Electric Cars FBT Exemption

Sky Accountants Senior Client Manager, Tracey Hunter takes us through the detail on the new ‘Electric Cars Exemption’ that is designed to encourage take-up of zero or low emissions vehicles.  

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Transcript

Ashley Carmichael  00:11
Welcome to episode three of the Sky Accountants podcast.  My name is Ashley Carmichael.  I'm a Client Manager and also the Chief Technical Officer at Sky Accountants .  And today we have Tracey Hunter here to talk to us. Tracey is a fellow Client Manager at Sky Accountants .  And she's here today to talk us through the new Electric Vehicle FBT Exemption. Tracey, welcome!

Tracey Hunter  00:37
Thank you very much, Ash!  Lovely to see you again.

Ashley Carmichael  00:41
Likewise, likewise.  So Tracey, first of all, let's start at the very beginning. What is fringe benefits tax?  Can you give us a bit of an overview?

Tracey Hunter   00:56
Yeah, absolutely.  Well, a fringe benefit in general is a benefit that's provided to an employee by their employer that is something other than salary and wages. So that could be a lot of things such as paying for your private health insurance, child care  expenses.  But by far the most popular version of that is the car fringe benefit, which is where  either your employer provides you with a company vehicle that you can use after hours or use  salary sacrifice your own private vehicle via your salary. And fringe benefits tax itself is designed to capture these benefits and make sure that  they get taxed alongside your normal salary and wages.

Ashley Carmichael  01:40
And so is it the tax on the employee or is it the employer?

Tracey Hunter   01:46
Well, it's a tax on the benefit.  So it depends on how you go about structuring it, who is required to pay that fringe benefits tax.  By default, it's going to be the employer, but they can pass that on to the employee  as part of the arrangement if they choose to do so.

Ashley Carmichael 02:03
Okay.  Okay.  And so what's this new electric vehicles exemption, Tracey?  Can you give us a bit of an overview?  Why is the government doing this?

Tracey Hunter  02:14
 Well, basically, with the climate change action that's going along around the world  at the moment, the Australian government has its own carbon emission reduction requirements  that it has to meet.  And one of the biggest producers in Australia is vehicles.  So this is one of their ways of trying to increase the number of electric vehicles on  the road, which reduces the emissions that are going into the atmosphere and helps them  meet their agreed targets over time. So that's really what they're trying to achieve.  And by making the fringe benefits tax exempt for those vehicles, it encourages people to  move in that direction.

Ashley Carmichael  02:53
Yeah.  And so, salary packaging or providing cars to employees is often quite beneficial anyway.  Can you explain the sort of added benefit that this new exemption might provide?

Tracey Hunter  03:10
Yeah, absolutely.  And at the end of the day, it really just comes down to the dollars.
 I mean, that's what we're all going to work for in the first place is to earn a dollar.  So when you have a look at a fringe benefits tax exemption, it literally just takes that  money out of play.  So for example, if you're an employee and you've got a company vehicle, the fringe benefits tax that might be payable on a vehicle of say $66,400, which is the cost of a Tesla  Model 3 at the moment, it's going to be approximately $13,000. So either your employer has to pay that or they're going to pass that through to you  as part of your wages of reimbursement.

Ashley Carmichael  03:53
Is that, can I just butt in for a moment there, Tracey? Is that all in or is that per annum? 

Tracey Hunter  04:00
That's per annum.

Ashley Carmichael  04:01
Ouch.

Tracey Hunter  04:02
Yeah.  It can be quite nasty.  And that's why it can be a, well, is it worth it or not kind of situation. And while having it there, it's not going to be that big a difference, whether it's  an ICE vehicle or an electric vehicle in this case. Exemption for the EVs is what makes that massive difference.  So if you can add that $13,000 to your pocket as an employee, obviously you're going to  be much better off financially. You're also going to be much happier with your employer for giving you an opportunity to put a third end grant back into your back pocket.  And when we're all trying to make our employees happy to keep them on board, it's a great  incentive to keep things moving.

Ashley Carmichael  04:48
Well, yeah, it certainly does sound like a really good incentive and, you know, might do quite a bit to make those who are keen to move to an electric vehicle might make that quite a bit more affordable to do.

