Novated Lease Tax Savings Explained
How novated leasing reduces your tax, the EV FBT exemption, and whether it makes sense for you.
How a Novated Lease Works
A novated lease is a form of salary packaging that lets you lease a car using pre-tax salary. Three parties are involved:
You
Choose and drive the car. Your pre-tax salary is reduced by the lease payments and running costs.
Your Employer
Pays the finance company directly from your pre-tax salary. Becomes liable for FBT on the car benefit.
Finance Company
Owns the car during the lease. You pay a residual (balloon) payment at the end to own it outright.
The tax benefit comes from reducing your taxable income by the amount you package. Because you pay the lease from pre-tax dollars, you effectively get a discount proportional to your marginal tax rate.
Understanding Fringe Benefits Tax (FBT)
When your employer provides a car benefit, they normally pay Fringe Benefits Tax (FBT). The FBT year runs 1 April to 31 March. The FBT rate is 47% (matching the top marginal rate + Medicare levy), applied to the taxable value of the car benefit.
For a novated lease on a petrol or diesel car, your employer recovers FBT costs from you via an after-tax "employee contribution". The combination of pre-tax deductions (income tax savings) and after-tax FBT contributions determines the net benefit to you.
ICE vehicles: the FBT offset
For petrol/diesel vehicles, FBT reduces but does not eliminate the tax benefit. The net saving is typically meaningful only for employees in the 37% or 45% bracket. For lower-income earners, the saving after FBT can be minimal.
The EV FBT Exemption (Game Changer)
From 1 July 2022, eligible zero or low-emission vehicles are exempt from FBT when provided through a salary-packaged novated lease. This makes EVs dramatically more tax-effective than conventional cars.
Eligible vehicle types (2025–2026)
The car must also be below the luxury car tax (LCT) threshold — $91,387 for the 2025–2026 year for fuel-efficient vehicles. Cars above this threshold do not qualify for the FBT exemption.
Example: Savings on an EV Novated Lease
The following is a simplified example for an employee earning $120,000 packaging a $65,000 EV with a 5-year lease and all running costs included.
This is illustrative only. Actual savings depend on salary, car cost, lease term, km driven, and your employer's salary packaging arrangement. Use our novated lease calculator for a personalised estimate.
Who Benefits Most?
High-income earners (37% or 45% bracket)
HighThe pre-tax saving is proportional to your marginal rate — the higher your bracket, the more you save.
EV buyers
HighThe FBT exemption eliminates the main downside of ICE vehicle novated leases. EVs are almost always better as novated leases than conventional car loans.
Employees of FBT-exempt employers
Very HighHealth workers, charities, and some not-for-profits have FBT concessions that make all cars more tax-effective.
Employees with $60k–$135k income
Medium-HighStill significant savings — the 32.5% bracket still delivers meaningful tax reduction for EVs.
Low-income earners (19% bracket)
Low-MediumSavings are smaller due to lower marginal rate. Consider whether the lock-in and residual risk outweighs the benefit.
People who change jobs frequently
Low (extra risk)Risk of 'portability' issues — not all employers offer salary packaging. Moving to a new employer can disrupt the arrangement.
Things to Watch Out For
Residual value risk
At the end of the lease you must pay the residual balance to own the car or refinance. If the car is worth less than the residual (negative equity), you may pay more than the car is worth.
Locked-in running cost estimates
Novated leases use estimated km and costs to set your pre-tax deduction. If you drive less than expected, any over-budgeted funds may be lost or reduce your next period's deductions. If you drive more, you pay the excess from after-tax income.
End-of-employment risk
If you leave your job, the novation ends. You take on the lease personally or pay it out. Make sure you have a plan.
Luxury car tax (LCT)
Cars above the LCT threshold are not eligible for the EV FBT exemption. Check the current threshold before choosing a vehicle.
Reportable fringe benefits
Even if FBT-exempt (EV), the grossed-up value of the car benefit is reported as a 'reportable fringe benefit amount' on your payment summary. This can affect your Medicare levy surcharge, HECS repayment rate, and family tax benefit thresholds.
Calculate Your Novated Lease Savings
Enter your salary and vehicle details to see your estimated pre-tax cost, FBT impact, and annual tax saving.
Open Novated Lease Calculator →Frequently Asked Questions
What is a novated lease?
A novated lease is a three-way arrangement between you, your employer, and a finance company. Your employer leases a car on your behalf and makes the repayments from your pre-tax salary. Because the payments reduce your taxable income, you pay less income tax — but the 'savings' may be partially offset by Fringe Benefits Tax (FBT) unless the car qualifies for the EV FBT exemption.
What cars are exempt from FBT in a novated lease?
Battery electric vehicles (BEV), plug-in hybrid electric vehicles (PHEV, for eligible contracts entered before 1 April 2025), and hydrogen fuel cell vehicles with a value below the luxury car tax threshold (~$91,387 for 2025-26) are exempt from FBT when packaged through a novated lease. This makes EVs significantly more tax-effective than petrol vehicles.
How much tax can I save with a novated lease EV?
Savings depend on your income and the car's cost. A person on $120,000 leasing a $60,000 EV might save $5,000–$9,000 per year in tax compared to buying the same car with after-tax income. The saving comes from reduced income tax and avoiding FBT entirely.
What costs are included in a novated lease?
A fully maintained novated lease typically bundles: lease repayments, fuel (or electricity), registration, insurance, servicing, tyres, and roadside assistance. All of these costs are packaged into the pre-tax deduction, maximising the tax benefit.
What happens to the lease if I leave my job?
If you resign or are made redundant, the novation (the employer's obligation) ends. You typically have options: take over the lease personally (continue repayments from your own after-tax income), refinance with a new employer, or pay out the residual balance and own the car.
Is a novated lease better than a car loan?
For an EV, a novated lease is almost always better than a car loan if your employer offers it — the FBT exemption means you pay with pre-tax dollars and avoid the fringe benefits tax. For ICE (petrol/diesel) vehicles, the comparison is more nuanced: you save income tax but pay FBT, and the net saving depends on your marginal rate, how much you drive, and the car's value.
This guide is for general educational purposes only and does not constitute financial or tax advice. Novated lease arrangements are complex and their suitability depends on your individual circumstances. Consult a financial adviser or tax professional before entering a novated lease. FBT rules and thresholds are subject to change. Information is based on ATO and Treasury guidance current as at 2025–2026.