Why Labor's new tax cut on electric vehicles won't help you buy one anytime soon

The Albanese government has introduced tax cuts to electric vehicles in its first sitting week, claiming the proposed changes would be “good for motorists, good for climate action and good for fleet purchases”. They won’t, however, help most Australians afford one.

Labor plans to stop the “fringe benefits tax” applying to electric vehicles. This tax usually applies to all cars provided by an employer to an employee, either as part of a salary sacrifice arrangement or as a company car available for personal use. This means the winners of the tax change are high-end employees who can afford a high-priced electric vehicle such as a Tesla.

Rolling business fleets over to the secondhand market is an important way to make electric vehicles more affordable to everyday people. But this tax cut won’t see this happen anytime soon.

Our recent report recommends a suite of other tax changes to lower electric vehicle prices and ownership costs. Australia can’t meet its target of 89% new car sales being electric by 2030 without significantly reforming the transport sector. Labor’s new tax cut is a far cry from what’s needed.

Read more: Australia could rapidly shift to clean transport – if we had a strategy. So we put this plan together

What does a fringe benefits tax do?

Australia’s transport sector accounts for around 18% of national emissions. Electric vehicles, powered by renewable energy, are crucial for meeting Australia’s emissions target of net-zero by 2050.

This won’t happen if electric vehicles remain prohibitively expensive. Indeed, 87% of Australians in a 2021 survey said the biggest barrier to buy an electric vehicle is its high upfront cost.

So what does a fringe benefit tax on cars actually do?

There are two ways the fringe benefit tax is calculated in Australia: using the statutory formula (based on the car’s cost price), or using the operating cost method (based on the costs of operating the car). The fringe benefits tax is 47% of each method’s calculated final value, known as “grossed up taxable value”.

The highest payable fringe benefits tax is under the statutory formula method, which applies when employees fail to keep a car logbook. Under this method, electric vehicles would be at a disadvantage.

Read more: How climate-friendly is an electric car? It all comes down to where you live

Employees would be penalised for choosing an electric vehicle because of its higher upfront cost price. Employers would pay a higher fringe benefits tax than if they’d bought a lower-priced petrol or diesel car. That doesn’t leave much incentive for businesses to buy an electric car.

Removing the fringe benefits tax on electric vehicles is a good way to stop penalising employees for choosing an electric vehicle. But it still won’t reduce the high upfront cost price.

Why businesses still won’t choose electric cars

Business uptake of electric vehicles depends on the total cost of ownership. Let’s use Hyundai’s Kona cars as a case study.

Modelling found Kona electric cars, including a smart charger, costs A$66,337 (excluding GST). A new Kona fuel-combustion car, on the other hand, costs $31,329 (excluding GST), which means electric vehicles are not cost competitive.

The fringe benefits tax would further widen this cost gap of over $35,000, adding around $12,000 each year to the Kona Electric.

Labor’s bill would remove the $12,000 yearly tax, reducing the ownership cost of an electric vehicle. But it will not reduce the upfront price difference with Kona’s fuel-combustion car.