By Shaun McGowan – CEO and Founder, Novated Lease Australia
Until recently, not many people outside of tax accountants and company payroll officers had heard of ‘fringe benefits tax’.
Now though, it’s the talk of internet forums, barbecues and water coolers up and down the country. The reason? A change to how this relatively obscure tax is applied has slashed the cost of buying and running an electric vehicle in Australia.
We’re talking thousands of dollars per year. To the point where it’s now possible to buy and run an EV for far less than a similarly-priced petrol or diesel car. In fact, we worked out that in some cases, you can now pay for a Tesla Model 3 (the best selling EV with a driveaway price of $67k approx) and run it for five years for less than a middle-of-the-road petrol vehicle, like a Toyota Camry (driveaway price approx $37k).
This saving won’t apply if you walk into your local car showroom and buy a vehicle the conventional way. But if you have access to novated leasing through your employer, buying an EV has become much more affordable.
The reason is the fringe benefits tax (FBT) I mentioned. Paying for a car with a novated lease has always had major tax advantages. But FBT usually applies, as it does to most employee benefits.
This means some of the GST and income tax savings you get through a novated lease are offset by the FBT. But thanks to the Treasury Laws Amendment (Electric Car Discount) Bill 2022 introduced by the federal government late last year, eligible low- and zero-emission vehicles are now exempt from FBT.
That means you can now pay for an all-electric or plug-in hybrid electric vehicle entirely from your pre-tax salary, with no FBT liability. All while still getting a GST discount on the vehicle purchase price and car running costs.
The government’s own estimate puts the annual tax saving with this exemption at up to $4,700 for an employee paying for a $50,000 electric vehicle through a novated lease.
Even if you compare the cost of novating a more expensive EV model to buying the same vehicle with cash (usually assumed to be the cheapest option as there are no finance costs), the FBT exemption makes the novated lease more than $13,000 cheaper over 5 years.
The simple reason for this is the tax saving on the vehicle running costs available with a novated lease.
Now, there is one notable exception you really need to watch out for. The exemption only applies to vehicles valued below the luxury car tax (LCT) threshold.
With electric vehicle prices overall still being on the high side, this threshold ($84,916 for fuel-efficient vehicles in the 2022/23 financial year) will be a factor if you are thinking about a higher-end model.
But of the 10 top-selling electric vehicles in 2022, all but one have prices below the threshold.
Best selling EVs eligible for novated lease FBT exemption
1. Tesla Model 3 (RWD and Long Range)
2. Tesla Model Y (RWD)
3. BYD Atto 3
4. Polestar 2 (Standard Range, Long Range Single Motor, Long Range Performance)
5. MG ZS EV (Excite & Essence)
6. Hyundai Kona Electric (Elite Standard and Long Range, Highlander Standard and Long Range)
7. Volvo XC40 Recharge
8. Hyundai Ioniq 5 (Dynamiq & Techniq)
9. Mercedes-Benz EQA
Among PHEVs in the market, the popular Mazda CX-60 P50E (Evolve and GT), and the Mitsubishi Outlander and Eclipse Cross PHEV ranges are also within the threshold.
The other thing you need to be aware of is what is and is not included in a vehicle’s cost when LCT is being worked out.
The base vehicle cost might be below the threshold, but once extras are added, if the cost goes above it, the vehicle won’t be exempt and full FBT will apply.
The Australian Taxation Office says the LCT value is the retail price of the car, including:
- GST and customs duty
- dealer delivery charges
- standard and statutory warranties
- accessories, modifications and treatments added to the car before delivery (unless made solely to adapt it for driving by, or transporting, a person with a disability).
The LCT value does not include:
- LCT included in the sale
- other Australian taxes, fees or charges such as stamp duty, transfer fees and registration
- compulsory third-party insurance (CTPI)
- extended warranties
- costs associated with financing the purchase of the car
- service plans.
The good news is more and more affordable EVs are coming to the market in 2023, including the GWM Ora, the MG4 and BYD Dolphin. These will all be comfortably within the LCT threshold, offering more choice at the cheaper end of the market.
In 2022, battery electric vehicles accounted for only 3.1% of all new vehicle sales in Australia. In February 2023, sales jumped to 6.8% for the month. We can safely assume that number is only going in one direction from here.
Novated Lease Australia is a provider of novated lease packaging solutions for employees. To learn more about novated leasing, visit www.novatedleaseaustralia.com.au
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