How a novated lease works
A novated lease has three parties:
1. You (the employee) 2. Your employer 3. The lease finance company (e.g., Maxxia, Smartsalary, FleetPlus, RemServ)
The mechanics:
* You choose the car (must usually be under 4.5 tonnes GVM, used for private + business) * The lease company buys the car. You drive it. * Your employer pays the lease company directly from your pre-tax salary (reducing your taxable income). * Lease covers: monthly finance payment + all running costs (fuel, servicing, tyres, registration, insurance, roadside assistance) bundled into one fixed amount. * At the end of the lease (typically 1-5 years), you pay a "residual" amount (the ATO-set minimum value remaining) and the car is yours, OR you re-lease, OR you walk away.
Why salary packaging saves tax: by paying pre-tax, you avoid paying personal income tax on that portion of your salary. At a 39% marginal rate (37% + 2% Medicare), every $10,000 spent pre-tax saves $3,900 versus paying after-tax with $10,000 of net income.
Why it has historically been complicated: Fringe Benefits Tax (FBT) was designed to claw back this advantage. FBT is paid at 47% on the "taxable value" of benefits provided to employees. For cars, the taxable value is calculated either by statutory formula or operating cost method.
The Electric Car FBT Exemption (the game changer)
On 1 July 2022, the Albanese government legislated an FBT exemption for eligible electric vehicles provided via a novated lease. This was a transformational change.
What qualifies:
* Battery electric vehicles (BEVs) * Plug-in hybrid electric vehicles (PHEVs) - but ONLY until 1 April 2025; after that PHEVs lose the exemption * Hydrogen fuel-cell vehicles * First held and used on or after 1 July 2022 * Below the Luxury Car Tax (LCT) threshold for fuel-efficient vehicles ($89,332 in 2026)
What does not qualify:
* Mild hybrids (Toyota Camry Hybrid - no plug) * Pure ICE (petrol, diesel) * Used EVs purchased before 1 July 2022 * PHEVs first leased after 1 April 2025 * Vehicles over the LCT threshold for fuel-efficient cars
Effect of FBT exemption: zero FBT on the car benefit. All car costs are paid from pre-tax salary without any FBT add-back. This is the cleanest tax outcome possible.
2026 numbers for a typical EV novated lease ($80,000 Tesla Model Y, 5-year lease, $130K salary at 39% marginal):
* Annual cost paid by lease company (purchase amortization + all running costs): $18,500 * Pre-tax salary diverted: $18,500 * Tax saved by paying pre-tax: $18,500 × 39% = $7,215 reduction in income tax * Medicare Levy + LITO interactions: roughly $200 additional saving * FBT cost: $0 (EV exemption) * GST input tax credits to employer: $1,680 (typically passed to employee) * Total annual saving vs paying after-tax: ~$9,000-$10,000 in year 1, growing to ~$15K+ when factoring in fuel/maintenance savings of EV vs ICE
| Item | EV (Tesla Model Y) | ICE (Mazda CX-9) |
|---|---|---|
| Annual lease cost | $18,500 | $18,500 |
| Income tax saved (39%) | $7,215 | $7,215 |
| FBT cost | $0 (exempt) | ~$5,500 |
| Fuel/electricity (annual) | ~$600 included | ~$2,800 included |
| Net annual saving vs after-tax | $9,000-$15,000 | $1,000-$3,000 |
| Residual at year 5 | ~$25,000 | ~$25,000 |
| 5-year net out-of-pocket | ~$81,425 | ~$108,925 |
| Vehicle type | Exemption status |
|---|---|
| Pure Battery EV (BEV) | ✓ Exempt (indefinitely) |
| Plug-in Hybrid (PHEV) - leased before 1 Apr 2025 | ✓ Exempt (grandfathered) |
| Plug-in Hybrid (PHEV) - leased on/after 1 Apr 2025 | ✗ NOT exempt |
| Hydrogen fuel-cell | ✓ Exempt |
| Mild hybrid (no plug) | ✗ NOT exempt |
| Pure ICE petrol/diesel | ✗ NOT exempt |
| Over LCT threshold ($89,332 in 2026) | ✗ NOT exempt |
Non-EV novated leases: the math is much weaker
For a regular petrol or diesel car, FBT applies. The two methods:
Method 1: Statutory Formula
Taxable value = (Cost of car × 0.20) - employee contributions
The 20% factor is fixed regardless of business use. Employee contributions are post-tax amounts you put in to reduce the taxable value (a common trick called "Employee Contribution Method" or ECM).
