The Albanian government has tax cuts introduced to electric vehicles in the first sitting week, to claim the proposed changes would be “good for motorists, good for climate action and good for fleet purchases”.
However, they won’t help most Australians afford one.
Labor plans to end the tax on fringe benefits that will apply to electric vehicles. This tax generally applies to all cars made available to an employee by an employer, either as part of a wage quote scheme or as a company car for personal use.
This means that the winners of the tax change will be high-end workers who can afford an expensive electric vehicle like a Tesla.
Transferring business fleets to the second-hand market is an important way to make electric vehicles more affordable for ordinary people. But this tax cut will not happen anytime soon.
U.S recent report recommends a series of other tax changes to lower electric vehicle prices and cost of ownership. Australia cannot meet its target of making 89% of new car sales electric by 2030 without radically reforming the transport sector. Labor’s new tax cut is a long way from what is needed.
What does an extra-legal tax do?
Australian transport sector accounts for about 18% of national emissions. Electric vehicles, powered by renewable energy, are crucial to meeting Australia’s zero emissions target by 2050.
This will not happen if electric vehicles remain unaffordable. Indeed, 87% of Australians in a survey 2021 said the biggest barrier to buying an electric vehicle is the high initial cost.
The Albanian government has kicked off and introduced tax cuts for electric vehicles in the parliament’s first week. These changes are good for motorists, good for climate action and good for fleet purchases. pic.twitter.com/P6EBw13TiO
— Chris Bowen (@Bowenchris) July 28, 2022
So what does a fringe tax on cars actually do?
There are two ways the fringe tax is calculated in Australia: using the legal formula (based on the cost of the car), or based on the operating cost method (based on the cost of using the car). The extra-legal tax is 47% of the calculated terminal value of each method, also known as the “gross taxable value”.
The highest surcharge tax to be paid falls under the statutory formula method, which applies when employees do not keep a car log. Electric vehicles would be at a disadvantage with this method.
Workers would be penalized for choosing an electric vehicle because of the higher upfront cost. Employers would pay a higher surcharge on secondary employment conditions than if they had bought a cheaper petrol or diesel car. That gives little incentive for companies to buy an electric car.
Eliminating the extra-legal tax on electric vehicles is a good way to stop penalizing employees for choosing an electric vehicle. But it will not reduce the high upfront cost.
Why companies are still not opting for electric cars
The use of electric vehicles by companies depends on the total cost of ownership. Let’s use Hyundai’s Kona cars as a case study.
Modeling Found Kona electric cars, including a smart charger, cost A$66,337 (excluding GST). A new Kona fuel car, on the other hand, costs $31,329 (excluding VAT), meaning electric vehicles are not competitive.
The benefits tax would further widen this cost gap of more than $35,000, giving the Kona Electric about $12,000 each year.
Labor’s bill would cut the $12,000 annual tax, leaving the cost of ownership of an electric vehicle. But it will not reduce the price difference with Kona’s fuel combustion car.
Another factor to consider is that: a survey from 2020 found that more than 47% of business fleets used for work are parked at home and subject to benefits taxes. This means that the exemption from the extra-legal tax does not apply to all company cars.
The exemption from the fringe benefits could encourage the 47% of business fleet vehicles parked at home to switch to electric vehicles. But this requires additional costs for installing chargers. This can be expensive, not tax deductible and subject to additional tax on fringe benefits.
Can we buy on the second-hand market?
Australia should learn from tax changes in Europe, which have successfully accelerated the introduction of electric vehicles. Company cars represent the largest market share for new electric vehicles in Europe.
The highest is in the Netherlands, where companies are responsible for 73% of new electric vehicle purchases. In the United Kingdom this is 67%, Germany 49% and Norway 34%.
After three to four years, these business electric vehicles will be rolled over to the used market, which is cheaper and more affordable for all consumers, not just high-end buyers.
In Australia, business buyers are responsible for: over 40% of new light vehicle sales. But their use of electric vehicles is shockingly low, with only one 487 electric vehicles acquired by corporate fleets in 2020.
This means that Australian consumers cannot rely on more affordable electric vehicles for commercial fleets entering the second-hand market soon.
What should we do instead?
Our report believes that the federal government should make additional tax changes and should not limit itself to the tax exemption for fringe benefits for electric vehicles.
We recommend 17 short- and long-term tax changes to lower electric vehicle initial prices and total cost of ownership, and encourage home charging to address the lack of business charging infrastructure. Among which:
- Immediate asset depreciation only applies to employer-supplied electric fleets, 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 by a company in its first year of ownership as an outright tax deduction.
- increase in the GST credit and depreciation charge limit for electric fleets, to the limit for luxury cars
- a tax exemption for fringe benefits for home charging installations and smart costs for electric vehicles in the fleet
- instant asset depreciation for home charging installations and smart costs for electric fleets.
Business incentives like these will bring Australia a big step closer to meeting its 2030 electric vehicle target and, crucially, its net-zero emissions target.
- 1 What does an extra-legal tax do?
- 2 Why companies are still not opting for electric cars
- 3 Can we buy on the second-hand market?
- 4 What should we do instead?