the tax. That's the reason the tax exists, but it's not the reason why that money that is raised is actually spent. That may not be like for like.

How would Australia's climate goals be impacted by an EV tax?

Andrew Sykes (08:07)

And Nicole, you did mention an equity issue. So, we are potentially faced with a situation where one group of road users is paying a lot more tax than the other. Regardless of what it's used for, we are taxing road users differentially at the moment. So that equity one is a good point. But how does this go towards impacting on our climate targets?

Nicole Mohan (08:27)

Definitely. As we consider this road user charge for electric vehicles, it must definitely align with our climate targets. Most recently the Australian government announced on 18 September that we have a new 2035 emissions reduction target, which marks a major step towards achieving that net zero by 2050 and we also have a net zero plan which outlines how that target will be met. So considering that we have to get to, I guess achieve our 2035 emissions, which it seems far away now, but it really isn't. We must carefully design this road user charge to avoid penalising, as I mentioned, those who drive less or those who live in rural areas and we should also incentivise EV low-emission vehicles. So, the best way is when considering this charge, it should be a universal distant based charge that perhaps incorporates vehicle mass and emissions as well and it should really reward low-emission choices, ensure fairness across income groups, and this will also help consider our broader sustainability objectives and will really help support our transition to net zero.

Should we drop the fuel tax for a universal road user charge?

Andrew Sykes (09:55)

Yeah, so picking up on a point you made there, do we think that this will be a universal charge or will it only apply — is this just the first part of a road user charge that will then extend… For example, we note that New Zealand has a charge on heavy vehicles. What's your view on that?

Nicole Mohan (10:20)

My personal opinion is that I believe it should be a universal charge because this will ensure that fairness across all households, so low-income and high-income households. And this could be made— be seen as the RUC as a fairer system.

Andrew Sykes (10:41)

Yeah, because there is an element of fairness in the excise on fuel in that the more you drive and use the roads, the more tax you pay. So, it's a bit of a user pay. Do you think this could be the more you charge? Is there any thoughts on that, tax the electricity supply, pay excise on electricity going into the vehicles?

Nicole Mohan (10:49)

Mmm.

Sam Mohammad (10:59)

I might just jump in with an observation just around the difference between excise and road user charge, which goes towards the point of fairness and equity. One of the issues with the current excise model and the way it's applied is at the moment, it's applied to combustion engine vehicles, so petrol and diesel, not applied to EVs. Now, when you do the modelling, traditionally, people who are on a higher socio-economic income, they can afford the EVs. They get FBT exemptions, they get concessions in terms of rebates, they have higher incomes, they can afford the EVs. So, when you actually look at the distribution of who pays the excise, it's actually more at the lower end rather than the higher end.

So leave aside the actual mechanics of how a road user charge would be applied. There's already an equity point here that people who can, I'll say less afford to pay tax, are in fact bearing a higher burden of the tax. So that's part of the reason for why something for EVs. Now, I guess I take the point around emissions, but when we then come to look at, well, the distance-based… At the moment, there is a, I guess a proxy between how much fuel you buy and how much you might travel. But it's not like for like. 

You could poorly maintain a vehicle, you will buy a lot more fuel and travel less distance. A more traditional or a more refined road user charge would generally link per kilometres travelled to the charge itself. So it may, as a very simple example, a road user charge could simply be on 1 January, you take a photo of your odometer, send that off to whichever revenue authority is going to look after this. 31 December, same year, you'll send them another odometer reading. The differential between the two, you pay a rate per kilometre, which has a much stronger link between the actual distance charged compared to the current model, which typically rewards those cars that are more efficient, to the point of being not taxed at all.

So there is a closer linkage between the damage that a car may end up doing to a road and actually paying some of that and the other point to note is that as a, again, as a very rough idea, your standard EV is generally heavier than your standard petrol or diesel engine car and if you look at how much damage relative they are doing, it's generally going to be on the EV side. So at the moment, as I said, there's a case for change and then there's a discussion to be had as to what does that change look like?

The complex problem of balancing road-use taxation

Andrew Sykes (13:40)

Okay, so a change away from excise tax to road user charge as a total solution.

Sam Mohammad (13:47)

Not a total solution because there's still equity issues to play out here, which have been highlighted by various, I guess, stakeholders. So, one issue may well be there are different segments of the community that may for whatever reason have to travel further. So, if you're in a rural community, you may have to travel a further distance than someone who's sitting in the city.

