Removing Fringe / Employee Benefits Tax for Electric Vehicles

Removing Fringe / Employee Benefits Tax for Electric Vehicles

The global electric vehicle (EV) market is on a continuous upward trend, even though zero and low-emission cars are typically more expensive. Powered by renewable energy, they are touted as environmentally friendly. In fact, many countries are setting optimistic targets for carbon reduction and electric vehicle sales looking forward.

 

The right financial incentives could accelerate the use of EVs and significantly impact global efforts to reduce emissions and combat climate change. It might also make financial sense for business owners considering rising fuel costs, and for employees who want to further reduce their carbon footprint.

The cost of company cars – fringe benefit / Employee Benefits tax

Cars are a popular fringe benefit; however, when employers provide employees with a car, electric or not, the benefit also comes at a cost – company cars that are also for personal use are subject to fringe benefits tax. And that cost, although it is an employer liability, is usually passed on to the employee. The fringe benefits tax for company cars depends on the salary package or the method of valuing personal use.

 

What would happen if countries implemented an exemption for electric cars? There are potential benefits for both the employer and the employee.

Legislation to encourage the use of electric vehicles

Australia is the first country to propose legislation to remove the fringe benefits tax for electric cars made available to employees, to make them more affordable, boost supply, and help companies and organizations transition to fleets of electric vehicles.

 

The Federal Government proposal would be applicable for electric cars with a retail price below the luxury car threshold for fuel-efficient cars, which is $84,916 for 2022-2023. Yet, it would not reduce the purchase price of an electric car for private buyers or for companies. This tax reform could have a substantial effect on an employee’s salary.

What does the exemption mean for tax reporting?

Employees would be the primary beneficiaries, potentially saving thousands of dollars on tax for the personal use of company cars. Fringe benefits tax in Australia is a 47 percent tax on the personal use of a company vehicle. It can be calculated in two ways – with or without a logbook. Many opt for the “statutory method,” which doesn’t require a logbook and is based on a flat rate of 20 percent personal use of the car, regardless of the distance travelled.

 

That figure is multiplied by the gross-up rate, and the tax is applied to the final result. Using the logbook, or operating cost calculation, the proportion of personal use could be less or more than the standard 20 percent. For example, a car with a retail price of $50,000 provided by an employer could save the employee between $4,700 to $9,000 a year, depending on the method of calculation.

Even if electric vehicles are exempt from fringe benefits tax (FBT) in Australia, they will still be reportable in individual tax returns and may be relevant for determining other liabilities or entitlements.

Tax advantages for the future

Removing the fringe benefits tax could be a win-win depending on the legislation and may make it easier for people to consider an electric car. Still, there is a long way to go before such incentivized policies turn the mainstream corner, and we see a massive transition to electric. Australia has taken that first step and shown that it’s possible. The government plans to review the results after three years.

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