In recent years, the Australian government has introduced several measures to make electric vehicles (EVs) more accessible and affordable, especially for businesses and individuals looking to adopt greener alternatives. One such measure is the Fringe Benefits Tax (FBT) exemption for eligible electric vehicles (EVs). In this blog, we’ll break down the key aspects of this exemption and how it can significantly reduce the cost of an EV, helping both businesses and individuals save thousands of dollars annually.
Fringe Benefits Tax (FBT) is a tax paid by employers on certain benefits provided to their employees or their associates (such as family members) in place of, or in addition to, salary or wages. These benefits can include items like company cars, low-interest loans, free or discounted goods, or entertainment. The tax is calculated based on the value of the benefit provided, and the employer is responsible for paying it. FBT is separate from income tax and is calculated annually, with rates and rules set by the Australian Taxation Office (ATO). The goal of FBT is to ensure that non-cash benefits are taxed appropriately, ensuring fairness between those who receive salary-based compensation and those who receive benefits in kind.
The FBT exemption for electric vehicles was introduced to incentivise the uptake of cleaner, zero-emission cars. This exemption removes the FBT on eligible electric vehicles and associated car expenses, which includes the cost of electricity to charge these vehicles. The exemption applies to EVs that meet certain conditions and have a value below the luxury car tax (LCT) threshold for fuel-efficient vehicles, which for the 2023/24 financial year is $89,332. This policy, which took effect from July 2022, makes electric cars much more affordable and attractive to both fleet owners and individuals.
Not only does this exemption reduce the cost of purchasing and maintaining an EV, but it also helps bring the total cost of an electric car closer to that of a comparable petrol or diesel vehicle. For companies and employees, this can mean significant savings, especially when bundled with other tax incentives such as salary packaging arrangements.
To qualify for the FBT exemption, the electric car must meet certain criteria, which include the following:
1. Zero or Low Emissions Vehicle: The car must be a battery electric vehicle (BEV), hydrogen fuel cell electric vehicle (FCEV), or a plug-in hybrid electric vehicle (PHEV). However, it must not be a hybrid vehicle that is solely powered by petrol.
2. First Use After 1 July 2022: The car must be first held and used on or after 1 July 2022. This means that even if a car is purchased before this date, it will not qualify for the exemption if it was first used before 1 July 2022.
3. No Luxury Car Tax (LCT): The vehicle must never have been subject to the luxury car tax at the time of its importation or sale.
4. Employee or Associate Use: The exemption applies when the car is used by a current employee or their associate (e.g., family members) for private purposes.
5. Salary Packaging Arrangement: The exemption applies to cars provided through salary packaging arrangements, making it even more advantageous for employees to receive electric cars as part of their compensation package.
Under the FBT exemption, the following car-related expenses are exempt from FBT:
Additionally, if the expenses would have been deductible to the employee had they incurred them themselves, such as the cost of electricity used for charging, the “otherwise deductible rule” can be applied to reduce the FBT on these items.
However, one point to note is that home charging stations are not considered car expenses for FBT purposes. These may instead qualify as a property fringe benefit or an expense payment fringe benefit.
The FBT exemption has several benefits, especially when it comes to reducing the overall cost of owning an EV. Here’s how it works:
1. Cost of the Car Itself
For businesses and individuals who are eligible, the FBT exemption means that there is no additional tax burden on the car itself, reducing the effective purchase cost. Without the exemption, FBT could add a significant cost to providing a vehicle for private use, particularly for higher-priced models. With the exemption, EVs under the LCT threshold ($89,332) are much more affordable, especially when compared to conventional petrol or diesel vehicles in the same price range.
2. Lower Annual Running Costs
Beyond the initial purchase cost, EV owners also enjoy lower running costs. With the FBT exemption, the annual costs of maintaining an EV—such as registration, insurance, repairs, and electricity—are reduced. For businesses, this can make fleet management significantly more affordable. For employees who use EVs as part of salary packaging arrangements, the savings can be substantial, with lower out-of-pocket expenses and a reduced tax burden.
3. Salary Packaging Benefits
The exemption is particularly beneficial when the car is provided under a salary packaging arrangement. In this case, employees can pay for their EV through pre-tax income, which reduces their taxable income and consequently their overall tax liability. This arrangement makes EVs an even more attractive option for employees looking to reduce their tax burden and save on car expenses.
While the FBT exemption for electric vehicles includes plug-in hybrid electric vehicles (PHEVs), it’s important to note that this exemption for PHEVs will expire on 1 April 2025. After this date, PHEVs will no longer be classified as zero or low emissions vehicles under the FBT law.
If you are planning to lease or purchase a PHEV and intend to take advantage of the exemption, it’s wise to do so before the deadline to ensure maximum savings.
Please note that whilst there are grandfathering provisions for eligible PHEVs before this date – the grandfathering rules are quite strict and there are many circumstances that could result in the loss of that grandfathering.
Charging costs are a crucial part of the savings an EV owner can make. The cost of electricity used to charge an eligible electric vehicle is exempt from FBT. However, determining the cost of electricity can sometimes be tricky, especially when charging at home, as it is mixed with the household’s overall electricity consumption.
To simplify this, the government has introduced the EV home charging rate, which is 4.20 cents per kilometre for zero-emission electric vehicles. This can be used to calculate the portion of electricity costs associated with the car when charging at home. Commercial charging station costs can be included as well if the percentage of electricity used for the vehicle can be accurately determined.
Even though the private use of an eligible electric vehicle is exempt from FBT, it is still considered a reportable fringe benefit. This means that businesses must work out the notional taxable value of the benefits associated with the private use of the electric car and report it accordingly. It’s important for businesses to keep accurate records of usage and any associated costs to ensure compliance with reporting requirements.
The FBT exemption for electric vehicles is an excellent opportunity for businesses and employees to reduce the cost of purchasing and operating an EV. By removing the fringe benefits tax on eligible EVs and associated expenses, the policy makes it easier for businesses to adopt more sustainable fleets and for employees to enjoy the benefits of driving an electric car without the added tax burden.
As the market for electric vehicles continues to grow, this exemption will likely play a key role in supporting the transition to a greener, more sustainable future. However, with the PHEV exemption set to expire in 2025, it’s crucial to act soon if you plan to take advantage of this tax break for plug-in hybrid vehicles.
If you have any questions about how the FBT exemption works or how it might apply to your business or personal situation, don’t hesitate to reach out to the team at The Hrkac Group for advice and assistance. Contact us today via our online booking form or call our Geelong office on (03) 5224 2366 to schedule a consultation and take the next step towards a healthier financial future.
