Business won’t switch to EVs while tax lurks for guzzlers are so generous

When parliament legislated that total emissions from major industrial facilities must come down, not just be offset, it was good news. But the fact remains that carbon emissions from cars, utes and SUVs contribute to about 11 per cent of Australia’s greenhouse gas emissions. And what are we doing about that?

If you asked the state and federal governments, they would tell you they’re doing a lot: they’ve introduced fringe benefits tax (FBT) exemptions designed to encourage drivers to switch from petrol and diesel vehicles to electric vehicles; they’ve provided more charging stations; and they’ve offered various EV rebates.

Company car? Dual-cab utes and 4WDs are used regularly for weekend fishing trips and family getaways.Credit:

On some level, it’s working. In December, the Federal Chamber of Automotive Industries reported an increase in EVs to 7.2 per cent of vehicle sales, which is substantially higher than 2022 figures.

But we accountants still haven’t seen too many small business owners make the switch, particularly in regional areas. A large part of the reason is that parliament’s patchwork style of legislation rarely considers the big picture.

Take FBT, for example. FBT was introduced in Australia in 1986. It’s a tax that employers pay when their employees receive part of their salary from non-cash benefits, such as a company car, instead of wages. For company directors who draw wages, they are considered “employees” for tax purposes, and must follow the FBT rules when buying company vehicles for their own use.

The FBT exemption for eligible EVs, which applied from July 1, 2022, sounds like an excellent policy for small business owners needing a new vehicle. That is, until you realise the FBT exemption for eligible dual-cab utes or four-wheel-drives remains unchanged.

The only catch to receiving the FBT exemption when buying an eligible dual-cab or 4WD is that, according to the legislation, private use needs to be limited. When businesses buy an FBT-exempt EV, there are no limits on private use.

At first glance, this seems to give small business owners a reason to switch to EVs, since they can use company money to buy a personal-use vehicle without FBT consequences. But in reality, the Australian Tax Office seems happy to ignore the multitudes of dual-cab utes and 4WDs used regularly for weekend fishing trips and family getaways. They say they’re cracking down on this, but I’m yet to see it happen.

When it comes to initial outlay, an FBT exemption doesn’t change the fact that the costs for an EV can be prohibitive, and small businesses are understandably price-sensitive. Cash rebates in various states offered a minor reprieve, although some have already been scrapped.

Low-cost EV options are further hindered through nonsensical rules: those wanting to save money by purchasing a second-hand EV can find themselves disadvantaged. EVs first used before July 1, 2022, are specifically excluded from the FBT exemption. But “first use” limitations don’t exist for FBT-exempt 4WDs and dual-cab utes; business owners are free to buy second-hand fuel guzzlers with no unwanted tax consequences.

Another disadvantage is the “car cost limit” under the Income Tax Assessment Act 1997. It provides the maximum value of a vehicle that can be used for claiming depreciation and GST credits, which for the 2024 financial year is $68,108. It applies to EVs, but that doesn’t apply to eligible dual-cabs and 4WDs, since the latter aren’t considered “cars” for tax purposes – even though their use is often exactly the same. Their buyers can claim the full GST and depreciation credits, regardless of the vehicle’s purchase price.

Some small business owners may also be disadvantaged by reportable fringe benefit (RFB) disclosures in their personal tax returns, which are required for FBT-exempt EVs but not for FBT-exempt dual cabs and 4WDs. RFBs are not taxed, but are taken into account when calculating family tax benefit, childcare subsidy, higher education loan program repayments and other obligations.

FBT and tax legislation aside, the other major factor is that the infrastructure isn’t ready. We still don’t have enough charging stations for EVs, particularly in regional areas, which account for 30 per cent of small businesses. State governments are dealing with this by committing to more charging stations, but it’s a slow-moving process that doesn’t inspire consumer confidence.

While I’ve seen very few clients buy EVs and plenty buying dual-cabs over the past year, I think many small business owners could still benefit from switching. Eliminating the need to pay FBT is a significant tax saving on its own; new EVs are becoming less expensive and charging stations are appearing in more places.

But the unfortunate fact remains that while EVs have been incentivised, there has been no change to the old policies that encourage businesses to buy fuel guzzlers. Until politicians learn to look at the big picture, I’m not sure I can blame small business owners for their reluctance to make the switch.

Denise Mills is a senior tax accountant and freelance writer.