Novated leases and the EV FBT exemption: how Australians save thousands

Salary packaging an electric vehicle can save thousands in tax, but high interest rates and balloon payments can erode those gains. Here is how the maths really works.

By ECTD Editorial · Published 2026-06-11 · Updated 2026-06-11

With the cost of living squeezing household budgets and new car prices remaining elevated, Australian employees are looking for ways to make their next vehicle more affordable. Salary packaging a novated lease has emerged as a popular strategy, particularly for electric vehicles (EVs), due to a specific tax exemption that can significantly lower the cost of ownership. However, the structure is complex, containing fees and risks that can quickly outweigh the benefits if not understood correctly. This guide breaks down the mechanics, the tax implications, and the potential financial pitfalls.

How a novated lease actually works

A novated lease is a three-way agreement between you, your employer, and a finance company. Essentially, you lease a car of your choice, and your employer agrees to take on the lease payments by deducting them from your salary before tax is applied. This arrangement is known as salary packaging or salary sacrificing.

Because the lease payments are deducted from your gross (pre-tax) salary, your taxable income is reduced. This means you pay less income tax. In addition to the lease repayments, the agreement usually allows you to package running costs—such as fuel, electricity, insurance, registration, and servicing—using the same pre-tax method.

There are two main components to the payments you make. The first is the lease rental, which covers the cost of the vehicle and interest. The second is the operating expense account, used to pay for the car's day-to-day running costs. Under the current rules for electric vehicles, the Fringe Benefits Tax (FBT) exemption applies to the car itself, but you must still ensure the running costs are managed correctly to maintain the tax efficiency.

The electric vehicle FBT exemption

The primary driver for the surge in EV leasing is the federal government's exemption from Fringe Benefits Tax for eligible electric cars. Introduced in the 2022-23 budget, this policy removes the tax that usually applies to cars provided by employers for private use. Previously, FBT could add a significant cost to novated leases, requiring complex calculations to minimise the tax payable.

For a car to be exempt, it must be a zero or low-emission vehicle. This definition includes battery electric vehicles (BEVs) and hydrogen fuel cell vehicles. To qualify, the vehicle must be the first time the car is both held and used on or after 1 July 2022. The car must also have a luxury car tax (LCT) value below the relevant threshold for fuel-efficient vehicles.

Eligibility criteria: The exemption applies to the car's taxable value. If the vehicle price exceeds the LCT threshold for fuel-efficient cars ($91,387 for the 2024-25 financial year), the exemption does not apply to the portion above that limit.

The PHEV phase-out (April 2025 deadline)

A critical distinction exists for Plug-in Hybrid Electric Vehicles (PHEVs). While these vehicles were initially included in the FBT exemption, the government has implemented a phase-out to encourage the transition to fully electric technologies. This creates a strict deadline for consumers considering a hybrid vehicle.

Under the current legislation, PHEVs will only remain eligible for the FBT exemption if the vehicle is purchased and first leased or used before 1 April 2025. Any PHEV acquired after this date will be treated as a standard internal combustion engine vehicle for tax purposes, meaning FBT will apply, reducing the potential savings.

PHEVs purchased before 1 April 2025 retain the exemption indefinitely.
PHEVs purchased on or after 1 April 2025 are subject to standard FBT rates.
This deadline applies to the first use or lease of the car, not just the order date.

Luxury Car Tax thresholds for EVs

While the FBT exemption makes expensive cars more attainable, the Luxury Car Tax (LCT) still acts as a barrier for high-end EVs. The LCT is a tax on cars with a value above a certain threshold. However, the Australian Taxation Office (ATO) sets a higher threshold for fuel-efficient vehicles, which benefits most EVs.

For the 2024-25 financial year, the LCT threshold for fuel-efficient vehicles is set at $91,387. These thresholds are indexed annually by the Australian Taxation Office (ATO), so future limits will likely adjust for inflation. This is significantly higher than the threshold for standard petrol and diesel vehicles. If the price of your EV exceeds this limit, you will pay LCT on the amount above the threshold. Importantly, the FBT exemption for EVs is lost on the portion of the car's value that exceeds this fuel-efficient LCT threshold.

Worked examples: How much can you actually save?

To understand the financial impact, it helps to look at realistic scenarios. The savings depend on your marginal tax rate and the specifics of the lease. The following examples assume a 12-month lease term for a battery electric vehicle valued at $50,000, with an interest rate included in the lease rental.

Scenario A: $90,000 salary

Consider an employee earning $90,000 per year. Without a novated lease, their annual tax payable to the ATO would be approximately $17,788 (excluding Medicare Levy). By entering into a novated lease for an EV with annual payments of $15,000 taken from pre-tax salary, their taxable income reduces to $75,000.

