Novated leases and FBT, explained
A novated lease lets your employer pay for a car from your salary, partly before tax. For electric cars it is one of the biggest tax breaks available to employees. Here is how it works, and what it really costs.
How a novated lease works
You lease a car from a finance company, and your employer agrees to make the lease payments, plus running costs such as fuel or charging, insurance, registration and servicing, out of your salary. Because the car is a benefit your employer provides, fringe benefits tax (FBT) can apply. How much of the cost comes out before tax depends on whether the car is exempt from FBT.
The finance company also claims the GST on the car’s price, so you finance a lower amount than you would buying it yourself.
Electric cars: no FBT
Battery electric cars priced under the luxury car tax threshold for fuel-efficient cars ($91,661 in 2026–27) are exempt from FBT. So the whole cost of the lease and running costs can come out of your pre-tax salary.
On a $100,000 salary, a $55,000 electric car over 3 years costs $1,089.35 a month in lease payments, or $13,072.20 a year. Paid entirely before tax, it reduces take-home pay by only $8,080.94 a year: $4,991.26 less than paying the same costs out of your take-home pay.
The exempt benefit is still reported on your income statement as a reportable fringe benefit, $20,754 a year in this example. It doesn’t change your tax, but it counts for HECS-HELP repayments, the Medicare levy surcharge, and family and child care payment income tests.
Petrol cars: the employee contribution method
For a petrol or hybrid car, FBT applies at 47% on the car’s taxable value, which is 20% of its cost each year under the statutory formula. To avoid paying FBT, you pay that taxable value from your after-tax pay instead: $11,000 a year on a $55,000 car. Only the rest, $1,883.82, comes out before tax.
The same lease then reduces take-home pay by $12,280.94 a year, saving just $791.26 against paying the costs after tax. Most of the benefit of novated leasing is for electric cars.
Before you sign
- Compare the interest rate, fees and the price of the car with buying it outright or with a normal car loan.
- Check what the running costs budget includes, and what happens to unspent amounts.
- Plan for the residual payment at the end of the lease.
- Ask about early termination costs if you leave your job or want out of the lease.
These examples leave out running costs, which are also paid before tax and increase the saving. Sources: ATO, Electric cars exemption; Taxable value of a car fringe benefit; Fringe benefits tax – rates and thresholds.
Frequently asked questions
Are plug-in hybrids FBT-free?
Not any more. Plug-in hybrids stopped qualifying for the electric car exemption from 1 April 2025, unless the car was already provided under a binding commitment made before then. Battery electric and hydrogen fuel cell cars still qualify if they are under the luxury car tax threshold for fuel-efficient cars.
What happens at the end of the lease?
You pay the residual, a balloon payment set by ATO minimum percentages of the car’s price. You can pay it and keep the car, refinance it into a new lease, or sell the car and use the proceeds to pay it. On a $55,000 car over 3 years, the residual is $23,440.
What if I change jobs?
The lease is in your name; your employer only makes the payments from your salary. If you leave, you can ask your new employer to take over the arrangement, or make the payments yourself, after tax.
General information based on ATO rules and rates, not tax advice. Figures are worked out by our calculators; see how we calculate.