The Federal Government has announced significant proposed changes to the Fringe Benefits Tax (FBT) treatment of electric vehicles (EVs). Since its introduction, the existing EV exemption has played a major role in accelerating EV adoption across Australia, particularly through novated leasing and salary packaging arrangements.
While the proposed reforms preserve strong incentives in the short term, they substantially narrow and restructure the concession from 1 April 2029.
For employers, fleet operators, OEMs, distributors and novated leasing providers, the timing of an arrangement and the value of the vehicle will become increasingly important in determining the tax treatment that applies over the life of the arrangement.
The current position
Under the existing rules, eligible electric cars can qualify for a full exemption from FBT, provided the vehicle satisfies the applicable eligibility requirements, including that it is valued at or below the fuel-efficient luxury car tax (LCT) threshold at the time of first retail sale (currently $91,387).
The exemption has driven strong uptake of salary-packaged EV arrangements, particularly via novated leases, and has significantly reduced the after-tax cost of EV ownership for many Australian employees.
What is proposed to change from 1 April 2029
From 1 April 2029, the Government proposes replacing the full FBT exemption with a permanent concessional regime for eligible electric cars valued up to and including the fuel-efficient LCT threshold.
Rather than a complete exemption, the concession would operate through a reduced statutory formula rate of 15%, compared with the standard 20% statutory rate ordinarily applied under the FBT statutory formula valuation method. In practical terms, this represents an effective 25% reduction in the statutory formula taxable value.
Electric cars priced above the fuel-efficient LCT threshold would fall outside the concession entirely and remain subject to the ordinary FBT rules, with no concessional treatment available.
Importantly, while the fuel-efficient LCT threshold already forms part of the current exemption framework, the proposed reforms materially reduce the level of concession available for vehicles within that threshold from 1 April 2029 onward.
Transitional rules
Recognising that employers and employees have entered into EV salary packaging arrangements in reliance on the current settings, the Government has proposed transitional measures intended to preserve existing benefits for many arrangements already in place.
The key transitional measures are as follows:
Existing arrangements retain their applicable treatment
Eligible electric vehicle arrangements are expected to retain the concessional treatment that applied when the arrangement first commenced. This is intended to ensure employers and employees are not retrospectively disadvantaged by later legislative changes.
Full exemption preserved for certain lower-value EVs
Electric cars valued at $75,000 or less that are first provided under an arrangement before 1 April 2029 are proposed to continue receiving a full (100%) FBT exemption for the life of the arrangement.
This effectively preserves the current exemption for qualifying lower-value EV arrangements entered into before that date.
Interim treatment for higher-value EVs
Electric cars valued between $75,000 and the fuel-efficient LCT threshold (currently $91,387) that are first provided between 1 April 2027 and 1 April 2029 are proposed to receive the reduced concession equivalent to a 25% discount, implemented through the 15% statutory formula rate.
This transitional measure effectively brings higher-value EVs onto the post-2029 settings ahead of the formal commencement date.
The overall effect is a tiered transition framework:
- lower-value EV arrangements entered into before 1 April 2029 are expected to preserve the full exemption; and
- higher-value EVs progressively transition onto the reduced concessional regime.
What this means in practice
The proposed reforms appear designed to balance two competing policy objectives: maintaining momentum in EV adoption and emissions reduction, while reducing the growing fiscal cost associated with the existing FBT exemption.
Arrangements entered into before 1 April 2029, particularly for vehicles valued at or below $75,000, are expected to preserve the most favourable treatment for the life of the arrangement.
Employees considering novated leasing arrangements may therefore seek to bring forward EV purchases before the new regime commences.
Next steps
These measures are presently proposed reforms only and will require legislation before taking effect.
Further detail is expected to emerge through exposure draft legislation and explanatory materials, particularly regarding:
- the precise meaning of when an arrangement “commences”;
- the treatment of refinancings and novations;
- vehicle substitutions;
- extensions or renewals of existing arrangements; and
- how the transitional rules will operate in practice.
Until legislation is released, some uncertainty remains regarding the precise operation of the proposed grandfathering provisions and the extent to which existing arrangements will continue to qualify for concessional treatment over time.
Important Disclaimer: The information contained in this publication is general and introductory in nature only and is current as of the date of publication. It does not constitute legal or financial advice and should not be relied upon as such. You should always obtain professional advice based on your specific circumstances before taking any action relating to matters covered by this publication.
