At the opening day of the Sydney International EV Autoshow, Andy Larmour, Principal Director at KPMG, presented a compelling breakdown of the tax benefits and financial incentives associated with electric vehicles (EVs) and plug-in hybrid electric vehicles (PHEVs). His insights highlighted key financial advantages, especially in the context of Fringe Benefits Tax (FBT) exemptions and novated leasing, aiming to clarify how Australians can maximise savings when opting for an EV.
Understanding the FBT Exemption
The federal government introduced the electric vehicle discount in 2022 to offset the higher cost of EVs relative to their petrol counterparts. This measure primarily targets employers who provide vehicles to employees, allowing them to avoid the high cost of FBT on electric vehicles—a tax burden that nearly doubles the cost of providing a petrol vehicle. As Larmour explains, “Fringe Benefits Tax won’t apply when you provide your employees with an electric vehicle.”
The conditions for this exemption are specific but straightforward: vehicles must be battery-electric, hydrogen-powered, or PHEVs (within the time limit) and cost under the luxury car tax threshold, currently set at $91,387.
Larmour notes, “Vehicles costing more than that won’t be eligible for the exemption, which can mean that, for certain makes and models, whether or not there’s a potential for it to be an exempt EV comes down to the specific model and price.”
Savings for Employers and Employees
The impact of the FBT exemption on employers can be profound. Larmour illustrates this with a scenario where an employer provides an EV with a price tag of $60,000. In a four-year lease arrangement with annual lease costs of $14,000, excluding running costs, the employer would pay $26,459 without the exemption. However, with the exemption, this cost reduces by 45% to $14,727. “That’s effectively what the exemption is,” Larmour states. “The vehicle can be provided to an employee, and the employer doesn’t have to pay any FBT.”
For employees, the FBT exemption opens doors to tax savings through novated leasing—a process where an employee can lease a vehicle through their employer by sacrificing a portion of their pre-tax income to cover the lease cost.
“What you can do is get a novated lease. You go to your employer and say, ‘I want you to use that $14,000 to go and lease a vehicle for me,’” Larmour explains. By sacrificing pre-tax salary, employees reduce their taxable income, realising significant tax savings.
In one example, an employee earning $210,000 a year who chooses a novated lease for a $60,000 EV ends up $8,943 better off annually compared to leasing independently. While novated lease providers may absorb part of this benefit as fees, Larmour emphasises the substantial savings potential: “This illustrates the potential savings that are there when somebody chooses to go down a novated lease route.”
Applicability Across Income Levels
One common misconception is that novated leasing mainly benefits high-income earners. However, Larmour clarifies that employees across income brackets can benefit. For an employee earning $100,000 annually, the savings might reduce, but they are still material at $6,868. “It’s not something that is only a benefit to top-rate taxpayers paying 47% margin,” he explains. “As the level of income goes up, the potential savings go up with it.”
Considerations: Reportable Fringe Benefits
While the FBT exemption is an attractive benefit, Larmour cautions employees to be mindful of reportable fringe benefits. This amount, which appears on employees’ end-of-year income statements, could impact eligibility for certain government benefits, such as child care subsidies and means-tested assistance. Larmour notes that even with the FBT exemption, a reportable fringe benefit still exists: “The employer has to go away and calculate what would be the benefit if the exemption didn’t apply, and then use that number to determine what your reportable fringe benefit amount is.”
This number can be substantial. For example, on an $85,000 EV, the reportable fringe benefit could be as high as $32,000, potentially affecting eligibility for means-tested benefits.
Final Thoughts on the FBT Exemption
With the FBT exemption on PHEVs ending in April 2025, Larmour advises employees interested in PHEVs to act soon. He emphasises that those who secure a financially binding novated lease agreement by March 31, 2025, can continue to enjoy the exemption for the lease term, even after the deadline. Looking ahead, he remains cautiously optimistic, suggesting that while there’s limited hope for an extension, political shifts could potentially impact EV policy.
For employees and employers, understanding the FBT exemption’s advantages can significantly impact financial decisions regarding EVs. As Larmour concludes, “We’ve heard of a huge uptake of electric vehicles through novated leases. You can see why that would be the case in terms of the tax savings.”
