One transport operator NTI spoke to on a recent visit to WA revealed their most-frequented trip now costs the business $1800 more in fuel than usual, a story that has been reciprocated by many across the country.
Luckily enough, a tiered fuel levy was negotiated with the customer to help combat the added expense.
What is a fuel levy?
Combatting these major hikes in fuel prices by implementing a fuel levy clause is essential in today’s environment of spiralling energy costs, according to Heavy Vehicle Industry Australia (HVIA) CEO Todd Hacking.
A fuel levy rate is an additional surcharge applied on top of your standard transport fee to help manage the fluctuations in fuel price. Many transport companies implement them, and their fuel surcharge calculation varies.
“Fuel levies are the most sophisticated safeguard local transport operators can implement to ensure they are not disadvantaged during this period of rising and uncertain fuel prices,” said Hacking.
“All operators should seriously consider building a levy into all contracts.”
Why introduce a fuel levy?
It’s simply smart business practice for transport operators to implement a fuel levy into their contracts, said Ryan Tax Services principal and national fuel tax leader Chris Sant.
He points out that effective fuel levies helped many companies deal with the recent reduction in the Fuel Tax Credit (FTC), which occurred as a result of the federal government’s temporary halving of the fuel excise for a period of six months from March last year.
Sant said operators with well-structured fuel levies in place were unfazed by the changes because “that’s why we have a fuel levy and our contracts allow us to review and adjust if required”.
“The difficulty for other operators was that fuel levies were either not present or static in many of their customer contracts.
“In many cases, fuel levies don’t effectively deal with FTCs as they are linked only to the price of fuel.
“The temporary changes earlier this year highlighted the danger of disregarding FTCs from fuel levies.
“Because the reduction in fuel price was accompanied by an almost-equal reduction in FTC rates, many transport operators found that the levy they were able to charge their customers reduced, whilst the effective cost of fuel remained the same.”
How to introduce a fuel levy
Done correctly, a fuel levy can set a baseline for fuel prices, with any rise or fall to be borne by the customer and not the transport operator.
Seen as standard practice, alarmingly, some transport operations are not using, or were unaware of fuel levies despite the current hits to their operating costs.
So, how should you go about implementing a fuel levy?
Be transparent and open in communication with customers.
Like all businesses, if your costs increase, you must pass it on. Transport operators should not have to absorb additional costs.
This is easily done by showing the surcharge as a separate line on the customer invoice. This provides full transparency as to the reason behind any service cost increases to the customer.
Find the appropriate surcharge calculation for your business.
This varies from operator to operator, but generally involves calculating the percentage increase in fuel costs from a base price and applying the change to the fuel proportion of your freight rate.
Fuel as a share of total operating costs varies depending on truck/s and task/s, but semi-trailers are likely to be between 25-40 per cent and smaller courier vehicles are likely to be 10-20 per cent.
The diesel fuel price used will often be the average of the fuel price over the daily, weekly or monthly period.
The freight rate is then automatically adjusted against the current fuel price which may be daily, weekly, or monthly depending on the agreement between the transport company and the customer.
Ensure your company is registered for fuel tax credits (FTC).
Fuel tax credits provide eligible businesses with a credit for the fuel tax (excise or customs duty) included in the price of certain liquid or gaseous fuel used in plant and equipment, and certain vehicles.
From September 29, 2022 the FTC rates were 18.8cpl for on-road operators and 46cpl for off-road operators.
But from February 1, 2023, they increase to 20.5cpl and 47.7cpl, respectively (see ATO table below).
Diesel fuel excise is also set to increase on the same day from 46cpl to 47.7cpl.
Sant adds that operators should also ensure their fuel levy takes account of any other change that affects net costs such as road user charges (RUC).
As road users, transport operators are forced to pay for the tarmac they travel. The federal government does this through registration charges (fixed component) and the RUC (variable component). The RUC is imposed through a reduction in your FTC entitlement for fuel used ‘on-road’.
The RUC rate is determined by the transport minister, on advice from the National Transport Commission (NTC), and generally changes on July 1. The RUC is currently 27.2 cents per litre and has gradually increased over the years.
“Any increase in the RUC may become a cost to operators and therefore, where possible, operators should be passing on to customers through an effective fuel levy,” Sant advises.
With a multitude of complex obstacles to rapid adoption of EV’s, diesel will be with us for plenty of years to come, so putting strategies in place to combat spiralling diesel costs is critical to survival in the notoriously low-margin transport industry.
Besides taking some simple steps to cut fuel usage, implementing an effective fuel levy is smart business practice, experts say.
To find out more talk to your accountant, financial advisor or NTI’s team of transport industry specialists.
Tips on introducing a fuel levy
- Be transparent and open in communication with customers
- Find the appropriate surcharge calculation for your business
- Ensure your company is registered for fuel tax credits