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Legislation passed in late 2022 removes Fringe Benefits Tax (FBT) on eligible electric cars provided by employers to current employees for private use.

Before we dive into the detail, ask yourself a few questions to see if the tax concessions on an electric vehicle might be right for you:

1. Do you need or want a new car? With a cost of say $50,000 to $85,000 a tax benefit will rarely outweigh the purchase and ownership costs of a new car
2. Is an electric car right for your needs?
3. Are you comfortable with the FBT compliance tax complexity that comes with owning a vehicle in your business or entering a novated lease?
4. Do you fit within the definition of current employee? A sole trader, partner or business owner who is not remunerated via salary and wages will not qualify as a current employee and may not qualify or may need to restructure in order to qualify.
5. For a business owned by more than one person, are all owners comfortable that you have personal vehicles owned by your business?
   OR
   For an employee, would your employer be comfortable working with a salary sacrifice arrangement on a novated lease?

If you answered YES to all of the above, then read on as the Government are offering you a chance to plug into savings…

New FBT exemption for Electric Cars

Under current laws, the provision of a car to an employee is subject to FBT on the taxable value of the benefit, which is calculated using the statutory formula or on a cost basis. This creates a cost for the business and an administrative burden to maintain a vehicle logbook and records of expenditure to determine the split of business and private use and the value of employee contributions.

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. Note that the drive between home and work is usually considered a private rather than a business trip.

Car benefit is exempt

Under the legislation, 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 legislation specifically refer to only current employees. This means the FBT exemption for electric cars will not extend to future or former 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
• A hydrogen fuel cell electric vehicle
• A plug-in hybrid electric vehicle

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 usual FBT on the taxable value of the benefit.

Other Tax Implications

A number of implications arise from the legislation:

• 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.

Practical yet Complicated Questions

1. How will this work if I am a joint owner of a business? Tax and ownership questions will get more complicated to be equitable to all owners where there are tax benefits and ownership costs incurred by the business but the benefits of the vehicle are all used by one owner. There is no single right answer to this.

2. Will this matter if I am going to sell the business? It might do. Your business profits may appear lower due to owning a private vehicle. If you sell the shares in a company then ownership of the electric car would go with the company so you might need to sell the vehicle to yourself with tax and stamp duty implications.

3. Can I buy a car for a family member who doesn’t work in the business to get the benefit of this exemption? The provisions require the benefit to be provided to a current employee. So first you should be employing that family member which comes with its own complications. If you had an electric car in your business that is driven by a family member then you should qualify. Our proviso is that anytime a tax law is manipulated beyond its intended purpose there is a risk of ATO action on general anti avoidance provisions.

4. How does the EV FBT exemption value limit of $84,916 (incl GST) work in with the ATO value limit of $64,741 (incl GST for FY23) that caps the amount that can be claimed for depreciation and GST? The two limits don’t work well together and will create tax complications where a vehicle costs between $64,741 and $84,916.

4. How else could you do this? For an employee, or a business owner who receives salary and wages from their own business, you might prefer to use a third party provider of novated lease vehicle. We’re normally not a fan of this option however with the specifics of this FBT exemption it will have more merit.

Employer Savings due to no FBT applying to provision of electric cars

We note many employers provide vehicles to employees in respect of their employment. Where the vehicle is made available for the employee’s private use, an FBT liability is likely to arise for the employer, unless it is exempt from FBT. It is this FBT exemption that will make an electric vehicle comparatively cheaper to own on an after tax basis.

We have included an example below of the estimated FBT savings for an employer who provides an electric car to an employee and qualifies for the FBT exemption.

Example calculation – annual savings (using current FBT & gross-up rates):

*This is based on the current estimated average cost of an electric car in Australia.

If you want to know more about services we can offer your business read on here or get in touch.

Employee contributions – savings due to salary sacrifice arrangement

Where an employee enters into a novated lease arrangement, or otherwise agrees to financially contribute towards the provision of a car fringe benefit, some or all of the employee contribution will typically be made from after-tax salary.

This will enable the post-tax amounts to offset the taxable value of the car fringe benefit for FBT purposes.

For electric cars that qualify for this exemption, the total contribution made by an employee may now be made from pre-tax amounts. This change is expected to provide significant tax savings for the employee due to reduced taxable income.

The below provides an example of the estimated income tax savings for an employee earning $150,000 per year, where the employee makes pre-tax contributions towards the provision of an electric car under a salary sacrifice arrangement.

Example calculations – per annum:

*PAYG Withholding amounts based on resident tax rates for 2022-23 and excluding the 2% Medicare levy

As demonstrated in the above example, salary sacrificing the electric car costs results in annual savings of $9,250 for the employee.

Reportable Fringe Benefits – adverse impacts

As a requirement of the FBT exemption, an exempt electric car will be included in the calculation of an employee’s Reportable Fringe Benefit Amount (RFBA). This will result in an administration cost to the employer to have accurate records to calculate and report the taxable value of the car for their employees.

This also has an impact on the employee. Whilst an employee does not pay income tax on an RFBA, it will be included as part of the employee’s tax return and will be taken into account for the calculation of various liabilities and entitlements (e.g. higher education contributions, their eligibility for certain family assistance payments, Division 293 additional tax on super contributions for high income earners, etc.).

Given the above, employees should ensure they are seeking the requisite advice to understand the extent to which they may be financially impacted by an RFBA and, further, whether this offsets the income tax gains that an electric car may provide.

Impact of the provision of wall chargers for use at an employee’s home

Electricity is vital for the operation of electric cars so the first question is whether you have, or can install, an appropriate charging for your new electric car.

It is currently unclear as to whether costs for purchase and installation of a wall charging unit in an employee’s home will qualify as exempt, and fit within the FBT electric car exemption.

We are waiting on guidance from the ATO in this regard.

Electricity – impact of charging the electric car at an employee’s home

The FBT legislation contains an exemption for car expenses that are attributable to the provision of a car fringe benefit. This ensures there is no double-up on the application of FBT over several categories of fringe benefits.

A car expense is defined for FBT purposes to include fuel. The ATO has confirmed in its recent guidance that fuel which includes ‘electricity to charge and run electric cars’, constitutes a car expense.

Employees who charge their cars at home using their own electricity may seek reimbursement or, alternatively, seek to salary sacrifice these costs. However, in the absence of a separate meter to measure the electricity consumption, how will an employee calculate and record the electricity costs associated with charging their electric car?

The ATO have recently released a fact sheet on these matters.

Contact us if you want to know more.