Tracey Hunter  05:06
So yeah, it's just a massive carrot to dangle in front of people.  And it's one of those things when you talk about a couple of thousand dollars, people  will go, well, I know internal combustion engine cars, the normal traditional vehicles. I trust them.  I know how they operate.  I think the two grand, I'll probably just stick with it.  But, you know, a $13,000 difference, that's going to turn some heads and it's going to  make people change their behaviour a lot more quickly.

Ashley Carmichael  05:33
And so for those who are interested in this, let's get into the some of the specifics and  let people know, you know, what exactly what boxes need to be ticked to access these exemptions. So you remember to run us through those.  Yeah, absolutely.  So with anything the government loves to put some eligibility criteria in there to keep  us on our toes.

Tracey Hunter  05:51
So the first thing is that the vehicle that you choose has to qualify as a low or low emission  vehicle.  So that could be a battery electric vehicle such as a Tesla. It might be a hydrogen fuel cell electric vehicle.  Now Toyota are big on those.  There is plug-in hybrid electric vehicles as well. So again, that is something that Toyota and especially the Camry is famous for.  So it has to fit into one of those categories.

Ashley Carmichael  06:31
Yeah, just picking up on what you said there about plug-in, that's an important detail,
 isn't it?

Tracey Hunter  06:41
It is.  It is.  So as I mentioned before, Toyota is big in the hybrid range, but there is a normal hybrid  and there's a plug-in hybrid. Now a normal hybrid, it's a car that's actually charged via the engine in the car.  So there's a fuel cell or a battery cell inside that hybrid, but it's charged by the internal combustion engine as you roll down the road.  All right?  A plug-in hybrid actually plugs into a wall and charges the battery from an external source  to the vehicle.  So it's only these ones that plug into the wall or a charging station that are actually  going to qualify for this exemption.

Ashley Carmichael  07:22
Yeah, so people who are looking at hybrids, they really do need to be, and if they want  this exemption, they need to be careful, don't they?

Tracey Hunter  07:31
Yeah, the acronym, it's a very small difference in the acronym, but it makes a massive difference  in this case, absolutely.

Ashley Carmichael  07:38
And so what other requirements are there?

Tracey Hunter  07:41
So another one at the moment is the carry load.  So if you're looking at a passenger vehicle such as a sedan or something like that, probably  not going to be an issue for you, but it has to carry under one tonne or have less than nine passengers. So for example, if you were to purchase a Renault Kangoo ZE, which is an electric van that you can use, very popular with say electricians and things like that, if you purchase one  of those and give it to your employee to take home at night, this will be fine because it's  got a capacity of 650 kilograms. But the Ford E-Transit, which is about to come out in Australia, will exceed this limit  and won't qualify.  So that's something to certainly be careful of if you're more in the van market as opposed  to sedans and things like that.

Ashley Carmichael  08:35
Yeah, probably worth noting with some of those vans for tradies.  The issue is if there's private use of these, if it's just a purely work vehicle, then that's  a different story.

Tracey Hunter  08:51
Yeah, another kettle of fish.

Ashley Carmichael  08:53
And is there a start date?  If I bought an EV two years ago, can I start claiming the exemption or is that no go?

Tracey Hunter  09:03
I would love to say yes, Ash, because I'm actually in that boat, but no, the vehicle  to qualify for this, the vehicle that you're using has to have been used for the first  time after 1st of July 2022. So unless you received that EV for delivery and have it sitting in storage for the last  two years, you're going to be out of luck, unfortunately. But it is a very specific date to look for.  So it's not the purchase date of the vehicle, it's the first use date of the vehicle.  So if that, with EVs especially, there's often a lag time between the two dates, so  it's important to make sure it's the first day the vehicle is being used that matters. And that has to be after 1st of July 2022.

Ashley Carmichael  09:51
So if I've been waiting a long time for mine to turn up, I'm still potentially in here.

Tracey Hunter  10:00
Yeah, absolutely.  But it is a bit of a trap with the second hand market for electric vehicles.  So we need to be very careful if you're looking at going down that path.

Ashley Carmichael  10:11
Yeah!

Tracey Hunter  10:11
Absolutely!

Ashley Carmichael  10:15
So it has to be a qualifying vehicle, it has to be under a certain load and passenger limit, start date 1 July 2022, anything else that we need to tick off?

Tracey Hunter  10:26
Yeah, there's two more things that can trip us up.  One is it has to be used by the employee or one of their associates. So an associate, you might ask, is that's an immediate or an extended family member?  So for example, it might be your wife, your husband, your partner, or it might be your children who are using that vehicle.
 So as long as you're used by a family member, you're all under control.

