What This Guide Covers
This article explains the EV FBT exemption phase-out announced in the 2026 Federal Budget, including:
- How the phase-out works and who it affects
- A practical example with dollar-figure calculations
- Common misconceptions and the actual ATO (ATO guidelines) rules
- Your next steps to minimise tax implications
- A quick checklist for review
EV FBT Exemption Phase-Out Explained
#### What Was the EV FBT Exemption?
Introduced to accelerate EV adoption, the EV FBT exemption removed the fringe benefits tax liability on eligible electric vehicles provided through novated leases or employer salary packaging. Previously, any battery electric vehicle (BEV) or plug-in hybrid electric vehicle (PHEV) — regardless of price — could qualify for the full exemption, making novated leases significantly more tax-effective for employees.
#### What Changed in the 2026 Budget?
The 2026 Federal Budget announced that the full exemption will be phased out for vehicles priced above $75,000. The key changes are:
- Vehicles below $75,000: Continue to qualify for the full FBT exemption. No change.
- Vehicles above $75,000: The exempt portion will gradually reduce, with some FBT benefit remaining even after the phase-out period ends.
- Existing leases: Fully grandfathered. Any novated lease already in place before the effective date continues under the old rules for its full term.
ATO Position: 'The FBT exemption for eligible electric cars continues to apply where the first retail sale of the car occurred before the phase-out date, or where the car is priced below the luxury car tax threshold for fuel-efficient vehicles.' — Based on 2026 Federal Budget materials
#### Why Phase It Out?
The original exemption created a surge in demand for high-end EVs, with many employees opting for luxury models priced well above $100,000. This unintended consequence led to substantial tax revenue leakage. The government's adjustment aims to:
- Target the benefit toward affordable EVs ($75,000 and below)
- Reduce the tax advantage for high-income earners packaging expensive vehicles
- Curb the middleman industry that emerged around maximising EV salary packaging structures
Community reaction has been largely measured, with most viewing the $75,000 threshold as reasonable — it still fully covers the majority of popular EV models on the Australian market.
How the Phase-Out Works: A Practical Example
Consider an employee earning $150,000 per year who novates a lease on an EV priced at $85,000 (drive-away) over 5 years.
| Item | Before Phase-Out (2025) | After Phase-Out (2026+) |
|---|---|---|
| Vehicle Price | $85,000 | $85,000 |
| FBT Exemption | 100% exempt | Partial — only $75,000 portion exempt |
| Taxable Portion | $0 | ~$10,000 |
| FBT Payable (Employer) | $0 | ~$1,955 per year |
| Employee Impact | Baseline | ~$160-$200 more per month |
*Note: Figures are indicative. Exact amounts depend on the statutory formula rate and employer policy.*
#### Dollar Calculation
Step 1 — Determine taxable value
- Total vehicle value: $85,000
- Exempt threshold: $75,000
- Non-exempt (taxable) portion: $85,000 - $75,000 = $10,000
Step 2 — Apply FBT statutory formula
- Statutory rate for EVs: 20% in the first year
- Taxable value for FBT: 20% × $10,000 = $2,000
Step 3 — Calculate FBT payable
- FBT rate: 47% (includes Medicare Levy)
- Grossed-up rate (Type 1): 2.0802
- FBT payable: $2,000 × 2.0802 × 47% = $1,955 per year
Result: The employer would owe approximately $1,955 per year in FBT on this vehicle. Most employers pass this cost back to the employee, making the lease roughly $160–$200 per month more expensive than under the full exemption.
*For comparison, a $74,000 EV remains entirely exempt with $0 FBT payable.*
Common Misconceptions
#### Misconception 1: 'All EV novated leases will lose the exemption'
Reality: Only EVs priced above $75,000 are affected. Vehicles under this threshold continue to receive the full exemption. Additionally, all existing leases are grandfathered under the previous rules.
#### Misconception 2: 'The phase-out means EVs are no longer tax-effective'
Reality: Even for vehicles above $75,000, the taxable portion is limited to the value above the threshold. A $90,000 EV still has $75,000 of its value tax-free. Combined with lower running costs and state incentives, novated leasing remains attractive.
ATO Rule: 'The exempt amount for an eligible electric car is limited to the car's value up to the luxury car tax threshold for fuel-efficient vehicles.' — FBT Exemption Guidelines
#### Misconception 3: 'Plug-in hybrids are treated the same as battery EVs'
Reality: The FBT exemption applies to both BEVs and PHEVs under the same $75,000 threshold. However, state-level incentives increasingly favour pure battery EVs over plug-in hybrids.
#### Misconception 4: 'The $75,000 threshold is indexed to inflation'
Reality: As of the 2026 Budget announcement, the $75,000 threshold is not automatically indexed. Without future legislative adjustment, it will remain fixed, meaning more vehicles may be caught over time as prices rise.
What to Do Next
Navigating the EV FBT phase-out requires careful planning — especially if you're considering a novated lease on a vehicle above $75,000. AusTax AI can help you:
- Model your specific tax outcomes under the new rules
- Compare pre and post phase-out scenarios with real dollar figures
- Structure your salary packaging to minimise FBT exposure
- Advise on grandfathered lease options before the effective date
#
Need Help With Your Tax Return?
Complex situation? a registered tax agent (see the directory) Our partner agents review every detail for accuracy and compliance.
*Disclaimer: This is general information only and does not constitute personal tax advice. Consult a registered tax agent for advice tailored to your specific situation. Always verify against the latest ATO guidelines at ato.gov.au.*
Quick Checklist
- Check your current or planned EV's retail price — is it below $75,000?
- If above $75,000, calculate the taxable portion using the formula in this guide
- Confirm with your employer whether they pass FBT costs to you
- If you already have an active lease, confirm it qualifies for grandfathering
- Consider switching to a model under $75,000 to maintain full exemption
- Run a full tax comparison using AusTax AI before signing any new lease
Disclaimer: This article provides general tax information only and does not constitute financial or legal advice. Tax laws and thresholds are subject to change. You should consult a qualified tax professional or use AusTax AI for advice tailored to your specific circumstances. The figures used in examples are for illustrative purposes and may not reflect your exact tax position.