From the 1st of April 2025, plug-in hybrid electric vehicles (EVs) will no longer qualify as zero or low emission vehicles and will no longer meet the criteria for the Fringe Benefit Tax (FBT) exemption for electric cars, except in limited transitional circumstances.
Background: The Government enacted a pre-election policy in late 2022 to grant a FBT exemption for certain electric cars, including battery electric, hydrogen fuel cell, and plug-in hybrid cars. However, starting April 1st, 2025, the FBT exemption for plug-in hybrid cars will be phased out, with a limited ongoing exemption only for those with existing ‘financially binding commitments’ made before the cutoff date.
In detail: After April 1st, 2025, the FBT exemption for private use of plug-in hybrid electric vehicles will be scaled back. While EVs will no longer be considered eligible for the FBT exemption from that date, transitional provisions will allow continued exemption for EVs that met the criteria prior to April 1st, 2025, unless there are changes or new commitments made post this date.
Transition Rules: Two key criteria must be met for the transitional rules to sunset the FBT exemption for EVs:
- Private use of the PHEV was exempt from FBT before April 1st, 2025.
- There exists a financially binding commitment made before that time to continue providing private use of the vehicle to an employee or associate after April 1st, 2025, and this commitment remains unchanged.
Financially Binding Commitment: The concept of a financially binding commitment in relation to car fringe benefits is not new, having been introduced in 2011 during the shift to a flat 20% rate for car fringe benefits. The Australian Taxation Office has provided guidance on what constitutes a financially binding commitment in the context of the PHEV transitional rules, specifying that it must be an obligation that cannot be revoked and should relate to the private use of the vehicle by a specific employee or associate.
Examples of new commitments include optional extensions to agreements, breaks in novated lease agreements, changes in financial obligations under the lease, or changes in employer for FBT purposes.
Implications: Employers with EVs in a shared pool must note that the financial commitment must be tied to a designated employee or associate for the FBT exemption to continue. If no such commitment is in place before April 1st, 2025, private use of a PHEV in a shared pool is likely to attract FBT.
The Responsibility: FBT is a business tax, so employers will be responsible for any FBT liability arising from April 1st, 2025, due to the end of the PHEV FBT exemption. This liability may be passed on to employees through existing salary packaging arrangements. Employers, whether using EVs in a fleet or through salary packaging, should be aware of the FBT implications post the exemption end date.
Recommendations: Employers currently offering salary packaged EVs should review agreements with external providers to identify any new commitments that could result in FBT liability. Businesses considering EVs in their fleet should:
- Identify private use of existing EVs for FBT accounting post April 1st, 2025.
- Review ESG policies to understand tax implications of transitioning to fuel-efficient vehicles.
- Assign EVs to specific employees before April 1st, 2025, to secure the FBT exemption.
- Factor in additional FBT liabilities when comparing total cost of ownership of EVs with other vehicles.
- Consider FBT costs in workforce restructuring or changes in employing entities for employees with EVs.
Switching to fully electric vehicles or other low emission options should also factor in FBT implications, particularly regarding infrastructure provision like home charging equipment for EVs.
