A Federal Government proposal to exempt electric cars from the Fringe Benefits Tax could slash thousands of dollars off the tax bills for the personal use of business vehicles – but private buyers won’t get the same free kick.
The newly-elected Federal Government has put forward a proposal that would slash up to $15,000 off the Fringe Benefits Tax bill for the personal use of electric cars operated by businesses – or financed under a novated lease.
However, private buyers – who represent the majority of electric-car owners – would miss out on the generous tax exemption.
Under the proposal, the Fringe Benefits Tax exemption would apply to electric cars priced below the Luxury Car Tax threshold of $77,565.
If ratified, the Fringe Benefits Tax exemption would take effect from 1 July 2022.
The plan would provide a generous financial incentive to electric cars purchased under a novated lease, and slash thousands of dollars off the Fringe Benefits Tax bill on the personal use of electric vehicles operated by fleets and company-car drivers.
However, private buyers who pay out of their own pocket for an electric car, would not benefit from the scheme.
The Fringe Benefits Tax (FBT) is levied on employers, but often passed-on to employees who lease their car through work – leaving them thousands of dollars out of pocket each year.
Fringe Benefits Tax is so named because personal use of a work car is deemed by the tax office as a “fringe benefit” or a “job perk”. It was introduced under the Hawke Government in 1986 and, today, remains in addition to numerous other taxes levied on car buyers.
It is difficult for consumers to estimate cost of Fringe Benefits Tax because there are a number of ways it can be calculated.
In essence, Fringe Benefits Tax is a 47 per cent tax on the personal use portion of a work motor vehicle.
Tax experts calculate Fringe Benefits Tax in one of two ways – with or without vehicle log book diaries.
Many employers and employees opt for what is known as the “statutory method”, which assumes a flat rate of 20 per cent personal use of a work vehicle.
“The statutory method is usually the (calculation) people use because it doesn’t require them to keep a logbook of business versus personal use, and that (is based on the starting point of) 20 per cent on the cost of the car, regardless of distance travelled,” Mark Chapman, H&R Block’s Director of Tax Communications, told Drive.
For those using the statutory method, 20 per cent of the cost of the car is attributed to “personal use”. The resulting figure is then multiplied by what’s known as the “gross-up rate”, which is rounded up to account for any further taxes that must be withheld from the payment. A 47 per cent Fringe Benefits Tax rate is then applied to the resulting amount.
For example, 20 per cent of the value of a $75,000 work car equates to $15,000. This is then multiplied by a gross-up rate of 2.0802, which equates to $31,203 – 47 per cent of $31,203 is $14,665, which would be the FBT amount.
Using the same method, on the opposite end of the electric-car spectrum, the driver of a $45,000 work car would attract an FBT bill of $8799.
In the middle of these two price points, the driver of a $55,000 car could attract an FBT bill of $10,754.
Under the newly-elected Federal Government’s proposal, electric cars in this price range would be exempt from these FBT charges.
While FBT is charged to an employer, it often ends up being passed-on to the employee.
“FBT is an employer liability, but employers can pass it all on to the employee in their lease packaging arrangement,” Mr Chapman said.
For employees using the log book method, their proportion of personal use could be calculated at less – or more – than the 20 per cent statutory rate, meaning savings could be even higher or lower depending on personal circumstances.
It is important to note the Federal Government’s proposed Fringe Benefits Tax exemption would not equate to a discount on the purchase price of an electric car for private buyers or business fleets.
However, under the proposal, employees who use an electric car for work and personal use, would not be required to pay FBT from their after-tax income on applicable vehicles – for as long as the scheme lasts.
“Employees usually end up footing the fringe benefits tax (FBT) costs of their novated lease. So that means they’d be the primary beneficiaries of the … proposal to remove FBT on electric vehicles below $77,565,” Elinor Kasapidis, Senior Manager of Tax Policy at Certified Practising Accountants (CPA) Australia, told Drive.
“Normally employees reduce their novated lease FBT by making employee contributions from their post-tax income. By making the FBT amount zero, those after-tax dollars will now stay in the employee’s pocket.”
The tax savings will vary depending on individual circumstances, say experts.
“The exact amount of the benefit will depend on things like which calculation method you use, your income, and how much you use the car privately,” said Ms Kasapidis.
“Taking up a novated lease can be confusing, so it’s worthwhile seeing a tax agent when you set one up – and also at tax time to help you work out any tax liabilities.”
For novated lease providers, the proposed Fringe Benefits Tax exemption could boost the uptake of electric cars purchased via a novated leasing arrangement.
“The take-up rate of [cars purchased via a novated lease] is less than 10 per cent, and that’s because of the lack of understanding around complex financial instruments,” said Mark Telfer, Director of Finance and Operations at novated leasing company Inside Edge.
“The messaging behind this FBT exemption will have more cut-through – it will be easy for us to tell people who have the concession available to them that they should consider [an electric car].”
Mr Telfer says, if ratified, the policy “will double the savings available to a business” for an employer-provided vehicle, with these savings trickling down to the employees.
“The people first out of the blocks will be government fleets and organisations that can order large numbers of cars in one go,” Mr Telfer told Drive.
“If you’re not operating in that space, there is a likelihood the (waiting times) you’re experiencing at the moment will blow out significantly, while early adopters soak up early stock,” said Mr Telfer.
Mark Chapman from H&R Block also warns buyers to weigh up the benefit of the exemption before rushing out to purchase an electric car.
“The Fringe Benefits Tax isn’t the only consideration – electric vehicles are currently more expensive than petrol vehicles, so whatever discount you get by not having the FBT, you may make up for with the increased cost of the vehicle,” Mr Chapman said.
Additionally, it’s worth noting newly-elected Federal Government’s proposal could change before its intended start date of 1 July 2022, so buyers shouldn’t make decisions based on the preliminary announcement, say experts.