Does that mean that there are differential rates depending on which postcode you may start in or whether there should be super rates if you're travelling in a CBD during peak hours? Whatever that might look like, I think there are still questions of equity that exist, even if you had a flat rate per kilometre, because it doesn't impact everyone equally.

Andrew Sykes (14:30)

There's some really good points there, Sam, and it's certainly got me thinking beyond the simple application of a flat charge or a fairly easy charge. Yeah, arguably that would be yet another piece of lodgement into a government that is struggling to deal with the amount of bureaucracy at the moment. So, there's some difficulties in administration.

The impact of an EV tax on future EV adoption in Australia

Andrew Sykes (14:54)

Nicole, do we have any evidence that these kind of charges make a difference in the adoption of electric vehicles?

Nicole Mohan (15:03)

Yeah, definitely. I think, considering all of Sam's points of what we just discussed, there is a risk as well that if the charge is perhaps seen as too high or implemented without considering those broader benefits, this will definitely hinder our transition to net zero and also, I guess, our transition to low carbon mobility and adoption of EV vehicles. In order to meet our new climate targets, EV adoption is actually a central pillar of achieving them. So again, we need to make sure that this rewards, ensures fairness amongst all and rewards everyone and really does support Australia's overall goals.

Andrew Sykes (15:52)

Yeah, so if we take that on board and then consider, you know, trying to achieve those goals, but also recognising a user pays approach to roads and the cost of maintaining them. Are there any other ways that we could encourage EV adoption in the face of a charge?

Nicole Mohan (16:10)

Yeah, so one option was how the revenue from this user, this road user charge will be used. Without any clear communication of how this will be used, the public could see this as just another revenue-raising measure rather than something to support climate action. And then again, this could erode that trust and willingness for people to actually purchase an EV. So in terms of actually using the funds from that road user charge revenue, some ideas are maybe we could use it to invest in sustainability initiatives. 

So, examples could be funding more EV charging networks or ensuring we put more money into public transport and those road safety upgrades that we talked about as well. So, within sustainability, if we see that circularity and that positive feedback loop, this will really help maintain and support momentum from the public.

Are EVs the best way to achieve Australia’s climate goals?

Andrew Sykes (17:23)

So finding other ways to make EVs attractive to use. Do we think that… is it more of an impact from EVs, or maybe if it was more expensive to travel, was a user-based charge or a kilometre-based charge as Sam was talking about? Would less driving have more impact on our climate change goals, so less driving in general because people are more conscious if there's a cost to the kilometres they drive. Would that have more of an impact on our climate goals than EVs themselves?

Nicole Mohan (17:57)

Yeah, definitely. So if people are driving less and perhaps considering alternative transport modes like, yeah, public transport, cycling, even carpooling, this would definitely encourage users to have that sustainability focus in mind. And this would definitely help with achieving our goals.

Corporate impact of RUC and fleet electrification

Andrew Sykes (18:19)

Yeah, so thank you. If we now move away from individuals and consider, because we also have corporates that own vehicles as well. Sam, do you think this tax would affect companies moving into fleet electrification?

Sam Mohammad (18:34)

Yes, but you've got to look at the whole picture here. So, the point I think you were raising before is almost a distinction or a trade-off between, do I still buy a petrol car? Do I move to an EV? Even under states already, so NSW, WA and Victoria have previously tried to implement a road user charge. And I'll come back to Victoria's in a second. 

Even under the most, I'd say generous model, the most that the average user was going to pay roughly equivalent was about $400 a year.

Under the current model, a typical person will pay roughly about $1,200 in excise. So, like for like, if you were jumping in an EV relative to jumping in a standard petrol car, under the road user charge, at the rates that were being set, you would be paying less. Now that sends a signal to the market that EVs are a better choice relative to traveling in a petrol car.

Also bear in mind that outside of just the road user charge versus excise debate, there are a range of other incentives that were available both at the federal level and at the state level for incentivising people to move away from petrol cars or at least inefficient petrol cars and moving towards full EVs. Now, you'd have the FBT exemptions, you've had direct cash rebates, you've had discounts on charging stations. So, there's a range of other incentives. 

Why we need to bring in an EV tax now and not later

Sam Mohammad (20:07)

There is, on one hand, there is a mixed message here to say, hang on, we're gonna start taxing EVs, okay. But the bigger picture is those incentives available to EVs that are not available to other cars. The other point is that you forward model what the EV uptake over the next 15 to 20 years looks like.

