How a novated lease works
A novated lease is a three-way agreement between you, your employer and a finance company. Your employer deducts the lease payments and running costs from your salary, and part of that comes out before income tax. You bundle finance, fuel or charging, registration, insurance, servicing and tyres into one regular deduction. The car’s GST is claimed by the financier, so you don’t pay it on the purchase price (capped at the car limit) or on running costs. At the end of the term a residual, or balloon, is owed if you want to own the car outright.
Why electric cars are the sweet spot
Since 1 July 2022, an eligible electric car is exempt from Fringe Benefits Tax. That single rule is why EV novated leases took off. On a petrol car, you have to make a post-tax contribution of about 20% of the car’s value to cancel the FBT, using the Employee Contribution Method. An FBT-exempt EV needs none of that, so 100% of the lease and running costs come from pre-tax salary. To qualify the car must be battery-electric or hydrogen fuel-cell, first held and used on or after 1 July 2022, and priced under the luxury car tax fuel-efficient threshold ($91,387 for 2025-26, $91,661 for 2026-27). Plug-in hybrids stopped qualifying for new arrangements from 1 April 2025.
ECM vs the statutory method
For a non-exempt car, FBT is worked out with the statutory formula: the taxable value is a flat 20% of the car’s base value. Left unmanaged, FBT at 47% on the grossed-up value would wipe out the benefit. The fix is the Employee Contribution Method, where you pay part of the lease from post-tax salary, dollar for dollar reducing the taxable value to nil. The rest stays pre-tax. An eligible EV has no taxable value to start with, so there’s nothing to cancel, which is the whole advantage.
What to watch before you sign
A novated lease is a fixed commitment. There’s a residual owed at the end, provider and management fees reduce the saving, and finance rates vary between providers, so ask for the full quote in writing. If you change jobs the lease travels with you, and you carry the running-cost budget whether you drive or not. The EV FBT exemption is also under government review, with a report due by mid-2027, so weigh that against the term you choose. This calculator gives an estimate; a provider quote will show the exact figures for your car.
Frequently asked questions
Is a novated lease worth it?
It depends on how much you drive and your marginal tax rate. The saving comes from paying the car and its running costs out of pre-tax salary and from claiming the GST. For an eligible electric car under the luxury car tax threshold, the whole package is exempt from Fringe Benefits Tax, which makes the maths much stronger than for a petrol car. Run your own numbers above and weigh the residual owed at the end.
How do you calculate a novated lease?
Start with the vehicle price, strip out the GST the financier claims, then finance the balance down to an ATO minimum residual over the term. Add annual running costs. For a petrol car you make a post-tax contribution equal to 20% of the car's value to cancel the FBT (the Employee Contribution Method); the rest comes from pre-tax salary. An eligible EV skips the post-tax contribution entirely because it's FBT-exempt. Your saving is the income tax, Medicare and GST you avoid.
Is a novated lease worth it on a $100,000 salary?
On $100,000 your marginal rate is 30% plus 2% Medicare, so every pre-tax dollar you put through the lease saves 32 cents in tax, plus the GST. An eligible electric car sends the full lease and running costs through pre-tax, so the saving is largest there. A petrol car still saves tax but you pay a post-tax ECM contribution that trims the benefit. The calculator shows your exact figure for both.
Why is an electric car novated lease cheaper?
Since 1 July 2022, eligible battery-electric and hydrogen fuel-cell cars first held and used from that date, and priced under the luxury car tax fuel-efficient threshold, are exempt from Fringe Benefits Tax. That means 100% of the lease and running costs come from pre-tax salary with no post-tax contribution to cancel FBT. On a petrol car you pay a post-tax ECM contribution of about 20% of the car's value, which is money you don't need to find for an EV.
Are plug-in hybrids still FBT-exempt?
No, not for new arrangements. From 1 April 2025 a plug-in hybrid is no longer treated as a zero or low emissions vehicle under FBT law, so it's no longer eligible for the exemption. Arrangements already in place before that date can keep the exemption if the commitment was financially binding and use stays unchanged. Battery-electric and hydrogen fuel-cell cars remain eligible.
What is the FBT exemption threshold for electric cars?
The car must be priced under the luxury car tax threshold for fuel-efficient vehicles, which is $91,387 for 2025-26 and $91,661 for 2026-27. Price it above that threshold at any point and the FBT exemption is lost, so the car is treated like any other under the statutory method. The threshold is indexed each year, so check the current figure at ato.gov.au.
What are the downsides of a novated lease?
You're locked into a fixed-term commitment with a residual (balloon) payment owed at the end to own the car. Provider and management fees eat into the saving, interest rates on the finance can be high, and if you leave your job the lease comes with you. It suits people who drive a fair amount and stay employed through the term. The EV FBT exemption is also under government review, with a report due by mid-2027, so factor in the term you're signing up for.
Does a novated lease reduce my taxable income?
Yes. The pre-tax portion of your lease and running costs comes out before income tax is calculated, so your taxable income falls. Note that reportable fringe benefits can still show on your income statement and may affect income-tested payments and surcharges, even though they aren't taxed again. For an FBT-exempt EV there's no taxable value, but the exempt benefit is still reportable.
General information, not financial advice.
