ZLEV vehicle subscription novation arrangements

A recent ATO Product Ruling (PR 2023/19) and Edited Private Advice (EPA 105299231540) confirm that ZLEV vehicles provided to employees pursuant to an electric vehicle subscription agreement can constitute an exempt car fringe benefit.

The ZLEV Exemption

As a reminder, for a ZLEV car to qualify for FBT exemption, it must meet the following criteria:

1. Be a zero or low emissions vehicle, which includes battery electric vehicles, hydrogen fuel cell electric vehicles, and plug-in hybrid electric vehicles (until April 1, 2025).
2. Be designed to carry a load of less than 1 tonne and fewer than 9 passengers (including the driver) – ie, it is a car.
3. Be first held and used on or after July 1, 2022.
4. Be used by a current employee or their associates.
5. Have a value below the luxury car tax (LCT) threshold, which is $91,387 for low-emission vehicles in the 2024/25 financial year.
6. Not be subject to luxury car tax (LCT) on its importation or sale.

It’s important to note that from April 1, 2025, plug-in hybrid electric vehicles will no longer be considered zero or low emissions vehicles for FBT purposes, unless they were already exempt before that date and there’s a financially binding commitment to continue providing private use of the vehicle.

Typical ZLEV subscription arrangement

A typical ZLEV subscription arrangement has the following features:

• A company provides ZLEV subscription services for employers who wish to make EV subscriptions available to their employees under novated arrangements.

• The company will arrange for the car to be made available in accordance with the terms of the EV subscription.

• Employees enter into a subscription agreement with the company under which the employee hires a vehicle in exchange for payment of a periodic fee (subscription fee). This covers the hire of the car, insurance, registration, servicing and roadside assistance.

• The minimum hire term for each vehicle is three months.

• At the end of the hire term the employee must return the vehicle to the company on or before the end of the maximum subscription period or the relevant termination notice period (whichever is earlier).

• The employee, employer and company enter into an agreement whereby the rights, interests, benefits, liabilities and obligations under the EV subscription contract are novated from the employee to the employer (‘novation agreement’).

• The employer assumes the liability to pay the EV subscription fee and other charges.

• The employer makes the vehicle available for use by the employee and the employee’s associates as part of the employee’s remuneration package and, via an effective salary sacrifice arrangement, deducts the ZLEV subscription fee and other charges from the employee’s pre-tax remuneration.

• The novation agreement specifically excludes certain obligations which remain with the employee, including upfront joining fee, EV charging station charger fee and toll charges.

• The novation reverses on the earliest of a number of events happening, including the date the novated ZLEV subscription contract ends, the date on which the company receives notice from the employer that the employee’s employment has ended and the date on which the employee dies.

FBT Outcomes

A car is ‘held’ by a person if the car is owned by the person; leased to the person; or otherwise made available to the person by another person.

In terms of car subscription or hire arrangements, subsection 7(7) of the FBTAA provides that a reference to a car ‘held’ by a person does not include a reference to:

(a)  …

(b)  a car let on hire to the provider under an agreement of a kind ordinarily entered into by persons taking cars on hire intermittently as occasion requires on an hourly, daily, weekly or other short-term basis unless the car has been or may reasonably be expected to be on hire under successive agreements of a kind that result in substantial continuity of the hiring of the car.

The ATO conclude the provision of a car under the proposed subscription arrangement is NOT a car on hire intermittently as occasion requires. Rather, a vehicle will be made available for a period of time for use for any purpose. In this way, the arrangement is NOT excluded from the definition of car fringe benefit by paragraph 7(7)(b) of the FBTAA.

In accepting a minimum 3-month period can constitute a car being ‘held’ for the proposed subscription arrangement, it is relevant to note this position is consistent with the minimum 3-month period accepted as constituting a car fringe benefit for short term car hire arrangements.

See, the National Tax Liaison Group’s (NTLG) FBT Sub-committee Minutes dated 15 June 1995 and the ATO’s Fringe Benefits Tax – a guide for employers publication respectively prescribe that:

If you hire a car for less than three months, you are not considered to ‘hold’ the car and it will not result in a car fringe benefit. However, if you make a rental car or taxi available for the private use of an employee, and the car is hired for less than three months, a residual fringe benefit may arise….

The ATO agreed that where the hire period is for 12 weeks or more, it will constitute a car fringe benefit. Less than 3 months it is to be treated as a residual fringe benefit.

The bottom line therefore is that the car, as a result of the novation arrangement, is taken to be held by the employer during the period the novation arrangement is in place. This is not different to your ‘standard’ novated lease scenario.

Flowing on from this position, the use of the vehicle by the employee or their associate will constitute a car fringe benefit.

However, where the specific ZLEV exemption conditions are met, no FBT arises.

Be aware though that, despite the ZLEV car exemption, such benefits are still reportable benefits.

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This article provides a general summary of the subject covered as at the date it is published. It cannot be relied upon in relation to any specific instance. TaxEd Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.