Australia Scales Back EV Tax Break, Holds Off on Road User Charge

The government is navigating a delicate balance: encouraging EV uptake while managing a ballooning tax break and preparing for the inevitable decline of fuel excise revenue.

Electric Vehicle Market and Emissions

Sales Growth Surges

Electric vehicle sales in Australia have accelerated dramatically. In May, 48% of new vehicle sales were electrified—including full EVs, conventional hybrids, and plug-in hybrids. Full EVs alone accounted for 21% of sales, plug-in hybrids 9%, and conventional hybrids the remainder.

In March, EVs represented 15% of new car sales, double their share from a year earlier. Tesla and Polestar sales in the first four months of the year rose 47% compared to the same period in 2024. Overall, EV sales have grown from approximately 7,000 in 2020 to 157,000 in 2025.

Second-Hand Market Booms

Second-hand EV sales rose 138% between February and March, reaching 7,557 vehicles. The top-selling second-hand EVs in April were Tesla Model 3 and Model Y, now selling for A$25,000–A$40,000.

Emissions Impact

The transport sector recorded its first reduction in carbon emissions since COVID-19 lockdowns. Official data shows a 1.9% overall reduction in Australia's greenhouse gas emissions in the year leading up to September 30. Transport sector emissions fell by 0.4% in the year ending September 2025 and by 0.6% in 2025 overall.

The transport sector is the second-largest source of greenhouse pollution in Australia, generating approximately one-fifth of the country's total emissions.

A Treasury review estimated that the EV tax discount resulted in an additional 64,000 battery EV sales through end of 2024, avoiding about 2.2 million tonnes of emissions. Australia's total annual emissions are roughly 440 million tonnes.

Electric Vehicle Fringe Benefits Tax Changes

Policy Timeline

The government announced a phased reduction of the FBT exemption for EVs, aiming to save $1.7 billion over four years. Treasurer Jim Chalmers and Energy Minister Chris Bowen outlined the following schedule:

• Until March 31, 2027: Full FBT exemption continues for eligible EVs below the Luxury Car Tax (LCT) threshold for fuel-efficient vehicles ($91,387).
• April 1, 2027 – April 1, 2029: Full exemption applies only to EVs costing $75,000 or less. Vehicles above $75,000 receive a 25% discount on payable FBT.
• From April 1, 2029: All EVs below the LCT threshold receive a permanent 25% FBT discount.

Import tariffs on eligible vehicles remain exempted. Existing lease agreements entered into before the changes take effect will remain under the old rules for the lease term.

Policy Context and Soaring Costs

The EV discount was introduced in early 2023, exempting eligible EVs from FBT and reducing leasing costs. The scheme's original cost projection was $605 million for 2022–2029; Treasury now estimates $10.1 billion over the same period. The cost of the FBT exemption has ballooned to $1.35 billion in the current financial year, far exceeding the original forecast of $90 million. Treasury estimates revenue foregone at $1.4 billion in 2025–26 and $2.8 billion in 2028–29.

The Productivity Commission estimated the abatement cost at between $987 and $20,084 per tonne of CO2, compared to the lowest-cost abatement price of $67 per tonne. The commission recommended phasing out the EV exemption, noting it primarily benefits individuals with access to salary packaging or novated leases and incentivizes more expensive car purchases.

The peak body for car leasing estimates that about half of EV sales are through novated leases. A poll of 2,269 novated lease holders found:

• 65% cited saving money as a top reason for buying an EV
• 57% cited the FBT discount
• 39% cited reducing dependence on petrol and diesel
• 20% cited environmental reasons

Reactions

Treasurer Jim Chalmers and Energy Minister Chris Bowen stated the new rules aim to encourage manufacturers to offer more affordable EVs and focus the FBT exemption on cheaper cars, noting the electric car market has matured since the government came into power.

"The electric car market has matured since we came into power," — Treasurer Jim Chalmers and Energy Minister Chris Bowen

Electric Vehicle Council CEO Julie Delvecchio welcomed the extension, calling EVs a cost-of-living measure. National Automotive Leasing and Salary Packaging Association CEO Rohan Martin said the scheme helped over 100,000 Australians switch to EVs and cited a benefit-to-cost ratio of at least 2:1.

