Cutting taxes to promote a particular activity can be a sound principle in public policy development. A policy in this field could be very effective. Unfortunately, the government has not undertaken detailed analysis to support the proposition that the Treasury Laws Amendment (Electric Car Discount) Bill 2022 will increase demand for electric vehicles in Australia.
Neither the Departments of Treasury and Climate Change could explain the impact of the bill in terms of electric vehicle adoption or tax revenue. The lack of information makes this a difficult exercise. It is clear that the detailed analysis on the impact on this bill by the Government is non-existent. It is a half-baked policy proposal.
Currently, 16 per cent of carbon emissions comes from the transport sector. There is no data from the Government on the emissions abatement resulting from this tax policy change, despite this being the ultimate aim of this legislation. The Treasury confirmed that neither they nor the Department of Climate Change, Energy, the Environment and Water modelled an abatement estimate for the Fringe Benefits Tax (FBT) measure.
This bill comes at a time when the electric vehicle (EV) market is maturing in Australia, demonstrated by figures from the Federal Chamber of Automotive Industries showing sales of pure battery EVs last month represented the highest market share ever recorded. The uptake of EVs has grown in the last several years, from 0.8 per cent of new cars in 2020, to 2 per cent in 2021.
One thing is clear. Supply remains a serious problem at an affordable price point for many Australians.
The Australian Finance Industry Association (AFIA) provided testimony on this key issue:
… there are supply chain issues. So, there are significant waiting times for people who are purchasing zero- and low-emissions vehicles presently. … So if you order a $49,000 car or a $60,000 car or an $80,000 car today many of them may not actually be available for use for up to 12 months and so I guess that's just one element of the situation that I would add to that.
Treasury’s claim that climate action is productivity enhancing may well be valid, but Treasury and the Department of Climate Change’s evidence shows the impact of this policy on emissions reduction has not been quantified. Third party evidence suggests it is negligible.
In that context and given the high ongoing financial impact of the measure, the Committee inquiry failed to reveal any substantial reasons to support the bill. Instead, the evidence raises questions around the design, cost, and impacts of the legislation.
Design and Cost
When asked, the Department of Climate Change, Energy, the Environment and Water confirmed that they had not assessed the impact on EV supply that this policy will have. This is disappointing, considering the Department is leading a review on the National Electric Vehicle Strategy. When asked about EV supply, the Treasury responded that the modelling on the EV supply impact will take place during this consultation.
Modelling a piece of legislation’s impact after the fact does not seem to be prudent practice. The electric car bill proposes to exempt electric and hybrid cars underneath the luxury car tax threshold from Fringe Benefits Tax (FBT). This threshold is $84,000.
Currently, utes and vans are exempt from FBT in the case where private use is expected to be minimal, given they are not designed principally to carry passengers. Employees can travel to and from work FBT-free, and use their vehicle for minor, infrequent and irregular non-work-related purposes (such as removing domestic rubbish).
In 2019‒20, FBT collected on cars was almost $1 billion.
According to the Treasury, this change will reduce revenue by $20 million in 2022‒23, and $205 million over the forward estimates.
In 2022‒23, this policy constitutes a 2 per cent reduction in FBT revenue on 2019‒20 revenue. The Department of Treasury confirmed this costing figure during the inquiry.
When queried about the discrepancy between the Treasury costing of $205 million and the Parliamentary Budget Office (PBO) post-election costing of $360 million, the Treasury posited that the difference was due to the proposed tariff exemption.
Excluding forgone tariff revenue, the PBO costing of the FBT exemption policy over the forward estimates is $161 million, which comes up to approximately $200 million if you account for Australian Taxation Office (ATO) administrative expenses.
Treasury has not provided further detail on their costings analysis detailed in the explanatory memorandum. We don’t know the details of the assumptions that formed the basis of this forecast. Responding on notice, the Treasury gave a fairly general answer about the relative prices of EVs to internal combustion (IC) cars and an assumed behavioural consequence that comes with a tax exemption.
No detail was provided on notice regarding whether the costing takes into account potential impacts on excise and income tax receipts.
The Treasury was not able to articulate the long-term costs of the measure. It agrees with the PBO that the cost of the measure will grow over time, stating “[t]he costs of the measure are expected to increase over time as the measure matures including into the medium term” and that “the Treasury costing is sensitive to the uptake of electric cars, and this is something which could vary”.
Furthermore, the Treasury could not provide any modelling on the average cost of revenue will be per vehicle that this legislation will have. The Treasury also confirmed that the Government made the decision to apply the scheme retrospectively to cars used from 1 July 2022, which incentivises purchases of vehicles that would have been bought prior to the election.
Given the financial impact of the exemption over the forward estimates provided in the explanatory memorandum, the Institute of Public Accountants (IPA) conducted their own analysis, extrapolating the following uptake figures based on an average EV purchase price of $60,000:
… the corresponding result would be 1,705 vehicles in 2022‒23, 3,409 in 2023‒24, 4,688 in 2024‒25 and 7,671 in 2025‒26. In the context of the number of vehicles sold in Australia for 2021 calendar year (1,050,000 units) it represents a very small percentage of new car sales and therefore will have a negligible impact on reducing Australia’s carbon emission from the transport sector.
