Deep dive: The FBT spectrum for electric car benefits

Deep Dive: The FBT spectrum for electric car benefits

15 December 2022

By Greg Kent, Shane Pinto, Rosie Muirden and Jack Collins

_{Share this article}

On 12 December 2022, the Treasury Laws Amendment (Electric Car Discount) Act 2022 (the Act) received Royal Assent. The Act provides the legislative framework supporting the Government’s pre-election policy announcement to provide a Fringe Benefits Tax (FBT) exemption for certain electric cars (see What’s emerging? Electric Car FBT exemption awaiting Royal Assent). 

It is important to note that the Australian Taxation Office (ATO) had indicated that it will release further guidance in relation to the FBT and broader taxation implications of Electric Vehicles once enactment of the Bill had occurred. Limited updated guidance was provided on the ATO’s website the same day the Act received Royal Assent.

In this Deep Dive article, we step through some key FBT considerations for employers (and employees) now that the measure is law.

1. What cars fit within the Act’s exemption?

The FBT exemption is restricted to ‘Zero or Low Emission Vehicles’ (ZLEVs) (including battery electric, hydrogen fuel cell and plug-in hybrid cars) that satisfy the following conditions:

1. are first held and used on or after 1 July 2022; and 
2. where the first retail sale of the car is below the luxury car tax threshold for fuel efficient cars ($84,916 in 2022-23). 

There is a further restriction placed on plug-in hybrids - these types of cars are only eligible for the exemption up until 31 March 2025, or for as long as the taxpayer maintains a ‘commitment’ (made on or before that date in relation to a car that constituted a car benefit on or before that date) to the car. Once there is a change in ‘commitment’ post that date, the vehicle will no longer have access to the exemption. 

In relation to the ‘held and used’ restriction, practically, this means that the ZLEV must be used for the first time on or after 1 July 2022 even if held before this date. For example, a ZLEV that is held on 15 June 2022, but first made available for an employee’s private use after 1 July 2022 is still eligible for the exemption. 

With respect to the luxury car tax threshold restriction, according to the Electric Vehicle Council’s 2021 annual report titled ‘State of Electric Vehicles’, there were 31 passenger battery electric and plug-in hybrid models available in Australia in August 2021, though only 14 were under $65,000, with only another two if the threshold was expanded to the luxury car tax threshold. Given the limited number of vehicles that are currently eligible for the exemption, and the expected increase in popularity in these models given the new tax measures, consumers should expect lead times to continue to be delayed. This is likely to be important given, for plug-in hybrids, the vehicle must be first held and used prior to 1 April 2025. That means the vehicle must be delivered prior to this date and made available for the private use of an employee - not just placed on order.

Additionally, the threshold also presents complications for second-hand acquisitions. To qualify, irrespective of the second-hand price, the first retail sale of the vehicle must be below the threshold (currently $84,916) to be eligible for the exemption. That is, there is no regard to the price of the second-hand acquisition. Furthermore, second-hand vehicles are only eligible if the first retail sale (and use) was on or after 1 July 2022.

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.

Example 1 - Employer provided vehicle

In this example, the employer would have ordinarily provided their employee an ICE vehicle which is replaced with a ZLEV. We have assumed the employee has an outstanding HELP debt.

As evidenced above, the employee will have an additional lump sum payment based on the 1% repayment rate increase, which may not be deducted by way of PAYG withholding throughout the financial year. The employee’s net position will be worse off than if the employee had provided them with a cheaper ICE vehicle.

Example 2 - Salary Packaged Vehicle

In this example, we have outlined the impact of an employee who historically has elected to novate a lease for a $30,000 ICE vehicle, and instead packages a $60,000 ZLEV. The employee has an outstanding HELP debt. We have used the following general assumptions to estimate the value of deductions: lease length of four years; salary $100,000; 20,000 kms travelled per year for a medium-sized car. The ICE vehicle will have a pre/post tax split to offset the FBT taxable value.

