The Albanese government has introduced tax cuts to electric vehicles in its first sitting week, claiming the proposed changes would be “good for motorists, good for climate action and good for fleet purchases”. They won’t, however, help most Australians afford one.
Labor plans to stop the “fringe benefits tax” applying to electric vehicles. This tax usually applies to all cars provided by an employer to an employee, either as part of a salary sacrifice arrangement or as a company car available for personal use. This means the winners of the tax change are high-end employees who can afford a high-priced electric vehicle such as a Tesla.
Rolling business fleets over to the second-hand market is an important way to make electric vehicles more affordable to everyday people. But this tax cut won’t see this happen anytime soon.
Our recent report recommends a suite of other tax changes to lower electric vehicle prices and ownership costs. Australia can’t meet its target of 89% new car sales being electric by 2030 without significantly reforming the transport sector. Labor’s new tax cut is a far cry from what’s needed.
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What does a fringe benefits tax do?
Australia’s transport sector accounts for around 18% of national emissions. Electric vehicles, powered by renewable energy, are crucial for meeting Australia’s emissions target of net-zero by 2050.
This won’t happen if electric vehicles remain prohibitively expensive. Indeed, 87% of Australians in a 2021 survey said the biggest barrier to buy an electric vehicle is its high upfront cost.
So what does a fringe benefit tax on cars actually do?
There are two ways the fringe benefit tax is calculated in Australia: using the statutory formula (based on the car’s cost price), or using the operating cost method (based on the costs of operating the car). The fringe benefits tax is 47% of each method’s calculated final value, known as “grossed up taxable value”.
The highest payable fringe benefits tax is under the statutory formula method, which applies when employees fail to keep a car logbook. Under this method, electric vehicles would be at a disadvantage.
Employees would be penalised for choosing an electric vehicle because of its higher upfront cost price. Employers would pay a higher fringe benefits tax than if they’d bought a lower-priced petrol or diesel car. That doesn’t leave much incentive for businesses to buy an electric car.
Removing the fringe benefits tax on electric vehicles is a good way to stop penalising employees for choosing an electric vehicle. But it still won’t reduce the high upfront cost price.
Why businesses still won’t choose electric cars
Business uptake of electric vehicles depends on the total cost of ownership. Let’s use Hyundai’s Kona cars as a case study.
Modelling found Kona electric cars, including a smart charger, costs $66,337 (excluding GST). A new Kona fuel-combustion car, on the other hand, costs $31,329 (excluding GST), which means electric vehicles are not cost competitive.
The fringe benefits tax would further widen this cost gap of over $35,000, adding around $12,000 each year to the Kona Electric.
Labor’s bill would remove the $12,000 yearly tax, reducing the ownership cost of an electric vehicle. But it will not reduce the upfront price difference with Kona’s fuel-combustion car.
Another factor to consider is that a 2020 survey found over 47% of business fleets used for work are parked at home and subject to fringe benefit taxes. This means the fringe benefit tax exemption does not apply to all business vehicles.
The fringe benefit tax exemption may encourage the 47% of business fleet vehicles parked at home to transition to electric vehicles. But this will require an additional cost of installing chargers. This can be expensive, non-tax deductible and subject to additional fringe benefits tax.
Can we buy from the second-hand market?
Australia should learn from tax changes in Europe, which have successfully accelerated the uptake of electric vehicles. Company cars represent the main market share for new electric vehicles in Europe.
The highest is in the Netherlands, where businesses account for 73% of new electric vehicle purchases. In the United Kingdom it’s at 67%, Germany at 49% and Norway at 34%.
After three to four years, these business electric vehicles are rolled over into the second-hand market, which are cheaper and more affordable to all consumers, not just high-end buyers.
In Australia, business buyers account for over 40% of new light vehicle sales. But their uptake of electric vehicles is shockingly low, with a mere 487 electric vehicles acquired by business fleets in 2020.
This means Australian consumers cannot rely on more affordable business fleet electric vehicles being rolled over into the secondhand market any time soon.
What should we do instead?
Our report finds the federal government must introduce additional tax changes, and not be limited to the fringe benefit tax exemption for electric vehicles.
We recommend 17 short-term and long-term tax changes to lower the upfront electric vehicle prices, the total cost of ownership and encourage home charging to address business lack of workplace charging infrastructure. These include:
- Instant asset write-off to only apply to employer-provided fleet electric vehicles, up to the luxury car limit of A$84,916 (including GST in 2022/23). This would allow the Kona electric vehicle purchase cost of $64,037 to be claimed as an outright tax deduction by a business in its first year of ownership;
- Increase the GST credit and depreciation cost limit for fleet electric vehicles, up to the luxury car limit;
- A fringe benefit tax exemption for home charging installation and smart charges for fleet electric vehicles; and
- Instant asset write-off for home charging installation and smart charges for fleet electric vehicles.
Business incentives such as these will bring Australia a big step closer to meeting its 2030 electric vehicle target and, crucially, its net-zero emissions target.
Anna Mortimore is a lecturer at the Griffith Business School at Griffith University.