How a Novated Lease Works
A novated lease lets an employee package car costs through payroll rather than paying for the car entirely from after-tax cash. 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 is not that the car becomes cheap by magic. It comes from the way the payments are routed through payroll: some costs are met from pre-tax salary, and in the EV case the FBT exemption can materially change the numbers.
If you want the broader context on how packaging works across super, cars, and other benefits, start with the salary sacrifice guide.
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 and diesel vehicles, FBT reduces but does not eliminate the tax benefit. In practice, the numbers usually work best for employees on higher marginal rates. At lower incomes, the benefit after FBT can narrow quickly.
The EV FBT Exemption
From 1 July 2022, eligible zero or low-emission vehicles are exempt from FBT when provided through a salary-packaged novated lease. That exemption is the main reason EV novated leases often look much stronger than petrol or diesel leases.
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 example is only a starting point. Actual results depend on salary, car cost, lease term, kilometres, provider pricing, and your employer's salary packaging arrangement. Run the calculator if you want to test your own assumptions.
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 EV exemption removes the biggest tax drag in a novated lease. This is usually where the structure stacks up best, provided the lease pricing itself is reasonable.
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 30% bracket 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. If that is relevant to you, the HECS/HELP repayment guide and income tax guide show where those amounts flow through.
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 can qualify for the exemption if the car's value is below the fuel-efficient luxury car tax threshold (about $91,387 for 2025-26). For many employees, that makes an EV lease easier to justify than a comparable petrol car.
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 often bundles lease repayments, fuel or electricity, registration, insurance, servicing, tyres, and roadside assistance. The exact mix depends on the provider, so it is worth checking what is truly included and what is only budgeted for.
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, the tax treatment often makes a novated lease competitive with or better than a car loan, but it still depends on lease pricing, running-cost assumptions, employer fees, and what happens if you leave your job. For petrol and diesel vehicles, the comparison is usually closer because FBT erodes part of the tax benefit.
