On Wednesday 27 July 2022, the Federal Labor Government introduced the Treasury Laws Amendment (Electric Car Discount) Bill 2022 into the House of Representatives. The Bill provides the intended legislative framework supporting the Government’s pre-election policy announcement to provide a Fringe Benefits Tax (FBT) exemption for certain electric cars.
Since the announcement, there have been queries from numerous parties (including employers, employees, leasing companies and salary packaging administrators) in relation to the scope of the exemption, in particular its application to plug-in hybrid vehicles and second-hand acquisitions. The policy announcement had also flagged that the exemption would commence from 1 July 2022 and be reviewed after three years, which also raised queries in the context of leasing arrangements that continue past the three-year mark.
The introduced Bill, if passed in its current form, clarifies these aspects as follows:
- The exemption is intended to apply to zero or low emission “cars”, including battery electric vehicles, hydrogen fuel cell vehicles and plug-in hybrids.
- Generally, the legislation specifies that only cars below the luxury car tax threshold for fuel efficient cars based on the first retail price (i.e. the first (new car) acquisition) are eligible for the exemption. Therefore, whilst second-hand acquisitions are within scope, the exemption only applies where the first retail price was below the relevant luxury car tax threshold ($84,916 in 2022-23).
- The application of the exemption beyond three years has not been clarified, with the accompanying explanatory memorandum noting that “(t)he Government will review the electric car discount in three years. The review will consider electric car take up at that time, whether this tax concession should be continued, and if so, in what form”.
Importantly, the current form of legislation does not exclude electric cars provided as part of salary packaging arrangements and, therefore, the FBT exemption is applicable to novated lease (and similar) arrangements.
Additional observations
Whilst the proposed legislation provides an exemption for car benefits and associated “car expenses”, there are some gaps in particular with respect to the associated hardware, software, subscriptions and other applicable costs (for example, it is unclear as to whether a home charging station fits under the exemption).
In this regard, it will be interesting to see whether these gaps will impact the Labor Government’s policy intent of driving electric car take-up. Much will be left to the Australian Taxation Office in terms of necessary additional guidance on related FBT implications. Early signs indicate that supply of electric vehicles will struggle to keep up with demand, which reflects the current market even before an FBT exemption is enacted.
With respect to the contents of the proposed legislation itself, it clarifies that the exemption applies to “cars” (i.e. electric non-”cars” - such as utility vehicles designed to carry greater than 1 tonne - are not within scope). Maybe that is reflective of the low levels of FBT already paid on such vehicles?
Additionally, the exemption only applies to electric cars that are first held and used on or after 1 July 2022. Therefore, if an employer purchased or leased a relevant electric car, and provided it to employees for private use prior to 1 July 2022, those relevant car benefits are not exempt from 1 July 2022. That car would also not be exempt for a subsequent employer’s applicable car benefits, where purchased second-hand.
However, where an electric car was ordered prior to, but delivered on or after, 1 July 2022, the exemption will apply. Similarly, a second-hand electric car may qualify for the exemption, provided that the car was first purchased as new on or after 1 July 2022.
The legislation also provides that these exempt car benefits are nonetheless included for the purposes of an employee’s reportable fringe benefit amounts, and therefore, there will still be a requirement for employers to track these benefits and complete the necessary taxable value calculations (despite no FBT liability being existent for the benefits themselves).
Finally, there is an FBT exemption for associated “car expenses”, namely “fuel”, “registration”, “insurance” and “repairs or maintenance” when a car benefit is provided. However, the application of this exemption in the context of electric car costs is not clarified in the proposed legislation, and should be considered where intended to be provided as employee benefits. For example, is a battery replacement (which could cost in the vicinity of $15,000) considered a “car expense”? For jurisdictions that have introduced a road user impost (for example, Victoria’s ZLEV Road-User Charge), is this considered to be a “car expense”?
With the government’s expected increase in take-up of electric cars, including as part of fleet and employee packaging arrangements, employers should consider if electric cars will feature in their Environmental, Social, and Governance (ESG) policies and also, employee benefit programs. The FBT exemption will benefit employers (and employees under packaging arrangements) who provide electric cars for private use, where commensurate conventional cars may not attract the same treatment.
Where looking to effect these benefit arrangements, it is paramount that the qualifications of the exemption are properly understood and implemented (for example, the costing against the luxury car threshold), and further, that the benefit framework around ancillary costs (e.g. battery replacements, road user imposts, etc.) is properly understood and defined at the outset.
In this regard, we expect that the Australian Taxation Office will review these considerations and provide public guidance in due course, and once published, employers should ensure alignment to mitigate any unexpected FBT liabilities. Further, noting that the benefits are also reportable to employees, employers should ensure appropriate tracking around these benefits for the purposes of taxable value calculations for year-end reporting.