Nationals leader Matt Canavan criticized the policy, stating it predominantly benefits higher-income earners, describing it as "upper-class welfare." The opposition Coalition's policy is to eliminate the discount entirely.

Road User Charge for Electric Vehicles

Government Position

Transport Minister Catherine King has indicated that implementing a road user charge for EVs may not be appropriate at this time. King stated the government is trying to encourage EV uptake and does not want to disincentivize it.

"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." — Transport Minister Catherine King

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."

Background

Treasurer Jim Chalmers stated last year that a road user charge to eventually replace fuel excise was "an idea whose time had come." Fuel excise revenue raises approximately $15 to $18 billion annually for road infrastructure funding. Successive governments have considered replacing the fuel excise as electric vehicles become more common.

Industry Positions

The Electric Vehicle Council stated it supports a "fair" road user charge that does not slow Australia's transition to clean transport, suggesting the tax should not apply until EVs represent one-third of new car sales.

State Actions

• New South Wales has legislated its own road user charge scheduled to begin in July next year.
• Western Australia has proposed a similar charge.
• Victoria's attempt to implement a road user charge was ruled unlawful by the High Court, which determined it constituted a goods tax that state governments cannot impose.

Budget Considerations and Global Fuel Pressures

Additional Relief Measures

The government is considering further relief measures for households and businesses in the federal budget scheduled for May. This consideration occurs amid ongoing peace talks between the US and Iran and a fragile ceasefire. The Strait of Hormuz remains blocked by Iran, affecting global oil supplies.

Infrastructure Minister Catherine King stated that successful US-Iran talks represent the "best chance" for reducing fuel prices. She noted that even if the Strait of Hormuz reopens, there would be a "long tail" effect from the crisis.

Existing Measures

• Australia's fuel excise has been halved until the end of June.
• Heavy vehicle road user charges have been suspended.
• Tax cuts are scheduled to take effect on July 1.

King suggested the three-month fuel excise cut could be extended.

Government Actions

Prime Minister Anthony Albanese recently traveled to Singapore to discuss fuel supplies and plans to visit Brunei and Malaysia for similar discussions. The government is launching a public information campaign titled "every little bit helps" to encourage reduced fuel use.

Treasurer Jim Chalmers stated that global energy shocks and their effects are a primary concern for the government ahead of the budget. He said pressures on people would not disappear immediately if a ceasefire holds or the Strait of Hormuz reopens.

"Global energy shocks and their effects are a primary concern for the government ahead of the budget." — Treasurer Jim Chalmers

Chalmers indicated the budget package would focus on fuel security, supply chain resilience, and economic reform.

Criticism

Shadow Defence Minister James Paterson criticized the public information campaign, describing it as "political propaganda."

Renewable Energy and Emissions Targets

Capacity Investment Scheme

The federal government has awarded contracts to 19 renewable energy projects under its Capacity Investment Scheme (CIS). The projects comprise 10 wind farms and nine solar farms with a combined capacity of almost 8 GW, also including battery storage totaling 7.9 GWh. The government states this will help meet its target of 40 GW of new capacity by 2030.

In a separate auction, the government awarded 15 large-scale battery projects with a combined capacity of 4.2 GW and 16.2 GWh of storage. The projects are expected to unlock $6 billion in private investment.

Budget Adjustments

The federal budget has reduced funding for green hydrogen and clean manufacturing initiatives by billions of dollars. The budget removed $1 billion from the program aimed at establishing Australia as a major green hydrogen producer. Budget papers show the government now expects to spend $1.9 billion less on production credits for early-stage hydrogen projects by 2030, and $300 million has been cut from schemes to support local manufacturing of solar panels and batteries.

Emissions 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 around a 36% reduction by 2030.

The Climate Change Authority estimates that EVs must comprise 50% of light vehicle sales in the decade to 2035 for Australia to meet its 62% emissions reduction target.