This trend had been recognised for some time, with commentators suggesting that reliance on fuel excise will need to be reconsidered sooner or later. The coming decades may see fuel excise fall even faster, as ZLEV adoption picks up pace and bans on the sale of new ICE vehicles have emerged (for instance, the ACT has proposed such a ban from 2035).
This predicament is not unique to Australia: many other countries rely heavily on fuel excises as a means of raising revenue to fund road infrastructure. While some jurisdictions have recently begun to impose various forms of additional fees and charges on ZLEVs, so far none have come up with a comprehensive plan for what to do once the fuel stops flowing. Ideally, a new policy should not just create revenue to fill the hole left by fuel excise, but should also equitably allocate the costs of building and maintaining the road network across those who use it.
Emergence of policy solutions
A distance-based road charge has to date found some support in Australia. NSW, SA, WA and Victoria have all proposed similar policies which would impose a distance-based charge on ZLEVs, with ICE vehicles continuing to pay fuel excise.
- NSW passed the Electric Vehicles (Revenue Arrangements) Act 2021, which imposed a charge of 2.5 cents per kilometre for ZLEVs and was slated to take effect from the earlier of 1 July 2027 or when battery electric vehicles reach 30% of new vehicle sales.
- South Australia passed the Motor Vehicles (Electric Vehicle Levy) Amendments Act 2021, with the same charge per kilometre and same commencement time as NSW.
- In 2022, the WA government announced that it would introduce a distance-based road user charge for ZLEVs starting from 1 July 2027, but has not yet passed any legislation.
Victoria passed the Zero and Low Emission Vehicle Distance-based Charge Act 2021, which similarly imposed a 2.5c charge per kilometre for ZLEVs. Unlike other States however, the Victorian Act commenced from July 2021. It was in operation until October 2023, when the charge was struck down as unconstitutional by the High Court of Australia.
The High Court's decision in Vanderstock v Victoria [2023] HCA 30
Victoria's distance-base charge was challenged on the basis that it constituted a duty of excise. Under section 90 of the Constitution, only the Commonwealth may impose a duty of excise. The long-standing view of the High Court was that an excise was a specific form of tax with the following features (summarised by Edelman J at [443]):
- the tax has a real and substantial economic effect in a market for the sale of goods;
- that economic effect is on the supply side of the market (i.e. independently of demand, the tax changes the price at which any supply will be made); and
- the economic effect on the market is a direct effect of the tax (rather than an indirect effect which flows from an effect the tax has on a different market).
In a 4:3 decision, the High Court overruled existing precedent, reducing the constraints on what constitutes an excise. The new understanding of an excise, as summarised by the joint majority judgment of Kiefel, Gageler and Gleeson JJ (at [197]), is:
Any tax on … goods – whether imposed at the stage of their importation into Australia or production or manufacture in Australia or at any subsequent stage in their distribution, sale, ownership, control, use, resale, reuse or destruction in Australia or export from Australia.
Implications for road infrastructure funding
At its narrowest, the High Court's decision rules out a distance based ZLEV charge as a means of revenue-raising by the States, all but guaranteeing that similar policies in other States will be abandoned before they come into effect.
- NSW still has references to its ZLEV road user charge available online (at the time of writing). However, the NSW Treasurer has said during question time that the government is seeking advice on the extent to which its ZLEV charge is impacted by the decision, and is currently communicating with other States and the Commonwealth.
- SA had already abandoned its ZLEV road user charge back in February 2023.
- WA has made no further public announcements regarding its ZLEV road user charge (at the time of writing). The Transport Minister, in response to a question during question time, has stated that the government will need to re-examine its approach and flagged ongoing discussions with the Commonwealth.
NSW and WA governments have both expressed strong support for a nationally consistent approach to road funding.
However, the new understanding of what constitutes an excise could have additional impacts for the way road infrastructure in Australia is funded. Possibly the most significant implication of Vanderstock is that an excise no longer seems to be confined to the supply side of a market, which culminated in the High Court overturning its decision in Dickenson's Arcade Pty Ltd v Tasmania (1974) 130 CLR 177. Victoria had submitted that it had acted in reliance on Dickenson's Arcade, and suggested that were it to be overturned, it could have an impact on other State imposts. Motor vehicle duties and vehicle registration charges were among the imposts Victoria suggested might be affected.
