FBT exemption for PHEVs expiring in April 2025

For a vehicle to qualify for the FBT exemption under a lease, it must meet the following criteria:

1. Private use: The car is used or available for private use by a current employee or their associates.
2. No amount of Luxury Car Tax (LCT) has become payable on the supply or importation of the car: For the 2022/23 financial year, the LCT threshold is $84,916. For the 2024/25 financial year, it will be $91,387.
3. First held and used from 1 July 2022: The exemption applies retrospectively from this date.
4. Tool of Trade or Novated Lease: The vehicle must be held through a tool of trade or novated lease arrangement.

Important note for used vehicles: If the vehicle is used, it must not have been liable for Luxury Car Tax at any point in its history. If sales records are not available to prove this, you will need to determine if LCT would have been payable if the vehicle had been acquired at that time.

FBT exemption for PHEVs ending on 1 April 2025

As of 1 April 2025, private use of plug-in hybrid electric vehicles (PHEVs) will no longer qualify for the fringe benefits tax (FBT) exemption in Australia.

However, if your existing novated lease for a PHEV started before 1 April 2025, you’ll continue to benefit from the FBT exemption until the end of your lease term, provided there are no changes to pre-existing commitments in your lease agreement after 31 March 2025.

Key considerations:

• Lease modifications: Any changes to the financial obligations under your lease agreement on or after 1 April 2025, such as refinancing or amending the residual value of the car, will result in the loss of the FBT exemption from the date of the new commitment.
• Lease extensions: Extensions made to an original lease term after 31 March 2025 will be considered a change to the financial obligations under the lease and the exemption will cease at the time of the new commitment.
• Modifications – accessories: The addition of car accessories after 31 March 2025 will change the financial obligations of the lease as the residual value of the vehicle changes and this causes the exemption to cease at the time the lease is altered.
• Modifications – lease budget: Changes made to your lease budget to alter services such as kilometre usage, maintenance budget, accident management, etc. are permitted under the terms and conditions of your novated lease and will not cause the FBT exemption to cease.
• Optional extensions: If you exercise an optional extension at the end of your initial lease term which ends after 31 March 2025 , the FBT exemption will not apply to the extended period i.e. the FBT exemption will cease at the end of the initial lease term.
• Breaks in novation agreements and change in employer: If there is a break in the novation agreement where the car is not used or available for private use (e.g. due to a period of unpaid leave) or if you change employers, these circumstances will result in the exemption ceasing.

What to do:

• Review your lease agreement: Ensure that the lease for your PHEV is financially binding and was established before 1 April 2025.
• Avoid post-31 March 2025 modifications: Refrain from making any changes to pre-existing commitments under your lease agreement after this date to maintain the FBT exemption.
• If you’d like to extend your lease before 1 April 2025 this must be fully completed including signed by you, returned and activated with new Vehicle Schedule issued by Custom Fleet prior to 1 April 2025.

By following these guidelines, you should be able to continue enjoying the FBT exemption for your PHEV under the terms of your existing lease.

Important: This article contains general information only. Please seek independent financial advice before making any decisions about your lease, based on the information contained on this blog post.

Example of a change to a pre-existing commitment

Simon enters into a novated lease with his employer and a finance company that entitles him to use a plug-in hybrid electric vehicle.

The lease begins on 1 April 2024 and is for 3 years, to 31 March 2027. There is an option to extend the lease for a further 2 years from 1 April 2027.

Simon's private use of the vehicle is exempt from FBT up to 31 March 2027. This is because:

• he starts using the vehicle before 1 April 2025 and the requirements of the electric car exemption are met
• there is a binding commitment to continue providing the vehicle until 31 March 2027.

However, the exemption will not apply after 31 March 2027, even if the option is taken to extend the lease for an additional 2 years. This is because, at the time the exemption for plug-in hybrid vehicles ends (just before 1 April 2025), the extension is conditional on it being exercised at a future time. Therefore, the agreement at that time was not a binding commitment beyond 31 March 2027.

*Example above was taken from the Australian Taxation Office (ATO) website.

Impact of the FBT exemption ending

When the FBT exemption for PHEVs ends on 1 April 2025, several implications for fleet managers should be considered:

1. Increased costs: Employers will need to account for FBT on PHEVs in the same way they do for other vehicles if there is no financially binding commitment to continue providing private use of the vehicle. This can increase the overall cost of providing these vehicles and might affect budgeting and financial planning your fleet.
2. Decision-making: The end of the exemption could prompt a re-evaluation of fleet policies. Employers might reconsider whether to continue offering PHEVs or switch to vehicle types that still benefit from tax incentives.
3. Employee benefits package: The attractiveness of PHEVs as part of employee benefits packages might diminish due to the reinstated tax liability. Employers may want to explore other ways to offer competitive benefits or consider other environmentally friendly options that still provide tax advantages.
4. Lease and purchase decisions: Fleet managers may need to adjust their lease and purchase strategies. For example, they might prioritise acquiring or leasing PHEVs before the exemption ends to take advantage of the tax benefits, or they might accelerate the acquisition of vehicles to minimise FBT exposure.

Continued exemptions for BEVs and FCEVs

It's important to note that the FBT exemption for private use of Battery Electric Vehicles (BEVs) and Hydrogen Fuel Cell Electric Vehicles (FCEVs) will remain in place beyond 1 April 2025.

Fleet managers should consider focusing on these vehicles to benefit from ongoing tax exemptions.

Strategic considerations

To make the most of the current FBT exemption and mitigate the impact of the upcoming changes:

1. Take advantage of the exemption: If your organisation is considering PHEVs, now is the time to act. Acquiring or leasing PHEVs before 1 April 2025 allows you to benefit from the current FBT exemption and maximise cost savings.
2. Review fleet policy: Reevaluate your fleet policy and make informed decisions based on the projected changes. Consider how the end of the exemption will affect your fleet's cost structure and employee benefits.
3. Consult with experts: Engage with fleet management consultants to understand the full implications of the change. They can provide tailored advice on how to navigate the transition and optimise your fleet management strategy considering the new tax environment.
4. Explore alternative incentives: Investigate other government incentives or benefits that might be available for electric or low-emission vehicles. Staying informed about evolving policies can help you make strategic decisions that align with your company’s sustainability goals and financial objectives.

By proactively addressing these considerations, you can better manage the transition and continue to support a sustainable and cost-effective fleet.

Consult with our team of strategic advisors to understand how these changes might affect your fleet and to develop a customised plan for your business’ needs.