It is concerning that we don’t have more detailed modelling from the Government on this.
Professor Miranda Stewart noted that the policy “will deliver the subsidy to a rather narrow class of employee beneficiaries and provides the largest benefit to the highest income earners.” Professor Stewart advised that the FBT rate provides little benefit to salary package cars except those on the top income tax rate, that “this [is the] cohort that derive the most benefit from the FBT exemption”.
Professor Stewart’s view was echoed by the IPA, which expressed concern about the scope of the scheme as currently designed, stating “The Government’s assertion that this initiative makes the take up of EV’s more affordable is misleading” and that “private buyers and sole traders of EV’s cannot access these significant savings.” The Institute’s submission stressed that “that there are other measures which would have a far greater short-term benefit to the environment than this measure”.
With regard to up-take, it is true that Australia is a large continent with a sparse population in many places. Despite this, Australia also has a highly urbanised population which means that the relatively low level of EV penetration can be combated.
A narrow tax policy change, not tax reform
This is not tax reform. Treasurer Jim Chalmers made this ambitious claim on the 7:30 Report when the bill was introduced:
The first bill I introduced into the parliament was a tax reform to make electric vehicles cheaper.
This is simply a change in tax policy to reduce taxation in a narrow form for employer owned fleets. Most Australians will be unable to benefit from this tax policy change which is extremely narrow. It will mean that people working in small businesses are less likely to access the proposed tax policy change due to the lower level of usage of salary packaging in small and medium businesses.
The National Automotive Leasing and Salary Packaging Association (NALSPA) reports there are 18 million vehicles in Australia today with 1 million sold per annum. Their members offer 400,000 novated leases at any time with 100,000 new leases per annum.
They believe the maximum application would be much higher at 450,000 per annum as it would capture small businesses which supply trade vehicles for their staff but are not salary packaging. This amount of potential application vastly exceeds the estimated uptake calculated by the IPA based on Treasury costings.
NALSPA reports that over 200,000 employer provided salary packaged vehicles are administered by their members. This tax policy change would apply to these arrangements.
The Federal Chamber of Automotive Industries (FCAI) conceded that an FBT exemption does not provide a broad benefit to the community:
With FBT, that depends on your personal circumstances, and I acknowledge that not everyone has the opportunity to actually exercise the FBT option. … Not everyone has the option or the inclination to lease a car. Therefore, not everyone has the capacity to exercise the FBT option.
Contending that novated leases are of limited availability (being used to purchase approximately 10 per cent of vehicles as per their estimate), and that the FBT exemptions applies only to those who utilise such arrangements (or salary sacrifice arrangements), Plenti noted that various groups of “prospective EV purchasers” not covered by the scheme. These include small businesses who do not use salary sacrifice regimes, sole traders, self-employed and retired persons.
Plenti also commented on the possibility that any financial benefits of the proposed exemption could even be eaten up by novated lease providers via commissions. The Government should be realistic about the real impact of this reform in terms of EV uptake. It’s clear that the level of consultation or modelling done by the Government has not been commensurate with the calibre of policy work that constitutes “tax reform”.
When asked, the Treasury confirmed that no public consultation was carried out in the development of the legislation, and that decision was made by the Government. They did however engage with the ATO as part of their “quality assurance processes”. The AFIA confirmed they were not consulted on the bill prior to this inquiry.
The Department of Industry, Science and Resources (DISR) confirmed they were not involved in the bill, but that the Treasury did consult with the Department of Climate Change, Energy, the Environment and Water (DCCEEW) “on specific provisions of the bill.” Nor was the Chief Economist within DISR approached by Treasury “to review, inquire into or analyse” the bill.
EVs have a higher capital cost so they attract a higher FBT weighting. In other jurisdictions, tax policy has been deployed to cut the upfront capital outlay which is required. The US and Germany both have schemes to cut taxes on EVs to address the high cost.
During the inquiry, FCAI confirmed the wide gap of entry costs for electric and petrol vehicles as $49,000 for zero or low emissions vehicles (ZLEVs) and $20,000 for internal combustion vehicles.
NALSPA provided evidence estimating that “if you had virtually identical cars, but one was a battery electric vehicle (BEV) and the other one was a petrol vehicle, there's about a $20,000 difference”.
In her submission to the inquiry, Dr Anna Mortimore provided useful data on how the FBT exemption will not substantially close the cost-gap between petrol vehicles and EVs, noting a $32,708 gap remains between the KONA BEV and KONA IC‒EV.
Given the issue of price-parity is largely a supply driven issue, and as this is a “demand-side measure” according to Dr Anna Mortimore, this legislation is not likely to significantly affect the up-take of electric-vehicles from a cost-gap perspective.