If these concerns prove to be valid, then not only are the proposed ZLEV levies no longer a viable means of filling the gap in road revenue, but the gap may suddenly balloon as billions of dollars in State duties and registration fees evaporate. As highlighted in the table above, state-collected vehicle registration and stamp duty on transfer of vehicles are significant for road funding, contributing approximately a third of all road-related revenue collection. Those revenue sources are also significant to State budgets generally, constituting between 9% and 14% of each State's total taxation revenue.
An increased future role for the Commonwealth?
The High Court's decision does not mean that existing methods of generating road revenue will become entirely unlawful. A possible, although somewhat extreme, outcome of the decision in Vanderstock is that the Commonwealth is to have exclusive purview over any revenue sources which may be found to constitute an excise. If it came to pass, this would represent a significant shift in Australia's federal balance, and could see the Commonwealth taking on more responsibility for collection of revenue that relates to road infrastructure.
If the Commonwealth were minded to legislate a ZLEV distance charge (or any other revenue source which constitutes an excise), it would be expected that it would be imposed uniformly across the States. The alternative would be to use Commonwealth legislation to re-impose existing State excises, which (to the extent State excises differ from one another) may run the risk of breaching the Constitutional prohibition against discriminating or giving preference to one State over another (per sections 51(ii) and 99 of the Constitution). There would presumably be some support for uniform Commonwealth legislation, noting that NSW and WA have both expressed a strong preference for a national approach.
A new approach to new road user charging
Aside from raising questions about who should collect road usage related revenue, the Vanderstock decision gives cause to reflect on how road user charges should be structured in a world striving to decarbonise. There may be opportunity to develop a holistic road user charging policy which is fit for purpose both today and into the future.
There are a few key policy considerations which a new road user charging policy may aim to achieve:
Charging in a way which is proportionate to the cost the individual user imposes on the road network
- There are a multitude of factors that go into the cost of building and maintaining a road network. Traffic volume and vehicle axle weight are two significant factors which influence wear and tear caused to roads.
- A road user charge may therefore aim to charge road users based on how much they use the roads and/or how heavy their vehicle is.
Congestion reduction
- While total traffic volume is important, peak traffic volume is just as important. Road network design takes into account the level of traffic it must carry in peak traffic times.
- Broadly, there are two ways to reduce congestion – increasing the peak road network capacity (which is costly) or have less cars on the road at the same time.
- A road user charge which takes into account when and where people drive can encourage drivers to consider other means of transport during peak traffic times, or to drive at different times where possible. Drivers who decide to drive in congested areas during peak times will contribute to the increased road costs required to support higher peak road capacity.
Incentivising lower emission vehicles
- Despite ZLEV sales gradually building momentum in Australia, the transport sector still contributes 19% of Australia's emissions. Transport emissions reduction may be increased by incentivising use of ZLEVs or more efficient vehicles as part of the road user charging framework. To an extent, this is already in-built to the existing excise arrangements.
- Any incentives need to be sustainable. For instance, a road user charge which provides discounts to ZLEVs may achieve relevant policy goals today. But at some point in the future where ZLEVs have reached market saturation, there is no longer any work for the incentive to do, leaving a system which brings in far less revenue than it did when the policy was first introduced.
- As an alternative, road user charging could focus only on the cost of road infrastructure, and separate policies could be used to push for lower emissions – such as ZLEV rebates and tax incentives or some form of a carbon consumption tax.
Ease of administration
A system that is difficult to administer will entail administration costs, which means less of every dollar collected will go towards road infrastructure spending.
An administratively complex system may also be poorly received by the public and / or susceptible to subversion.
Looking ahead
New policies such as Victoria's (now abandoned) ZLEV distance charge are an attempt to reckon with the weaknesses inherent in the existing road funding system. The present system is not designed to cater for a decarbonising economy, and is also complex and disparate – containing a Commonwealth fuel excise, other Commonwealth taxes (e.g. luxury car tax), 8 different state and territory systems of vehicle registration, 8 different systems of transfer duty on vehicles and other differing charges (such as tolls and parking levies). In this light, is the solution really an additional 8 systems of ZLEV distance charges?
For now, the High Court seems to have ruled out state-based ZLEV distance charges. Preferably, what happens next will be informed by what is not only Constitutional, but also desirable in the context of policy objectives and technological change.
While road funding may be experiencing a period of uncertainty, it is also an opportunity for regulators, industry representatives and road users to collaborate on design of a fit for purpose, flexible road user charging system. In our part 2 update on the road ahead for the funding of road infrastructure post Vanderstock, we have examined some potential solutions. In the meantime, if you would like to discuss road user funding models, the Vanderstock decision or any other issues discussed in this article, please contact our team.
