A new federal bill has been introduced to remove Fringe Benefits Tax and Customs Duty on electric cars, which is a good incentive for employers to switch to electric for their employees. BDO tax expert Tim Sandow explores the issue.
The Treasury Laws Amendment (Electric Car Discount) Bill 2022 was introduced into the Australian House of Representatives on 27 July 2022. The bill proposes to remove Fringe Benefits Tax (FBT) on eligible electric cars provided by employers to current employees for private use.
This is welcome news for both employers and employees and gives effect to the Government’s pre-election promise to make electric, plug-in hybrid, and hydrogen cars exempt from FBT. This exemption is subject to the car’s value at the first retail sale being below $84,916 for 2022-23, which is the luxury car tax threshold for fuel-efficient cars.
Tim Sandow, a Partner specialising in tax at BDO in Adelaide, said the proposed amendments are a welcome development.
“We expect they will incentivise a greater uptake of electric cars in the 2022-23 financial year onward,” Sandow said.
“The exemption should have the dual effect of making these cars more affordable to employees, while reducing Australia’s carbon emissions from the transport sector.”
When the bill becomes law, the FBT exemption will apply retrospectively from 1 July 2022 to eligible electric cars that are first held and used on or after 1 July 2022. An electric car ordered prior to 1 July 2022, but not delivered until after 1 July 2022, will still be eligible for the exemption. This will apply even if an employer acquired the legal title to the car before 1 July 2022. Second-hand electric cars may also qualify for the FBT exemption, provided the car was first purchased new on or after 1 July 2022.
“Although the bill unfortunately discriminates against early adopters of electric cars, it may prompt them to trade-in for a new electric vehicle to take advantage of the new FBT exemption, therefore increasing the stock of electric vehicles in Australia,” Sandow said.
The Government also announced it will remove the 5 per cent customs duty on electric, plug-in hybrid, and hydrogen fuel-cell vehicles, with a customs value less than the fuel efficient luxury car tax threshold. This will apply to cars entered for home consumption from 1 July 2022, except cars imported from Russia or Belarus.
Under current law, where an employer provides a fringe benefit to an employee on an electric car –“zero or low emissions vehicle” – the employer is subject to FBT on the taxable value of the benefit, which is calculated using the statutory formula or on a cost basis.
The proposed FBT exemption relates to car fringe benefits and will only apply to vehicles that are “cars” for FBT purposes. This means that other types of electric vehicles will not qualify for the exemption, such as vehicles that can carry a load of one tonne or more, or nine passengers or more. For example, the popular dual-cab ute may qualify for a separate FBT exemption in certain circumstances.
Generally, a car fringe benefit arises where a car is applied to or made available for private use to an employee, or an associate of an employee, by their employer.
Under the proposed amendments, a car benefit will be exempt if all the following conditions are satisfied:
- The benefit is provided to a current employee
Although the definition of “employee” in the FBT rules includes a current, future, or former employee, the amendments specifically refer to only current employees. This means the FBT exemption for electric cars will not extend to future or former employees. It is not clear why the Government have limited the exemption to only current employees.
- The car is a “zero or low emissions vehicle”
- The value of the car at the first retail sale (i.e. purchase price) was below $84,916 for 2022-23, which is the luxury car tax threshold for fuel efficient cars
- The car was first held and used on or after 1 July 2022.
The benefit exempted from FBT is the private use of the vehicle, including any associated costs of running and maintaining the car for the period the car fringe benefit was provided.
Eligible Electric Cars
An electric car must meet specific criteria to be eligible for the FBT exemption. Specifically, a car that is a “zero or low emissions vehicle” is defined as being either:
- A battery electric vehicle, which is a car that:
- Uses only an electric motor for propulsion
- Is not fitted with a fuel cell or an internal combustion engine.
- A hydrogen fuel cell electric vehicle, which is a car that:
- Also uses an electric motor for propulsion
- Is equipped with a fuel cell for converting hydrogen to electricity
- Is not fitted with an internal combustion engine.
- A plug-in hybrid electric vehicle, which is a car that:
- Uses an electric motor for propulsion
- Takes and stores energy from an external source of electricity
- Is fitted with an internal combustion engine for the generation of electrical energy and/or propulsion of the car. This means that a car with an internal combustion engine will only qualify for the exemption if it can be recharged by an off-vehicle power source.
Cars that do not meet the specific criteria of a “zero or low emissions vehicle” will not qualify for the FBT exemption, and employers providing car fringe benefits on these cars will be subject the FBT on the taxable value of the benefit.
Other Tax Implications
A number of implications arise from the introduction of the Bill:
- Reporting exempt car fringe benefits– Electric car fringe benefits that are exempt from FBT will still be counted towards a current employee’s reportable fringe benefits amount (RFBA). This will apply for each FBT year in which the exempt benefit is provided, as RFBAs are used to determine various liabilities and entitlements
- Salary packaging arrangements– Provided all the conditions for FBT exemption are satisfied, salary packaging electric cars will not affect their exemption from FBT. This means that the exemption will still be available for car fringe benefits provided under a salary sacrifice arrangement.
BDO’s Sandow said it was important for anyone considering salary packaging a car to be aware that the luxury car depreciation limit is $64,741.
“For cars costing above this amount, employers may require the employee to package an additional amount to compensate them for the non-deductible depreciation,” Sandow said.
“We are aware submissions have been made to increase this amount for electric vehicles to $84,916 to align with the amount which is exempt from FBT and remove any additional complexities. Hopefully this amendment will be made before the legislation is passed.”
Date of Effect
When the bill becomes law, the FBT exemption will only apply to fringe benefits provided on or after 1 July 2022, for eligible electric cars that are first used on or after 1 July 2022.
This means that the electric car must be first held, or owned, or otherwise made available to the employee or associate on or after 1 July 2022. It also means that the car must be first used on or after 1 July 2022 for the FBT exemption to be available.
Therefore, electric cars that employers have provided to employees for their use before 1 July 2022 will not be eligible for the FBT exemption. The bill has been referred to the Senate Economics Legislation Committee, which is due to provide its report on 21 September 2022, and the amendments will be reviewed after three years to assess electric car uptake.
Extracted in full form: Employing the electric cars rebate (indaily.com.au)