At the end of last year, the Government introduced a Fringe Benefits Tax (FBT) exemption for electric and other low omission vehicles. The Treasury Laws Amendment (Electric Car Discount) Act 2022 (the Act) received Royal Assent. The Act provides the legislative framework supporting the Government’s pre-election policy announcement to provide a Fringe Benefits Tax (FBT) exemption for certain electric cars.
In order to qualify you must meet the following:
- the car is a zero or low emissions vehicle
- the first time the car is both held and used is on or after 1 July 2022
- the car is used by a current employee or their associates (such as family members)
- luxury car tax (LCT) has never been payable on the importation or sale of the car
Before we get too carried away, we need to consider what is a low emission vehicle:
- battery electric vehicle
- hydrogen fuel cell electric vehicle, or
- plug-in hybrid electric vehicle (the eligibility for these will end in February 2025)
It should be noted at this point that motorcycles and scooters are excluded from the FBT legislation relating to cars. Consequently, electric will not qualify for this exemption either.
The luxury car limit for fuel efficient vehicles for 22-23 is $84,916, any fuel-efficient cars below this value should automatically qualify for the exemption.
What’s the benefit?
First up any employee who has previously dealt with salary sacrifice will be quite familiar with the pre-tax and post-tax contribution amounts a strategy previously implemented to minimise FBT obligations. This exemption allows us to do away with those post tax contributions allowing the funds to be drawn entirely from pre-tax salary creating a larger overall benefit for the employee over the life of the arrangement.
Those working with closely held entities like mum and dad business operating through companies would be more familiar with their employee contribution income that appears in their annual accounts after their accountant works out the private use on their vehicles once again this process becomes unnecessary under these exemptions.
A car expense is defined for FBT purposes to include fuel. The ATO has confirmed in its recent guidance that fuel which includes ‘electricity to charge and run electric cars’, constitutes a car expense. Therefore, the cost of electricity relating to charging can be incorporated into the exempt benefit…. just remember though the charger itself can’t be, not that the ATO want to confuse you or anything. We are hoping that a reasonable calculation will be forthcoming from the ATO prior to the end of the FBT year (31st March 2023).
The tax planning benefits of this exemption can be quite substantial for most small business owners operating their business through a company or a trust structure. The car can be financed through the company, the vehicle GST can be claimed by the entity along with the ongoing operating expenses and the depreciation while only affecting reportable Income not actual taxable income. Clients who have no HELP Debt and hold private health cover are best placed to obtain the maximum benefit from this exemption.
The FBT exemption opens up a number of tax planning considerations because not only does it relate to the cost of these vehicles it also means that day to day running costs such as fuel, registration, insurance and repairs are also exempt from FBT. The legislation does have a down fall in this regard there wasn’t enough foresight exhibited by the government to include home charging stations in the legislation. Unfortunately, these are still subject to expense benefit FBT and employees should in most cases consider buying these with after tax funding where possible.
Reportable Fringe Benefits (RFBA) is one you need to be aware of, there is no FBT payable to the notional value of the benefit will still be recorded on the employee’s payment summary where the benefit exceeds $2,000.00. This means the value of the benefit will still be taken into account when looking at things like HELP repayments or medicare levy Surcharge calculations.
Depreciation limits should also be considered to maximise the potential benefits while the luxury car limit sits around $84,000, the current motor vehicle depreciation limit only sits at $64,471, which means any amounts over this your business will not be able to claim depreciation for.