There is a critical point at which is going to be very difficult to implement a road user charge once you've got 50% to 60% of the market in EVs, relative to bringing it in now where roughly about 7% to 10% of the market is EVs. So, if you're going to do it, do it early. That's where the government's trying to get to. And again, they can kind of figure a lot of the detail out as they go along and tweak it to the extent that there are any discrepancies and exemptions or carve outs that need to be made. 

But what they wanted to do is to get ahead of trying to bring something in when the whole excise model falls down and you've got too many EVs on the road to start taxing them. And they all vote, right? You know, there's a trade-off in terms of timing. 

The other thing I wanted to bring in is the constitution. So, this is not a castle type argument. The constitution becomes relevant because the different states originally imposed, or sought to impose, excise. And an affected driver in Victoria took the case through to the High Court and had a win, which effectively said states cannot impose a road user charge of this nature because it's an excise. And excises, under the Constitution, can only be levied by the federal government. So, as much as the federal government kind of sat back and happily let everyone else impose it, they're now the ones stuck with it going, well, we're the only ones that can now impose a road user charge because the states can't because they're constitutionally barred from doing so. So that's, as a collective, that's kind of created the case for change.

Andrew Sykes (21:57)

Okay, so really a bit of sticker shock there, just thinking a new charge will come in, but there is potentially still a relative cost advantage running an EV of what, about $800 a year when it comes to tax. I do like, with a little bit of a cynical grin, the view that bring it in now while it won't cost as many votes, arguably a sensible strategy from the government.

Sam Mohammad (22:26)

Purely my interpretation not RSM's.

Transparency in emissions reporting by companies

Andrew Sykes (22:30)

Yeah, I tend to agree with it, Sam. I think it's a good observation. So Nicole, looking at companies still — and companies have to consider their decisions around emissions reporting, will this influence those decisions? Nicole

Nicole Mohan (22:30)

Yes, certainly. So, I guess if we do the introduction of this road user charge for EVs, it will most likely influence how companies do report. If there are any increased costs, this may make companies closely monitor and actually consider the way that they use their fleet.

And obviously, if the emissions number is getting higher, then companies might actually look to reduce their emissions through other means. So, they might look to purchase offsets. They could look at, obviously, other incentives within the business, lighting, how they recycle waste, those sort of initiatives.

And they might, in terms of actually using fleet and vehicles, companies could actually explore optimising delivery routes, perhaps looking at doing everything all in one go or also partnering with other low-emission transport providers. But essentially in terms of emissions reporting, we need to make sure that… companies need to ensure that transparency is key and it is really essential for maintaining credibility within emissions disclosures. 

Andrew Sykes (24:03)

Yeah, so really interesting points there on how it can change things. Do you think it will encourage innovation in EV design or even alternate fuels, Nicole?

Nicole Mohan (24:14)

Yes, certainly. I guess as Sam mentioned before, EV vehicles are actually more heavy. So, there might be innovation considered in making them lighter or looking at any other materials that could be used. There might also be other research and investment into alternative fuels and perhaps other technologies that could also help further reduce emissions and operating costs.

Possible complications in implementing a road user charge

Andrew Sykes (24:41)

Yeah, thank you. Sam, you have raised a few points and issues around it. If we go to your tax background can I ask you, what are the difficulties in introducing this type of legislation?

Sam Mohammad (24:59)

So, I'll leave the political discussion about how difficult it is to impose and create new taxes to one side. If we're just looking at the design of a road user charge, probably the fundamental point is around recording of the base of the tax. Now, if we use the base of the tax as the number of kilometres travelled, that's all well and good, but there's got to be a mechanism by which that is tracked. Now, as I said, one mechanism might simply be: take a photo at the start, the end. Now, the cynic in me suggests that you could well take photos at different points in time and say, well, that's my current odometer. What it could lead to, and this is, I guess, a follow-on suggestion. This goes back to roads user charging and it is not a new idea. This has been around for a long time. It's been mentioned in the Henry review.

It was an idea that was championed back in 2010 and kind of died a slow death. We're now talking about it again as we are now moving towards vehicles that are tracked. So, without needing you necessarily to have any kind of friction point of actually doing anything, the government may well have access to your data, and it will know that you've travelled a thousand kilometres this month.

