Novated Leasing, EV FBT Exemption and Luxury Car Tax: Complete Employee Guide
The most comprehensive free guide to novated leasing in Australia: the three-way structure (employee, employer, finance company), pre-tax vs post-tax components, the Employee Contribution Method, residual values under TR 2005/20, the electric vehicle FBT exemption under FBTAA 1986 s 8A, the $91,387 fuel-efficient LCT threshold, the PHEV sunset from 1 April 2025, RFBA implications for income-tested benefits, state EV incentive variations, and a full comparison of when novated leasing beats outright purchase.
A novated lease is a three-way arrangement where an employee leases a car from a finance company and the employer takes on lease obligations via a novation deed, with repayments and running costs paid through salary packaging. For eligible electric vehicles under FBTAA 1986 s 8A, the FBT exemption means the entire novated lease package can be funded from pre-tax salary with zero FBT payable, provided the car's value at first retail sale is below the fuel-efficient LCT threshold of $91,387 (2025-26) and LCT has never been payable on the vehicle. PHEVs entering new arrangements from 1 April 2025 no longer qualify.
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Guidance, not advice. We explain the rules, we don't assess your situation. Always seek financial or tax advice from your accountant, or contact ATO. Read our editorial scope →
How a novated lease works: the three-way structure
A novated lease involves three parties: the employee (who chooses the car and uses it), the finance company (which owns the car during the lease term), and the employer (which takes on the lease obligations through a novation deed and makes payments from the employee's pre-tax and post-tax salary). The employee enters a finance lease with the lessor. The employer then 'novates' the lease by agreeing to make payments on behalf of the employee via salary packaging. For FBT purposes under FBTAA 1986 s 7, this is treated as a car fringe benefit provided by the employer.
What is included in the package
A typical novated lease package covers finance and lease rentals (principal and interest), running costs (fuel or electricity, comprehensive insurance, registration, servicing, tyres, roadside assistance), and administration or management fees. Most of these costs are paid from pre-tax salary. The Employee Contribution Method (ECM) adds a post-tax component specifically designed to reduce the FBT taxable value.
Who can access novated leasing
Any employee whose employer is willing to enter into the novation. It is not limited to large corporates or government employers. The ATO treats any arrangement between an employer and current employee as a salary sacrifice arrangement per Taxation Ruling TR 2001/10. Part-time and fixed-term contract employees can access novated leasing, though shorter employment periods affect the lease term and residual calculations.
Pre-tax, post-tax and the Employee Contribution Method
Under the statutory formula method in FBTAA 1986 s 9 and s 10, the taxable value of a car fringe benefit is 20% of the car's base value. The Employee Contribution Method (ECM) applies FBTAA 1986 s 9(2): the taxable value is reduced by any post-tax contribution made by the employee to the employer. In practice, novated lease providers set the after-tax component so that the employee's contribution exactly equals the calculated FBT, driving FBT payable to nil.
Residual values under TR 2005/20
At the end of a novated lease, a residual (or balloon) payment remains. The ATO sets minimum residual values under Taxation Ruling TR 2005/20 as a percentage of the car's original cost. The residual protects against excessive salary sacrifice by ensuring the car retains a minimum notional value.
End-of-lease options
At lease end you have three choices: pay the residual value and take ownership of the car, refinance the residual into a new finance arrangement, or trade the car in and roll into a new novated lease. If the car's market value has fallen below the residual, you face a shortfall. If it has held value above the residual, you retain the equity.
Electric vehicle FBT exemption under s 8A
The Treasury Laws Amendment (Electric Car Discount) Act 2022 inserted FBTAA 1986 s 8A, exempting eligible zero and low emissions vehicles from FBT. The exemption applies to car fringe benefits provided on or after 1 July 2022, where the car was first both held and used on or after 1 July 2022.
Eligibility criteria
The car must be a battery electric vehicle (BEV) or hydrogen fuel cell vehicle. The car's value at first retail sale must be below the fuel-efficient LCT threshold ($91,387 for 2025-26). LCT must never have been payable on the car. The car must be used by a current employee or their associate. PHEVs entering new arrangements from 1 April 2025 no longer qualify (see the sunset provision below).
What the exemption delivers
Where the EV qualifies under s 8A: FBT taxable value is fully exempt, no FBT payable on the car benefit or associated running costs, no need for an ECM post-tax contribution to wash out FBT, and the entire novated lease package (lease payments plus running costs) can be funded from pre-tax salary. This produces significantly larger tax savings than a standard novated lease on a petrol or diesel vehicle.
Second-hand EVs
The 'first held and used' requirement does not mandate a new vehicle. A second-hand EV qualifies if the first time it was both held and used is on or after 1 July 2022 and LCT has never been payable. This opens the exemption to the growing used EV market.
PHEV sunset from 1 April 2025
From 1 April 2025, plug-in hybrid electric vehicles (PHEVs) are no longer considered zero or low emissions vehicles for FBT law purposes. PHEVs are grandfathered only if both conditions are met: the PHEV was used or available for use before 1 April 2025 and that use was exempt under s 8A, and there was a financially binding commitment to continue providing the car on and after 1 April 2025. New PHEV novated lease arrangements entered into from 1 April 2025 onwards do not qualify for the FBT exemption. The car would be treated as a standard vehicle for FBT purposes, requiring ECM to manage the FBT liability.
