On the 29th of June 2022, the Government announced a proposal to provide an exemption for fringe benefits tax (FBT) on electric cars from 1 July 2022.
On the 27th of July 2022, Treasury Laws Amendment (Electric Car Discount) Bill 2022 (‘the Bill’) was introduced to Federal Parliament containing the proposed legalisation to give effect to this exemption.
The Bill applies to car fringe benefits provided on or after 1 July 2022 for cars that are eligible zero or low emissions vehicles that are first held and used on or after 1 July 2022. The Bill has been referred to the Senate Economics Legislation Committee. The Committee is due to provide its report by 21 September 2022.
Below are the details of what is certainly a bold initiative by our new Government.
Which vehicles are eligible for exemption?
Only motor vehicles that are ‘cars’ as defined for FBT purposes are eligible for exemption and, specifically cars that:
- use one or more electric motors for propulsion; and
- be fuelled by either an off-vehicle electrical power source, a battery, an electric generator, a hydrogen fuel cell, or a combination of these.
A car that has an internal combustion engine will not be within scope unless it is able to be fuelled by a battery that can be recharged by an off-vehicle power source, for example, a plug-in hybrid car.
So in summary the following types of cars will qualify for exemption:
- battery electric vehicles
- hydrogen fuel cell electric vehicles
- plug-in hybrid electric vehicles
These types of cars are collectively referred to as zero or low emission vehicles.
Additionally, to be eligible for the exemption the value of the car at the first retail sale must be below the luxury car tax threshold for fuel efficient cars ($84,916 in 2022-2023).
First held and used on or after 1 July 2022
Further, the car must be first held and used on or after 1 July 2022.
Michael acquires a car that is a low emission vehicle on 1 April 2022 and makes that car available for the private use of his employee Simon, to provide car fringe benefits from that date for 4 years, the benefits provided from 1 July 2022 will not be exempt.
In the above example, if another employer were to acquire the car post 1 July 2022 from Michael and commence providing that vehicle to an employee of theirs as a car fringe benefit, the exemption will not be available to that second employer.
However, second-hand low emission cars may qualify for the exemption, provided that the car was first purchased new on or after 1 July 2022.
Michael acquires a car that is a low emission vehicle on 1 August 2022 and makes that car available for the private use of his employee Simon, to provide car fringe benefits from that date for 4 years, the benefit provided is exempt.
Rob purchases the car from Simon after 2 years and commences to provide the vehicles to his employee as car fringe benefit. Rob will also be eligible for the exemption.
However the Explanatory Memorandum to the Bill confirms:
Provided the conditions of the exemption are met, an electric car that was ordered prior to 1 July 2022, but was not delivered until after 1 July 2022 would be eligible for the exemption (even if an employer acquired legal title to the car before 1 July 2022). This is because the car would not be both held and used until after 1 July 2022. A second-hand electric car may qualify for the exemption, provided that the car was first purchased new on or after 1 July 2022.
Other key takeaways
The amendments do not alter access to salary packaging arrangements. Provided the conditions above are satisfied, the exemption is available pursuant to a salary packaging arrangement between an employer and employee.
Reportable Fringe Benefits
Despite the proposed exemption from FBT on low emission vehicles , no exclusion applies for Reportable Fringe Benefits purposes.
The amendments effectively add back to an employee’s individual fringe benefits amount the taxable value of the car fringe benefit on the assumption the FBT exemption did not apply.
Therefore, unless the low emission car is eligible for the pooled car exclusion, employers will have the continued administrative requirement to calculate a notional FBT taxable value for the purposes of Reportable Fringe Benefits compliance obligations.
Three year review period
The Government will review the exemption in three years.
The review will consider electric car take up at that time, whether the exemption should be continued, and if so, in what form.
Despite one’s political standing, the Government is to be commended on making good this election promise. The proposed exemption is part of an overall goal to make Australia a ‘greener’ country and follows recent legislation designed to remove 5% customs duty from importations of certain low emission vehicles as from 1 July 2022.
The plus side for employers is that significant FBT savings may be available depending on the profile of car benefits currently/able to be provided to employees. The FBT exemption will also provide on-cost savings for other employment imposts such as pay-roll tax. Employees can also use salary sacrifice arrangements to access low emission vehicles with the FBT exemption effectively allowing tax free income to be used for this purpose.
Of course, playing ‘devils advocate’ the following considerations come to mind:
- access to stock of low emission vehicles causing long lead times from order to delivery;
- low emission vehicle distance range and load carrying limitations;
- the upfront cost of low emission vehicles and parts (which are generally more expensive);
- implications for whether current salary packaging processes will be suitable to deal with any FBT and other nuances of low emission vehicles;
- ongoing need for Reportable Fringe Benefits compliance;
- uncertainty regarding the exemption after the three year review period;
- potential additional costs and issues insofar as installation and/access to charging stations; and
- the prospect of State & Territory road user type levies that may be introduced.
This will be a most interesting ‘watch this space’ not only as far as low emission vehicle take-up is concerned but also from an Australian psyche perspective and the extent to which this type of generous tax policy will increase the speed of take-up.