Example: $80,000 ICE car, no ECM
* Taxable value: $80,000 × 0.20 = $16,000 * FBT: $16,000 × 1.8868 (gross-up) × 47% = $14,189 * Employer typically passes this cost back to employee via pre-tax salary reduction * Net result: most of the pre-tax saving is eaten by FBT
Method 1 with ECM: pay $16,000 of after-tax money in to reduce taxable value to zero. FBT becomes $0, but you used $16,000 of after-tax money which is the equivalent of $26,229 pre-tax at 39% marginal. Net saving: small.
Method 2: Operating Cost
For cars used heavily for business (high % business use), the operating cost method can be better. Requires logbook for 12 weeks every 5 years. Taxable value = total operating costs × (1 - business use %). For 80% business use, only 20% of operating costs become FBT-eligible.
Most personal-use cars cannot achieve high business %. Statutory formula dominates for typical commuter use.
Net 2026 numbers for an $80,000 ICE SUV, 5-year lease, $130K salary, 100% personal use:
* Annual pre-tax cost: $18,500 * Pre-tax salary diverted: $18,500 * Income tax saved: $7,215 * FBT cost (with ECM strategy): roughly $5,000-$8,000 (varies by lease company's admin) * Net annual saving vs paying after-tax: $1,000-$3,000
Compare to EV: the EV saves $9,000-$15,000/year vs the same after-tax car. The ICE saves $1,000-$3,000/year. The EV exemption is worth $6,000-$12,000/year for an otherwise-comparable car.
The total cost of ownership shift
EV vs ICE total cost of ownership over 5 years (typical Australian usage, 15,000 km/year):
$80K Tesla Model Y (5-year novated lease, 100% personal, $130K salary):
* Pre-tax cost: $18,500/year × 5 = $92,500 * Personal tax saved: $7,215/year × 5 = $36,075 * FBT: $0 * Residual at end: roughly $25,000 (ATO minimum) * Fuel cost: $0 to lease (charging covered) * Servicing: minimal (~$500/year) * Net 5-year personal out-of-pocket: $92,500 - $36,075 + $25,000 = $81,425 * Personal value: car ownership at end + 5 years of use
$80K Mazda CX-9 (5-year novated lease, 100% personal, $130K salary):
* Pre-tax cost: $18,500/year × 5 = $92,500 * Personal tax saved: $7,215/year × 5 = $36,075 * FBT cost: roughly $5,500/year × 5 = $27,500 * Residual: ~$25,000 * Fuel cost: $2,800/year × 5 = $14,000 (included in lease) * Servicing: ~$1,200/year × 5 = $6,000 (included in lease) * Net 5-year personal out-of-pocket: $92,500 - $36,075 + $27,500 + $25,000 = $108,925
Difference: ~$27,500 over 5 years in favor of the EV.
This ignores: residual value differences (EVs have larger second-hand price swings, both ways), insurance cost differences (EV insurance is often higher initially), and personal preferences (towing, range anxiety, charging infrastructure).
For workers on lower marginal rates (30% or under): the salary packaging savings shrink proportionally. The EV exemption is still meaningful but at $50K income with a $40K used EV, the absolute savings might be $4,000-$6,000/year instead of $10,000+ at higher incomes.
For workers in the top bracket (47%): an EV novated lease can be the single biggest annual tax saving available, worth $15,000-$20,000+ per year on a top-of-range Tesla or BYD.
Risks and gotchas
1. Residual value risk: at lease end, you owe the ATO-mandated residual. If car market value is below residual, you lose money buying it out. EV resale values have been more volatile than ICE. Tesla price cuts in 2023-2024 hurt several lease customers.
2. Job change disrupts the lease: your novated lease is salary-packaged through your employer. If you leave, the lease typically converts to your personal liability. New employer may or may not accept the existing lease (most large employers do; some small businesses do not). This is the biggest practical risk.
3. Lease cost variance vs expected: novated lease companies bundle costs at fixed monthly rates. If actual fuel/electricity/insurance costs are below the bundled amount, the lease company keeps the excess (in some plans). Reconcile carefully.
4. PHEV exemption sunsetting April 2025: if you lease a PHEV after 1 April 2025, the FBT exemption does NOT apply. Make sure you understand which side of the date your lease starts.
5. Cap on luxury cars: the EV exemption only applies up to the LCT threshold for fuel-efficient vehicles. In 2026, that is $89,332. Cars above this lose the exemption.
6. ATO operating cost method audit: if you claim operating cost method (high business use), the ATO can audit. Keep a 12-week logbook every 5 years and supporting evidence of business use.
7. Personal use restrictions: some industry-specific schemes (e.g., FBT-exempt public hospital employees) have additional rules. Check with your salary packaging provider.
8. Comparison must be car-vs-car: do not compare "$80K Tesla via novated lease" against "no car at all." Compare against the same Tesla bought with after-tax money, OR against the cheaper car you would otherwise buy.
Run the math for your situation
Use our 🇦🇺 Australia calculator to plug in your own numbers.