FBT exemption wind-back for electric cars to rake in $1.9 billion over four years

A wind-back of lucrative tax incentives for electric-car buyers is set to earn the Australian Government $1.94 billion over the next four years.

That money will indirectly go towards funding an ongoing three-month halving of the fuel excise charged on every litre of petrol and diesel sold, which is estimated to chop $2.9 billion from the bottom line.

Last week, the Federal Government announced it would scale back an exemption from the Fringe Benefits Tax for eligible electric vehicles purchased through novated leases – where cars are bought from an employee's pre-tax salary – replacing it with a 25 per cent discount on the levy.

More than 100,000 Australians are said to have taken up the tax break since it was introduced in 2022, as it cuts the cost of buying an electric car by 30 to 40 per cent.

The changes, set to come into effect from 1 April 2027, initially retain the exemption, but reduce the price cap from $91,387 – the current 'fuel-efficient' vehicle threshold under the Luxury Car Tax – to $75,000.

Vehicles priced between $75,001 and $91,387 switch to a 25 per cent FBT discount.

While the LCT threshold for ‘zero-emission’ vehicles is set to rise to $120,000 once a free-trade deal with Europe is locked in and passed, the FBT exemption is based on the ‘low-emission’ threshold of $91,387.

From 1 April 2029, all new EVs purchased with a value below the low-emission threshold will only be able to claim a permanent 25 per cent FBT exemption.

The latest data from the Federal Government forecasts revenue of $1.94 billion by the end of the 2030-31 financial year, as Treasury begins earning 75 per cent of applicable FBT revenue, rather than zero.

The 2026 Federal Budget argues Australians no longer need to be heavily incentivised to purchase electric vehicles, claiming “the increased maturity in the electric vehicle market reduces the need for significant incentives”.

The exemption was initially rolled out to stimulate electric-car sales by offsetting the higher purchase prices of the vehicle type, even if traditional petrol and diesel cars require more fuel and maintenance expenditure over their lives.

On its introduction in 2022, the FBT exemption was projected to cost the government $25 million in lost tax revenue in financial year 2022-23, and climb by approximately $25 million per year to $110 million in lost tax earnings in 2025-26, for a total cost to date of $260 million.

In reality, the latest data shows the scheme has cost $3.35 billion in lost tax revenue, in excess of $3 billion more than expected in lost taxation earnings, and nearly 13 times its initial projections.

In fact, it blew past its initial four-year projected cost in the first year alone.

Despite the forecast blowout, the Government still considers the scheme a success.

Budget documents claim that of the circa-330,000 plug-in hybrid (PHEV) and fully-electric vehicles purchased between 2023 and 2025, “around one quarter of these would not have been purchased in the absence of the discount.”

Elsewhere, it lists an estimate of 100,000 vehicles that have taken advantage of the scheme.

Some creative Government accounting rationalises the $3 billion blowout in cost estimates by claiming that the vehicles which used the scheme offset carbon emissions worth $460 million, deliver healthcare savings due to reduced air pollution at $500 million, and offer a significant saving of $2 billion in the combined value of fuel that these EV buyers didn’t fill their tank with.

The changes are set to turn things around, however.

Last year's Federal Budget estimated the scheme to cost a further $6.75 billion in lost taxation revenue between financial years 2026-27 and 2028-29.

The revised accounting now has the scheme earning $1.94 billion up to the end of FY30, as the applicable FBT revenue transitions from 0 to 75 per cent.

The first change to the scheme, in April 2027, will impact about 20 vehicles from predominantly prestige brands – at their current price points – including the BMW iX1, Volvo EX40 and Tesla Model 3 Performance.

These models, priced above $75,000 but below $91,387, will only receive a 25 per cent FBT exemption when purchased on a novated lease.

The majority of electric vehicle models, including the most popular new ones, are priced below $75,000.

Fully-electric vehicles priced between $91,387 and $120,000 will soon be exempt from Luxury Car Tax, but will receive no Fringe Benefit Tax exemption.

With over 20 years of experience in digital publishing, James Ward has worked within the automotive landscape since 2007 and brings experience from the publishing, manufacturer and lifestyle side of the industry together to spearhead Drive's multi-media content direction.

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