by Michael Read, courtesy of The Australian.
Labor’s signature measure to boost electric vehicle uptake has blown out tenfold, with taxpayers spending $560 million per year to exempt one in three EV drivers from paying fringe benefits tax.
Economists have warned the cost of the tax break, which the Productivity Commission said disproportionately favours the wealthy, will continue to escalate as more Australians switch to electric vehicles.
Treasury originally forecast the FBT exemption would cost just $55 million in 2024-25. Labor says the tax break is vital to boosting Australia’s electric vehicle adoption rates and achieving its target to reduce emissions by 43 per cent on 2005 levels by the end of the decade.
But Treasury appears to have dramatically underestimated the lure of the generous tax break, which is available when a person buys an EV or plug-in hybrid worth less than $91,387 through a novated lease – where an employer pays a car lease through pre-tax salary deductions. The FBT exemption can save a vehicle owner tens of thousands of dollars over several years.
Between July 1, 2022, when the scheme started, and February 2025 almost 100,000 Australians took out a novated lease on an electric vehicle or a plug-in hybrid, according to the National Automotive Leasing and Salary Packaging Association.
While Treasury never revealed the number of motorists it expected would take out novated leases, the Institute of Public Accountants estimated in 2022 the $55 million projected cost in 2024-25 implied Treasury had budgeted for about 4700 EV drivers.
Institute of Public Accountants senior tax advisor Tony Greco estimates the FBT exemption could now cost the government $564 million per year in foregone revenue, assuming the average cost of $60,000 per electric vehicle, and 100,000 novated leases.
“You’ve got to ask yourself, could we get the same emission reduction elsewhere for less cost,” Greco said. “My take on this is that it’s an expensive way to do it.”
Electric vehicles and plug-in hybrids accounted for around 10 per cent of all new car sales in 2024. Under the FBT exemption policy a person who leases a $60,000 car would save close to $12,000 per year if they bought an EV instead of a petrol car through a novated lease.
Veteran budget watcher Chris Richardson said the FBT exemption for EVs was a very expensive way to combat climate change, especially compared to the least-cost method of introducing a carbon price that made it more expensive to buy a petrol car.
“It’s not that there’s a problem with the goal of what the exemption is trying to achieve. The problem is this is the worst lever to achieve it,” Richardson said.
“It would appear Treasury was hopeful that not many people would find this loophole. But welcome to Australia, the loophole capital of the world.”
Asked whether the FBT exemption was costing taxpayers far more than first forecast, a spokeswoman for Energy and Climate Change Minister Chris Bowen said more than two-thirds of the EVs on Australia’s roads had been bought since the Albanese government came to power.
“Our electric car discount policy has been a huge success, helping Australians pay less at the petrol pump with cheaper to run cars,” the spokeswoman said.
By boosting demand for relatively costly EVs, Labor has argued the policy will also bring forward supply of the vehicles to the secondhand car market so they become more affordable for lower income households.
The amount of foregone tax revenue will rise steadily as more Australians sign multi-year novated leases, with more than 9000 drivers buying an electric vehicle every month, according to data from the Australian Automobile Association.
Of the 239,435 electric vehicles purchased since the policy began in July 2022, about one in three were financed through a novated lease and therefore receive the FBT exemption. But NALSPA estimates that about one in two EV sales were through novated leases in the final half of 2024 as awareness of the tax break has grown.
Rush on hybrids
The FBT exemption for plug-in hybrids will end on April 1 this year, which has sparked a last-minute rush for the vehicles. Concerns about charging infrastructure have also fuelled a growing preference for plug-in hybrids, which can switch between drawing power from a battery or petrol.
In the final three months of 2024, a record 2.6 per cent of all car sales were hybrids, according to the AAA. Another 7.4 per cent were fully electric, down from a peak of 8.7 per cent at the start of last year.
Labor was forced to carve plug-in hybrids out of the policy after three years to secure support for the tax break from some Senate crossbenchers, who argued they were “legacy fossil fuel technologies”. The scheme is scheduled to be reviewed in the middle of this year.
The Productivity Commission said in its five-yearly inquiry in 2023 that the FBT exemption for EVs was one of the most ineffective ways to reduce vehicle emissions, with an implied cost of $987 to $20,084 per tonne.
The cost to taxpayers dwarfs the carbon price paid by heavy emitters of less than $40 a tonne via Australian carbon credit units (ACCUs) and the $75 carbon price cap the government has imposed for the carbon safeguard mechanism.
The PC also warned the FBT exemption was inequitable since richer households were disproportionately more likely to purchase EVs, and also risked undermining the integrity of the income tax system.
Electric vehicles accounted for about 9.5 per cent of all new car sales in Australia in the nine months to September, beneath the global average of 20 per cent, according to the Electric Vehicle Council. In Norway, the world leader for EV adoption, about 90 per cent of new sales were electric last year.
Shadow treasurer Angus Taylor declined to say whether the Coalition would axe the tax break, but said it was an example of the government “robbing Peter to pay Paul with Australian taxpayers’ money”.
“It’s typical of the Treasurer’s ability that a bad policy he dressed up as tax reform has blown out in cost while delivering a benefit to only a tiny slice of Australians,” Mr Taylor said.