FBT On Electric Vehicles
The Treasury Laws Amendment (Electric Car Discount) Bill 2022, which took effect on December 12, 2022, introduces a fringe benefit tax (FBT) exemption for eligible electric vehicles valued below $84,916.
What is an FBT exemption?
An FBT exemption refers to a provision that allows employers to be exempted from paying fringe benefit tax on certain benefits provided to their employees and their families. These benefits can include the personal use of work cars, gym memberships, entertainment tickets, reimbursement of school fees, discounted loans, and other benefits offered through salary sacrifice arrangements. An FBT exemption helps reduce the tax liability for employers.
Overview of the legislation The Treasury Laws Amendment (Electric Car Discount) Bill 2022 grants an FBT exemption to employers who provide their current employees with electric vehicles (EVs). To qualify for the exemption, the EV must meet the criteria for being a zero or low emissions vehicle and have a value at the time of first retail sale below the luxury car tax threshold for fuel-efficient vehicles ($84,916). It’s important to note that motorcycles and scooters, even if electric, do not qualify for this exemption.
The purpose of this legislation is to incentivize the transition to more environmentally friendly vehicles in Australia by reducing the tax burden associated with EVs.
Benefits of the exemption choosing an electric vehicle and taking advantage of the FBT exemption offers not only environmental benefits but also significant financial advantages.
Under a novated lease arrangement, you can enjoy tax benefits such as purchasing the car GST-free and paying for running costs with pre-tax dollars, resulting in financial savings. However, in the absence of the FBT exemption, you would need to make after-tax contributions to offset the FBT liability, which could lead to a financial loss.
With the FBT exemption, packaging an eligible electric car allows you to pay expenses before taxes without the need for after-tax contributions, eliminating the drawback of an FBT adjustment. This exemption can lead to substantial tax savings over the lifespan of the vehicle.
Understanding the savings from the FBT exemption To illustrate the savings from the FBT exemption, consider the scenario of an employee who needs to make after-tax contributions to offset the taxable value of a car fringe benefit provided by their employer. Let’s assume the car is valued at $75,000, and the applicable FBT rate is 20%. Without the exemption, this would result in a $15,000 reduction in take-home pay annually. However, if the FBT exemption applies, the taxable value is reduced to zero, eliminating the need for the $15,000 after-tax contribution. This represents a significant tax saving for the employee.
Important considerations While the FBT exemption means that you won’t have to pay FBT for personal use of an eligible electric car, it’s important to note that the value of this benefit must still be included when determining your reportable fringe benefits amount (RFBA) by your employer. If the total RFBA exceeds $2,000 in a financial year, it will be included in your payment summary and can impact your HECS or other repayments to the Australian Taxation Office (ATO) by increasing your adjusted taxable income (ATI).