FBT-free EVS: Is it time to switch

Intro:
Welcome to CPA Australia's With Interest podcast, bringing you this week's need to know information for businesses and accounting professionals.

Elinor Kasapidis:
Hello, and welcome to CPA Australia's With Interest podcast. I'm Elinor Kasapidis, Senior Manager of Tax Policy at CPA Australia. It's Monday the 12th of September, and the recently tabled changes to fringe benefits tax, also known as FBT, and electric vehicles are being considered by the Senate Economics Legislation Committee.

Elinor Kasapidis:
In essence, the law change will mean that there will be no FBT imposed on cars that are zero or low emissions vehicles and sit below the luxury car tax threshold. This means that if a model valued at about $50,000 is provided by an employer through this arrangement, the FBT exemption would save the employer up to $9,000 a year. For individuals using a salary sacrifice arrangement to pay for the same model, their saving would be up to $4,700 a year. The treasurer has stated the programme will be reviewed in three years. The ALP sees this as an important part of its EV strategy, while others have pointed out that the estimated take-up remains pretty low and the benefits will vary.

Elinor Kasapidis:
Joining me to discuss this issue is Mark Morris of Morris and Associates. Mark has extensive experience as a senior tax practitioner and represents CPA Australia on the ATO Fringe Benefits Tax Stakeholder group. It's a pleasure to have you on With Interest, Mark.

Mark Morris:
Great to be here, Elinor.

Elinor Kasapidis:
So today, Mark, we're talking about FBT and electric vehicles, also known as EVs. This FBT-free EV policy has been on Labor's cards for a while. What's the government trying to achieve with this FBT exemption?

Mark Morris:
Look, Elinor, I think essentially they're trying to reduce the price differential between electric vehicles, or EVs, and conventional petrol-fueled cars, internal combustion engine cars. And the way they're thinking they can do that is by making certain vehicles, or EV vehicles, FBT exempt. And that's attractive because obviously the employer will get that saving you just referred to, if they provide the benefit directly. But particularly they're envisaging that employees will enter into salary sacrifice arrangements. And in this case, when an employee does that, they're only going to have to salary sacrifice enough gross salary to cover the lease costs and the running costs. Whereas typically, they'd also have to kick in additional pre or post tax contributions to fund the payment of the FBT.

Mark Morris:
So overall, I think this is designed to be a bit of a game-changer inspired by other jurisdictions, such as Norway and the UK. And overall, as part of the more global attempt to reduce emissions, they're wanting to follow this initiative, given that the transport sector makes up about 16% of our total emissions.

Elinor Kasapidis:
It's definitely a step forward. But like any policy, there are always some rules. What are some of those rules to qualify for this exemption?

Mark Morris:
Very perceptive observation, Elinor. I mean, the first point is that this only applies to cars that are eligible, being zero or low emission cars. So for example, it wouldn't include SUVs which have a carrying load of one tonne or more. Secondly, it's only for zero or low emission cars whose cost is below the luxury car tax threshold for fuel-efficient vehicles, which is currently $84,916. It will also only apply to cars that are eligible that are first held and used on or after 1 July 2022.

Mark Morris:
A zero or low emissions vehicle basically is a car which is propelled or driven by electricity. It can include hydrogen fuel cell cars, where the hydrogen is converted into the electricity which powers the electric engine. Or alternatively, and this was a bit of a surprise, it can also include plugin hybrids, which have an internal combustion engine but also can be powered by electricity which is recharged externally. So there's a reasonable amount there, but there's also constraints in terms of cost and the nature of the vehicle in issue.

Elinor Kasapidis:
And so, what are some of the electric cars that people might be thinking about purchasing under this arrangement?

Mark Morris:
Well, there are some cars below that 84,916 threshold, Elinor. So, for example, the Volvo Recharge pure electric, retails at around 72,990. The MINI Electric Hatch, which I like, starts at 61,500 and the Hyundai IONIQ Electric starts at 52,900. But some of the more groovy cars, like the Tesla Model X, starts at a retail price of about 135,000. And if you're really going up the chain, the Porsche Taycan sports car, well that costs around $177,060. So some of the more really glamorous luxury electric cars won't be eligible for the exemption.

Elinor Kasapidis:
But still, I can see you zipping around in the MINI quite well, Mark. So that's quite a good choice, I think.

Mark Morris:
So can my daughter, Elinor, which is a big problem I have, but anyway.

Elinor Kasapidis:
Fantastic, but it's good to have choice. However, it's not just a matter of drive away, EVs do come with additional costs. What are some of the other things employers or employees should consider before jumping into this?

Mark Morris:
Well, there are additional costs that you need to consider, and obviously a big one is the cost of a charging unit. And they can vary all manner of price from $900 to almost 2,000. A Tesla Wall Connector, I think retails at around $1,000, but in addition, you've also got installation fees, which can be considerable. And typically, I think they cost around $1,500. In addition, you've got the cost of recharging the car at home, which is an issue which we've canvassed with the ATO. And obviously in the past, you've got a receipt for the petrol you've charged. Obviously, if you're recharging at home, it's just part of your total electricity bill, so it's a bit of a hidden cost.

