“You can kill a technology, but you can’t kill an idea.” – Narrator, Who Killed the Electric Car?
Electric cars have experienced their share of ups and downs, from early promise to near extinction and then a dramatic resurgence.
Much like the plot of Who Killed the Electric Car?, the narrative around electric vehicle (EV) tax benefits has been full of twists and turns.
Now, as we approach April 1, 2025, there’s another plot twist on the horizon for business owners relying on fringe benefits tax (FBT) exemptions: the end of the FBT exemption for plug-in hybrid electric vehicles (PHEVs).
It’s not the end of the electric car story, but a significant chapter is closing.
So, how can your business recharge its tax strategy and stay ahead of these changes?
Adapting to the New Fringe Benefits Tax Landscape
The Australian Government has been driving the push towards sustainable transportation by offering FBT exemptions for electric cars, making it more attractive for businesses to incorporate EVs into their fleets.
For the past few years, this exemption, often referred to as the electric car discount, has encouraged businesses to invest in environmentally friendly options, reducing costs and emissions. Businesses providing an EV or a PHEV are currently not subject to an FBT liability. (more below)
But come April 1, 2025, there’s a curveball: plug-in hybrid electric vehicles will lose their FBT exempt status.
This change has significant implications for business owners, especially those who have built their fleet strategy around these dual-powered vehicles.
Overview of the Current Electric Vehicles FBT Exemption
Under the current rules, businesses do not pay FBT on the private use of eligible electric cars and associated expenses, such as:
- Registration and insurance
- Repairs and maintenance
- Fuel, including the cost of electricity to charge them
This includes battery EVs, hydrogen fuel cell electric vehicles and plug-in hybrids that meet specific criteria, like being first held and used after July 1, 2022, and not being subject to luxury car tax (LCT). The electric car FBT exemption has provided significant financial benefits for businesses looking to reduce their carbon footprint while also enjoying some appealing tax savings.
FBT Exemption Eligibility – Luxury Car Tax Threshold
To qualify for the FBT exemption, an electric vehicle must meet specific criteria. Firstly, the vehicle must be a zero or low-emissions vehicle, designed to carry a load of less than 1 tonne and accommodate a maximum of 8 passengers. Additionally, the vehicle must be used by a current employee or their associates.
A crucial factor to consider is the luxury car tax (LCT). For a vehicle to be FBT exempt, LCT must never have been payable on its importation or sale. This means the vehicle’s value must fall below the luxury car tax threshold, which is currently set at $91,387 for low-emission vehicles.
The FBT exemption applies to EVs that were first held and used on or after July 1, 2022. This exemption covers various associated car expenses, making it a financially attractive option for businesses looking to reduce their carbon footprint while enjoying tax benefits.
The Changes Coming in April 2025
The big change? From April 1, 2025, plug-in hybrid electric vehicles (PHEVs) will no longer qualify for the electric car FBT exemption.
- What Stays the Same? Fully electric vehicles and hydrogen fuel cell cars will still be FBT exempt.
- Already Leasing a PHEV? If your business entered into a lease or agreement for a PHEV before this date, the FBT exemption can still apply, provided there’s a financially binding commitment to continue providing private use of the vehicle on or after 1 April 2025. This financially binding commitment must :
- be binding on one or more of the parties (Employer or Employee)
- Relate to the private use of the car to an employee or associate
An example is where an employer commits to the purchase or lease of a car including novated lease arrangements. But beware that any changes to this commitment after the 1 April 25 may result in the FBT exemptions ceasing.
This makes fully electric vehicles a more appealing option for businesses seeking sustainable and tax-efficient solutions.
Impact on Business Fleet Planning – Electric Car Tax Benefits
This change is more than just a tax update; it’s a shift in how businesses will plan their fleets going forward, especially with the electric car exemption playing a crucial role. Companies that have relied on the exemption for PHEVs must now consider alternatives:
- Should You Look into Fully Electric Vehicles? These remain FBT exempt, making them a more cost-effective option.
- Exploring Other Sustainable Transport Options? Consider alternative vehicles that align with your company’s goals and the evolving regulatory environment.