Ashley Carmichael  10:55
Okay, so you've got an employee, say it's me, and I don't need a new car. I happened to buy one last year, but my other half does.  I could salary package that car and they could drive that and we're looking good.

Tracey Hunter  11:15
Yeah, yeah, still under control there.  The only other hurdle that you need to watch out for Ash and anybody else who might be  looking at an EV is that the luxury car tax limit can't have been applied to that vehicle  at any point in time.  So it's not just your purchase of the vehicle that that might apply to.  It might be the previous owner again if you're buying a second hand vehicle, or it may be  if that vehicle has been imported from overseas, the dealer may have had to have paid that  that car tax. So it's important to check on that.

Ashley Carmichael  11:50
So what is that limit at the moment?

Tracey Hunter  11:53
So as of right now, it's at $84,916 exactly.

Ashley Carmichael  11:59
Very specific, isn't it?

Tracey Hunter  12:01
Yeah! They have a very unusual CPI increase that gets applied to it, but that's the current  limit.  The thing to keep in mind is that that limit has been lower in previous years.  So if you are buying a second hand vehicle again, that limit may be lower for your particular car than others in today's market.

Ashley Carmichael  12:24
Yeah, okay.  Important one there, isn't it?  So do I have to literally buy it?  Do I have to essentially pay cash or the employer to the business have to pay cash for the car  or could it be financed or leased?

Tracey Hunter  12:42
Yeah, that is perfectly fine.  There's no limitation on that.  So you can do it either way.  So all of your traditional options such as a personal loan or a shadow mortgage is preferred, but novated leasing via a salary sacrifice option is also perfectly fine.  No issues with that at all.

Ashley Carmichael  13:03
Very good.  And are there any traps that people need to look out for with this exemption?

Tracey Hunter  13:10
Oh, unfortunately Ash, there's lots of them.  So we'll cover often as many as we can.  So the first thing to keep in mind is that this is a car benefit, not a motor vehicle benefit.
And the reason I bring that up is that there's a lot of electric motorbikes and scooters  coming out into the market at the moment.  They are not going to qualify for this exemption. So make sure that we steer away from those and don't get too excited.  One other thing we were talking about the hybrid option before, for plug-in hybrid options, they're only going to qualify up until the 1st of April 2025.  Now if you're using one of those vehicles now, so if you purchase a vehicle today that  qualifies and your salary sacrificing agreement, for example, goes past that date, you'll still  be able to keep using it and qualify for the exemption for the life of that vehicle. But you have to have that contract in place before the 1st of April to be able to qualify.

Ashley Carmichael  14:15
So no new, so you couldn't acquire one beyond 2025 and if there's some kind of change in  your salary packaging arrangements that might put you on the wrong side of the exemption  too, is that right?

Tracey Hunter  14:30
Yeah, absolutely.  And the reason for that is because it's still a hybrid option, the government are looking  to still move towards those cleaner vehicles. So it's just another step in the system that they're looking for there.  So another trap to look for is we were talking about the limit on the pricing that you have. Now one of the things that you will find a lot and anybody who's purchased a new vehicle  will find this coming, you have a purchase price and then you have the extras, you have  the add-ons that come with it, the heated seats, the leather, you know, all of the things  that make you get excited about a new car. Anything that is installed in the vehicle at the date of delivery is going to be included in that price limit for you.  So be careful with all of the smooth talking that the dealer is doing and make sure that  they don't accidentally push you over that limit. I've actually had a client come exceptionally close to that already.  So it's very careful to watch out for that one.

Ashley Carmichael  15:39
Hmmm. Yeah, it seems to me that a small amount, so just going ever so slightly over that limit  when we're talking about upwards of 13K saving a year, that added extra might be very costly.

Tracey Hunter  15:59
Absolutely, agreed.  And again with the luxury car tax limit, the thing to keep in mind that this does apply  to previous ownership purchases as well. So you've got to make sure that you've got your bases covered there.

Ashley Carmichael  16:15
Yeah, that sounds like the second head market sounds like it's a real sort of headache there. It is brought with danger.  Yeah.  So what should you do?  Like if you are looking at a second hand car, how do you know whether or not you're under? Like what do you have to do there?

