The adoption of electric cars in Australia has been on the rise, as people become more environmentally conscious.
With the Australian government’s recent exemption of electric cars from Fringe Benefits Tax, there is now even more incentive to make the switch. If you are interested in owning an electric vehicle, this article provides a comprehensive guide to the recent changes to FBT laws and explores the benefits of owning an electric vehicle.
The big news is that it is now very cost effective to buy an electric vehicle for more than just the fuel savings. The ATO have also made electric vehicles Fringe Benefit Tax (FBT) free. This means when you pay for your electric vehicle, you pay from pre-tax dollars, not post tax dollars saving you a heap of tax.
In this blog we’ll work through what the FBT exemption means and what benefit you get when you complete your online tax return at the end of the year and throughout the year. As you’ll see from the examples below, the tax savings are quite big. We’ll run through some background knowledge about salary sacrificing first, then jump straight into an example.
Salary sacrificing in Australia is a popular method used by employees to reduce their taxable income and boost their take-home pay.
It involves an agreement between the employer and employee where a portion of the employee’s pre-tax salary is redirected towards benefits such as novated car leases, superannuation, or other allowable expenses.
One of the benefits of salary sacrificing towards an electric car is that the payments are deducted from the employee’s pre-tax salary, meaning they pay less tax. Salary sacrificing removes the need for employees’ after-tax income to be used. Come tax time, employees can enjoy a reduction in their taxable income, resulting in a lower tax bill.
Example: Electric vehicle novated lease vs Petrol vehicle novated lease
The following table shows examples of a person on a $120,000 salary, purchasing an $80,000 car, and driving 15,000km on average per year.
|EV Novated Lease||EV w/out Lease||Petrol Novated Lease||Petrol w/out Lease|
|Car cost: Novated lease||-$24,943||$0||-$10,563||$0|
|Tax paid – tax credits||$21,836||$31,867||$27,653||$31,867|
|Salary after tax||$73,221||$88,133||$81,784||$88,133|
|Car cost: After-tax||$0||-$24,342||$0||-$25,962|
|Novated Lease Savings||$9,430||$0||$3,613||$0|
Using a novated lease for an EV, you save $9,430 compared to purchasing the car yourself. When leasing a petrol car, you save $3,613 compared to purchasing the car yourself. Overall, you save $5,817 per year leasing an electric car rather than leasing a petrol car.
It’s important to note that this is an example based on a number of assumptions and your real-life example will vary from the information above based on cost of car, kilometres travelled and other tax deductions you may have access to.
What is Fringe Benefits Tax?
Fringe Benefits Tax is a tax paid by employers on certain benefits they provide to their employees, such as company cars, health insurance, and gym memberships. The purpose of FBT is to ensure that employees are not receiving tax-free benefits instead of salary.
FBT is calculated based on the taxable value of the benefits provided to employees, with the employer responsible for paying the tax. The FBT rate is currently set at 47%, which means that for every dollar of taxable value, the employer must pay an additional 47 cents in tax.
FBT exemption for electric vehicles
As an employee, it’s worth noting that if your employer provides you or your associates with an electric vehicle (EV) for private use, they may be able to avoid paying Fringe Benefits Tax (FBT). This exemption could mean that you won’t have to pay tax on the car benefit from having access to an EV.
From 1 April 2025, the exemption for the private use of a plug-in hybrid EV will no longer apply, unless your employer was already eligible for the exemption before that date and has a financial commitment to continue providing you with private use of the vehicle after 1 April 2025.
Salary sacrifice arrangements
If you’re interested in salary packaging an electric vehicle, the first step is to speak to your employer or salary packaging provider. They will be able to provide you with more information about the options available and help you to set up a salary packaging arrangement.
You will also need to choose the electric vehicle that you want to purchase or lease and ensure that it meets the eligibility criteria for the FBT exemption.
Benefits of salary sacrificing EVs for employees
Electric cars are becoming an increasingly attractive option for employees as they offer a range of benefits including:
- Tax savings: Employees pay less tax as the cost of the vehicle is deducted from their pre-tax income. Using a novated lease for an EV is attractive as employees have more disposable income for the things they want to buy.
- Reduced fuel costs: Electric cars are much cheaper to operate than petrol or diesel vehicles, as they rely on electricity instead of fossil fuels.
- Reduced maintenance costs: Electric cars have fewer moving parts than traditional vehicles, which means they require less maintenance and are less likely to break down.
Better sustainability: Electric cars produce zero emissions, which can help businesses reduce their carbon footprint and meet their sustainability goals. Employees can feel more satisfaction knowing they’re helping the environment.
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