Tax breaks for high-end electric cars would be axed or restricted to cheaper models under a proposal the government is actively considering in an attempt to claw back $3 billion in deductions in the May budget.
The cost of the fringe benefit waiver for EV leases has blown out as high-income earners rushed to sign up for cheap deals that lowered their tax, but government sources familiar with planning for the May budget said changes are being examined to help cover the cost of a broad suite of tax changes.
The uptake of EVs on novated leases has far outstripped government estimates and contributed to the cost of the policy blowing out from $1.9 billion to $5.1 billion between 2022-23 and 2026-27. It is expected to get even more expensive, reaching $2.8 billion in the 2028-29 financial year.
The government is also reviewing the zero tariff on imported electric cars.
While no final decision has been made, options such as axing the tax breaks, phasing them out or reducing the current price threshold are all being explored by Treasury.
Climate Change and Energy Minister Chris Bowen’s department has used the incentive to drive up EV sales to meet its 2035 renewable energy target.
Treasury and Finance, however, want cost savings in the budget as Labor faces growing pressure from the Coalition and economists to rein in government spending as inflation rises.
Treasurer Jim Chalmers has made clear the May 12 budget will contain savings measures and policies aimed at boosting productivity growth with a stated aim of dealing with “intergenerational inequity”.
This masthead revealed last week that all ministers were being asked to find big savings as the government mulls separate changes to the capital gains tax discount and negative gearing.
The budget could also feature income tax cuts aimed at younger Australians, though the government’s appetite for a political brawl over tax might limit its ambition.
The EV tax breaks, limited to vehicles with a sticker price under $91,387, were introduced in 2022 in a bid to fast-track Australian motorists’ adoption of EVs.
When the policy was introduced in 2022, less than 4 per cent of all car sales were EVs. The tax break for cars bought through lease-hire was forecast to cost the budget $1.9 billion between 2022-23 and 2026-27.
That cost is now $5.1 billion as 13 per cent of the new car market is EVs, entry prices have fallen sharply and there are plenty of vehicles moving into the used car market.
The Productivity Commission, in a report that was delivered to Chalmers in December, recommended the government phase out the EV exemption. It also urged state governments to end EV exemptions from stamp duties and registration discounts.
According to the commission, while EV tax breaks may increase the uptake of electric vehicles, it was at an extraordinary cost of between $1000 and $20,000 per tonne of avoided greenhouse gases.
“In addition, the exemption only benefits people who can access salary packaging or novated leases, incentivises more expensive car purchases and does not provide an equal benefit to consumers based on emissions reduction,” it found.
Lowering the cap so that the concession could only be used by people buying cheaper EVs could save money for the government and stop the benefits of the policy from flowing predominantly to high-income earners.
A Treasury review of the EV tax breaks was launched in mid-December. Submissions to that inquiry closed in early February, giving the government time to consider its findings before the budget.
The review’s terms of reference include whether the tax breaks on EVs continue, how effective they have been for the EV industry, and changes in the electric car market including price, the number of brands for sale in the Australian market and the size of the second-hand market.
The Coalition went to the last election promising to end the tax breaks, which can be worth several thousand dollars.
The Parliamentary Budget Office, which costed the Coalition’s policy, estimated axing the breaks would save the budget more than $23 billion over the next 10 years.
Meanwhile, an inquiry headed by the Greens into the capital gains tax concession is due to hand down its report within a fortnight.
Greens’ treasury spokesman Nick McKim said the May budget was probably the government’s only chance this term to make “progressive tax reform” that would help young people and working Australians. He said the Greens would support CGT changes.
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Shane Wright is a senior economics correspondent for The Age and The Sydney Morning Herald.Connect via X or email.
Paul Sakkal is chief political correspondent. He previously covered Victorian politics and has won Walkley and Quill awards. Reach him securely on Signal @paulsakkal.14Connect via X or email.