Australia to Phase Out Full EV FBT Exemption in $1.7 Billion Savings Drive
The Australian government is implementing a phased restructuring of the fringe benefits tax (FBT) exemption for electric vehicles (EVs), aiming to save $1.7 billion over four years.
This change comes as the government considers additional cost-of-living relief in the May federal budget amid global fuel supply concerns, while simultaneously reviewing an EV road user charge. The policy shifts occur against a backdrop of record EV sales and Australia's first post-COVID reduction in transport sector emissions.
Changes to the FBT Exemption for Electric Vehicles
The Australian government will phase out the full FBT exemption for electric vehicles, replacing it with a tiered system that maintains a partial discount for most vehicles. The changes are scheduled to take effect in two stages:
From April 1, 2027: EVs with a retail price above $75,000 will become subject to FBT at 75% of the usual rate. EVs priced at or below $75,000 will retain the full exemption.
From April 1, 2029: All EVs below the luxury car tax threshold (currently $91,387) will receive a 25% FBT discount, meaning they are taxed at 75% of the usual FBT rate. Luxury EVs (priced above the luxury car tax threshold) and used EVs imported before July 2022 will continue to be fully taxed under existing FBT rules.
Grandfathering provisions: Lease agreements entered into before the relevant implementation dates will remain under the old rules for the duration of the lease term. For example, an EV acquired in early 2029 under a five-year lease would remain fully FBT-exempt until the mid-2030s.
Context and cost projections: The FBT exemption was introduced in early 2023 to encourage EV adoption. The scheme's original cost projection was $605 million for the period 2022–2029. Treasury now estimates the cost over the same period at $10.1 billion. The exemption's cost has ballooned to $1.35 billion in the current financial year, far exceeding the original forecast of $90 million. The National Automotive Leasing and Salary Packaging Association (NALSPA), supported by EV manufacturers including Tesla, Polestar, and BYD, has campaigned against the changes, arguing they would impede EV adoption and impact workers' vehicle affordability.
Government rationale: Treasurer Jim Chalmers and Energy Minister Chris Bowen announced the policy change on Monday evening. They stated the new rules aim to encourage manufacturers to offer more affordable EVs in Australia and focus the FBT exemption on cheaper cars. They said support for families switching to EVs will continue as the policy transitions to a permanent 25% FBT discount.
Policy Review and Budget Considerations
The government is reviewing the EV tax incentives ahead of the May budget, with the Treasury and Finance departments prioritizing cost savings amid inflation concerns. Treasurer Jim Chalmers has indicated the budget will include savings measures. Options under consideration include completely axing the tax breaks, phasing them out, or reducing the current price threshold for eligible vehicles.
External recommendations: The Productivity Commission, in a December report, recommended phasing out the EV exemption. It estimated the cost per tonne of avoided greenhouse gases due to these tax breaks to be between $1,000 and $20,000, noting the exemption primarily benefits individuals with access to salary packaging or novated leases and incentivizes more expensive car purchases. The commission also urged state governments to end EV exemptions from stamp duties and registration discounts.
Political positions: The opposition Coalition has campaigned on ending the tax breaks, estimating savings of over $23 billion over 10 years if abolished. The Greens' treasury spokesman Nick McKim has expressed support for progressive tax reform, including potential changes to the capital gains tax discount.
Road User Charge Deliberations
Transport Minister Catherine King has stated that now may not be the appropriate time to implement a federal road user charge for electric vehicles. King said her department continues to develop a model for such a charge, but implementation might be delayed.
Background: Treasurer Jim Chalmers stated last year that a road user charge to eventually replace the fuel excise was "an idea whose time had come." The federal government has spoken little about the proposed charge since then. Fuel excise currently generates approximately $15 to $18 billion annually for road infrastructure funding. Revenue from fuel excise is projected to decline as electric vehicles become more common. Some government officials have expressed concern that a charge on EVs could conflict with efforts to transition drivers to cleaner vehicles.
King said: "At the moment we're trying to encourage as much electric vehicle uptake as we possibly can, we don't want to disincentivise that at all, so there is a balance to be struck here."
She added: "We want to try and not disincentivise electric vehicle uptake, particularly right at the moment when we are seeing such a surge in that, so it may not be the time for it right now." King noted that legislation would need to pass through parliament, and she is uncertain about its current legislative pathway.
Electric Vehicle Council position: The Electric Vehicle Council stated it supports a "fair" road user charge that does not hinder Australia's shift to clean transport, suggesting the tax should not apply to EVs until they represent one-third of new car sales.
State-level developments:
- New South Wales has legislated its own road user charge, scheduled to begin in July of next year.
- Western Australia has proposed a similar charge.
- Victoria's attempt to legislate a road user charge on EVs was ruled unlawful by the High Court, which determined it constituted a goods tax that state governments cannot impose.
EV Market Growth and Emissions Impact
Electric vehicle sales in Australia have increased significantly, with battery electric vehicles representing nearly 15% of new car sales last month, approximately double the share from the previous year. In the first four months of this year, sales of Tesla and Polestar vehicles rose 47% compared to the same period in the previous year. EV sales have grown from approximately 7,000 in 2020 to 157,000 in 2025.
Emissions impact: Australia's transport sector recorded its first reduction in carbon emissions since the COVID-19 lockdowns. Department of Climate Change and Energy data indicates a 0.4% fall in transport sector emissions for the year ending September 2025, primarily due to decreased petrol consumption for road transport. This contributed to a 1.9% overall reduction in Australia's greenhouse gas emissions over the same period. Across the entire economy, emissions were 2% lower than the previous year, marking the first sustained decrease since the pandemic. This broader reduction is largely driven by renewable energy sources increasingly replacing coal-fired power plants.
2030 targets: Australia is committed to the Paris Agreement goals, aiming for a 43% emissions cut by 2030 from 2005 levels and at least 62% by 2035. Current projections suggest the country is on track to achieve approximately a 36% reduction by 2030. The Climate Change Authority estimates that a nearly five-fold increase in clean car sales is necessary, requiring EVs to account for every second light vehicle sold over the next decade to meet the 2035 target—approximately 9 million EVs.
Budget Considerations and Global Fuel Supply
The government is considering further relief measures for households and businesses in the federal budget scheduled for May 12. This consideration occurs amid peace talks between the US and Iran under a fragile ceasefire. The Strait of Hormuz remains blocked by Iran, affecting global oil supplies.
Current measures: Australia's fuel excise has been halved until the end of June. Heavy vehicle road user charges have been suspended. The government is preparing to launch a public information campaign encouraging people to minimize fuel use.
Government statements: Infrastructure Minister Catherine King stated that successful US-Iran talks represent the "best chance" at reducing fuel prices but noted there would be a "long tail" effect from the crisis. Treasurer Jim Chalmers said the budget package would focus on fuel security, supply chain resilience, and economic reform. He stated that pressures on people would not disappear immediately if the ceasefire holds or the Strait of Hormuz reopens.
Energy policy focus: Minister King stated the government would focus on increasing renewable fuel and electrification options. She commented that Australia should produce low-carbon liquid fuels domestically rather than exporting raw materials and importing finished products.