A 'silver bullet' that could improve Australia's lagging uptake of electric vehicles

Australia’s uptake of electric vehicles (EV) is lagging, but tax experts say they have a “silver bullet solution” that will boost sales and help increase the supply of cheaper used EVs.

Key points:

• Business fleets account for 40 percent of light vehicle sales, but almost no electric vehicles
• Federal tax law acts as a disincentive, experts say
• Changing this could quickly drive EV uptake and provide consumers with a cheaper supply of used EVs

The Commonwealth-funded climate-focused research center 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 (ICEV) vehicles.

Prepared by tax experts from the universities of Monash and Griffith, the report describes a sad situation: business fleets (which include government and corporate vehicles) account for 40 percent of light vehicle sales, but almost no electric vehicles.

Of the more than 600,000 passenger vehicles and light SUVs sold to business fleets in 2020, only 488 were EVs.

The main reason for this is federal tax laws, said Anna Mortimer, a tax expert at Griffith University and a co-author of the report.

“The current tax regime is a disincentive to buying EVs and that explains why there are only 488 vehicles, which is pretty sad.”

But this failure is also an opportunity, he added.

Fleet managers are responsible for purchasing vehicles in bulk. Providing tax incentives to purchase EVs will rapidly increase the total uptake of EVs.

“Business fleets are the silver bullet solution for EV absorption.”

Could tax reforms make EVs as cheap as ICEVs?

Last week, the federal government made EVs (priced below the luxury car threshold) exempt from the allowance tax (FBT) and import tariffs.

These reforms are welcome, but not sufficient, says Dr Mortimer.

To illustrate the price gap between the equivalent EV and ICEV, the report uses the example of the Hyundai Kona EV, which $28,900 more expensive than the ICEV version.

Among EVs, the Kona is favored by business fleets for its longer reach.(Provided: Hyundai)

With the exception of last week’s new FBT, that price gap has dropped to a little over $20,000. (That’s assuming the business has to pay FBT on its work vehicle, which isn’t always the case).

But the gap is still too wide for fleet managers, said Diane Kraal, a tax expert at Monash University and a co-author of the report.

“The fleet manager is a very rational person who looks at the total cost of owning a fleet car,” he said.

“They say EVs are not cost-competitive.”

Total cost of ownership includes fuel and service savings over the period of ownership, tax deductions and resale price.

Dr Kraal and his colleagues calculated fuel and service savings added up to about $3,936 over three years, based on average usage.

Once again, the price gap is still too wide, he said.

“That’s why we need changes to the income tax.”

That is, changes to the rules surrounding income tax cuts.

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 EVs having a higher resale value than ICEVs, narrows the price gap significantly.

There are approximately 4 million business fleet vehicles in Australia.(Getty: Jackal Pan)

Finally, with additional state and territory buying incentives, either as subsidies or registration rebates, the price gap disappears.

In this scenario, for example, incentives in Victoria are equivalent to about $2,522 over three years.

“So the cost gap is significantly reduced,” says Dr Kraal.

“That brings us closer to parity.

“It basically shows you that there has to be a combination of policies to reduce the cost gap.”

Do what Norwegians do?

In their analysis, the researchers used tax concessions offered in countries such as Norway and Germany, where EV uptake far outstrips Australia.

In Norway, EVs account for 85 percent of passenger vehicle registrations.

In Australia, EVs make up about 0.12 per cent of the light vehicle fleet.

And although EV sales are growing faster than ever, the bulk of those sales are Teslas, which tend to be more expensive, said Dr Mortimer.

“If you look at EV uptake in 2021, it’s up from 0.7 percent to 2 percent, but 1.4 percent of that will be Teslas.

“The people who buy EVs are the ones who can afford the high-end.”

The Tesla Model S has a price tag of over $150,000. The new Model 3 is about half that.(Provided: Tesla)

That is, people who buy EVs are generally those who don’t really care about price.

“Norway, UK, Netherlands, Germany are all using tax policies to close the gap between petrol and electric cars and encourage EV uptake,” said Dr Mortimer.

In 2001, Norway made EV sales exempt from the equivalent of GST (which is higher than ours, by 25 percent).

EVs have also been exempted from toll fees, road taxes and import duties.

“When they delete [the tax equivalent to our GST]which really promotes EV absorption,” says Dr Mortimer.

