Tax-free electric cars? What you need to know about the fringe benefits tax exemption for electric vehicles

This article was updated on 17 May 2024. 

It’s not often that tax legislation gets anyone’s motor running, but a new bill from the Federal Government that exempts electric cars from fringe benefits tax (FBT) has people talking – and it might finally shift Australia’s transition towards EVs into gear.

In today’s red-hot jobs market, plenty of employers are willing to offer fringe benefits to help attract, retain and motivate the right employees. One of the most popular fringe benefits is a car, either under a salary sacrifice arrangement, or through the personal use of a company car.

Traditionally, those benefits have been taxed – but under this new legislation, that tax won’t apply to electric cars.

Even before the FBT exemption was made law, there was plenty of speculation about what this means for employers, employees and the uptake of electric vehicles in Australia.

Here’s what you need to know about the winners and the losers of the FBT exemption, and what it could mean for you.

In this article:

Which vehicles will be eligible for the FBT exemption?

So, first thing’s first – which sorts of cars are we talking about here?

The updated legislation exempts cars that are zero or low emission from FBT. It’ll only apply to vehicles that are considered ‘cars’ under the existing Fringe Benefits Tax Assessment Act – that’s cars, vans, 4WDs, utes, any goods-carrying vehicle that has a cargo capacity of less than one tonne, or a passenger vehicle that can carry up to eight people. It won’t be available for electric motorbikes, or any other type of electric vehicle not covered by that definition.

The definition of a zero or low emissions vehicle includes battery electric vehicles (BEVs), hydrogen fuel cell electric vehicles (FCEVs) and plug-in hybrid electric vehicles (PHEVs). However, it’s important to note that PHEVs will only be eligible for the FBT exemption until the end of the 2024 FBT year. From 1 April 2024, PHEVs will no longer be considered zero or low emissions vehicles for FBT purposes.

Hybrid electric vehicles (HEVs) that run mainly on liquid fuels and are recharged by regenerative braking are not eligible. To qualify, a car has to have a battery that’s capable of being recharged by an external power source.

It won’t apply to all electric cars, either. To be eligible, a car’s first retail price has to be below the luxury tax threshold of $89,332 for the 2024 FBT year. That rules out a lot of the EVs that are currently on the market in Australia, but will cover a selection of models from BMW, Hyundai, Kia, Lexus, Mazda, Mercedes-Benz, MG, MINI, Mitsubishi, Nissan, Polestar, Volvo and Tesla.

In theory, economies of scale will bring down the price of EVs as they make up a bigger share of the market, so you should have more options to choose from in the years to come. That’s assuming, of course, that you can even get your hands on an EV in the first place, which is a whole other issue that we’ll get into later.

The car must also have been first held and used on or after 1 July 2022 (which means the legislation will be backdated when it passes). According to the Bill’s Explanatory Memorandum, if an electric car was ordered before 1 July, but it wasn’t delivered until after 1 July, it’ll still be eligible for the exemption.

What about second-hand cars?

Second-hand cars will qualify for the exemption eventually – provided that they were first purchased as new on or after 1 July 2022 for less than $89,332 (or whatever the luxury tax threshold is set at in future financial years).

Let’s say I buy a Tesla Model 3 RWD for $65,000 today. If I later sell that Tesla to you, and you make it available to your employee for their private use as a fringe benefit, it’ll be eligible for the exemption. Even if I somehow swindle you into paying me $85,000 for it, it’ll still be eligible for the exemption, because its first retail price was under the luxury tax threshold.

On the other hand, let’s say I buy a Tesla Model 3 Performance for $93,000 today. Even if I take temporary leave of my senses and you hoodwink me into selling it to you for $50,000 the day after I drive it off the lot, it still won’t be eligible for the exemption, because its first retail price was over the luxury tax threshold.

Incidentally, selling company cars second-hand is one of the most effective ways to make EVs more affordable for the general populace. In Europe, company cars – which are heavily subsidised by tax breaks – make up the bulk of new EV sales, and when they roll over into the second-hand market after a few years, they make buying an EV a more realistic option for your everyday consumer.

How will the FBT exemption for electric vehicles actually work?