As evidenced above, despite the vehicle eligible for an FBT exemption, the net cash saving to the employee is only $3,008 due to the significant cost differential in acquisition price. Further, this difference is likely to be neutralised at lease-end through the residual value payment. Relevantly, on an annuity basis, the RFBA impact will result in a 1% uplift to the employee’s HELP repayment at year-end which may be on a lump-sum basis.

If there are multiple programs affected - for example, an individual loses Family Tax Benefit support, childcare subsidies and has higher HELP debt repayments - the impact could be material.

6. Other EV associated costs

We have outlined other EV related costs that may have FBT implications below:

Road User Charge

The Victorian Government introduced an additional cost in respect of ZLEVs, the Road User Charge (currently 2.6 cents/km for EVs and 2.1 cents/km for hybrids, payable together with vehicle registration). This charge is designed to fund the development and maintenance of roads, which is usually collected via the Commonwealth fuel excise tax when Australian drivers purchase fuel. Relevantly, a number of other Australian jurisdictions have also announced similar measures. 

There is currently no public guidance on whether such road user charges are considered to be a ‘car expense’ as defined for FBT purposes, noting that ‘car expense’ benefits are generally exempt when provided in connection with a car benefit (including where the car is exempt). Notwithstanding, in our view, such costs should be treated similarly to the fuel excise tax inbuilt into fuel costs, noting that fuel costs for an ICE vehicle are considered a ‘car expense’ for FBT purposes. We expect the ATO will issue guidance to clarify this point in due course.

Ancillary Subscription Costs

As is the case with most ZLEVs, there are additional subscription costs for access to particular products and features. For example, Tesla has the option to upgrade to Premium Connectivity for a monthly fee, which provides access to features such as live traffic visualisation and satellite-view maps. 

Currently there is no guidance on whether these subscription costs are included within the ZLEV FBT exemption, or subject to FBT separately - therefore, there is a level of uncertainty, as such costs do not appear to fall within the ‘car expense’ definition for FBT purposes. We expect the ATO will issue guidance to clarify this point in due course.

EV Battery Replacements

Currently, there is no public guidance as to whether ZLEV battery replacement costs are considered to be a ‘car expense’ for FBT purposes (arguably, most relevantly, in respect of ‘repairs to or maintenance of the car’). It is our view that, akin to the battery replacement for an ICE vehicle, a battery replacement in an EV constitutes ‘repair’ or ‘maintenance’. 

However, the cost of a ZLEV battery replacement is substantially higher than an ICE vehicle (i.e. up to $20,000 for some ZLEVs versus approximately $200 for an ICE vehicle). This could have a significant financial impact if not FBT-exempt, and could also impact the operating cost method calculations for RFBA purposes. In any case, we expect the ATO to be issuing guidance on the treatment of these costs.

7. Governance and stakeholder management 

As the ZLEV landscape is very new and likely, unfamiliar for the vast majority of employers and employees, it is important that each is aware of the potential implications of acquiring or leasing a ZLEV and that, for employers in particular, relevant governance measures are implemented.

For employers, the transition to ZLEVs, or the accommodation of ZLEVs as part of employee novated lease programs, likely necessitates investment in updating policies, systems, record keeping requirements and employee communication. In addition, there needs to be greater investment in the education process to understand the FBT and broader implications of running a ZLEV fleet, including internal processes around aspects such as the capturing costs for ZLEVs (including electricity consumption, road user charge, ancillary subscription costs and battery replacements), as well as the maintenance of logbooks should the operating cost method be used, and RFBA processes. In the coming years, understanding and protecting access to grandfathering provisions (to maintain FBT exemptions) will become important.

For employees, in a packaging context, understanding what ZLEVs are eligible for the FBT exemption is critical, as is the FBT exemption applicability to associated costs, particularly common cost outlays for home charging, charging infrastructure, road user charge costs, etc. is important before committing to an ZLEV at the outset. It is also key for employees to understand the potential (and likely significant) impacts from the RFBA increase, which could impact government programs such as study and training loan repayments, child care rebates, etc.

For any enquiries relating to the above information please contact one of your PwC specialists.