European countries are also focused on increasing EV sales to business fleets, knowing this increases the supply of used EVs.

Fleet cars purchased new are generally resold within three to four years at heavy discounts, says Dr Mortimer.

“It addresses equity issues.”

Will this make ICEV more expensive?

The reforms outlined above won’t make ICEV more expensive, but the researchers have some further proposals that they describe as “debate”.

In particular, they propose single and double cabin ICEVs, which are conditionally excluded from FBT, subject to FBT “under all circumstances of personal use”.

The current exception is the reason Australia’s two best-selling vehicles are equally ute, said Dr Kraal.

“Part of the reason traders love them is that they are not subject to FBT.

“That’s the reason why there are so many second-hand items on the street.”

The Toyota Hilux ute is Australia’s best-selling vehicle.(AP)

This exemption doesn’t differentiate between EVs and ICEVs, but because no EV on the market is deemed “fit for purpose”, it is a tax deduction for ICEVs, he said.

The investigators recommend removing exceptions for the ICEV route as soon as a suitable EV route becomes available.

Another recommendation is to index the FBT level for vehicle carbon emissions, so that more polluting vehicles will cost more.

Dr Kraal admits, “setting a tax rate based on CO2 emissions is debatable.”

“The more emissions a car puts out, the higher the tax. It has been used very successfully in Europe.”

What did the fleet manager say?

Fleet managers are waiting for EV prices to drop, said Mace Harley, executive director of the Australian Fleet Management Association (AFMA).

Some large fleet managers would be willing to pay extra for EVs to meet corporate social responsibility goals and government leadership, but the current price gap is too wide, he added.

“There are a myriad of problems [around purchase decisions]but cost always comes first.”

Of the 469,000 organizations in Australia with fleets of more than two cars, only about 1,000 have more than 250 cars in a fleet, Hartley said.

“Those relatively few fleet managers control millions of cars.”

More than half of the cars in the business fleet are owned by only 1,000 organizations.(ABC News: Andrew O’Connor)

This means when prices drop low enough, business fleet EV uptake can increase very quickly.

Some fleet managers find themselves caught between pressure from their bosses to run lower emission fleets, and the high prices of the EVs themselves, Hartley said.

“I know a fleet manager who works for a public agency, and the agency wants an EV but the fleet manager says it’s too difficult,” he said.

“The entire ethos of fleet management is carried out in the safest possible way, and as cheaply as possible.

“The thought of doing something more expensive, albeit more sustainable, is a bridge too far for some older fleet managers.”

How about the charge of the charger?

To make matters more complicated, there is also the issue of home chargers.

A 2020 AFMA survey found 47 percent of fleet vehicles are home garages, meaning the total cost of owning an EV should include a home charger.

Under the current system, that home charger would normally draw the FBT.

The RACE report for 2030 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.

EV home chargers can cost anywhere from $1,000 – $2,500.(ABC News: Brendan Esposito)

This is already happening in Europe, says Dr Kraal.

“They pay subsidies to employers with fleet vehicles to install housing infrastructure for employees.”

Mr Hartley said it was a good idea, but noted some employees would not be able to have a home charger, because they rent, live in apartments, or don’t have off-street parking.

But this problem can be solved, he said.

“A large proportion of the home garage population will have reasonable control over their charging infrastructure.”

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume.

Why electric vehicles could soon be cheaper(Emilia Terzon)

What about lost tax receipts?

The researchers did not model the costs for government revenues from these tax reforms, but said they had to largely “balance”.

For example, the loss of revenue as a result of the EV exclusion from the FBT would be “balanced” by the removal of the FBT exemption for the ICEV.

“ICEV has got going. It’s time for EVs – it’s their turn, they’re not benefiting at all,” said Dr Mortimer.

As in Norway, where some EV tax concessions have been canceled in line with EV uptake, the system could be changed from time to time, he added.

“They only exist until there is price parity,” he said.

But since there is no price parity [with ICEVs] right now, these changes need to be made.”

Dr Kraal points out that Australia has recently committed to reducing its emissions by 43 per cent by 2030, which cannot be achieved without the keen use of EVs to get ICEVs off the road.

“We keep saying EVs are going to get cheaper, but we have to do something now,” he said.

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Posted 6 hours ago6 hours agoWed Jul 6 2022 at 6:54am, updated 6 hours ago6 hours agoWed Jul 6 2022 at 6:54am

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