FBT usually applies to any car provided by an employer to an employee, either by a salary sacrifice arrangement in which the employee finances the car through repayments from their pre-tax salary, or by making a company car available for personal use.

To work out the taxable value of a car fringe benefit, you can use either the statutory formula method (based on what the car cost), or the operating cost method (based on what the car cost to operate).

You can use whichever method leaves you paying the least tax, unless you haven’t kept the log books you need to separate business use from personal use for the operating cost method, in which case you have to use the statutory formula method.

The big deal here is that Labor is going to stop FBT applying to electric vehicles. They say that if a model valued at about $50,000 is provided by an employer to an employee for their private use, the FBT exemption will save the employer up to $9,000 a year. For an employee using a salary sacrifice arrangement to pay for that same model, they say it’ll save them up to $4,700 a year.

Let’s dig into that a little deeper. Let’s say an EV costs $77,000 (GST-inclusive), and a business purchases this EV and provides it to the founder’s spouse. There’s no business use for the vehicle, and no after-tax contribution from the founder or spouse.

Because there’s no business use, we can assume they’re not keeping a log book, and they’ll be using the statutory method to calculate the taxable value for FBT. We’ll assume the business is taxed at the base rate (25 per cent), that they’re liable for payroll tax, and that they’re based in NSW.

Let’s compare the cost to the business against the standard FBT statutory method treatment.

Assuming you were going to buy the car anyway, that’s a pretty good deal – $12,480 in cash savings to the business, and you get a new EV!

What’s the catch?

It all sounds pretty good so far, but – and there’s always a but – the benefit provided still counts from a reportable fringe benefits amount (RFBA) perspective, even though there’s zero FBT payable.

Effectively, that means employers will still have to do an FBT calculation for vehicles they provide as fringe benefits, and employees will still have to report the taxable value of the car fringe benefit as part of their RFBA on their tax return, as though the FBT exemption didn’t apply.

Does this matter? Potentially, yes. For instance, if you…

  1. Have a study loan
  2. Pay child support
  3. Don’t have private health insurance, and therefore have to pay the Medicare Levy surcharge
  4. Are on the cusp of the arbitrary $250,000 tax threshold under Division 293

…then it’s in your best interest to keep that RFBA as low as you can. (And that’s just the tip of the iceberg; there are at least 12 other scenarios in which this amount matters.)

If the employee isn’t the founder of the business, that leaves us with an interesting scenario where the business doesn’t care about the private use of the vehicle (because they don’t have to pay FBT anyway), but the employee does, because they want their RFBA to be as low as possible.

The employee might then ask to keep a logbook, so the employer can calculate a more tax-efficient FBT taxable value, even though this is of no real benefit to the business.

How good are mismatches in incentives!

Another key consideration is which expenses related to operating an EV will be covered under the new legislation. For EVs that qualify for the FBT exemption, certain running costs are not subject to FBT, such as registration, insurance, servicing, repairs and fuel.

However, the installation of home charging stations does not fall under this exemption. The costs associated with purchasing and installing home charging units are considered separate and can be subject to FBT as a property fringe benefit. This means while ongoing charging costs may be exempt, the initial expense of setting up a home charging station could incur FBT as normal.

The policy is set to be reviewed after three years, based on the national take-up of EVs by that time. There’s no guarantee the exemption will continue after that – which raises the question of how employers, employees and financiers can agree on terms for leasing arrangements that’ll continue past that three-year mark.

How will the FBT exemption affect the uptake of electric vehicles?

So, will this legislation actually do what it’s supposed to do? It certainly won’t hurt the uptake of EVs, but whether or not it leads to a surge in sales is debatable.

The Government’s intentions here are clear enough. Australia’s transport sector is responsible for about 18 per cent of national emissions, and EV take-up will be key to reaching the target of net zero emissions by 2050.

But for all the hype around EVs, that take-up has been slow to take off. According to the Electric Vehicle Council’s latest State of Electric Vehicles report, EVs make up just two per cent of all new car sales in Australia.

Globally, EVs make up nine per cent of new car sales. Take-up has been highest in Europe, with EVs making up 15 per cent of new car sales in the UK and France, and a whopping 72 per cent in Norway.

