What’s emerging? Electric Car FBT exemption awaiting Royal Assent

What’s emerging? Electric Car FBT exemption awaiting Royal Assent

29 November 2022

_{Share this article}

As at Monday 28 November 2022, the Treasury Laws Amendment (Electric Car Discount) Bill 2022 (the Bill) has passed both Houses of Parliament and now awaits Royal Assent. The Bill provides the legislative framework supporting the Government’s pre-election policy announcement to provide a Fringe Benefits Tax (FBT) exemption for certain electric cars.

Whilst some amendments were made to the Bill during its passage through Parliament, the overall objectives have remained largely unchanged, being to exempt certain zero or low emission vehicles (ZLEVs) (including battery electric vehicles, hydrogen fuel cell vehicles and plug-in hybrids) from FBT. Additionally, the eligibility restrictions with respect to being first held and used on or after 1 July 2022 and the first retail sale being below the luxury car tax threshold for fuel efficient cars ($84,916 in 2022-23) have continued (see What's Emerging? Labor Government’s electric car discount policy introduced into Parliament). The key changes made to the Bill included a sunset date for the FBT exemption for plug-in hybrids and to legislate a review process with respect to the continuation of the exemption after 3 years.

Amendments to the Bill since introduction

The two key amendments made to the Bill since it was introduced into Parliament are outlined below:

1. Exemption for plug-in hybrids to cease from 1 April 2025

The first amendment to the Bill, predominantly an initiative by the Australian Greens, is the sunsetting of the exemption for plug-in hybrids from 1 April 2025. However, importantly, 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, 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 (for example, a lease term that extends beyond 1 April 2025, provided a new commitment, such as refinancing or extending the lease duration, does not occur on or after 1 April 2025).

This grandfathering approach is also likely to instil further confidence in the take-up of battery electric and hydrogen cell vehicles as the expectation will be that similar grandfathering would be available if and when the exemption is removed for such vehicles.

2. Formal review in 3 years

The second amendment to the Bill provides that a review of the FBT exemption over the first 3 years of its operation must be completed within 18 months of the end of the 3 year period, with the report following the review to be tabled in Parliament and made available to the public. Relevantly, the legislative provisions provide that the review should cover the following:

• how effective the FBT exemption provisions are in encouraging the uptake of ZLEVs;
• whether some or all of the provisions should continue; and
• what types of motor vehicles should continue to be covered.

Additional Observations

Despite the Bill passing both Houses of Parliament, there remain some key uncertainties and challenges on the horizon:

1. ATO to review FBT treatment of in-house charging stations

In announcing the deal securing the amendments, the Australian Greens’ media release noted that “the ATO will also issue guidance on when household charging technology is able to be included within FBT-exempt vehicles packages”.

Since the release of the original Bill in July, a common query has been with respect to the inclusion (or otherwise) of in-home charging equipment within the exemption. Whilst the amendments did not specifically include provisions clarifying this, the noted comment indicates that the exemption may include charging assets in some circumstances.

We are of the view that the inclusion of charging assets in the exemption is pivotal in facilitating its success, reducing the financial burden of the initial outlay in transitioning to ZLEVs. Taxpayers will eagerly await the ATO’s guidance to more clearly understand the exemption’s scope, as neither the legislative definition of a 'car', nor the ATO’s historical interpretation of it, has been sufficiently broad as to enable such charging infrastucture’s inclusion.

2. Reportable-fringe-benefit-amount impact

A concern many have had since the release of the original Bill has been the requirement to calculate a reportable fringe benefit amount (RFBA), even where the car benefit itself is exempt from FBT. This requirement has not been removed in the finalisation of the Bill.

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. Notwithstanding, in our view, this approach has the potential to significantly (and adversely) affect employees, constituting an unwanted surprise at year end (in terms of impact on government entitlements, including child care subsidies).

It also potentially falls on taxpayers who can least afford the impact, with the legislation arguably impacting those who, but for the FBT exemption, would be unlikely to commit to a more expensive ZLEV.  For example, a $60,000 ZLEV could generate a RFBA in the vicinity of $22,000 per annum. This will likely materially raise an individual’s adjusted taxable income, which is relevant for the calculation of the above entitlements, not to mention a range of liabilities.

It will also create added administration and system challenges for employers and internal or outsourced fleet managers.

With respect to employer fleets, the Labor Government’s pre-election policy announcement noted that there were only five electric cars available in Australia for under $60,000. By comparison, an Internal Combustion Engine (ICE) sedan could cost as low as $20,000. Where an employer provides a fleet electric car (instead of an ICE sedan in this instance), if there are private use entitlements (which includes commuting between home and work), the employee will likely have RFBA implications similar to those outlined above.

These potential implications will need to be assessed by employers and employees alike before committing to ZLEVs, with mitigation strategies deployed accordingly.

3. Prioritisation of ZLEVs in the Australian government fleet

The Australian Government will be prioritising ZLEVs in their fleet procurement policy, only considering hybrids in exceptional circumstances.

This initiative was also flagged in the Australian Greens’ media release with Party Leader, Adam Bandt, stating “[t]he government fleet will go electric, and when these cars are sold second hand, it will help bring the cost down of EVs for everyday people.”

Given this push for the Government to transition to electric vehicles, it is expected that other employers will also undertake similar initiatives as part of their ESG policies.

Stay tuned for our forthcoming article where we will discuss the key steps every employer should consider when transitioning to EVs.