Example: Imagine you’re a business owner who added several plug-in hybrids to your fleet over the past two years, enjoying the FBT exemptions and lower operating costs. Now, with the new rules, these vehicles will lose their FBT-exempt status for new agreements. You’ll still enjoy the exemption for existing agreements, but any new hybrids added after April 1, 2025, won’t get the same benefit.
Real-life Scenarios
Let’s take a real-life example:
Scenario: You’re managing a medium-sized company that has incorporated plug-in hybrids into your fleet over the last few years. This has saved you a significant amount in FBT and running costs.
Impact: With the upcoming changes, your current hybrids will still benefit from the exemption if the loan agreements were made before April 2025. However, if you plan to expand your fleet or replace vehicles, you’ll need to consider fully electric models to maintain those tax benefits.
This highlights the need to make informed choices about fleet management, focusing on long-term sustainability and tax efficiency.
Novated Leases and FBT Exemption
A novated lease is a popular arrangement among large Australian and multinational corporations, allowing employees to finance a vehicle through salary packaging. However, small businesses may need to consult with a financial or taxation advisor to determine if this option is feasible and beneficial for their employees.
The FBT exemption specifically applies to the personal use of electric cars operated by businesses or financed under a novated lease. Employers must include FBT-exempt electric cars as a reportable fringe benefit on an employee’s payment summary. The potential FBT savings can be significant, especially for more expensive electric vehicle models that cost up to the $91,387 luxury car tax threshold for fuel-efficient vehicles.
Reportable Fringe Benefits
While the private use of an eligible electric car and associated expenses is exempt from FBT, it is still considered a reportable fringe benefit. Employers need to calculate the notional taxable value of the benefits related to the private use of the exempt electric car and determine if they need to report it.
The reportable fringe benefits amount is used by the ATO and Services Australia to assess certain obligations, such as income-tested government benefits and child support payments. Failing to disclose an electric car as a fringe benefit could result in penalties for the employer, making it crucial to stay compliant with reporting requirements.
Preparing for the Changes
The best way to tackle this challenge is through proactive planning:
- Review Existing Fleet Agreements: Ensure compliance with the new rules.
- Explore Alternative Options: Consider fully electric or hydrogen fuel cell vehicles that will continue to be FBT exempt.
- Consult With A Tax Expert: Explore other incentives and rebates available for electric vehicles.
Updating your fleet strategy now can save you from future headaches and keep your business in the fast lane.
Plug In Hybrid Vehicles and the End of the Fringe Benefits Tax Exemption
The FBT exemption for plug-in hybrids may be ending, but this isn’t the end of the road for EVs in your business.
It’s simply time to take a different route. Staying informed and proactive will ensure you don’t miss out on valuable tax benefits.
While the government reviews these exemptions, it’s wise to plan based on the current rules and make adjustments as needed.
Talk To The Fringe Benefits Tax Experts
Navigating these changes can be complex, but you don’t have to do it alone.
At Bishop Collins, we’re here to help you understand the evolving FBT landscape and optimise your fleet strategy.
Reach out to us today for personalised advice and ensure your business remains ahead of the curve, because remember: You’re not alone in business.
Additional Key Facts and FAQs
- Which EVs are eligible for FBT exemption? The FBT exemption for EVs comes with eligibility requirements. The car must be a zero or low-emissions vehicle, designed to carry a load of less than 1 tonne and a maximum of 8 passengers. Luxury car tax (LCT) must have never been payable on the importation or sale of the car.
- What is the FBT exemption threshold for 2024? The luxury car tax threshold has increased for the 2023-24 financial year to $89,332 for fuel-efficient vehicles and $91,387 for the 2024/25 financial year..
- What types of vehicles do not qualify for the EV FBT exemption? The following vehicle types will not be eligible for an FBT exemption: mild hybrids, vehicles with a retail price above the LCT threshold, and vehicles that are not electric or plug-in hybrid EVs.
How will I know if my electric vehicle is below the LCT threshold and is therefore FBT exempt? Your Chartered Accountant can help you understand which new EVs and PHEVs in Australia are valued below the LCT threshold. The dealer selling the car should also be able to advise you on this. The ATO explains that to be below the LCT threshold, the vehicle’s retail price must be below $91,387 (for the 2024/25 financial year). If it is a used vehicle it must also never have had LCT applied when it was first registered in Australia.