EV tax breaks to be slashed from April next year

A generous tax break for high-end electric vehicles will be wound back from next year as the government swings the axe on cost blowouts ahead of a pivotal budget to be handed down next week.

The move is expected to save the government $1.7 billion over five years, while electric vehicle buyers will pay thousands more on their novated leases.

The electric vehicle fringe benefits tax waiver – currently in place for vehicles purchased for under $91,387 through a novated lease – will start being phased out from April 2027. From this time, the full discount will only apply to electric vehicles costing $75,000 or less.

Treasurer Jim Chalmers has made savings a key priority for the budget as the global oil shock caused by the US-Israeli war on Iran has rattled global markets, pushed up inflation domestically and forced the government into expensive cost-of-living relief such as the fuel excise cut.

The cost of the electric vehicle tax break, designed to steer consumers away from petrol cars, has blown out as high-income earners have rushed to sign up for cheap deals that lowered their tax.

Energy Minister Chris Bowen said the swift uptake of the incentive and the proliferation of more affordable models in recent years meant the discount should be more targeted.

“Four years ago, there was no EV available for under $40,000 – now there’s about 10. That’s enabled us to better calibrate the tax exemption going forward, to focus on those more affordable models,” Bowen told ABC radio on Tuesday.

He said the staged phase-out of the tax break would allow Australians to plan to make the purchases they wanted to.

In the first phase, the full exemption will be available until March next year.

Then, from April 2027, vehicles between $75,000 and the luxury car threshold of $91,387 will get a 25 per cent discount on their fringe benefit tax.

Finally, from April 2029, the exemption will be reduced to a permanent 25 per cent discount for all vehicles below the luxury car tax threshold.

Existing leases will not be effected, and eligible vehicles will remain exempt from import tariffs.

This masthead revealed in March the government was considering restricting the tax break to affordable models as the uptake of EVs on novated leases far outstripped government estimates.

The cost of the policy blew out from $1.9 billion to $5.1 billion between 2022-23 and 2026-27. It was projected to get even more expensive – $2.8 billion in the 2028-29 financial year.

Bowen said the changes would save the budget $1.7 billion over the forward estimates, and the phase-out, which would benefit cheaper models for longer, would encourage manufacturers to offer more affordable choices to the Australian market.

Asked why the tax would not be scrapped altogether given the pressures on the budget, Bowen told the ABC that EVs provided a “great public and social benefit”.

“Obviously, there’s the carbon impact, but there’s also respiratory health impacts,” he said.

Before the war in Iran, this masthead reported that the budget razor gang led by Treasurer Jim Chalmers was pushing to significantly pare back the tax concession, which had blown out by 15 times its original forecast size.

However, the war changed the government’s thinking. Energy Minister Chris Bowen and other members of the government pushed to retain the measure for some time longer, to keep powering EV uptake which was being accelerated by the oil shock.

The government landed on a slower phase-out than it originally planned.

Another policy in this space, plans for a road vehicle user charge that that would force EV drivers to fund road maintenance, will not be included in the budget.

With Paul Sakkal

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