Australia's electric vehicle (EV) uptake is lagging, but tax experts say they have a "silver bullet solution" that would both drive sales and help increase the supply of cheaper second-hand EVs.
The Commonwealth-funded, climate-focused research centre RACE for 2030 has released a report recommending tax reforms similar to those in Europe to encourage fleet managers to buy EVs, rather than internal combustion engine vehicles (ICEVs).
Prepared by tax experts from Monash and Griffith universities, the report describes a woeful situation: business fleets (which include both government and company vehicles) account for 40 per cent of light vehicle sales, but almost none of these are EVs.
Of the more than 600,000 passenger vehicles and light SUVs sold to business fleets in 2020, only 488 were EVs.
A major reason for this was federal taxation laws, said Anna Mortimore, a tax expert at Griffith University and lead author of the report.
But this failure was also an opportunity, she added.
Fleet managers are responsible for huge numbers of vehicle purchases. Providing tax incentives to buy EVs would rapidly drive up the total EV uptake.
"Business fleets are the silver bullet solution to EV uptake."
Can tax reform make EVs as cheap as ICEVs?
Last week, the federal government announced its intention to make EVs (priced below a luxury car threshold) exempt from fringe benefits tax (FBT) and import tariffs.
These reforms were welcome, but not enough, Dr Mortimore said.
To illustrate the price gap between EVs and the equivalent ICEVs, the report uses the example of a Hyundai Kona EV, which was $28,900 more expensive than the ICEV version.
With last week's proposed FBT exemption, that price gap drops to a bit over $20,000. (That's assuming the business continues to pay FBT on its combustion-engine work vehicles, which isn't always the case).
But that gap was still too wide for fleet managers, said Diane Kraal, a tax expert from Monash University and another co-author of the report.
"Fleet managers are very rational people that look at the total cost of ownership of fleet cars," she said.
Total cost of ownership includes the savings on fuel and servicing over the period of ownership, tax deductions, and the resale price.
Dr Kraal and her colleagues calculated savings on fuel and servicing added up to about $3,936 over three years, based on average use.
Again, the price gap was still too wide, she said.
"That's why we need changes to income taxes."
That is, changes to the rules around income tax deductions.
If the business could claim the full cost of the EV as a tax deduction (known as "instant asset write-off"), it would save about $11,000 over three years.
This, combined with the EV having a higher resale value than the ICEV, narrowed the price gap significantly.
Finally, with the addition of purchase incentives from various states and territories, either as subsidies or rebates on registration, the price gap vanished.
In this scenario, for instance, the incentives in Victoria include a $3,000 subsidy for the purchase of an EV.
"So then the cost gap is reduced significantly," Dr Kraal said.
"That brings us close to parity.
"It’s basically showing you there has to be a combination of policy to reduce the cost gap."
Do what the Norwegians did?
In their analysis, the researchers used the tax concessions offered in countries like Norway and Germany, where the EV uptake has far outstripped Australia's.
In Norway, EVs account for 85 per cent of passenger vehicle registrations.
In Australia, EVs make up about 0.12 per cent of the light vehicle fleet.
And though EV sales are growing faster than ever, most of those sales are Teslas, which tend to be more expensive, Dr Mortimore said.
"If you look at the uptake of EVs in 2021, it's gone up from 0.7 per cent to 2 per cent, but 1.4 per cent of that is Teslas.
That is, the people who are buying EVs are generally those who are not so concerned about price.
"Norway, the UK, Netherlands, Germany all used tax policy to close that gap between petrol and electric cars and drive EV uptake," Dr Mortimore said.
In 2001, Norway made EV sales exempt from its equivalent of the GST (which is higher than ours, at 25 per cent).
EVs have also been exempt from toll charges, road taxes and import duties.
"When they removed [the tax equivalent to our GST], that really drove the uptake of EVs," Dr Mortimore said.
