Time to upgrade your car? Why don’t you consider salary packaging an EV?
When increases in the cost of living are headline news, and inflation is profoundly impacting the way we do business and everyday household budgets, we need to be aware of ways in which we can take advantage of tax savings offered by the Government.
Back in January 2023, we mentioned the Fringe Benefits Tax (FBT) Incentive for Electric Cars in our newsletter and now we would like to illustrate how salary packaging electric vehicles (EV) as part of your remuneration package can save you in income tax paid on your salary.
With the federal government’s exemption of electric cars from the FBT, there is now even more incentive to upgrade your car to an EV. Previously all salary packaged novated motor vehicle (MV) leases were required by law to have a certain amount of FBT paid. However, the FBT exemption applies to fringe benefits provided on or after 1 July 2022 for eligible zero or low-emission vehicles that are held and used on or after 1 July 2022 with a value below the luxury car tax threshold of $89,332.
These include battery electric vehicles and hydrogen fuel cell electric vehicles if the vehicle is first held and used from 1 July 2022. Plug-in hybrid electric vehicles (PHEVs) are also eligible up until 1 April 2025. From that date, those on pre-existing leases are still entitled to the FBT exemption up until the end of their lease, if a commitment is made before 1 April 2025.
This FBT exemption only applies to the personal use of electric cars operated by businesses or financed under a novated lease.
Salary Packaging EVs – Novated Lease Explained
Novated lease involves a three-way agreement between the employer, employee and the vehicle lease company. The employer agrees to make regular automated payroll deductions from the employee’s salary to the leasing company. Novated leasing companies procure the vehicle, establish the lease and manage the administrative, and contractual aspects of the transaction. The employee agrees to have those salary deductions in exchange for the use of the vehicle. The vehicle can be used for work-related purposes or even 100% personal use.
The Table below shows how different methods of financing EVs can save you over the 5-year period:
|Example $60,301 Telsa Model 3
Over 5 Years:
|Novated Lease||Up Front Ownership||Car Loan|
|Total Purchase cost of the car (inc GST)||60,301.00||60,301.00||60,301.00|
|GST Saving on the Purchase Price||-5,382.00||0.00||0.00|
|Cost of the Car Financed / Purchased||54,919.00||60,301.00||60,301.00|
|Running Costs over 5 years*||29,242.00||32,167.00||32,167.00|
|Provision for leasing administrative fee over 5 years||1,285||0.00||0.00|
|Finance Cost over 5 Year Term**|
|(inc principal, interest and fees excluding pre tax benefit for FBT Exempt novated Lease)||61,740.00||0.00||78,180.00|
|Potential Income Tax Savings Over 5 years***||-35,483.00||0.00||0.00|
|Residual Value to Pay (Incl GST)****||16,994.00||0.00||0.00|
|Total Cost over 5 Years||73,778.00||92,468.00||110,347.00|
*EV lease payment can include the total MV running cost (excl GST) of the vehicle.
**The finance cost over five years will vary depending on the finance interest rate and other fees charged by the lease company.
***Potential tax savings over five years will vary depending on the individual’s taxable income level and applicable marginal income tax rate. The table has calculated potential income tax savings on a person’s marginal tax rate of 37% plus 2% Medicare levy.
**** Balloon payment at the end of the loan is based on the ATO’s minimum residual value on a five-year lease.
The above table is an illustration only and individual circumstances may vary.
Here is the list of benefits of Salary Sacrificing EVs through Novated Lease:
- No GST payable on the initial car lease and running cost;
- Lease payment GST can be claimed by the employer as the tax credit;
- Reduce payroll tax for employers;
- No obligation on the part of the employer to either the vehicle or the lease;
- Employee income tax saving;
- Fully maintained personal vehicle – including electricity, insurance, servicing, repairs, roadside assistance and registration;
- Option to de-novate and re-novate if changing employers;
If you would like more information on this FBT incentive, please do not hesitate to contact your Hall Chadwick QLD advisor.