FBT exemption for electric cars: How to take climate action whilst reducing employees’ tax

The climate crisis and the cost of living are two prominent issues at the forefront of many people’s present-day concerns. The government recently introduced legislation to address the former, but if implemented properly by employers, it could also improve the latter.

As such, on 27 July 2022, Australia’s Labor Government introduced a bill to remove Fringe Benefits Tax (“FBT”) on electric and plug-in hybrid cars.

If this legislation is passed, employers should consider offering their staff members the ability to salary sacrifice a car. A salary sacrifice essentially means that the employee forgoes part of their monetary salary in exchange for employee benefits such as the leasing of a vehicle. When it comes to leasing an electric vehicle, not only would an employer be taking positive climate action, they would simultaneously be reducing their employees’ tax.

Here's how:

If an employee’s salary sacrifice is an electric or hybrid car exempt from FBT, the employee will receive substantial financial benefits. Namely:

1. Since the car will be exempt from FBT, the employee salary sacrifice (pre-tax) will comprise the lease payments, and potentially, vehicle running costs. This essentially has the same outcome as if the employee were to claim 100 percent of the vehicle’s purchase cost and costs associated with operating the car as a tax deduction. This is because the employee’s taxable income will be reduced by the whole amount of the overall car expenses in the form of a salary sacrifice.
2. Secondly, the employer can claim back GST input credits, and pass this benefit on to the employee. This means the cost of the car to the employee is further reduced by this tax benefit which the employer can pass onto the employee.
3. These two points can therefore provide a substantial financial benefit to employees. For example, based on average numbers, we have calculated an employee on the 37 percent tax rate purchasing an AUD 50,000 car would potentially need to sacrifice AUD 18,000 per year (being total costs of AUD 20,000 less GST), and would save tax of potentially AUD 7,000 per year. In this example, the car only costs the employee AUD 11,000 per year (AUD 18,000 less the tax savings).

There are also additional indirect financial advantages, specifically:

1. Businesses can increase staff retention by virtue of employee satisfaction;
2. Businesses can uphold corporate social responsibility with respect to environmental consciousness, which is gaining importance in maintaining both employee and client retention; and
3. It is a practical measure to address cost-of-living pressures for employees through tax reduction. It is also worth noting that this problem has been exacerbated by rising fuel costs – another cost that employees wouldn’t have to incur.

Eligibility requirements

The FBT exemption will apply to vehicles that are:

- Battery electric, hydrogen fuel cell electric or plug-in hybrid electric vehicles;
- Purchased on or after 01 July 2022; and
- Below the luxury car tax threshold for fuel efficient cars, which is currently AUD 84,916 for the 2022/23 income year.

Learn more

If you want your business to take climate action and offer your employees the financial benefits of these proposed government incentives, get in touch with Azure Group to learn more about how you can implement the required arrangements once legislated.


XLNC MAGAZINE | No. 10 | Autumn 2022

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