Luxury Car Tax thresholds and interaction with the EV exemption
Luxury Car Tax is imposed under A New Tax System (Luxury Car Tax) Act 1999 at 33% on the GST-inclusive value above the relevant threshold.
LCT and the EV FBT exemption
The EV FBT exemption under s 8A requires that LCT has never been payable on the car. An EV priced above $91,387 (drive-away, GST-inclusive) will attract LCT and therefore cannot qualify for the FBT exemption. This effectively caps the EV FBT benefit at the fuel-efficient threshold. Buyers considering higher-specification EVs (for example, Tesla Model Y Performance or Hyundai Ioniq 5 long-range AWD) should verify the drive-away price sits below $91,387.
Car depreciation cost limit
The car depreciation cost limit for 2025-26 is $69,674. This caps the amount that can be depreciated for income tax purposes, regardless of the actual purchase price. The maximum GST credit claimable on a car is 1/11th of the car cost limit: $6,334 for 2025-26.
Dual-cab utes and LCT
Many dual-cab utes are not luxury cars for LCT purposes. Vehicles with a payload capacity over 1 tonne or designed to carry more than 8 passengers are exempt from LCT under LCT Act s 25-1. Common qualifying vehicles include Toyota HiLux and Ford Ranger variants. This is relevant for tradies considering novated leasing for a work vehicle.
The RFBA cost: income tests you need to check
Even when the EV FBT exemption eliminates FBT payable, the grossed-up value of the car fringe benefit is reported as a Reportable Fringe Benefits Amount (RFBA) on your income statement via STP. RFBA is added to your adjusted taxable income for the purposes of several income tests.
Comparison: when novated leasing wins and when it does not
Novated leasing is not universally the best option. The benefit depends on your marginal tax rate, the vehicle type, your employer's willingness, and your personal circumstances.
State and territory EV incentives snapshot (2025-26)
State and territory governments offer varying incentives for electric vehicles. These change frequently and should be verified against current government websites before making a purchase decision.
Employer obligations and record-keeping
Employers providing cars via novated leases must register for FBT if a liability exists, calculate the taxable value using the statutory formula or operating cost method, lodge an FBT return by 21 May, and report the grossed-up value as RFBA on the employee's income statement via STP. For EVs exempt under s 8A where no other fringe benefits exist, the employer may not need to lodge an FBT return but must retain evidence that the exemption conditions are satisfied: the car's value at first retail sale, the date it was first held and used, proof that LCT was never payable, and confirmation of the vehicle type (BEV or hydrogen fuel cell).
Owner-directors of SMEs
An SME company providing an eligible EV to a director who is also an employee receives the same s 8A exemption. The company can claim depreciation on the vehicle up to the car cost limit ($69,674 for 2025-26) if it holds the car as a company asset. The director-employee benefits from pre-tax salary packaging with zero FBT. This structure can be particularly effective for small business directors considering their next vehicle.
Common traps to check before signing
Novated leasing providers are commercially incentivised to highlight tax savings without always surfacing the constraints. Check these items before committing.
Statute references
- Fringe Benefits Tax Assessment Act 1986 (FBTAA) s 7 (Car fringe benefits)
- FBTAA 1986 s 8A (Electric vehicle FBT exemption, inserted by Treasury Laws Amendment (Electric Car Discount) Act 2022)
- FBTAA 1986 s 9 and s 10 (Taxable value of car fringe benefits, statutory formula and operating cost methods)
- FBTAA 1986 s 9(2) (Employee Contribution Method, reduction by post-tax contribution)
- Taxation Ruling TR 2001/10 (Salary sacrifice arrangements)
- Taxation Ruling TR 2005/20 (Car lease residual values)
- A New Tax System (Luxury Car Tax) Act 1999 s 5-10, s 25-1, s 18-5, s 27-1
- ITAA 1997 Division 40 (Capital allowances, car depreciation cost limit $69,674)
- Australian Border Force Notice 2025/13 (LCT threshold confirmation)
- Fringe Benefits Tax Assessment Act 1986 (FBTAA) ss 5–9 (FBT framework; FBT year is 1 April – 31 March, not the income year)
- FBTAA ss 5B and 5C (Type 1 / Type 2 gross-up: Type 1 factor 2.0802 where GST input credits available; Type 2 factor 1.8868 — unchanged since FBT year ending 31 March 2019; applies for FY 2025-26)
- FBTAA Division 2 ss 7–13 (car fringe benefits — statutory formula method s 9 at 20% flat; operating cost method s 10 requires a 12-week logbook)
- FBTAA s 58P (minor benefit exemption — minor + infrequent ≤ $300 per benefit)
- TR 96/26 (car parking fringe benefits) and MT 2034 (logbook substantiation) [verify current versions]
- Treasury Laws Amendment (Electric Car Discount) Act 2022 (FBT exemption for eligible zero/low-emission vehicles under FBTAA s 8A)
Frequently asked questions
Can a sole trader or self-employed person access novated leasing?+
Does the EV FBT exemption apply to second-hand electric vehicles?+
What is the RFBA cost of an FBT-exempt EV novated lease?+
What happens to the residual value at the end of the lease?+
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