The FBT exemption, paired with recent legislation to remove five per cent customs duty from eligible imported EVs from 1 July 2022, is an attempt to follow the example of those European nations, where similar legislation has helped to drive EV sales.

It’s true that cost is a big barrier to EV take-up, so any policies aimed at reducing that cost are a good start. The Electric Vehicle Council’s Consumer Attitudes Survey 2021 found that 54 per cent of Australians would consider an EV as their next car purchase, but 87 per cent said the biggest turn-off was the high upfront cost.

But cost is just one factor. In that same survey, 92 per cent of respondents said public charging infrastructure would be important in encouraging them to buy an EV.

This lack of public charging infrastructure is being addressed. A 50 kilowatt (kW) fast charger adds about 50 kilometres of range to a vehicle in just 10 minutes, and there are now 291 public fast charging locations around Australia, with another 700 set to be deployed over the next five years, all with multiple charging bays. There are also 1,580 ‘regular’ (sub-50kW) charging stations around the country.

For the most part, Federal Government support is focusing on fast charging stations for metropolitan areas, while State Government programs are funding fast charging stations for remote locations like Broken Hill, Bourke, Fitzroy Crossing, Coober Pedy and Mount Isa, to give drivers confidence they can visit the regions in an EV.

This is something of a chicken-and-egg scenario – as more EVs take to the road in Australia, more businesses and regional tourism locations will be motivated to roll out charging stations to attract customers.

But the biggest hurdle to getting more EVs in more driveways at the moment is simple supply and demand. Demand from Australian customers is outstripping supply from EV car makers at the moment, and those customers are being told they might have to wait months, or even years, for the car they want.

Global semiconductor supply constraints are no doubt taking a toll, but it’s also because Australia isn’t perceived as an attractive market for EV manufacturers. Australia is one of the only OECD nations that hasn’t adopted fuel efficiency standards, or any other regulations that would penalise manufacturers for not selling enough low or zero emissions vehicles here.

According to the State of Electric Vehicles report, that’s pushing Australia down the priority list for manufacturers, who are more incentivised to get EVs into America and Europe so they can count them towards meeting the fuel efficiency standards for those jurisdictions.

Volkswagen Group Managing Director Paul Sansom recently echoed this sentiment, admitting that countries with stronger legislation were being prioritised over Australia by manufacturers.

In other words, if you want more choice of EV models and you don’t want to wait months to get them, you’d better hope the government has more up its sleeve than the FBT exemption.

Are dealerships the real losers?

If and when EV sales do start to catch fire here, then spare a thought for the real losers – car dealers.

On the surface, anything that stimulates car sales would seem like a good thing for anyone in the business of, you know, selling cars.

But the growth of EVs will have interesting, and potentially severe, consequences for car dealers. A recent McKinsey report found that average dealership sales margins for EVs are lower than for ICE (internal combustion engine) vehicles, because dealerships are being squeezed between the higher costs of EV manufacturing and the need to win over customers who increasingly demand transparency and consistency in pricing across sales channels, whether online or on the lot.

The McKinsey report also found that EVs will generate up to 40 per cent less aftermarket spending when compared with similarly aged ICE vehicles. EVs have just 20 moving parts, whereas ICE vehicles have roughly 2,000, and fewer moving parts means less maintenance and repair.

EVs brake more efficiently than ICE vehicles, meaning less brake wear, and they don’t require oil changes, transmission repairs and other aftermarket services that usually account for about 50 per cent of dealerships’ gross profits.

On the other hand, when EVs do need servicing, the tasks involved are generally more complex. This could mean more billable hours – but it also means money will need to be spent on providing staff with training to work on high-voltage EV powertrains, as well as specialised tools and safety equipment.

Ultimately, the McKinsey report notes that the impact on dealership profitability won’t be immediate. With plenty of ICE vehicles on the road for the foreseeable future, and more ICE vehicle sales in the next few years, they’ll have time to plan, train their staff, and consider adopting initiatives like subscription maintenance services and investing in charging infrastructure.

In Australia, where EV sales have been relatively sluggish, those dealers will have even more time to consider their options.

And for us accountants? Well, the FBT exemption probably just means we have the same amount of work to do…

Watch this space, and if you have any questions, reach out to us here at SBO Financial.

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