Novated Leases & the EV FBT Exemption Explained (2025-26)

Why novated leases are getting attention in 2025-26

If you’ve been offered a novated lease at work, or you’re eyeing an electric car, you’ve probably heard the numbers “stack up better” than they used to. The reason is the Electric Car Discount — a fringe benefits tax (FBT) exemption that, for eligible zero and low-emission vehicles, removes the single biggest cost that used to make novated leasing unattractive.

This guide explains, in plain English, what a novated lease is, how salary-packaging a car saves income tax, and how the EV FBT exemption works. It’s general information only, and the rules have real edges — so treat the numbers here as illustrations of the mechanism, not a quote for your situation.

You can model your own scenario with our free novated lease calculator. Always confirm the specifics with the ATO, your employer, and your lease financier before signing anything.

What is a novated lease?

A novated lease is a three-way arrangement between you, your employer, and a finance company (the lessor). You choose the car; the finance company owns it during the lease; and your employer agrees to take on the lease payments and deduct them from your pay.

The word “novated” refers to the novation deed — the document that transfers your obligation to make lease payments to your employer while you keep and use the car. Key features:

• The car is usually for your private use, not a work vehicle.
• Payments come out of your salary, typically a mix of pre-tax and post-tax dollars.
• If you leave your employer, the novation usually ends and the lease obligation reverts to you — you take the car (and the remaining debt) with you.
• At the end of the term there’s normally a residual value (a balloon amount set by ATO guidelines) that you pay, refinance, or settle by selling the car.

Because part of the cost comes out of your salary before income tax is calculated, a novated lease is a form of salary packaging (also called salary sacrifice).

How salary-packaging a car saves income tax

Normally you pay for a car with money that has already been taxed. With salary packaging, an agreed portion of the car’s running costs is deducted from your pre-tax income, which lowers your taxable income — and therefore the income tax you pay.

The catch, historically, is FBT. When your employer provides you a benefit like a car, the government applies FBT so the arrangement isn’t just a tax dodge. To manage FBT on cars, most novated leases use the Employee Contribution Method (ECM): you pay part of the cost from post-tax salary to reduce or cancel the taxable value of the fringe benefit. This is why novated lease quotes show both a pre-tax and a post-tax component.

For a conventional petrol or diesel car the result is usually a modest saving — the pre-tax benefit is partly clawed back by FBT and the post-tax contribution. This is exactly the part the EV exemption changes.

The Electric Car Discount: FBT exemption for eligible EVs

Under the Electric Car Discount, providing an eligible electric car through a novated lease can be exempt from FBT. Removing FBT removes the need for a large post-tax employee contribution, so far more of the car’s cost can be packaged from pre-tax income. For a higher-income employee, that can be a meaningful saving over the life of the lease.

The exemption isn’t automatic for every EV. A car generally needs to meet all of these conditions:

Which vehicles qualify

• Battery electric vehicles (BEVs) — fully electric, no petrol engine.
• Hydrogen fuel-cell electric vehicles (FCEVs).
• Plug-in hybrid electric vehicles (PHEVs) — but only where the commitment to provide the car began before 1 April 2025. From that date, PHEVs are no longer treated as zero or low-emission vehicles for this exemption. If you had an eligible arrangement locked in before then and it continues without a new commitment, transitional treatment may apply — check the current ATO guidance for your exact dates.

Conventional hybrids (that you can’t plug in) and petrol/diesel cars do not qualify.

The car must be under the luxury car tax (fuel-efficient) threshold

The car must never have been priced above the luxury car tax (LCT) threshold for fuel-efficient vehicles at the time of its first retail sale. For 2025-26 that threshold is $91,387. If the car’s value exceeded that threshold when it was first sold (even by a previous owner), it is generally locked out of the exemption — a used EV can be caught by this if its original retail price was above the cap.

It must be a car, first used on or after 1 July 2022

The exemption applies to cars (designed to carry a load under one tonne and fewer than nine passengers) that were first held and used on or after 1 July 2022. An EV you already owned before that date won’t newly qualify just because you package it now.

Comparison: what actually qualifies

Vehicle type	Eligible for FBT exemption?	Notes
Battery electric (BEV)	Generally yes	Must be under the LCT fuel-efficient threshold at first retail sale
Hydrogen fuel-cell (FCEV)	Generally yes	Same value and timing tests apply
Plug-in hybrid (PHEV)	Only if commitment began before 1 April 2025	No longer treated as low-emission from that date
Conventional (non-plug-in) hybrid	No	Not a zero/low-emission vehicle for this measure
Petrol / diesel	No	Standard FBT rules apply

This table summarises the mechanism at a high level. Confirm current eligibility, thresholds and transitional rules directly with the ATO.