Tracey Hunter  16:38
Yeah, well it really comes down to who you're dealing with and what options you have.  For example, some vehicle owners will be happy to pass on copies of their own purchase history  to you. So they may give you the original purchase contract and let you know that it's got the delivery date on there for the use date and things like that. 

Ashley Carmichael  16:58
So that's really the ideal from an ATO compliance point of view, isn't it?

Tracey Hunter 17:03
100%. Yeah, absolutely.  They have given you some other options.  So if you're unable to get those details, you can do historical searches on the internet to be able to provide the historical purchase prices and things like that. But certainly if you can get the original documentation from the previous owner, that  is the sweet spot. That's what we'd be looking for.

Ashley Carmichael  17:28
Yeah, and it's important that people are going down this path that they're really aware of  that and bring that up in the wheeling and dealing because once you've got the keys and metaphorically speaking, you're driving off into the distance, it might be hard work to  get that detail.

Tracey Hunter  17:50
Yeah, absolutely.  And I mean, while it's not an issue with Teslas, there's a lot of servicing history that still  has to happen for some electric vehicles and plug-in hybrids. So the last thing you want to do is take possession of one of these and see a service  entry that predates the use date that you had before you got started. So definitely worth doing your homework and making sure you have all your ducks in a row  at the start.  100%.

Ashley Carmichael  18:17
Yeah! Okay.  And what about all the sort of the infrastructure that goes with it?
 What do you say you want a home charging unit?

Tracey Hunter  18:29
Yeah, so again, that's something to keep in mind because that's actually excluded specifically  from this exemption. The government have been quite clear about that.  The purchase of a home charger and the installation of a home charger is not going to be included in this exemption.

Ashley Carmichael  18:48
 So if the employer were to pay for that?

Tracey Hunter  18:51
It's either recommended that you have it reimbursed.  By the employee, that's going to be the easiest way.

Ashley Carmichael  18:59
 Yeah, so you're looking at an FBT bill if the employer funds that.  So that sounds like it's a watch out.

Tracey Hunter  19:09
Yeah, it's considered another benefit. So it's not part of the car vehicle benefit.  It's not going to prevent you from applying the exemption to the car benefit, but it's considered a different type of benefit.  So that will be taxable just on a different.

Ashley Carmichael  19:24
Yeah.  Okay.

Tracey Hunter  19:26
And the only other thing which can be a major issue for people is with the vehicle benefit  being exempt, that does not mean that it's exempt from reporting. So as an employer, you're still going to be required to make sure that this is reported  on the income statement that you issue to your employees at the end of the year.  And as an employee, it's important to keep in mind that that means that it will still  impact anything that is income tested that you're looking at. So for example, that might include government assistance from Centrelink, child support, your Medicare levy surcharge position.  And even if you still have some student debt such as help or student debt itself, the supplementary loans, it's going to impact your repayment levels on those.

Ashley Carmichael  20:15
Yeah.  Those those hex debts or help debts.  I'm showing my age there.  That's always been an issue with salary packaging where sometimes the employer, as a result  of the packaging doesn't deduct enough tax and the employee gets a big tax bill when  they lodge their tax return. So...

Tracey Hunter  20:38
Never happy to see it.  That's for sure.

Ashley Carmichael  20:39
No.

Tracey Hunter  20:40
Sleepy tiger.

Ashley Carmichael  20:42
But that's always one of those ones that we'd always recommend, wouldn't we, that you check out the amount of tax that's being withheld once you've entered into that salary packaging to make sure that it's set up right. There's just nothing worse than that nasty surprise.

Tracey Hunter  21:01
Yeah, absolutely.  Definitely worth the double check.

Ashley Carmichael  21:09
Okay.  Well, yeah, it does sound like there is a fairly long list of things to be careful of  there, Tracey.

Tracey Hunter  21:16
Well, like anything, Ash, the good things sometimes you have to work for them.  So you've got to make sure that you cover all your bases, but it's worth it if you get there. 

Ashley Carmichael  21:24
And look, it really does sound like the devil's in the detail here. And I guess the message that I'm taking away here is that if someone's really seriously looking at doing this, they need to make sure that they're ticking off the box or boxes. And it's probably a good idea to talk to the likes of yourself or your accountant who can  go through these requirements with you and make sure that you are meeting all of the  requirements.

