As businesses adopt more environmentally friendly practices, Plug-in Hybrid Electric Vehicles (PHEVs) are becoming an increasingly popular option for corporate vehicles.

They offer reduced fuel costs and lower emissions, making them attractive for businesses and employees alike.

However, with this shift, it’s essential to understand how Fringe Benefits Tax (FBT) applies to PHEVs, particularly in light of recent changes in tax rules.

What Is FBT?

Fringe Benefits Tax (FBT) is a tax that employers must pay on certain benefits provided to their employees or their employees’ associates in place of, or in addition to, salary and wages. When it comes to cars, FBT applies when a vehicle is made available for the private use of an employee.

FBT Exemption for Electric Cars

In Australia, as part of the push to reduce carbon emissions, certain electric vehicles (EVs) were made exempt from FBT. PHEVs which use both electricity and petrol or diesel, were initially included under this exemption, however changes have been introduced to this exemption which will apply from 1 April 2025.

Changes to FBT for PHEVs: Key Dates and Transition

From 1 April 2025, PHEVs will no longer qualify for the FBT exemption that applies to fully electric vehicles. This means that while fully electric cars (such as battery electric vehicles or BEVs) will remain exempt from FBT, PHEVs will revert to being taxable under standard FBT rules.

This change is crucial for employers who are considering leasing or purchasing PHEVs for their employees, as it may significantly alter the cost-benefit analysis of providing these vehicles.

It’s important to note that vehicles purchased or leased before 1 April 2025 will remain exempt from FBT until their lease expires.

Calculating FBT on PHEVs

For employers who provide PHEVs to employees for private use, FBT is calculated in the same way as for any other car benefit. The two primary methods used for calculating FBT on car benefits are the Statutory Formula Method and the Operating Cost Method.

• Statutory Formula Method: This method assumes that 20% of the car’s value is used for private purposes, regardless of the actual distance travelled. It is a straightforward calculation and tends to be used more often due to its simplicity.

• Operating Cost Method: This method involves calculating the actual operating costs of the vehicle, including fuel, maintenance, and depreciation, and then determining the proportion that is attributable to private use. This method can sometimes result in a lower FBT liability if the vehicle is predominantly used for business purposes.

Employers can choose the method that results in the lowest FBT liability. For PHEVs, it’s essential to keep detailed records of both business and private use, particularly if you opt for the Operating Cost Method.

To use this method, you must have a complying logbook that has been kept for a minimum of 12 consecutive weeks.

Maximising Tax Benefits: What Employers Should Consider

While the FBT exemption for PHEVs is set to expire, businesses can still take advantage of tax savings by carefully planning their vehicle acquisitions. Here are some strategies to consider:

• Leasing or Purchasing Before April 2025: If your business is considering adding PHEVs to its fleet, purchasing or leasing them before 1 April 2025 can ensure that you benefit from the FBT exemption during the lease term.

• Opt for Fully Electric Vehicles: If reducing FBT liabilities is a priority, you may want to explore fully electric vehicles, which will continue to be exempt from FBT beyond 2025. EVs offer the dual benefit of lower operating costs and tax savings.

• Record Keeping: For businesses opting for the Operating Cost Method, maintaining accurate records is critical. Ensure that you document the vehicle’s business and private use, fuel consumption, maintenance, and other operating expenses. Proper record keeping can help reduce your FBT liability.

As the transition toward electric vehicles continues in Australia, the landscape for FBT on plug-in hybrid electric vehicles is evolving. While PHEVs currently offer an FBT exemption, this will change in April 2025.

Employers should review their fleet management strategies now to maximise tax benefits and minimise costs. Consider whether it makes sense to lease or purchase PHEVs before the deadline, or explore other options such as fully electric vehicles to take advantage of ongoing FBT exemptions.

Staying informed about these changes and understanding your options will help ensure that your business remains compliant with tax regulations while also benefiting from cost-efficient, environmentally friendly transportation options.