FBT exemption for electric vehicles in Australia

Fringe Benefits Tax (FBT) exemption for electric vehicles in Australia has now been legislated. The relevant legislation, Treasury Laws Amendment (Electric Car Discount) Bill 2022, received Royal Assent on 12 December 2022. It upholds the Government’s pre-election commitment and broader decarbonisation initiatives.

Of all the employee ‘perks’, employer-provided cars (through novated car leases or private use of company vehicles) are one of the most popular fringe benefits in Australia. As a result, FBT exemption for electronic vehicles has been keenly anticipated.

What do employers and employees need to consider?

Which vehicles are covered by the FBT exemption?

The FBT exemption covers “zero or low emission vehicles” (commonly known as ‘electric vehicles’ or ‘EVs’), which the ATO has defined as:

  • Battery electric vehicles
  • Hydrogen fuel cell electric vehicles
  • Plug-in hybrid electric vehicles – if they can be recharged by an off-vehicle power source – until 1 April 2025.*

In addition, to qualify for FBT exemption, the vehicle must be:

  • Valued below the luxury car tax threshold (currently $84,916)
  • Both held and used for the first time on or after 1 July 2022
  • Used by a current employee or their associates (such as family members)
  • A ‘car’, as defined for FBT purposes. (Motorcycles, scooters, and any vehicles designed to carry one tonne or more, or nine passengers or more, do not qualify.)

Second hand electric vehicles qualify if their first retail sale was on 1 July 2022 or later.

* One of the two amendments to the legislation moved by the Greens is a sunset clause for the exemption of plug-in hybrids. This means that FBT exemption for plug-in hybrids will no longer be available after 1 April 2025, unless there is an existing, financially binding commitment in place to continue providing private use of the vehicle after 1 April 2025.

Savings for employers due to FBT exemption for EVs

FBT is paid by employers on certain benefits (known as ‘fringe benefits’) provided to their employees or their associates (such as family members). FBT is separate to income tax and is calculated on the taxable value of the fringe benefit. Read more about how FBT works on the ATO website.

When a vehicle is made available for an employee’s private use, an FBT liability is likely to arise, unless the vehicle is exempt from FBT. Therefore, under the new laws, by providing an eligible EV the employer can benefit from substantial FBT savings.

For example: 1

Based on an EV valued at $48,000, the FBT exemption would provide an annual saving to the employer of almost $9,400.

For an EV valued at $80,000, the annual savings to the employer would be over $15,600

      Savings for employees due to salary sacrifice arrangements

      Where an employee agrees to financially contribute towards a car fringe benefit (e.g. through an novated lease agreement), some or all of the employee contribution will usually be made from after-tax salary. This enables the post-tax amounts to offset the taxable value of the car fringe benefit for FBT purposes.

      For EVs eligible for FBT exemption, the total contribution by an employee may now be made from pre-tax amounts. This is known as ‘salary sacrifice’. This change is expected to provide significant tax savings for the employee due to reduced taxable income.

      For example: 2

      For an employee earning $100,000 per year, who makes $25,000 pre-tax contributions towards an FBT exempt EV, salary sacrificing would result in an annual saving to the employee of $9,645.

      Impacts of Reportable Fringe Benefits

      Private use of these vehicles will still result in a Reportable Fringe Benefits Amount (RFBA) for employees. This is unusual as there are not typically reporting obligations on FBT-exempt benefits.

      For the employer:

      This means that employers will still need to keep accurate records and perform FBT-related calculations for these vehicles to determine the RFBA for their employees. This will likely result in an administration cost to the employer.

      To ensure all ramifications are considered and to maximise administrative efficiencies, employers should seek advice from their business adviser before choosing the FBT valuation method and making decisions regarding calculation and reporting processes.

      For the employee:

      Although an employee does not pay income tax on an RFBA, it will be included on the employee’s tax return. It will therefore be considered for the calculation of any means-tested Government entitlements or liabilities (such as Family Tax Benefit support, childcare subsidies, higher education contributions debt, Medicare levy surcharge). Therefore, the expected income tax savings (as shown above) may be partially offset by the resulting RFBA

      This additional RFBA is likely to add a substantial amount to an employee’s “income” calculation for these purposes. Particularly given the starting price of EVs, this could have significant unexpected consequences,

      Employees should get advice from their tax adviser to understand the financial consequences of the RFBA, and whether this offsets the income tax savings that an EV may provide.

      What next?

      Our taxation specialists and business advisers can help you make the most of the new FBT exemption for electric vehicles. Get in touch with us today.

      1. Annual savings calculated using Statutory Formula FBT valuation method, and current FBT and gross-up rates.
      2. Annual savings calculated using PAYG Withholding amounts based on resident tax rates for 2022-23 and excluding the 2% Medicare levy