EV tax breaks to be slashed from April next year

A generous tax break for high-end electric vehicles will be wound back from next year as the federal government swings the axe on cost blowouts ahead of a pivotal budget to be handed down next week.

The move is expected to save the government $1.7 billion over five years, while electric vehicle buyers will pay thousands more on their novated leases for the most expensive models.

The electric vehicle fringe benefits tax waiver – currently in place for vehicles purchased for under $91,387 through a novated lease – will be phased out over three years and replaced with a 25 per cent discount on the tax for cars under that threshold.

Treasurer Jim Chalmers has made savings a key priority for the budget as the global oil shock caused by the US-Israeli war on Iran has rattled global markets, pushed up inflation domestically and forced the government into expensive cost-of-living relief such as the fuel excise cut.

The cost of the electric vehicle tax break, designed to steer consumers away from petrol cars, has blown out as high-income earners have rushed to sign up for cheap deals that lowered their tax.

Energy Minister Chris Bowen said the swift uptake of the incentive and the proliferation of more affordable models in recent years meant the discount should be more targeted.

“Four years ago, there was no EV available for under $40,000 – now there’s about 10. That’s enabled us to better calibrate the tax exemption going forward, to focus on those more affordable models,” Bowen told ABC radio on Tuesday.

He said the staged phase-out of the tax break would allow Australians to plan to make the purchases they wanted to.

In the first phase, the full exemption will be available until March next year.

Then, from April 2027, vehicles between $75,000 and the luxury car threshold of $91,387 will get a 25 per cent discount on their fringe benefit tax.

Finally, from April 2029, the exemption will be reduced to a permanent 25 per cent discount for all vehicles below the luxury car tax threshold.

Existing leases will not be affected, and eligible vehicles will remain exempt from import tariffs.

Opposition Leader Angus Taylor attacked the move, saying the tax break should be scrapped straight away rather than phased out.

“It should be wound back faster, immediately,” he said at a press conference on Tuesday.

“It’s not means tested. It’s some of the wealthiest Australians … getting a handout from this government. That’s just a sign of how they’ve got their priorities so wrong.”

Before the war in the Middle East, this masthead reported that the budget razor gang led by Chalmers was pushing to significantly pare back the tax concession, which had blown out by 15 times its original forecast size.

However, the war changed the government’s thinking. Bowen and other members of the government pushed to retain the measure for some time longer, to keep powering EV uptake which was being accelerated by the oil shock.

The government landed on a slower phase-out than it originally planned.

The cost of the policy blew out from $1.9 billion to $5.1 billion between 2022-23 and 2026-27. It was projected to get even more expensive – $2.8 billion in the 2028-29 financial year.

Bowen said the changes would save the budget $1.7 billion over the forward estimates, and the phase-out, which would benefit cheaper models for longer, would encourage manufacturers to offer more affordable choices to the Australian market.

Asked why the tax would not be scrapped altogether given the pressures on the budget, Bowen told the ABC that EVs provided a “great public and social benefit”.

“Obviously, there’s the carbon impact, but there’s also respiratory health impacts,” he said.

Another policy in this space, a plan for a road vehicle user charge that would force EV drivers to fund road maintenance, will not be included in the budget.

Accelerating EV adoption is essential to the Albanese government’s target to cut national greenhouse gas emissions by 62 to 70 per cent on 2005 levels by 2035.

Last September, the Climate Change Authority said even the lower end of the target could only be achieved if half the light vehicles – cars, motorcycles, SUVs, vans and utes – sold in the next decade were electric.

EVs made up just over 10 per cent of the light vehicle market at the time, but this figure jumped to 16.4 per cent in April 2026, as the war on Iran sent fuel costs skyrocketing.

Francis Vierboom, chief executive of electrification advocacy group Rewiring Australia, said the decision showed the government recognised that EV incentives still had an important role to play.

“Even in a record-setting month, during a national fuel crisis, when filling up an EV costs a small fraction of the petrol equivalent, six in seven new car buyers still chose a petrol car,” Vierboom said.

“Every new petrol car sold locks in another two decades of oil dependency, higher running costs and emissions.”