What’s trending? Sunsetting of FBT exemption for plug-in hybrid electric vehicles

Towards the end of 2022, the Government enacted its pre-election policy announcement to provide a fringe benefit tax (FBT) exemption for certain electric cars. Currently, eligible electric vehicle included a battery electric, hydrogen fuel cell or plug-in hybrid car. However, from 1 April 2025, plug-in hybrid cars will be phased out of the FBT exemption, except for a limited ongoing exemption for those that continue to have a ‘financially binding commitment’ that was in place before 1 April 2025.

In this article, we explore what a financially binding commitment means and highlight key considerations for employers who provide PHEVs as part of their fleet.

From 1 April 2025, the FBT exemption for the private use of plug-in hybrid electric vehicles (PHEV) is wound back. While PHEVs will no longer be considered a zero or low emission vehicle eligible for the FBT exemption from 1 April 2025, transitional rules apply to continue the exemption for PHEVs that were eligible for the exemption prior to 1 April 2025, unless there is a change to, or a new financially binding commitment post this date.

Broadly, transitional rules will apply to sunset the FBT exemption for PHEVs if they satisfy two criteria:

• use of the PHEV was exempt from FBT before 1 April 2025, and
• there is a financially binding commitment in place before that time to continue providing private use of the vehicle to an employee or their associate on and after 1 April 2025, and that commitment remains in place, unaltered.

Financially binding commitment

The concept of a financially binding commitment in relation to a car fringe benefit is not new — a similar concept applied in 2011 in response to the transition of the progressive statutory rates for car fringe benefits to the flat 20% rate. The Australian Taxation Office has issued guidance on what will be a financially binding commitment in the context of the PHEV transitional rules, stating a commitment is an obligation to undertake a transaction that cannot be backed out of. The commitment must:

• be financially binding on one or more of the parties, and
• relate to the private use, or availability for private use, of the car to a particular employee or associate.

An example of this is a contractual agreement entered into by an employer to purchase or lease a PHEV (including novated lease agreements).

In considering whether a financially binding commitment is in force (as will be relevant for continuing the exemption from 1 April 2025), the ATO provides examples of circumstances which would give rise to a new commitment, such as:

• optional extensions to the agreement
• breaks in novated lease agreements
• changes to financial obligations under the lease (for example, a change to the residual value of the car or the lease payment amount), and
• change of employer for FBT purposes (even within company groups).

In these instances, FBT will apply at any time from 1 April 2025 for existing PHEVs from the time the new commitment is entered into.

Employers with PHEVs in a shared pool should take particular note of the ATO’s view that the financially binding commitment must relate to a single, designated employee or associate. In the example of a vehicle fleet, where vehicles are not assigned to a particular employee, it is likely that the FBT exemption will not roll over for PHEVs. Where there is no financially binding commitment in place between an employer and a particular employee for the private use of a pool vehicle prior to 1 April 2025, any private use of a PHEV in a vehicle pool, including home garaging, will likely attract a FBT from 1 April 2025.

As FBT is a tax on businesses, the employer will bear any FBT liability that arises from 1 April 2025 as a result of the sunsetting of the PHEV FBT exemption, although this liability might be passed through to employees as part of existing salary packaging arrangements. Whether PHEVs form part of a vehicle fleet, or are salary packaged by employees, employers should be mindful of the FBT impact for existing PHEVs.

Where employees are currently salary packaging PHEVs, employers should review their arrangements with any external salary packaging providers to ensure that if a new financially binding commitment occurs, employers will have sufficient information to identify this change and recourse to recover any FBT payable from employees.

For businesses which currently use, or potentially may use PHEVs as part of its vehicle fleet in the future, it is important to consider:

• having processes in place to identify the private use of existing PHEVs to account for FBT from 1 April 2025 and whether additional record keeping practices are required
• whether ESG policies should be reviewed or updated to ensure that businesses understand the tax impacts of vehicle fleet transitions towards fuel efficient vehicles
• re-assigning a PHEV (new commitment) to a particular employee pre-1 April 2025 to avoid loss of the FBT exemption
• where there are plans to acquire new PHEVs or exercise an optional extension of lease agreements in the near future, whether it is possible to bring forward the commitment time to before 1 April 2025, or factor in any additional FBT liability when comparing the total cost of ownership of PHEVs with other types of vehicles, and
• in the event of workforce restructuring, consider the impact of any additional FBT cost where there is a change of employing entity for employees provided with PHEVs.

If organisations are looking to switch from PHEVs to fully electric vehicles or other zero or low emissions vehicles, employers should also consider the FBT liability in relation to providing the infrastructure for EVs and other alternatives. As an example, providing or reimbursing the cost of in-home charging equipment is likely to constitute a separate taxable fringe benefit. For further information see our most recent article on this topic.

For further information, please don’t hesitate to contact one of our Employment Taxes specialists or refer to the following articles on the PwC employment taxes website:

• 2024 FBT Series: What you need to know about vehicles, electric vehicles and non-cars
• What’s trending? ATO finalises guidance on calculating electricity costs for charging an electric vehicle at an employee’s or individual’s home