The catch most people miss: reportable fringe benefits

Here’s the part that surprises people. Even when the FBT payable is nil because the car is exempt, the benefit can still generate a reportable fringe benefits amount (RFBA) that appears on your income statement.

The RFBA is not counted as taxable income, so it doesn’t increase your income tax directly. But it is used in a range of income-tested measures, which can include the Medicare levy surcharge, private health insurance rebate tiers, some family assistance and child support calculations, and certain repayment thresholds (for example, study/training loan repayments).

In other words, an exempt EV can still nudge some of these tests. Whether it affects you depends on your income and circumstances — so ask your employer or accountant to show you the estimated RFBA and which measures apply to your household before you sign.

A worked Australian example (illustrative)

Meet Priya, on a salary of around $120,000, whose employer offers novated leasing through a provider. She’s comparing an eligible battery EV priced under the $91,387 LCT fuel-efficient threshold against a similar petrol car.

• With the petrol car, FBT applies. Her lease quote uses the Employee Contribution Method, so a chunk of the cost is paid from post-tax salary. Her net saving versus buying the car outright with post-tax cash is real but modest.
• With the eligible EV, the car is FBT-exempt. There’s no need for the large post-tax contribution, so almost all of the lease and running costs come from pre-tax salary. Because she’s in a higher marginal bracket, packaging those costs pre-tax reduces her taxable income more, and her net cost of running the EV drops noticeably compared with the petrol equivalent.
• But her income statement will show a reportable fringe benefits amount. Priya checks whether that RFBA pushes her over any private health rebate tier or affects her study loan repayment rate before she commits.

The exact figures depend on the car’s price, the lease term, the residual, running costs, and provider fees — which is why the sensible next step is to run your numbers, not rely on a generic example. Our novated lease calculator is built for exactly this comparison.

Running-cost bundling

One reason novated leases feel convenient is that most providers bundle running costs into the single deducted payment. Depending on the package, that can include finance repayments, registration and compulsory third-party insurance, comprehensive insurance, servicing, tyres and maintenance, and fuel — or, for an EV, electricity/charging (some providers offer a home-charging component).

For an exempt EV, bundling these into pre-tax salary is where a lot of the benefit comes from, because the running costs are packaged efficiently too. The trade-off is that you’re paying the provider to administer all of this, and packages vary — so compare the total cost including fees, not just the headline “tax saving.”

You need an employer who offers novated leasing

None of this works without an employer willing to enter the novation. Some points to check:

• Not every employer offers it. Salary packaging a car is common in government, health and larger corporates, and less so in small businesses.
• Your employer chooses the provider(s) and packaging rules — you generally can’t bring your own lessor.
• If you change jobs, the novation typically ends and the lease reverts to you personally: you keep paying, but lose the pre-tax treatment unless a new employer novates it.
• Public benevolent institutions and some not-for-profits have their own FBT concessions that interact with all of this differently.

Risks and when a novated lease may not suit you

A novated lease is a finance product with a car attached. It isn’t automatically a good deal. It may not suit you if:

• You might leave your job soon. The obligation follows you, not the employer.
• You drive very little. Much of the value depends on packaging running costs; low mileage weakens the case.
• You want an EV over the LCT threshold. A more expensive EV can miss the exemption entirely, which changes the maths dramatically.
• You’d otherwise pay cash and avoid finance costs, fees and interest built into the lease.
• The residual worries you. At the end of the term you owe the balloon amount; if the car’s resale value has fallen below it, you’re exposed.
• Income-tested benefits matter to you. The RFBA could reduce a rebate or increase a repayment in ways that erode the saving.
• Provider fees are high. Administration and packaging fees vary widely between providers.

The exemption genuinely tilts the numbers toward EVs for many salaried employees — but “many” is not “everyone.” The only way to know is to compare your specific car, salary, term and running costs.

Next steps before you commit

1. Confirm the car is eligible — BEV or FCEV (or a pre-1 April 2025 PHEV commitment), first used on/after 1 July 2022, and under the $91,387 LCT fuel-efficient threshold at first retail sale.
2. Check your employer offers novated leasing and which provider(s) they use.
3. Get a full quote showing pre-tax and post-tax components, the residual, all bundled running costs, and every fee.
4. Ask about the reportable fringe benefits amount and which income-tested measures it could touch for your household.
5. Model it with our novated lease calculator and compare against buying outright or a conventional car.
6. Verify with the ATO and a professional. Thresholds, eligibility and transitional rules change — the ATO website and a licensed accountant or financial adviser are the authoritative sources for your circumstances.

This is general information only, not financial advice.