Jun 28, 2022 / News

FBT-exempt cars are coming! (Did you know that?)

We discuss a surprisingly little-discussed election policy that will likely change the landscape of employer-provided cars.

Tax policies?

Last month’s election featured an almost complete absence of tax policies.  Almost.  That’s perhaps not surprising, given what happened at the 2019 election.  But that was then, this is now.  And so, what tax policies did Labor propose?  There were essentially three:

• Supporting the OECD's Two-Pillar Solution for a global 15% minimum corporate tax
• Limiting debt-related deductions by multinationals at 30% of profits
• Fringe Benefits Tax (FBT) exemption from 1 July 2022 for certain electric cars – called the “Electric car discount”

The first policy came about under the previous government in conjunction with our OECD partners, and so would have happened anyway.  The second one is largely a tweak to the thin capitalisation rules.  However, the last one compels our attention.  It’s interesting that this policy received almost no attention during the election campaign – we’re talking FBT-exempt cars!  And yet, it will likely impact decisions by employers and employees alike.

Perhaps a contributing factor to the little attention given to this policy is that it’s not actually on the Labor Party’s policy summary page (neither are the other two).  Click here to go there… and you won’t find a blue or red box saying anything about FBT, cars, electric or discount (try the word search).  The only way you can find the policy is to Google it to find a link directly to its page on Labor’s website (to save you the trouble, click here).

FBT-exempt electric cars

The exemption from FBT will apply only to electric cars costing less than the luxury car tax threshold for fuel-efficient vehicles, which is $84,916 from 1 July 2022.  Currently, there is only a handful of electric cars costing less than $85,000, but one expects economies of scale will bring down prices as they form a greater share of the market.

Details are not yet known, such as whether the exemption will extend to hybrid cars, or electric motor bikes.  We’ll know when we see the legislation.

Incentive to switch

When it comes time to update (or provide a car to an employee for the first time), both employees and employers will have an incentive to opt for an electric car over a petrol one.

For employers, where one or more cars are provided whereby any FBT is the employer’s cost, the benefit of switching to eligible electric cars is obvious – no more FBT cost.

For employees with a car provided as part of a set remuneration package figure, the change provides no direct incentive for the employer.  Rather, it is the employee who is motivated to request an electric car.  Whatever the components of the package (salary, superannuation, benefits, FBT, etc), they must total to the set remuneration package figure.  So, with FBT dropping out of the equation, what fills the void?  You guessed it – additional salary and super.

Here's an illustrative comparison of a $200,000 remuneration package that includes providing an $80,000 car (figures are approximates):

In both cases, the employer’s total cost is the same agreed package figure of $200,000.  Yet, with an FBT-exempt electric car, the $16,000 FBT cost is replaced with approximately $14,000 additional salary and $2,000 additional superannuation. So, the employee has about an extra $8,500 in their pocket (extra $14,000 salary, less 39 cents tax and Medicare levy) plus a bit more superannuation.

Overseas experience

Inspiration was no doubt drawn from the UK’s experience where a similar policy was enacted, after which electric cars went from 2% of the car market to 17%.  The change won’t be legislated in time for 1 July 2022, but there is every reason to think it will be in due course.

Decisions

Employers managing their business’s use of cars, and employees with a car provided as part of their remuneration package, will have a clear financial incentive to switch to electric cars.  Details will follow in due course when the legislation is released. 

Talk to your trusted Nexia Edwards Marshall advisor about how we can help you with making these decisions in your business.

The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Adviser.