The Government acknowledged that the measure increases demand for electric vehicles, despite also confirming it expects EV uptake to be constrained in the short term due to existing supply chain issues in global car markets. The DCCEEW told the Senate that “demand for EVs is currently higher than supply”.
The Treasury confirmed the measure’s success or failure will not impact the Government’s climate change commitments, saying “The performance of any particular measure does not affect the Nationally Determined Contribution (NDC) commitment and will not require the NDC to be updated”.
The Government has confirmed that every State and Territory already has discount schemes in place to support EV uptake, a point numerous submissions also made. When asked about the impact of an additional demand-side measure on prices in an already constrained market, all the Treasury answered was “There are a number of factors that influence the price of motor vehicles”.
But given the disproportionate FBT that electric vehicles attract due to their higher cost, this legislation may in theory have some effect in softening that gap.
Stakeholder views
Industry stakeholders such as the FCAI, Australian Automobile Dealer Association (AADA), Motor Trades Association Australia (MTAA) are supportive of the bill’s intent.
Yet organisations have identified extensive issues around grandfathering and whether the costs associated with electric vehicles are clearly captured under the bill’s definition and tax interpretation.
NALSPA provided a non-exhaustive list of the associated costs of running electric vehicles, including in-home charging infrastructure, road user charges, battery replacements and subscription costs.
The MTAA has asked the committee to consider “extending or clarifying the application of the bill [that] includes associated costs peculiar to ZLEV, such as home charging infrastructure, batteries and auxiliary equipment used in external charging”. They also added that “the ATO could provide guidance material that clarifies that the exemption also captures the associated ZLEV costs”.
Furthermore, the MTAA considered whether the FBT exemption should also be extended to used EVs, noting that “new electric vehicle supply chain delays are continuing” and that “demand has surged for used electric vehicles”.
Regarding the proposed review after three years, Dr Anna Mortimore recommended that the bill be reviewed yearly:
This is a demand measure which is supporting supply. You don't have supply. So, does that mean that, if this fails in three years because we haven't addressed supply, this incentive has failed? That's not necessarily the case. It's just that it hasn't been supported by other measures.
If the intended behavioural outcome of the proposed tax policy is to be achieved, then the incentive must be strong enough and not undermined by a three-year review in the context of constantly changing market supply. Treasury confirmed it had not identified metrics to define whether the measure is successful or not. It is notable that the bill does not have a sunset provision.
When asked about the lack of a sunset provision, the Treasury said that this was not unusual.
Professor Miranda Stewart expressed concern about the equity and long-term fiscal impacts of the measure, stating:
It is important that the measure actually be sunsetted, ie stop operating after a period of time, and require re-legislation, given its fiscal cost, unequal benefit and uncertainty about the electric car market and the best policy to transition Australia.
Although there are extensive requests for concessions and additions to the bill by submitters, there is support for the policy intention behind this legislation.
Conclusion
This tax policy is not tax reform, as the Treasurer has erroneously stated. It was an election commitment by the Labor Party, and the process in which this legislation was drafted has been below par. There was little to no consultation done with industry. The legislation has not been properly modelled or analysed.
The Government has failed to:
(1)
establish clear criteria and metrics of success for the policy;
(2)
ensure the measure was temporary, proportionate, and linked to measurable productivity gains;
(3)
quantify any benefit of the policy to EV uptake, to emissions reduction, or to the budget bottom line;
(4)
tangibly address the biggest constraint on EV uptake, which is supply; and
(5)
consult with business and civil society on policy design.
In principle, this legislation constitutes a tax cut. But the scope of this legislation is very narrow and it will not benefit the majority of prospective EV purchasers.
It may provide an incentive to employer owned fleets to purchase electric vehicles, however small that incentive may be. The FBT exemption does not address the core supply issues of electric vehicles, and it will not substantially close the consequent cost-gap between electric vehicles and internal combustion vehicles.
Given the nature of fleet purchases of vehicles, providing an incentive for them to purchase new EVs would in theory have a positive impact on the second-hand market, given the life cycle of employer provided fleets. The size of this impact may not be substantive, as indicated by Treasury’s modelling.
But given the lack of consultation and extensive modelling, this Bill is not true reform when considered in isolation. It must be considered as part of a wider policy strategy to drive down emissions, and to provide greater options to consumers.
This exact process was announced by the Minister for Climate Change and Energy in August 2022. In this absence of the review being finalised and a holistic tax policy for EVs, the bill cannot be supported.
Recommendation 1
The bill cannot be supported now and should be considered following the findings of the Department of Climate Change, Energy, the Environment and Water inquiry on the National Electric Vehicle Strategy.
Recommendation 2
The $205 million in prospective tax cuts over the forward estimates should be redeployed to the best method of increasing electric vehicle (EV) uptake, which should include EV infrastructure.
Senator Andrew Bragg
Deputy Chair
Liberal Senator for New South Wales
Senator Dean Smith
Member
Liberal Senator for Western Australia