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On November 28, 2022, Parliament passed legislation that allows for fringe benefits tax (FBT) free, zero or low emission electric vehicles from July 2022. This is a step in the Government’s plans to make low emission vehicles the car of choice for Australians
FBT is a tax that is paid by employers on certain benefits provided to employees. Common examples include: personal use of the company car, leased vehicles, discounted loans etc. For the electric vehicle (EV) FBT to apply, there are several conditions that need to be met, which we will discuss below.
The Australian EV market currently stands at 3.8% of all new vehicle purchases, a stark contrast to the UK’s 19%. Considering the lower emissions, reliability, lower fuel costs and convenience of EVs, the new legislation will have a positive impact on employees, employers and the overall economy.Â
The government has implemented this new legislation that will eliminate FBT for zero or low emission vehicles from July 1, 2022. The following conditions apply for the FBT exemption to be applicable to cars provided by an employer to an employee:
If an electric car meets the FBT exemption requirements, the benefits associated with running the vehicle during the car fringe benefit period can also be exempt from FBT. The government has estimated that if an employer provides an EV valued at around $50,000 through this arrangement, they could save up to $9,000 annually thanks to the FBT exemption.
However, even with the exemption, the value of the fringe benefit still factors into the employee’s reportable fringe benefits amount. This means the value of the benefit will appear on the employee’s income statement, even though income tax is not payable on it. The reportable amount is used to determine the employee’s adjusted taxable income for various purposes, including the Medicare levy surcharge, private health insurance rebate, employee share scheme reduction, and social security payments.
Assuming your employer agrees and the car meets the eligibility criteria, salary packaging can be considered as an option. Although some FBT concessions may not apply in a salary sacrifice agreement, the exemption for electric cars is available. To qualify for tax purposes, a salary sacrifice arrangement must be agreed upon, documented, and implemented before the employee earns the income that they will be sacrificing.
According to government estimates, individuals who use a salary sacrifice arrangement to purchase a $50,000 electric vehicle could save up to $4,700 per year.
The applicability of the FBT exemption depends on the business structure. The exemption is only available when an employer provides a car to an employee. Partners of a partnership and sole traders are not eligible for the benefits of the exemption, as they are not considered employees of the business. For beneficiaries of a trust and shareholders of a company, it is crucial to determine if the benefit is being provided to them as an employee or director of the entity to ascertain their eligibility for the exemption.
The FBT exemption only relates to cars, which are defined as motor vehicles (including four-wheel drives) designed to carry a load less than one tonne and fewer than nine passengers. The FBT system contains some other exemptions which can potentially apply to vehicles that are not classified as cars if certain conditions can be satisfied.
At present, electric vehicles (EVs) account for roughly 2% of new car sales in Australia; however, the EV sector is rapidly expanding, with new EV registrations rising by 62.3% between 2020 and 2021. The Government’s objective is to make zero and low emission vehicles the preferred choice for Australians by enhancing affordability and addressing “range anxiety.” The Government’s plan includes cutting import tariffs, establishing EV fast chargers every 150 kilometres along major highways, creating a national Hydrogen Highways refuelling network along Australia’s busiest freight routes, and transitioning the Commonwealth fleet to 75% no-emissions vehicles. The FBT exemption for EVs is only the first stage of this plan.
The FBT exemption on EVs is primarily aimed at incentivizing businesses to transition their fleet cars to electric vehicles. According to a research report by Griffith and Monash Universities, businesses account for approximately 40% of light vehicle sales in Australia, yet EV sales to business fleets only represented 0.08% of the market in 2020. While the Government can control the vehicles it purchases, the private sector faces a significant gap in the total cost of ownership between EVs and traditional combustion engine vehicles. This cost difference is a significant impediment to wider EV adoption, and the FBT system is being leveraged by the Government to reduce this barrier.
A $3,500 rebate on the purchase of a new zero emission, hydrogen fuel cell or battery light vehicle with a value of up to $70,000 purchased on or after 10 May 2022. The ATO has recognized that determining the cost of electricity used to charge an electric vehicle at home can present compliance difficulties for individuals with work-related expenses and employers with FBT obligations. To address this challenge, the ATO has released a draft PCG, which outlines eligibility criteria that must be met in order to calculate the electricity costs. Individuals and employers who meet these criteria can use the EV home charging rate of 4.20 cents per kilometre to calculate the costs associated with charging an electric vehicle at a residential home. The aim of this PCG is to simplify the process of calculating these costs and reduce the compliance burden.
The ATO has recognized that determining the cost of electricity used to charge an electric vehicle at home can present compliance difficulties for individuals with work-related expenses and employers with FBT obligations. To address this challenge, the ATO has released a draft PCG, which outlines eligibility criteria that must be met in order to calculate the electricity costs. Individuals and employers who meet these criteria can use the EV home charging rate of 4.20 cents per kilometre to calculate the costs associated with charging an electric vehicle at a residential home. The aim of this PCG is to simplify the process of calculating these costs and reduce the compliance burden.
For FBT purposes, from 1 April 2022;
For income tax purposes, from 1 July 2022.
It is not possible to use the guideline if the vehicle is a plug-in hybrid vehicle that has an internal combustion engine.
The record-keeping requirements for those who want to use the EV home charging rate are summarised below:
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A transitional approach is available if odometer records have not been maintained as at 1 April 2022 or 1 July 2022. In this case a reasonable estimate can be used based on service records, log books or other available information.
If you would like to discuss any of the above measures, our team at Breathe Accounting are here to make sure you feel confident navigating the FBT legislation. Contact our team today.
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*All information has been taken from Knowledge Shop.