Electric cars should now be a lot cheaper for millions of Australians courtesy of a tax exemption announced in mid-2022 and introduced into law later that year.
The Fringe Benefits Tax (FBT) exemption allows salaried employees to take out a novated lease on an electric car (EV) and pay for it wholly from their pre-tax income but not pay the fringe benefits tax that would normally be incurred.
In announcing the FBT exemption Treasurer Jim Chalmers said it could save employees up to $4700 a year on a $50,000 vehicle and employers up to $9000 annually.
Some have described the fringe benefits tax exemption on electric cars as a game changer for the industry, such is its ability to offset the price premium attached to most EVs.
But there’s lots you need to know about this new tax break.
What is a novated lease?
A novated lease is a way of financing a vehicle that uses salary sacrificing with the aim of providing tax benefits to the person taking out the loan.
It allows you to pay for the financing of a car and its running costs from your pre-tax salary. The financing is arranged with an external leasing company through your employer. But the lease belongs to you, so if you leave your employer, it’s up to you to transfer the lease, refinance or continue repayments.
At the termination of the lease there will be a one-off payment, with the size of that payment dependent on the original purchase price and the term of the lease.
Fringe Benefits Tax
If the car is not provided by your company as a tool of trade vehicle but is instead one chosen by you for your personal use, it would typically attract fringe benefits tax. That’s the Australian Taxation Office’s way of taking a cut because the vehicle is treated as a different form of payment.
FBT is paid by your employer, but most novated leases are structured with after-tax contribution payments that eliminate the requirement for the company to pay FBT. Having to pay for some of the lease from after-tax earnings means less in an employee’s take-home pay.
With the new FBT exemption on EVs, there is no need for that after-tax payment, allowing employees to fund the purchase and running costs of the vehicle wholly from their pre-tax salary.
“Prior to the [FBT] exemption some of the costs associated with a lease were coming out pre-tax and some of it was coming out after tax to offset fringe benefits tax liability,” explains Steven Ogle, the group product manager, employee benefits for SG Fleet, Australia’s largest vehicle leasing and fleet management company.
With this exemption, all of the payments are from pre-tax income, so the income tax savings are a lot better.”
The FBT exemption is not available to everyone
For those wanting to purchase an EV for private use, the FBT exemption only applies to those taking out a novated lease.
People paying cash for a car or taking out a separate loan – including borrowing against their home loan – will not get any benefit.
A novated lease requires the employer to be open to facilitating the financing through its payroll system but given there is no financial penalty to the company it is a matter of paperwork.
There can also be minor benefits in payroll tax to the employer given the amount of money being paid to the employee will be less once the leasing payments are deducted.
The higher the tax rate, the bigger the savings
Because of the structure of a novated lease – whereby payments are made from your pre-tax income – the benefits are usually greater for those paying a higher tax rate.
Anyone earning over $180,000, for example, is paying 45 cents per dollar earned whereas those earning $45,001-$120,000 pay 32.5 cents.
If you’re funding your car from your pre-tax income, anyone on the top tax rate will effectively be saving 45 cents in the dollar, whereas those earning an average wage will only save 32.5 cents per dollar.
Not all cars are eligible for the FBT exemption
The FBT exemption only applies to certain vehicles and for a limited time.
They must be either battery electric vehicles (the things people generally refer to as EVs) or a fuel cell EV (which converts hydrogen into electricity), with the government saying it will “complete a review into this exemption by mid-2027”.
Until the end of March 2025, the exemption also applies to plug-in hybrid electric vehicles, which can be recharged externally but have a petrol engine for longer journeys.
It does not apply to regular hybrids, which includes the most popular models sold by Toyota.
Stay below the luxury car tax threshold
While the FBT exemption is applicable across new and used vehicles, it can only be utilised on cars sold on or after 1 July 2022.
The FBT exemption only applies to cars that have never paid any luxury car tax (LCT); in the 2023/2024 financial year, the LCT threshold for EVs is $$89,332, inclusive of GST, dealer delivery and accessories but exclusive of government charges such as registration and stamp duty.