Tracey Hunter  22:03
Absolutely.  And I think because it's one of those situations where if you don't have all of your, you know,  your T's crossed and your eyes dotted at the start of the situation, there's no coming  back from it. It's not something that you can rectify later down the track.  You're either in or you're out with that particular vehicle.  So yeah, absolutely.  100% it's very important to make sure that you speak to a professional to get that nailed right at the start.

Ashley Carmichael  22:30
Yeah, get it right and then you don't have to worry.

Tracey Hunter  22:33
Yeah, absolutely.  And you can sleep well while your car charges outside in the garage. 

Ashley Carmichael  22:41
And look, that's been a really good overview, Tracey. I just sort of wanted to end on a note to just around electric vehicles more generally  because, you know, this, as you said, this is all about promoting take up of electric vehicles. And I'm still a, you know, fossil fuel burning petrol driver myself, but it certainly does  seem that we're going to be seeing more and more electric vehicles on the road. And at the moment, we're seeing incentives coming out for EVs.  I suspect not too far into the future, we might start seeing some disincentives for petrol, new petrol vehicles.

Tracey Hunter   23:35
Yeah, well, this exemption itself, Ash, it has a, I wouldn't say a sunset clause, but  they're going to look at reviewing it in a couple of years time.  And that comes in around that 1st of April, 2025 that they were looking at phasing out  the plug in hybrid. And the reason for that is the government wants to see how this impacts the uptake of EVs in Australia to see if they need to tweak it to continue that encouragement.  But as you say, turn the tables a little bit so it becomes more of a disincentive for the  internal combustion engine purchase versus the EV purchase.  But I mean, you know me, Ash, I'm actually a little bit of an EV enthusiast. I've got a Model 3 Tesla myself and I wouldn't drive anything else after I've been in it.  I absolutely love the EV lifestyle. There's nothing like not having to smell the petrol at a petrol station as I fill up. Certainly something I don't miss.  So a lot of the governments around the world are actually trying to push for the adoption of EVs by putting in a date that says you can't purchase an internal combustion engine  at a past a certain date.  Now, Australia is a little bit behind the rest of the world in that kind of position.  They haven't set that hard and fast date yet, but they're certainly pushing in that direction. So I would expect that to be coming a bit later down the track.

Ashley Carmichael  25:09
Yeah.  And look, it seems like there's more and more infrastructure to support it now.  I think perhaps one of the biggest concerns that a lot of people have is around the range, particularly people who don't live in urban areas.

Tracey Hunter   25:27
Yeah. I mean, a lot of the talk about EVs you hear is about the UK or the US.  And when you compare the size of those locations to the travelling that we do in Australia, it's a very different kettle of fish.  So I mean, for me, I obviously go, oh, I think it's about 40 kays a day coming into and out  of work. So I live a little bit outside of town.  I have no issues.  I can bolt from Ballarat up to Melbourne without any problems down to Warrnambool to see the  family. I have no range anxiety or any issues like that.  The infrastructure is fantastic for that kind of situation. But, if you're heading out into the more rural areas, I can understand at the moment it's  still a little dicey, but we're working on it. There's a lot of people out there pushing.  And you'll find one of the things that a lot of people aren't aware of is that it's not  just the Tesla superchargers or the charge fox stations that RACV or RACQ, etc. are putting out there.  A lot of businesses are actually putting EV charges in to encourage people.  One of the main things that you will find if you go out on the road, hotels have these so that you can charge overnight if you're doing a run down to see a client in another city or town. You'll also find that a lot of restaurants are starting to put them in so you can plug in and charge your car while you have lunch while you're on the road and then off you  go and you're all charged up, ready to go. It's not as scary as you may think, but certainly the charges are also increasing in number as well, so that'll help.

Ashley Carmichael  27:24
Yeah, look at it.  Certainly feels like we're going to see a lot more uptake on this.
 I think this exemption is going to help that. There might be people listening or watching this right now who are quite interested to  see how they can make it work for them.

Tracey Hunter   27:49
Absolutely.  If I could say one thing, don't be shy, give it a go.

Ashley Carmichael  27:58
Good sales pitch there, Tracey. Thank you.  Well, thank you for taking the time out to talk us through it.  It's been really good.  I know I've learned a few things about it that I didn't know and I would encourage anyone who is interested to get in touch. It sounds like a fantastic opportunity for those who are keen on EVs.  Thank you.

Tracey Hunter  28:28
It's been a pleasure.  Happy to talk.