New FBT exemption on Electric Cars could save you 40%
The Fringe Benefits Tax exemption on electric cars has now passed parliament. Using this exemption can result in a saving of around 40% off the purchase and running costs of an electric car purchase.
The FBT exemption applies to battery electric, hydrogen fuel cell electric or plug-in hybrid electric cars first held and used after 1 July 2022. Importantly the car must not have been subject to luxury car tax which means the cost of the car must be less than $84,916 for the 2023 Financial Year to be eligible. This threshold will likely increase every year. The exemption also only applies to cars used by current employees or their associates (eg family).
The government will review this exemption by mid-2027 to consider if the exemption will continue. However in the case of plug-in hybrid electric vehicles, the exemption wont apply to vehicles first held and used after 1 April 2025 or cars first used earlier if there isnt a financial binding commitment to continue providing the vehicle on and after 1 April 2025.
The way the exemption provides a benefit generally is that an employee sacrifices a portion of their wage each year to cover the purchase and running costs of a new electric vehicle that is used for private purposes. There is little or no benefit to the FBT exemption if your private use of the vehicle is low. The sacrifice amount reduces the employees taxable income meaning they pay less tax while still receiving the same amount of financial benefits in wages plus car fringe benefits as before. It effectively makes the car tax deductible. The tax savings can be as much as $40,000 over the life of the arrangement for a $77,000 purchase made for an employee who earns between $65,000 to $120,000. This includes tax savings on running costs of the car over time and assumes 100% private use of the vehicle. The saving will be less if your income is less than about $65,000 and more if your taxable income is over $120,000.
To access these savings, if you are an employee, you’ll need to discuss a salary sacrifice arrangement with your employer. These can be set up as a novated lease arrangement with a salary packaging provider. These salary packaging providers prepare calculations of what amount your wage needs to be reduced by and what the saving will be. Note that the financing costs of these providers can vary significantly so you should obtain more than one quote.
To access these savings as a business owner, depending on how your business is organised, you may be able to have your business purchase the car directly rather than needing to use a salary packaging provider to set up a novated lease.
If you were already thinking of purchasing an electric car, this is a great way to reduce your cost of purchase. If you were looking for a car more generally, this can reduce the cost of an electric car down to be more comparable with existing hybrid and fuel powered cars on the market.