FBT Exemption for electric cars under proposed legislation

FBT Exemption for electric cars under proposed legislation – Exciting news for business owners and tree lovers alike!

On 27 July 2022, the Labor Government introduced legislation (Treasury Laws Amendment (Electric Car Discount) Bill 2022) aimed at helping increase the adoption of electric vehicles by making them more affordable for Australians by reducing FBT liability to nil regardless of the amount the vehicle is used for private travel for Electric Vehicles (EV) and Plug-in Hybrid Vehicles (PHEV).

Currently, when a business owns a vehicle (directly of via novated lease) and provides the vehicle to an employee and there is an element of private use, there is a deemed ‘Fringe Benefit’ provided by the business. The business is then either liable for Fringe Benefits Tax (FBT) or your accountant makes a ‘private use’ adjustment which is added to the business as taxable income to negate any FBT liability – either way the tax benefits of vehicles owned in businesses are currently reduced for private use.

But – should the proposed legislation be enacted there will no longer be limited tax benefits for vehicles owned by businesses – provided they are ‘electric vehicles’

If an employee purchases an EV/PHEV via a novated lease, provided it is under the luxury car tax threshold then the employee can pay for the entire car and ongoing costs from pre-tax salary with no FBT payable by their employer.

If the business purchases the car outright (or via chattel mortgage), the business can potentially claim the GST, a tax deduction for the cost of the car and ongoing running expenses in full.

A quick example of how big the potential savings could be, for a vehicle used entirely for personal travel for an employee business owner operating through a Trust structure:

The business owner has personal taxable income of $200k with after tax earnings of $135k. If he/she purchases a Model 3 Tesla for $60k including GST:

Without the proposed FBT exemption, the vehicle would be purchased personally and cost $60k – no tax savings to be had.

With the proposed FBT exemption, the vehicle could be purchased by the Trust which could:

  • Claim an input tax credit for the GST on purchase ($5,454 GST credit)
  • Claim an immediate tax deduction for the cost of the car under the current temporary full expensing rules provided the car is acquired and ready for use by 30 June 2023
  • The taxable income will be reduced to $145k and tax to c.$42k
    Overall a tax/GST saving of c.$23,000 + c.$5k = $28k in the year of purchase reducing the cost of the vehicle from $60k to $32k. With no ongoing private use/income adjustments required.

Exempt car fringe benefits for electric cars will still be included for the purposes of determining an employee’s reportable fringe benefits amount. This means that the benefits will be included for the purposes of calculating an employee’s Medicare levy surcharge, determining entitlement to certain tax offsets and determining eligibility for certain family assistance payments.

The impact on an employee’s reportable fringe benefits amount should be considered when modelling the benefits of salary sacrifice arrangements taking advantage of the new FBT exemption.

Key dates/notes:

  • The exemption will apply to electric cars that are first held and used on or after 1 July 2022. Second hand vehicles may qualify and the exemption may apply to vehicles ordered but not received before 1 July 2022.
  • The exemption will only apply to vehicles costing less than the luxury car tax threshold for fuel efficient cars, which is $84,916 for the 2022-23 financial year
  • The car must be a battery electric vehicle; a hydrogen fuel cell electric vehicle; or a plug-in hybrid electric vehicle. There are definitions for each of these terms in the Bill. The vehicle must be a car i.e. motorbikes are not exempt under the proposed legislation.
  • Exempt car fringe benefits for electric cars will still be included for the purposes of determining an employee’s reportable fringe benefits amount.

Business owners should consider whether they could implement salary sacrifice policies to take advantage of this new FBT exemption to attract and retain staff, and reduce their carbon footprint.

The Bill was before the Senate and not yet passed at date of writing this article, please liaise with your accountant prior to making any significant asset purchases as always.

IMPORTANT DISCLAIMER: This article is published as a guide to clients and for their private information. This article does not constitute advice. Clients should not act solely on the basis of the material contained in this article. Items herein are general comments only and do not convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of these areas. 

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