And it could then use that information to then just send you a cheque or alternatively, just deduct it from your account, whatever that might look like, not overly dissimilar to a total account. So, there are a number of challenges in terms of calculating and capturing that information, but potentially we're moving to a model that suggests maybe it doesn't require you to do anything and maybe it doesn't require the government to do anything through the use of data, whether you want to call it AI.

Whatever it might look like, we could end up with a fairly frictionless model. But there are a number of non-tax-related issues that come with that, leaving aside the political privacy, for instance. 

Would you really want the government to have that access to knowing how far you're travelling, potentially where you're travelling, at what times you're travelling, if we decide to have different rates for different times to kind of manage traffic? So, there's a range of non-tax issues with bringing some of those issues in.

But the flip side is: is it fairer, potentially, relative to excise, which has its challenges? It is, but, you know, they're all issues for government to resolve.

Are there fairer alternatives to the proposed EV tax?

Andrew Sykes (27:20)

Yeah, so we did note in the research for this that Iceland already has a charge as the only other jurisdiction with an EV charge. I think it's just an EV charge. They're talking about transitioning to in-vehicle units, which would be an interesting political proposition here in Australia; to allow the government to track your vehicle.

The other thoughts there are also around using like state averages, district averages, et cetera and that would go a long way to what you were talking about before, Sam, which is around regional or country users versus city users. 

Do we think, asking both of you this, do we think there's a better alternative to increase the equity in who's paying for the roads?

Sam Mohammad (28:09)

Leave aside all the challenges, I do think a road user charge, in its purest form, provides the best opportunity for a fairer and more equitable system, overcoming all of those challenges I've noted before in terms of the regressive nature of excise. Mentioning before around, you know, the respective damage that certain vehicles do. You can have different rates for different types of vehicles and making it relatively simple to administer if, for instance, we go down the path of government, or another third party, having access to specific data to be able to impose a tax. 

So, in a pure sense, I think a road user charge makes sense, but there are obviously challenges with rolling it out, implementing it, and making sure it works for all segments of the market.

Nicole Mohan (28:54)

I think, yeah, agree with that and I guess from the sustainability perspective, agree there's definitely both those risks and opportunities. As we mentioned before, if it's structured poorly, it could discourage EV adoption, impact those lower-income households, and perhaps even slow down organisations or corporations changing to a fleet of EV vehicles. 

But if it is carefully designed with all those factors that we talked about and if they are considered, then it can definitely support those behavioural shifts, and it can help drive innovation and also help us achieve our climate goals. So yeah, I don't know if there's an alternative, a better alternative.

Wrap up

Andrew Sykes (29:37)

Yeah, like many taxation issues and equity issues, it's really complex. And what can appear to be quite a simple measure or a simple argument… a lot of layers to it. We're getting some online feedback about this and the sentiment's mixed. And I would suggest it's probably more negative if you own an EV and more positive if you're watching EV owners not paying excise tax and that's anecdotal comments that we've received and also its arguments about whether it's fair, how to measure it, whether we should scrap it entirely and just raise revenue elsewhere and there's certainly a lot of feedback about how it be administered and the pain of doing that tied in with concerns about the environmental commitment.

Both of you have outlined a lot on those today. Really, overall, it's a really complex issue and we are getting quite a simple solution. And generally, our view is that if it's done well, it can provide equity and fairness in taxation, because roads need to be paid for somehow. 

So, thank you very much for joining us today for the talkBIG episode. I've been your host, Andrew Sykes. I'd encourage all of our listeners to subscribe to our podcast, whatever your favourite platform is. 

Nicole and Sam, any last thoughts to add before we sign off for this episode?

Sam Mohammad (31:15)

The only last thought I have is it'll be interesting to see how quickly the government moves on this. None of this is new. None of this is something that the governments didn't know about before. So, the fact that we're still talking about implementing something 15 years after it was last suggested suggests that there's still a little bit to go.

Andrew Sykes (31:31)

Yeah, terrific.

Nicole Mohan (31:32)

Yeah and I guess just from my point of view, the success of this will depend on how well it integrates with our broader climate commitments. And from my perspective, I think if it integrates, it will be supported.

Andrew Sykes (31:49)

Terrific. Thank you, Sam. Thank you, Nicole and I invite our listeners to tune into our next episode of talkBIG. Thank you for joining us on talkBIG. If you found this episode helpful, please subscribe and leave a review. Thank you.