2. Grandfathering
As noted above, the exemption ceases for plug-in hybrids from 1 April 2025, however, the amendment provides for grandfathering for existing ‘commitments’ of plug-in hybrids who had access to the exemption prior to 1 April 2025. Given similar terminology was used for the previous phasing out of the tiered statutory fraction rules for cars (which introduced the single fraction of 20% irrespective of annualised kilometres travelled), it will provide employers and employees with the confidence that they can commit to a plug-in hybrid and have access to the exemption for the duration of the ‘commitment’.
Importantly, we expect that, from 1 April 2025, where there is a change in ‘commitment’ to a plug-in hybrid part way through an FBT year, unlike the phasing out of the tiered statutory fraction rules, the exemption will cease from the date of the post 1 July 2025 commitment (rather than cease from the start of the next FBT year after the change, which was the case with the statutory fraction law change in 2011). We expect that ensuing ATO guidance will clarify this view.
The term ‘commitment’ is not defined in the Fringe Benefits Tax Assessment Act 1986 (FBTAA). Given similar terminology was used for the previous statutory fraction law change, we anticipate that the same interpretation of the term will apply. In this regard, per the Explanatory Memorandum to Taxation Laws Amendment (2011 Measures No 5) Act 2011 (which introduced the statutory fraction changes):
“5.51 A commitment is considered entered into at the point that there is a commitment to the transaction, and it cannot be backed out of. The commitment needs to be financially binding on one or more parties.
5.52 Changes made … such as refinancing a car, altering the duration of an existing contract or changing employers, are new commitments and will therefore be subject to the new arrangements.”
The ATO provided detailed guidance at the time outlining examples that would be considered changes to a financially binding ‘commitment’, including:
- Refinancing a car;
- Altering the terms of an existing contract (e.g. lease term or residual value);
- Fitting of accessories (such as window tinting, DVD players, luggage racks or bull bars) to a leased car if this results in lease payments being increased; and
- Changing employers even if within the same corporate group (this includes an employee transferring to another employer where ownership of the car remains under the original employer - in this instance, the new employer has committed to the application and availability of the car).
Examples that were provided by the ATO as not constituting a change to a financially binding commitment include:
- Adjustments to salary packing arrangements which alter post-tax contribution amounts; and
- Use of an employer’s “fleet car” by different employees (not involving any salary sacrifice arrangements).
3. Electricity costs
One of the key concerns for employers and employees regarding the transition to ZLEVs is the complexity surrounding valuing of electricity recharging costs for FBT purposes. This is largely because, in instances where employees charge their ZLEVs at home, they generally receive a single cost, which includes usage for the entire household, and there is no current guidance on how to attribute electricity costs to the charging of the vehicle. There is also added complexity if an employee re-charges their vehicle at a charging station location within the office, or at a public charging station.
The ATO has announced it will be preparing a Practical Compliance Guideline (PCG) which will “provide a methodology to enable users of electric vehicles to determine an approximate cost for the electricity when charging an electric vehicle at home”, and is expected to be released in March 2023. This clarification is vital to help determine the ‘car expenses’ of the vehicle, which is important for several calculation aspects.
For example, for car benefits that do not meet the new exemption criteria, it will be necessary to calculate the car expenses and the recipient’s contribution. Alternatively, in a salary packaged context, for an exempt vehicle, employees will be able to calculate the applicable electricity expenses for exempt reimbursement from the employer. Furthermore, whilst a ZLEV may be exempt and, thus, have no taxable value, these costs will be required for the purposes of the Reportable-Fringe-Benefit-Amount (RFBA) calculation, particularly where the operating cost method is to be applied.
4. In-home charging equipment
The ATO has released guidance on the ZLEV exemption stating that “a home charging station is not a car expense associated with providing a car fringe benefit for electric cars.” The guidance does state that the home charging station “may be a property fringe benefit or an expense payment fringe benefit”.
We note that the ATO’s published guidance does not currently align to the anticipated exempt treatment of home charging equipment noted in the Australian Greens’ media release from November 2022, which indicated that “the ATO will issue guidance on when household charging technology is able to be included within FBT-exempt vehicle packages”.
Given in-home charging equipment is not an insignificant cost (particularly when one factors in installation charges),
taxpayers will be eagerly awaiting whether the ATO releases further guidance to make it clear how in-home charging equipment is expected to be valued from a FBT perspective, and in particular how (and when) it will be classified as FBT-exempt.
5. Reportable fringe benefit amount impact
Whilst relevant ZLEVs will be exempt from FBT, the Act still requires employers to calculate an RFBA that will need to be reported to employees. As reasoned in the Explanatory Memorandum, this requirement to report an exempt benefit is to “ensure fairness in the tax and transfer systems”, given that an employee’s RFBA is used to calculate various entitlements or liabilities.
This approach has the potential to significantly (and adversely) affect employees who are subject to any means-tested Government entitlements or liabilities (such as Family Tax Benefit support, childcare subsidies, HECS debt, Medicare levy surcharge). The additional RFBA of the vehicle is likely to be a large add-on to an employee’s relevant “income” calculation, which could result in an unforeseen large lump sum payment at tax time.
Even in a novated leasing context, given the FBT exemption is only available for ZLEV vehicles up to the relevant luxury car tax threshold, in our view, the measure is most likely to be relevant to lower-middle income earners, who are also arguably more likely to face the consequences of having a RFBA amount (for example, at the higher income end, certain programs such as the child care subsidy are not claimable and so a RFBA is unlikely to be as relevant).
More broadly, regarding the calculation of RFBAs, employers and employees will need to consider the valuation methodology (i.e statutory formula or operating cost method) and processes/documentation required (e.g. if utilising the operating cost method - recharging costs, logbook records, etc). This unusual treatment of an exempt benefit as a reportable fringe benefit is also likely to provide a major challenge to existing systems and calculation and reporting processes.
To illustrate the employee impact, we have outlined below two examples. In each example, an Internal Combustion Engine (ICE) vehicle with a base value of $30,000 has been compared with a commensurate ZLEV vehicle with a base value of $60,000. For completeness, we have included our RFBA calculations below, assuming the statutory formula method is used with the vehicle available for private use for the entire FBT year.