The tax on $75,000 is approximately $13,288. The difference in tax payable is $4,500. In this simplified scenario, the employee has saved $4,500 in income tax. However, they have also spent $15,000 on the car. The net cash flow cost for the lease payments is $15,000 minus the tax saved ($4,500), which equals $10,500. This represents a significant discount on the running costs and finance of the vehicle, though it does not account for the residual value (balloon payment) required to own the car at the end of the term.

Scenario B: $150,000 salary

For a higher earner on $150,000, the savings are more pronounced due to the higher marginal tax rate. Without packaging, their tax bill is roughly $36,838. If they package the same $15,000 vehicle lease, their taxable income drops to $135,000. The tax on $135,000 is approximately $31,288.

The tax saving here is $5,550. The effective cost of the $15,000 lease is reduced to $9,450. This demonstrates why novated leasing is often marketed more aggressively to high-income earners; the value of the tax deduction increases as the marginal tax rate increases.

GST benefits: Employers can claim GST credits on the purchase price of the car and running costs. This GST saving is typically passed on to you in the form of lower lease payments, effectively making the car purchase price GST-free.

The hidden costs and interest rate traps

While the tax savings are real, the novated leasing industry is not a charity. Lease providers build their margins into the product, often in ways that are not immediately obvious to the consumer. The most significant trap is the interest rate applied to the lease.

The interest rate (or 'effective interest rate') in a novated lease is often higher than what a savvy borrower could secure through a standard car loan from a bank or credit union. It is common for novated lease interest rates to sit between 7% and 10%, or even higher, whereas competitive secured car loans might sit between 5% and 7%. You must calculate whether your tax savings outweigh the extra interest you will pay over the life of the lease.

Establishment fees: Many providers charge an upfront fee to set up the lease, which can be hundreds of dollars.
Monthly administration fees: A fixed fee (often $10 to $30) is charged every month to manage the account.
Insurance commissions: Some providers require you to use their insurance partners, which may be more expensive than policies you could find on the open market.
Residual value risk: At the end of the lease, you must pay a 'residual value' or balloon payment to own the car outright.

Balloon payments and the end of the lease

A novated lease is typically structured over a term of one to five years. To keep the monthly payments lower, the lease is calculated with a residual value (balloon payment) at the end. The ATO sets minimum residual value percentages based on the lease term. For a four-year lease, the minimum residual is 37.5%.

This means if you lease a $50,000 car over four years, you will pay monthly instalments that cover roughly 62.5% of the value, plus interest. At the end of the four years, you must pay the remaining 37.5% (approximately $18,750) to the finance company to take ownership of the car.

The risk here is market fluctuation. If the value of the car drops significantly—perhaps due to a flood of second-hand EVs entering the market—the car might be worth less than the balloon payment. If you want to sell the car at the end of the lease, you must pay the balloon payment first. If the sale price does not cover the balloon, you are out of pocket. Alternatively, you can refinance the balloon amount, but this means taking on new debt and potentially paying interest for several more years.

What happens if you change jobs?

A common misconception is that the car belongs to the employer. The lease is actually in your name, but the payment obligation is novated (transferred) to your employer. If you leave your job—whether by choice or redundancy—the novation agreement ends.

When this happens, the liability for the lease payments reverts entirely to you. You have a few options. You can ask your new employer to take over the novated lease, though they are not legally obliged to do so. If they refuse, you must continue making the payments from your post-tax income, which effectively negates the tax benefits and makes the lease more expensive. Alternatively, you may need to pay out the lease early, which can incur break fees and penalties.

Redundancy risk: If you lose your job while under a novated lease, you are still contractually bound to pay the lease. Ensure you have an emergency fund or income protection insurance to cover the payments during a period of unemployment.

What to do this week

A novated lease can be a powerful tool for reducing the cost of running an electric vehicle, but it is not a magic bullet. You must approach it with the same scrutiny you would apply to any financial product. Do not simply accept the default offer from your employer's preferred provider.

Compare the novated lease interest rate against a standard car loan from a major bank. If the difference is more than 2-3%, the tax savings might be eroded by interest costs.
Check the PHEV deadline immediately if you are considering a hybrid. You must secure the vehicle before 1 April 2025 to lock in the exemption.
Review the residual value requirements for your preferred lease term. Ensure you are comfortable with the lump sum you will owe at the end.
Ask for a breakdown of all fees, including establishment, monthly admin, and early termination fees.
Use an online novated lease calculator, but cross-check the figures with your own spreadsheet to verify the tax savings.

This information is general in nature and does not constitute personal financial advice. You should consider your own financial situation and seek independent advice before entering into a lease agreement. Tax laws are subject to change.

General information only — not personal financial, tax, legal or medical advice. Consider your own situation and consult a licensed professional before acting. Figures are current as at the date shown above.