The recent tax exemption announced in mid-2022 has significantly reduced the cost of electric cars for numerous Australians. This exemption, pertaining to the Fringe Benefits Tax (FBT), enables salaried employees to opt for a novated lease on an electric vehicle (EV) and cover its expenses entirely from their pre-tax income, exempting them from the usual fringe benefits tax.

Treasurer Jim Chalmers, while announcing the FBT exemption, highlighted potential savings, indicating that it could amount to up to $4700 annually for individuals purchasing a $50,000 vehicle and up to $9000 for employers.

This FBT exemption for electric cars has been labeled as transformative for the industry due to its capacity to offset the price difference typically associated with most EVs. However, comprehending the nuances of this new tax break is essential.

Understanding a novated lease:

A novated lease functions as a vehicle financing method employing salary sacrifice to offer tax advantages to the borrower. It facilitates payment for a car’s financing and running costs using pre-tax salary. While the lease is arranged through an external leasing company via the employer, the lease ownership belongs to the individual. Should the individual change employers, they must either transfer the lease, refinance it, or continue repayments independently.

Transitioning between employers requires coordination with the lease provider. In cases where the new employer won’t manage the lease, direct payments to the lease provider become necessary, albeit from after-tax income.

Fringe Benefits Tax (FBT) and its exemption:

Normally, a car chosen for personal use, not provided by the company as a tool of trade vehicle, attracts fringe benefits tax. With novated leases structured to include after-tax contribution payments, the FBT requirement is usually eliminated. This arrangement, however, reduces an employee’s take-home pay due to after-tax payment obligations.

The new FBT exemption for EVs removes the necessity for after-tax payments, enabling employees to fund both the purchase and ongoing costs of the vehicle solely from their pre-tax salary.

Previously there were some leasing costs that came out of pre tax and some post tax of employee salaries that enabled to offset fringe benefits tax liability but with the new exemption all payments are from pre tax income that results in tax savings for an employee.

Key considerations and eligibility factors:

The FBT exemption applies exclusively to individuals opting for a novated lease to purchase an EV for personal use.

Cash purchases or separate loans, including those tied to home loans, do not qualify for the FBT exemption.

Employers facilitating the lease through their payroll systems incur no financial penalty, making it primarily a matter of administrative process.

The benefit is more pronounced for individuals in higher tax brackets due to the pre-tax income structure of a novated lease. For instance, those earning over $180,000 can effectively save 45 cents per dollar compared to individuals earning $45,001-$120,000, who save 32.5 cents per dollar.

Vehicle eligibility criteria:

The FBT exemption applies to battery electric vehicles (EVs) or fuel cell EVs until a review slated for mid-2027.

Until the end of March 2025, plug-in hybrid electric vehicles (PHEVs) also qualify for the exemption.

Regular hybrids, do not meet the eligibility criteria.

Additional considerations:

Cars eligible for the FBT exemption must fall below the luxury car tax threshold and can only be purchased on or after July 1, 2022.

At the time of writing, 42 battery electric vehicles were available in Australia, with 20 qualifying for the FBT exemption in the 2022/2023 financial year. However, not all models within a range may qualify due to specific thresholds.

Availability challenges:

While popular models like the Tesla Model 3 and BYD Atto 3 are readily available, certain EVs such as the Hyundai Ioniq 5 and Kia EV6 face supply limitations.

Tax implications and considerations:

While the FBT exemption saves money, individuals need to be mindful of other implications. Although FBT on applicable vehicles is waived, reporting the FBT benefit remains necessary and can impact eligibility for various entitlements, subsidies, or obligations.

Consulting an accountant or tax advisor is essential to comprehend the overall impact of the FBT exemption, considering its potential effects on different aspects of personal finance.

Why Choose Boutique Accounts?

At Boutique Accounts, we don’t just crunch numbers; we build relationships. Here’s why businesses trust us with their FBT concerns:

Expertise:

Our team comprises skilled professionals well-versed in the complexities of taxation laws. We provide expert guidance tailored to your unique business needs.

Comprehensive Solutions:

We offer end-to-end solutions, from understanding FBT regulations to implementing compliant practices. We streamline the process, saving you time and resources.

Personalized Support:

We recognize that every business is different. Our solutions are customized to suit your specific requirements, ensuring you receive the support you need.

As you gear up for the festive season, let Boutique Accounts be your guiding star. We’ll help you navigate the FBT intricacies associated with Christmas parties and gifts.