The massive change coming for electric vehicle owners in Australia this year

Rolling back the electric vehicle tax exemption will save taxpayers $1.7 billion over four years, the treasurer says.

The government’s economic advisory body has rejected a tax break for electric vehicles because it is expensive and inefficient and will be retained in the budget, albeit in a reduced format to rein in costs.

The incentive, which allows employers to pay fringe taxes on EVs under $91,387 purchased through a renewed lease agreement, will convert to a 25 percent rebate, Treasurer Jim Chalmers and Energy Minister Chris Bowen announced Tuesday.

The cost of the tax credit to the federal budget has risen in recent years from an initial $90 million to $1.35 billion in 2025/26 and is expected to rise to $3 billion by 2028-29.

But a phased tightening of the incentive will save taxpayers $1.7 billion over four years in the 2026/2027 budget.

As of April 2027, the full tax credit will only apply to electric vehicles costing $75,000 or less, while vehicles above $75,000 but below the luxury tax threshold will only receive a 25 percent discount.

From April 2027, all electric cars below the luxury tax threshold will only receive the 25 percent discount.

The luxury tax threshold is $91,387, but increases every year with inflation.

The electric vehicle tax credit will be rolled back in 2027, saving $1.7 billion

EVs that qualify for the discount remain exempt from import tariffs.

The changes will ensure fairer and more financially sustainable tax treatment for electric vehicles, Chalmers and Bowen said in a joint statement.

The program’s growth has coincided with a rapid uptake of electric vehicles, which has accelerated since conflict in the Middle East sent oil prices soaring.

Electric vehicles accounted for 14.6 percent of all new car sales in March, up from 7.5 percent in March 2025, according to figures from the Federal Chamber of Automotive Industries.

While the plan helped encourage the use of electric vehicles, the Productivity Commission found that this incentive was the most expensive of the government’s current policies to reduce carbon emissions, at $987 to $20,084 per tonne of CO2 reduced.

Lachlan Vass and Amy Tramontozzi, researchers at the independent think tank e61 Institute, identified two major flaws in the plan.

The incentive increases with the cost of the vehicle, encouraging people to buy more expensive electric vehicles.

Second, the subsidy provided increases as the buyer’s income increases, disproportionately benefiting high income earners.

Chris Bowen (pictured) announced that electric cars under $75,000 would still be sold at a discount

Reprioritizing the plan’s resources to expand EV charging infrastructure would be more effective, Mr. Vass and Ms. Tramontozzi argued.

The changes come as Labor tries to rein in a forecast $36.8 billion deficit in the 2025/2026 budget, due to be announced on May 12.

The government will save more money than it spends and adjust revenues upward, he said.

The decision has been welcomed by clean energy advocates, who say incentives remain crucial to accelerating Australia’s transition to electric vehicles.

Rewiring Australia welcomed the federal government’s decision to maintain the Fringe Benefits Tax (FBT) exemption for electric vehicles, as the country remains warned it is still a long way from mass EV adoption

Rewiring Australia CEO Francis Vierboom said the decision showed the government recognized that EV incentives still had an important role to play.

“This is good news, but the mission is not yet accomplished,” Mr. Vierboom said.

‘Even in a record month, six in seven new car buyers still opted for a petrol car. That tells us that we are still at the foot of the transition to electric.

“The exemption has encouraged more Australians to drive electric cars, but Australia still has a long way to go before it can achieve mass adoption.”