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
Makes the agreed payments from your pre-tax salary and may be liable for FBT on the car benefit.
Financier or lessor
Provides the finance or lease. Who owns the car and whether a residual payment, refinance or return is available depend on the contract.
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 — or compare a car against the other benefit types with the salary sacrifice calculator.
Is FBT Payable on a Novated Lease?
Petrol, diesel and hybrid cars — including most plug-in hybrids since 1 April 2025 — are subject to FBT, although after-tax contributions usually reduce the amount payable to nil. An eligible battery-electric or hydrogen car is exempt. A novated car is a car fringe benefit, so Fringe Benefits Tax (FBT) applies unless the EV exemption covers it. FBT is legally your employer's tax, but in a novated lease the cost is passed on to you. It is the single biggest factor in whether a lease saves money. The FBT rate is 47% of the benefit's grossed-up taxable value (matching the top marginal rate plus Medicare levy), and the FBT year runs 1 April to 31 March.
That is current law. The Government has announced a partial wind-back of the EV exemption from 1 April 2027, but it is not yet law and existing leases won't be affected. The novated lease calculator sets out the announced rules.
How FBT is worked out on a novated car
Most novated leases use the statutory formula. The car's taxable value for the FBT year is its base value — broadly the purchase price including GST, but not registration or stamp duty — multiplied by 20%, then scaled down for any days the car wasn't available for private use. Kilometres driven don't change the result. For example, a car with a $45,000 base value that is available for private use all year has a taxable value of $9,000.
How FBT is reduced to nil
Providers usually apply the employee contribution method: you pay part of the car costs from after-tax pay, and each after-tax dollar reduces the taxable value dollar for dollar. Contributions equal to the taxable value — about $9,000 a year in the example — bring the FBT to nil, while the rest of the package stays pre-tax. Those after-tax dollars are the cost of the arrangement, so the tax saving is smaller than on an exempt EV, where the whole package can stay pre-tax. Provider fees and the GST treatment of contributions vary, so check your quote.
ICE vehicles: the FBT offset
The EV FBT Exemption
Eligible zero or low-emission vehicles can be exempt from FBT when provided through a salary-packaged novated lease — an exemption in place since 1 July 2022. This can improve an EV lease comparison, but it does not make every lease cheaper once finance pricing, running costs, fees and residual value are included.
| Vehicle type (2026–2027) | FBT status |
|---|---|
| Battery Electric Vehicle (BEV) | Exempt — no FBT |
| Hydrogen fuel cell vehicle | Exempt — no FBT |
| Plug-in hybrid (PHEV) | Transition only: exempt use or availability before 1 April 2025 plus a continuing financially binding commitment |
| Petrol / diesel / hybrid (non plug-in) | FBT applies |
Source: ATO — electric cars exemption.
Example: Savings on an EV Novated Lease
An FBT-exempt EV can reduce the tax cost of eligible pre-tax packaging, but the saving depends on the package composition and employer arrangement. Here is a simplified example for an employee earning $120,000 packaging $18,000 a year of lease and running costs:
| Component | Amount |
|---|---|
| Annual lease + running costs packaged | $18,000 |
| Income tax + Medicare saving (32% marginal) | +$5,411 |
| FBT payable (EV exemption) | $0 |
| GST credit on $12,000 of running costs | +$1,091 |
| Total annual saving vs paying after-tax | ~$6,502/yr |
Who Benefits Most?
Novated leases work best for higher marginal-rate earners, EV buyers, and employees of FBT-exempt employers — and worst for low incomes and short job tenures:
✓ High-income earners
✓ EV buyers
✓ Employees of FBT-exempt employers
✓ Middle-income earners
✗ Low-income earners
✗ People who change jobs frequently
Things to Watch Out For
Five risks come up again and again with novated leases — residual value, locked-in budgets, job changes, the LCT ceiling, and reportable fringe benefits:
Residual value risk
Locked-in running cost estimates
End-of-employment risk
Luxury car tax (LCT) ceiling
Reportable fringe benefits
Frequently Asked Questions
What is a novated lease?
A novated lease is a three-way arrangement between you, your employer, and a finance provider or lessor. Your employer makes the agreed lease payments 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. Ownership and end-of-lease options depend on the contract.
How does a novated lease save tax?
Lease payments and running costs can be met from pre-tax salary, reducing taxable salary. The actual saving depends on your marginal rate, the costs that are packaged, FBT, GST credits, provider fees and your employer's arrangement. An eligible FBT-exempt EV avoids FBT, while petrol and diesel cars often use after-tax employee contributions to reduce FBT. Do not assume each packaged dollar produces the same tax saving.
What cars are exempt from FBT in a novated lease?
Battery electric vehicles and hydrogen fuel cell vehicles can qualify if the car is below the fuel-efficient luxury car tax threshold ($91,661 for 2026-27). A PHEV can remain exempt only if it was actually used, or available for private use, before 1 April 2025 and that earlier benefit was exempt, and a financially binding commitment continues to provide that private use or availability after that date. Post-date delivery is one example where the first condition fails; optional extensions or a new commitment can also end the transition.
How much tax can I save with a novated lease EV?
Savings depend on your income and the car's cost. As an illustration, packaging $18,000 a year of lease and running costs on a $120,000 salary saves about $5,411 in income tax and Medicare levy, plus GST credits on running costs — with no FBT on an eligible EV. Run your own numbers in the novated lease calculator.
How do you avoid paying FBT on a novated lease?
There are two common ways to reduce it to nil. For a petrol, diesel or hybrid car — including most plug-in hybrids since 1 April 2025 — the employee contribution method has you pay part of the car costs from after-tax pay. Each after-tax dollar reduces the car's FBT taxable value, and contributions equal to that value bring the FBT to nil, although those after-tax dollars are themselves a cost. Under the statutory formula the taxable value is 20% of the car's base value for a full year. The other way is an eligible battery-electric or hydrogen car below the fuel-efficient luxury car tax threshold, which is exempt, so no contribution is needed.
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 employer's novation normally ends. Your options can include taking over repayments personally, transferring or refinancing the arrangement with a new employer, or paying out the lease — but the available choices, fees and residual-value treatment are set by the finance and packaging contracts. Check them before signing.
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.