Europeans countries have also focused on boosting EV sales to business fleets, knowing this increased the supply of second-hand EVs.
Fleet cars bought new are generally re-sold within three to four years at a hefty discount, Dr Mortimore said.
"This addresses the equity issue."
Would this make ICEVs more expensive?
The reforms outlined above wouldn't make ICEVs more expensive, but the researchers had some further proposals they described as "contentious".
Specifically, they proposed ICEV single and dual-cab utes, which are conditionally exempt from FBT, be subject to FBT "in all private use circumstances".
The current exemption was the reason the top-two selling vehicles in Australia were both utes, Dr Kraal said.
"Part of the reason tradespeople love them is they’re not subject to FBT.
This exemption does not distinguish between EVs and ICEVs, but because there are no EV utes on the market that are considered "fit for purpose", this amounted to a tax break for ICEVs, she said.
The researchers recommended scrapping the exemption for ICEV utes as soon as a suitable EV ute was available.
Another recommendation was to index the FBT rate to a vehicle's carbon emissions, so that more-polluting vehicles would be more expensive.
Dr Kraal acknowledged, "setting a tax rate based on CO2 emissions needs debate."
"The more emissions the car puts out, the higher the tax. That's been used very successfully in Europe."
What do the fleet managers say?
Fleet managers were waiting for the price of EVs to fall, said Mace Harley, executive director of the Australian Fleet Management Association (AFMA).
Some managers of large fleets would be willing to pay extra for EVs to meet goals of corporate social responsibility and government leadership, but the current price gap was too wide, he added.
"There's a myriad of issues [around purchase decisions], but cost is always at the forefront."
Of the 469,000 organisations in Australia with a fleet of more than two cars, only about 1,000 have more than 250 cars in a fleet, Mr Hartley said.
This means when the price falls low enough, business fleet EV uptake could increase very quickly.
Some fleet managers were finding themselves stuck between pressure from their bosses to run a lower emissions fleet, and the high price of EVs themselves, Mr Hartley said.
"I know of fleet managers working for public institutions, and that institution wants EVs but the fleet manager says it's too hard," he said.
"The entire ethos of managing a fleet is doing it for as safe as possible, and as cheap as possible.
"The thought of doing something that costs more, even though it's more sustainable, is a bridge too far for some of the older fleet managers."
What about the cost of chargers?
To make matters more complicated, there's also the issue of home chargers.
A 2020 AFMA survey found 47 per cent of fleet vehicles are home garaged, meaning an EV's total cost of ownership should include the home charger.
Under the current system, that home charger would typically attract FBT.
The RACE for 2030 report recommends tax exemptions for home chargers, for travel between home and work for home charging, and subsidies and rebates to employers for installation of EV charging infrastructure.
This was already happening in Europe, Dr Kraal said.
"They pay subsidies to employers with fleet vehicles to install home charging infrastructure for employees."
Mr Hartley said this was a good idea, but noted some employees wouldn't be able to have a home charger, as they were renting, living in an apartment, or otherwise had no off-street parking.
But these issues could be worked through, he said.
"A big chunk of the home-garaged population would have reasonable control over their charging infrastructure."
What about lost tax revenue?
The researchers didn't model the costs to government revenue of these proposed tax reforms, but said they should be mostly "self-balancing".
For instance, the loss of revenue as a result of making EVs exempt from FBT would be "balanced" by the removal of FBT exemptions for ICEVs.
As in Norway, where some EV tax concessions have been rolled back in line with EV uptake, the system could be tweaked over time, she added.
"They're only there until there is price parity," she said.
"But because there's not price parity [with ICEVs] at the moment, these changes need to be made."
Dr Kraal pointed out that Australia had recently committed to reducing its emissions by 43 per cent by 2030, which could not be achieved without a sharp uptake in EVs to take ICEVs off the roads.
"We keep saying EVs are going to get cheaper, but we have to do something now," she said.
