Plug-in hydrid electric vehicles and the transitional rule that extends FBT exemption – is it clear cut?

As at the date of this article and prior to 1 April 2025, you do not pay FBT if you provide private use of an electric car that meets all the following conditions:

• the car is a zero or low emissions vehicle;
• the first time the car is both held and used is on or after 1 July 2022;
• the car is used by a current employee or their associates (such as family members); and
• luxury car tax (LCT) has never been payable on the importation or sale of the car.

A zero or low emissions vehicle currently includes a plug-in hybrid electric vehicles (PHEV). However, subject to a transitional rule, from 1 April 2025, a PHEV will not be considered a zero or low emissions vehicle and will cease to be eligible for the zero or low emissions vehicle FBT exemption.

The transitional rule works in two ways:

• it establishes when FBT exemption for a PHEV may continue as at 1 April 2025; and
• when exemption ends.

In this article we explore both aspects of the transitional rule, using published ATO views which support the treatment of the various scenarios considered. However as there may be some dispute as to how the transitional rule should work (and whether the ATO views are too narrow or where no published guidane exists) we re-produce below key elements of the transitional rule (which forms part of Treasury Laws Amendment (Electric Car Discount) Act 2022.

In relation to when the PHEV exemption continues and when it ends the law provides (from Schedule 2 clause 5(2)):

“…  

(b)  before 1 April 2025, the employer, the employee, or an associate of the employer or of the employee, committed to the application or availability of the car, in respect of the employment of the employee by the employer, for a period that began before 1 April 2025 and includes the relevant time; and

(c)  at no time on or after 1 April 2025 and before or at the relevant time did the employer, the employee, or an associate of the employer or of the employee, commit to the application or availability of the car, in respect of the employment of the employee by the employer, for a period that includes the relevant time; and

…”

The ATO’s interpretation of the transitional rule provides that you can continue to apply the electric car exemption to a PHEV where you meet the following requirements:

• use of the PHEV was exempt before 1 April 2025; and
• you have a financially binding commitment to continue providing private use of the vehicle on and after 1 April 2025.

We explore below the ATO view as to what is a ‘commitment’ prior to 1 April 2025 (which extends the PHEV exemption) and what is a new post 1 April 2025 commitment (such that the PHEV exemption is ended by it).

What is a commitment?

You are taken to have entered into a commitment at the point there is an obligation to undertake a transaction and it cannot be backed out of. The ATO take the view the commitment must:

• be financially binding on one or more of the parties,
• relate to the private use, or availability for private use, of the car to an employee or associate.

The most common example of entering a commitment is where an employer commits to the lease of a car, including a novated lease arrangement.

However, the following scenarios will result in the required commitment being voided (due to a change in the pre-existing commitment) with the result the exemption will no longer apply from that time.

Optional extensions to the agreement

The exemption will no longer apply from the time you have an option to extend an agreement. This is because it is not a financially binding commitment.

For example, a 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.

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 PHEVs 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.

Breaks in novation agreements

The FBT exemption is lost from the time there is a break in the novation agreement. This is because the break results in the car not being used, or available for the private use, of the employee under the agreement.

For example if an employee takes an extended period of leave without pay that results in them becoming personally responsible for the lease repayments during that time, this results in a break in the novation agreement.

If the novation doesn’t end during the extended leave period, there would be no change in the commitment and the FBT exemption would be maintained.

So , for example, if the employee were to prepay the lease payments in advance to their employer before going on leave without pay, and the novation doesn’t stop, the relevant commitment has not been breached and the exemption continues.

Changes to the financial obligations under the lease

The exemption is lost from the time there is any change to the financial obligations of one of the parties under a lease because of a change to the lease agreement. This is because there is a change to a financially binding commitment. This includes changes to lease payments or the residual value of the car.

The ATO provide the following example, along with others, in their Fact Sheet – FBT on plug-in electric vehicles:

Cade entered a 2-year novated lease arrangement on 7 February 2025 for a plug-in hybrid electric vehicle. Cade is planning a big trip and has some additional accessories added to the vehicle on 1 July 2025, including a bull bar and luggage racks. The accessories are added as part of the novated lease.

The addition of these items results in a change in the residual value of the car and the lease payments. This means that there has been an alteration to the commitment that began before 1 April 2025, which will result in a new commitment.

Cade’s employer is not entitled to the FBT exemption for the vehicle from 1 July 2025. Cade’s employer would need to work out how to value the car fringe benefit.

Changed employer for FBT purposes

You won’t be eligible for the FBT exemption from the time there is a change of employer. Any change of employer for FBT purposes, even within the same group of companies, is a new commitment to the application or availability of the car by the new employer.

What about pooled PHEVs?

An employer isn’t entitled to an exemption in FBT from 1 April 2025 if there was no binding financial commitment, to provide the car to a particular employee, in place before then.

In a ‘pooling’ scenario where PHEVs are not assigned to a particular employee and are used both pre and post 31 March 2025, each time an employee drives the car, it is a separate car benefit and the employer needs to check if the requirements for the FBT electric vehicle exemption are satisfied.

Where a car benefit arises on or after 1 April for such pooled PHEVs, the employer is not entitled to the exemption because there is no binding financial commitment in place to provide that car to a single, designated employee before then.

However, what if an employee, as part of their remuneration package is entitled to be provide a PHEV and a specific PHEV is made available for their exclusive use. In such a scenario, does the exemption extend past 1 April 2025?

In our view we feel the exemption can extend under such an arrangement. Disappointingly, there is a lack of ATO guidance specifically confirming this to be the case. We look forward to exploring this issue further with the audience at our upcoming FBT Roadshow.

The key takeaway from the above is the divergence between the transitional rule referring to a commitment but the ATO interpretation there-of requiring a “financially binding commitment”, Perhaps the transitional rule is not as straightforward as one may think meaning proper analysis should occur by an employer to ensure they do not unnecessarily commence paying FBT on a PHEV after 31 March 2025.

We recommend the internal review process start now (if it hasn’t been started already!).

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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.