In a recent Tax Technical Update, BDO experts explored the details of the Treasury Laws Amendment (Electric Car Discount) Bill 2022 (the Bill), including eligible electric cars and the conditions to be satisfied.
The Bill has now passed both Houses of Parliament with two amendments from the Senate, and received Royal Assent on 12 December 2022. This legislation provides an exemption from Fringe Benefits Tax (FBT) for fringe benefits relating to electric cars, subject to certain requirements being met.
But what do these changes mean for you? In this article, we outline some of the practical impacts of this FBT exemption for electric cars.
Recent amendments
The first amendment made by the Senate adds a sunset clause for the exemption of plug-in hybrids from 1 April 2025. However, existing commitments for plug-in hybrids - which had access to the exemption prior to 1 April 2025 - will remain exempt.
The second amendment provides that a review of the FBT exemption over the first three years of its operation is to be conducted, and must be completed within 18 months of the end of the three-year period.
This amendment also includes provisions that the review should cover:
- How effective the FBT exemption is in promoting the uptake of electric cars
- Whether the operation of some or all of those provisions should continue
- The type of motor vehicles that should be covered by the provisions.
As part of the process, there will be public consultation about the matters to which the review relates.
Employer Savings due to no FBT applying to provision of electric cars
We note many employers provide vehicles to employees in respect of their employment. Where the vehicle is made available for the employee’s private use, an FBT liability is likely to arise for the employer, unless it is exempt from FBT.
We have included an example below of the estimated FBT savings for an employer who provides an electric car to an employee and qualifies for the FBT exemption.
Example calculation – annual savings (using current FBT & gross-up rates):
Topic |
Amount / Details |
|
FBT valuation method |
Statutory Formula method |
|
Electric car cost |
$48,000* |
|
Taxable value where no exemption |
$9,600 (calculated as $48,000 x 20% statutory fraction) |
|
FBT liability |
$9,385.86 (calculated as $9,600 x 2.0802 x 47%) |
|
FBT where electric car exemption applies |
$Nil |
|
Employer annual FBT saving |
$9,385.86 |
*This is based on the current estimated average cost of an electric car in Australia.
Employee contributions – savings due to salary sacrifice arrangement
Where an employee enters into a novated lease arrangement, or otherwise agrees to financially contribute towards the provision of a car fringe benefit, some or all of the employee contribution will typically be made from after-tax salary.
This will enable the post-tax amounts to offset the taxable value of the car fringe benefit for FBT purposes.
For electric cars that qualify for this exemption, the total contribution made by an employee may now be made from pre-tax amounts. This change is expected to provide significant tax savings for the employee due to reduced taxable income.
The below provides an example of the estimated income tax savings for an employee earning $150,000 per year, where the employee makes pre-tax contributions towards the provision of an electric car under a salary sacrifice arrangement.
Example calculations - per annum:
Details |
Without salary sacrifice($) |
With salary sacrifice($) |
|
Total remuneration |
150,000 |
150,000 |
|
Less: Salary sacrificed car & running costs (pre-tax) |
0 |
(25,000) |
|
Cash Salary |
150,000 |
125,000 |
|
Less: PAYG Withholding* |
(40,567) |
(31,317) |
|
Net pay |
109,433 |
93,683 |
|
Electric car costs (after-tax) |
(25,000) |
0 |
|
Net |
$84,433 |
$93,683 |
|
Savings for the employee |
|
$9,250 |
*PAYG Withholding amounts based on resident tax rates for 2022-23 and excluding the 2% Medicare levy
As demonstrated in the above example, salary sacrificing the electric car costs results in annual savings of $9,250 for the employee.
Reportable Fringe Benefits – adverse impacts
As a requirement of the FBT exemption, an exempt electric car will be included in the calculation of an employee’s Reportable Fringe Benefit Amount (RFBA). This will likely result in an administration cost to the employer, as the employer needs to ensure they have accurate records to be able to calculate the taxable value of the car to determine the RFBA for their employees.
This also has an impact on the employee. Whilst an employee does not pay income tax on an RFBA, it will be included as part of the employee’s tax return and will be taken into account for the calculation of various liabilities and entitlements (e.g. higher education contributions, their eligibility for certain family assistance payments etc.).
Notwithstanding the expected income tax savings that may exist for an employee who salary packages an eligible electric car - as our example above highlights - these savings may be offset to some extent due to the resulting RFBA for the employee.
Reporting obligations will typically not arise on benefits that are exempt from FBT (subject to certain exceptions, such as reporting obligations for FBT exempt employers), therefore the potential impact an RFBA may have on an individual’s personal tax situation where they salary package an FBT exempt electric car, should be considered.
Given the above, employees should ensure they are seeking the requisite advice to understand the extent to which they may be financially impacted by an RFBA and, further, whether this offsets the income tax gains that an electric car may provide.
Electricity – impact of charging the electric car at an employee’s home
Electricity is vital for the operation of electric cars, however the impact of home electricity costs incurred by the employee when charging their electric cars requires further consideration for FBT purposes.
The FBT legislation contains an exemption for car expenses that are attributable to the provision of a car fringe benefit. This ensures there is no double-up on the application of FBT over several categories of fringe benefits.
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.
Employees who charge their cars at home using their own electricity may seek reimbursement or, alternatively, seek to salary sacrifice these costs. However, in the absence of a separate meter to measure the electricity consumption, how will an employee calculate and record the electricity costs associated with charging their electric car?
Whilst this remains a current challenge for employers and employees alike, we await further guidance from the ATO to assist users of electric cars with the calculation of electricity costs when charging the car at an employee’s home. In this regard, the ATO has indicated a Draft Practical Compliance Guideline should be issued around March 2023.
There is also the possibility of employees using charging stations rather than charging at home.
There are a number of different providers for these charging stations, with the cost varying depending on the provider - and some may have no cost at all. This option eliminates the challenges associated with dissecting home versus electric car charging electricity costs, particularly as we await further ATO guidance, however regular use of public charging stations without fully charging may impact the electric car’s battery life and capacity over time.
Given our previous comments regarding the need for an employer to calculate the taxable value of an electric car in order to determine the car’s corresponding RFBA, the Operating Cost Method (OCM) may be considered. However, this valuation requires electricity costs to be taken into account as this forms part of the car expenses.
Whilst the OCM may produce a more tax-effective outcome (compared to the Statutory Formula Method) and, therefore RFBA for the employee, employers should consider the manner in which the electricity costs will be determined, including the additional administration this would create.
Impact of the provision of wall chargers for use at an employee’s home
Finally, we note it is currently unclear as to whether costs associated with the purchase and installation of a wall charging unit in an employee’s home will qualify as exempt, and fit within the FBT electric car exemption.
We are anticipating further guidance from the Australian Taxation Office (ATO) in this regard, which will enable employers to determine whether this component may be included within FBT-exempt car packages.
Contact us
As we await further announcements and guidance from the ATO regarding the implications of this new law, if you have any questions regarding this article or would like more information on employment taxes, please contact a BDO employment tax specialist.