Why your next car on novated lease should be electric

The tax man isn't on everyone's Christmas card list, but you might consider adding him to yours this year if he shaved thousands of dollars each year off your next tax bill, right?

Well, it doesn’t happen very often, but the tax man delivered some good news recently with a new law that eliminates Fringe Benefits Tax for eligible electric, plug-in hybrid, and hydrogen fuel cell cars, further encouraging the take-up of low-emission vehicles through novated leases.

So, how does it work? How much money could you save? And what are the rules? Let’s dig into the FBT exemption and explain the benefits.

A novated lease is a unique type of car ownership that offers numerous financial benefits and other conveniences.

Instead of purchasing a vehicle personally with your own funds or finance, the vehicle is technically owned by the financier, managed by a leasing company like Maxxia, and provided to you by your employer for an agreed period of time. It is essentially a company vehicle, with all details like registration and insurance in your name.

But rather than repaying a loan from your salary that has already been taxed, regular payments on a novated lease are paid by your employer using a combination of your pre-and post-tax salary (or fully pre-tax in the case of eligible EVs; more about this later). This is often referred to as salary sacrificing and can lower your overall taxable income, which can be hugely beneficial in itself.

Fully maintained novated leasing also brings additional conveniences and financial benefits as all running costs for the vehicle are included in the regular payments, including fuel, registration, insurance and regular servicing. This not only ensures running the vehicle is simpler but makes it easier to manage a household budget. Whereas with a self-managed novated lease, you will need to stay on top of all of the lease-related tasks yourself.

However, employees with a novated lease can attract Fringe Benefits Tax which is an additional government tax that is applied when employers provide certain benefits to employees, their families or associates.

Fringe Benefit Tax (FBT) is separate from standard income tax and paid by employers that provide additional benefits above and beyond regular wages, shares and superannuation contributions.

This can be applied to a wide variety of offerings, such as paying school fees, gym memberships, car parking, reimbursements and entertainment. But it is commonly applied to the use of company vehicles for private purposes, which are commonly managed under a novated lease agreement.

The Australian Tax Office has set the FBT rate at 47 percent of the ‘grossed-up’ value of the benefit provided, which is calculated from the equivalent gross income the employee would normally have to earn to pay for the benefit themselves.

It is a complex formula that applies only to the percentage of time the vehicle is being used for private use and the variance between the employer’s and employee’s contributions to the cost of the service.

Employers can choose to calculate the personal use portion in two ways; either through an operating cost method that requires the driver to use a logbook with detailed breakdown of odometer readings, or via a statutory formula method (also known as the Employee Contribution Method, or ECM) that assumes a flat rate of 20 per cent private use.

Using the latter method as an example, if an employer provided a vehicle that cost $75,000, this equates to $15,000 of value for private use by an employee. This is multiplied by a standardised rate of 2.0802 to determine the gross-up amount, equivalent to $31,203. The FBT is then extracted at 47 per cent, which comes to $14,665.

For more information and advice on FBT, we recommend you speak to a taxation professional to fully understand the benefits of undertaking a novated lease for a company vehicle.

But there is a simple solution that eliminates the murkiness – and penalties – of FBT altogether.

The federal government recently passed a bill called the Treasury Laws Amendment (Electric Car Discount) Bill 2022 that provides an exemption to payment of FBT for zero and low emission vehicles with a retail price below the $84,916 luxury car tax threshold for fuel efficient vehicles first held and used on or after 1 July 2022.

Employees will still have to act as though the FBT is being calculated and either use a logbook or the statutory method, as, even though the amount of FBT won’t have to be paid, it will be reported on an annual income statement (if it amounts to more than $2000 over the financial year), which can affect your eligibility to receive certain government benefits, or impact the amount you have to pay for items such as child support or HECS/HELP repayments.

This is just one part of the government’s proposal to encourage greater use of electric vehicles in Australia and is particularly beneficial to employees via novated lease arrangements as well as business fleet operators.

The FBT exemption applies to all battery-electric, plug-in hybrid and hydrogen fuel cell vehicles, which are designed to carry a load of less than one tonne and fewer than nine passengers, but not conventional petrol-electric hybrid vehicles, that cost less than $84,916 prior to any further subsidies or rebates that may be available from state governments.

That automatically eliminates high-end electric vehicles and plug-in hybrids from the likes of BMW, Mercedes-Benz, Audi and Porsche, as well as flagship versions of popular EVs such as the Tesla Model 3, new Kia EV6 and Hyundai’s streamlined Ioniq 6 sedan.

But there are more than 20 individual models currently on sale in Australia that do meet the criteria across a broad spectrum of price, performance and space, with plenty more coming to showrooms in the next year or so.

Plug-in hybrids offer the ability to commute short distances on battery power alone yet can utilise a petrol engine for long-distance driving, providing more peace of mind and flexibility if you need a company car for more than just the commute to work and back.

They will only be included as part of the Electric Car Discount scheme until March 31, 2025, by which time a decision will be made whether the discount continues.

Among those that qualify for the FBT exemption until then are a range of SUVs in varying sizes, including the Mitsubishi Eclipse Cross and Outlander PHEV models, the Peugeot 3008 PHEV, Mazda’s brand-new CX-60 (in base-model Evolve trim only) and the impressively spacious seven-seat Kia Sorrento PHEV.

But it’s the MG HS +EV that sits in the Goldilocks zone for value and performance. Costing from $52,590 driveaway, it pairs a 1.5-litre turbo engine with an electric motor that offers 63km of zero emission driving range and is loaded with the latest in active safety and digital technology.

There are far more dedicated electric car options to choose from, starting with the cheerful GWM Ora hatchback that has just arrived in showrooms as the country’s most affordable EV. Costing from just $44,490 driveaway, the city-sized hatchback is offered with a choice of two battery sizes – 48kWh and 63kWh – that provide a driving range of 310km and 420km respectively.

Or you can pay a little more for larger SUVs like the popular MG ZS EV, which starts at $44,990, or the BYD Atto 3 SUV, which costs from $48,011, or the quirky Mazda MX-30 Electric.

Or, if you run a boutique inner-city business that offers regular delivery service then the Renault Kangoo EV is the only commercial vehicle at the moment that meets the FBT exemption criteria. Unfortunately for tradies, the only fully-electric ute – the LDV eT60 dual-cab – is too expensive to qualify.

Finally, there’s a range of cutting-edge electric vehicles from the likes of Hyundai, Kia, Tesla, Volvo and Polestar that fit the bill and offer the latest in technology.

All versions of the Kia Niro Electric and Hyundai Kona Electric qualify, as does both variants of the retro-futuristic Hyundai Ioniq 5. But only the entry-level specification of the all-new Ioniq 6 falls under the price ceiling. Similarly, only the lower-grade versions of the Tesla Model 3 and Model Y SUV, Kia EV6 and the Volvo XC40 and C40 Pure Electric models meet the FBT exemption criteria.

But the entire range of existing Polestar2 vehicles from Volvo’s all-electric offshoot fits the bill, with the flagship Dual Motor Long Range costing from $73,400 (plus on-road costs).

So, there you go, a brief rundown on the new FBT exemption for novated lease vehicles.

While it can appear complex, it makes choosing an electric vehicle on novated lease or as part of your business fleet much more attractive, potentially saving you thousands of dollars.

The information contained in this article is for general purposes only and does not constitute financial or tax advice.

For more information on leasing an electric vehicle, visit the Maxxia website.