Mark Morris:
In addition to all that, there's all these commercial considerations. So, for example, if you're going to buy a car, obviously the secondary market for electric cars, or EVs, is developing or emerging, so that's a bit volatile. And from a practical point of view, an electric vehicle, when you do a long trip, it takes a bit of time to recharge it. So it's not a perfect replacement for a petrol-fueled car in that sense, but obviously it's continuing to develop.

Elinor Kasapidis:
And like with any purchase, it's important to get good advice on whether it's right for you and to think about all of those on-costs and servicing costs as well. And Mark, for employers considering helping their employees make the change to EVs, what are some of the other FBT obligations that come with providing car fringe benefits or engaging a salary sacrifice provider?

Mark Morris:
I think there's probably two considerations here, Elinor. The first is that all the rules that typically apply with novated lease and salary packaging arrangements apply. Really critical to have a valid written salary sacrifice agreement in place pursuant to which the employee's foregoing future growth salary. If you don't have that, the whole thing falls over. You've also got to have obviously the novated lease agreement and, from a practical point, enough deduction of pre-tax contributions from a person's package to fund the lease and running costs.

Mark Morris:
I think probably the other key thing to recognise here is that whilst the provision of an electric car will be an FBT exempt benefit, it will nonetheless be a reportable fringe benefit. Now, what that basically means is you're going to take 20% of the cost of the car and whack that as a reportable fringe benefit on your payment summary. That reportable fringe benefit is not assessable income, but it is one of the items of income that is included in determining, for example, your liability for Division 293 tax, the extra 15% tax on superannuation contributions, or in some cases may make you liable for the Medicare levy surcharge or lead to a high health debt repayment. So it's worth investigating, just making sure that none of these unexpected consequences are not taken into account when you first enter into the arrangement.

Elinor Kasapidis:
So, as always, it really is make sure you have the right records as well as making sure that you are reporting correctly, even if there's no tax payable.

Mark Morris:
Very correct observation.

Elinor Kasapidis:
And the FBT rules for cars come from another century, literally. So EVs have posed some interesting questions in relation to tax. What are some of the other questions you're hearing, and how do you see these issues playing out in the coming years, Mark?

Mark Morris:
Really good point, Elinor, particularly given the electric car exemption is still before the parliament, as you know. So I think there's three things that hit me. The first is that the home charging unit, which is absolutely essential to acquiring the electric car, it won't be regarded as an exempt benefit, on the basis that it's an accessory to the car. To be an accessory to a car, it's got to be a non-business accessory which is physically attached to the car. And obviously the charging unit is a standalone item which sits on the wall of your garage, typically. So the problem there is you're going to have to fund it from your after-tax salary, together with the installation costs. If your employer pays for it, it won't be a concessionally taxed car fringe benefit, it'll be a fully taxed expense payment fringe benefit, so that's an issue.

Mark Morris:
Home electricity costs, we've talked about before. This is an issue the ATO's taken on. If you go the ATO website, you'll see that they are consulting widely on this issue, recognising that they need to get a handle on home electricity costs, especially for cars that wouldn't fit the exemption, that were acquired before 1 July 2022 or they're the more expensive electric car. And the third thing is there's probably going to be a lot of issues arising from the current bill if it's legislated and enacted. Because whilst it obviously provides a lot of guidance, as you will know better than just about anyone, once you have the legislation, there'll be all the nuances that the ATO will have to address by way of rule. So there's a lot of further work to be done in this area.

Elinor Kasapidis:
Definitely. The work doesn't stop just because the bill passes the parliament. And finally, speaking of the ATO and implementation, the ATO's estimate of the FBT tax gap is a whopping 22.6%, meaning that employers aren't reporting more than one fifth of their FBT obligations. The ATO has highlighted that car fringe benefits are a focus area. While one way to avoid FBT might be to buy an EV, what are some of the other things employers should watch out for in this space?

Mark Morris:
I really think the important thing is to be totally on top of car fringe benefits. And I think you're going to find that the ATO is going to be a lot more active, both in educating the community about some of the subtleties of car benefits as well as conducting targeted reviews. And you're quite right in saying it's a whopping 22.6%. That's a big figure. I think the concern is that whilst corporates typically have the resources and maybe experience to handle things like car fringe benefits and FBT more generally, it's far more challenging for SME taxpayers.

Mark Morris:
So with SME taxpayers, I really think, and their advisors, I'd stress get on top of the car fringe benefit rules, make sure you've got all the right documentation. E.g, have you got valid salary sacrifice agreements? Are you keeping appropriate documentation on novated leases and invoices, et cetera? And to the extent to which you feel overwhelmed, go out and seek advice, because FBT is a very prescriptive law. It's written in old legalese rather than the more contemporary way in which tax laws are written. And it's very, very easy to quite inadvertently miss something. So if you're in doubt, go and get advice.

Elinor Kasapidis:
And as always, Mark, great advice from you. Thank you so much for talking us through the new FBT EV legislation today. That's all we've got time for. Thank you very much for joining us, Mark.

Mark Morris:
Absolute pleasure. Thanks Elinor.

Elinor Kasapidis:
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