The short answer
A novated lease lets you pay for a car — and often its running costs — from salary before tax, lowering your taxable income. But the car becomes a "car fringe benefit" under the *Fringe Benefits Tax Assessment Act 1986*, so your employer carries a Fringe Benefits Tax (FBT) liability on it. Most novated leases neutralise that liability with the Employee Contribution Method (ECM) — a post-tax deduction that offsets the taxable value dollar-for-dollar, often reducing FBT to nil. FBT itself is a flat 47% on a grossed-up taxable value, calculated using either the statutory formula method (20% of the car's base value) or the operating cost method (running costs × non-business-use %, via a logbook). Electric vehicles under the fuel-efficient luxury car tax threshold ($91,387 for FY2025–26) can be exempt from FBT entirely — though that exemption is scheduled to wind back from 1 April 2027 under the 2026–27 Federal Budget.
How a novated lease changes your taxable income
A novated lease is a three-way deed between you, your employer and a finance/leasing company, usually arranged through a salary packaging provider. You choose and finance the car; your employer then pays the lease — often bundled with running costs like fuel, servicing, insurance and registration — directly from your pay while you're employed there.
Two deductions come out of your pay each cycle:
| Component | When it's deducted | What it does |
|---|---|---|
| Pre-tax (salary sacrifice) | Before income tax and Medicare levy are calculated | Lowers your gross/assessable salary |
| Post-tax (employee contribution / ECM) | After tax | Offsets the FBT liability the car creates |
Because the pre-tax portion reduces gross salary, less income is taxed at your marginal rate — 30% between $45,001–$135,000, or 37% between $135,001–$190,000 under the FY2025–26 Revised Stage 3 rates. FBT is the other side of the ledger: the ATO (ATO guidelines) treats an employer-provided car benefit as remuneration in kind, not cash salary.
How FBT on a novated lease car is calculated
FBT is assessed for the FBT year — 1 April to 31 March, not the income-tax year (1 July–30 June).
| Method | Formula | Records needed | Best suited to |
|---|---|---|---|
| Statutory formula | Base value × 20% × (private-use days ÷ FBT-year days) − contributions | None | Most novated leases (default) |
| Operating cost | Total running costs × (100% − business-use %) − contributions | 12-week logbook + odometer | Genuinely high business-use % |
- Statutory formula: the 20% rate is flat regardless of kilometres travelled (it replaced the old sliding scale for arrangements from 10 May 2011). Base value excludes registration and stamp duty, and is cut by one-third from the FBT year after the car's fourth anniversary with the same provider — lowering taxable value on longer leases without the 20% rate changing.
- Operating cost: only worth using when genuine work-related use is high — otherwise the statutory formula usually gives a similar or lower taxable value with far less record-keeping.
Once the taxable value is set, it's grossed up before the 47% FBT rate applies:
| Gross-up type | Rate | Applies when |
|---|---|---|
| Type 1 | 2.0802 | Employer claims GST credits on the car and running costs (typical for novated leases) |
| Type 2 | 1.8868 | No GST credit available |
FBT payable = taxable value × gross-up rate × 47%. This is legally the employer's liability, but in a salary-packaged novated lease it's built into your package cost — which is what the Employee Contribution Method is designed to manage.
The Employee Contribution Method (ECM): why quotes often show "$0 FBT"
Under ECM, every post-tax dollar contributed toward running costs reduces the taxable value dollar-for-dollar. If contributions over the FBT year equal or exceed the taxable value, FBT payable falls to nil — and since the taxable value is nil, there's no reportable fringe benefit either.
Illustrative example, statutory formula method (figures are illustrative only — your provider calculates the real split):
| Full ECM offset | Partial ECM offset | |
|---|---|---|
| Base value | $40,000 | $40,000 |
| Statutory taxable value (20%) | $8,000 | $8,000 |
| Employee (ECM) contribution, FBT year | $8,000 | $3,000 |
| Remaining taxable value | $0 | $5,000 |
| Grossed-up value (Type 1) | $0 | $10,401 |
| FBT payable (× 47%) | $0 | $4,888 |
ATO position: an employee's post-tax contribution towards the running costs of a car fringe benefit reduces the taxable value of that benefit dollar-for-dollar — which is why almost every novated lease quote is split into a pre-tax and a post-tax deduction rather than shown as one number.
A reportable fringe benefit appears on your income statement only once the *total* taxable value of all fringe benefits you receive exceeds $2,000 for the FBT year — below that, nothing shows on your payment summary. Employee contributions are typically GST-inclusive, since they're treated as consideration for a taxable supply; a good provider's quote already accounts for this.
Novated lease vs car allowance vs car loan vs cents-per-km
Each of these is taxed differently, and mixing them up is the most common source of confusion.
| Novated lease | Car allowance | Car loan / cash (own name) | Cents-per-km (own car) | |
|---|---|---|---|---|
| Funded from | Pre-tax + post-tax salary | Extra cash on top of salary | After-tax income / personal finance | N/A — a deduction method |
| Subject to FBT? | Yes (offset via ECM or EV exemption) | No — cash salary | No | No |
| Effect on taxable income | Pre-tax portion lowers taxable salary | Fully assessable, adds to taxable income | None | None |
| Work-use deduction available? | No — costs already salary-packaged | Yes — logbook/cents-per-km, business-use % | Yes — logbook or cents-per-km, business-use % | Yes, capped at 5,000 km × 88¢ = $4,400/yr (FY2025–26) |
| GST | Financier can generally claim credits up to the car limit ($69,674 for FY2025–26; max credit $6,334) | None — retail price paid in full | None for individuals | N/A |
| Ends when | Employment ends | Role/eligibility changes | Continues regardless of job | N/A |
Novated lease vs car allowance, specifically: an allowance is cash salary — fully taxed at your marginal rate, no FBT, no reportable fringe benefit — and you fund, run and substantiate the car yourself. A novated lease shifts part of the cost to pre-tax dollars but layers on FBT/ECM mechanics and, once the reportable fringe benefit exceeds $2,000, adds back into the HECS and MLS income tests below. The rule that trips people up most: you cannot claim a logbook or cents-per-km deduction for running costs already paid through salary packaging — a deduction under section 8-1 of the *Income Tax Assessment Act 1997* requires you to have personally incurred the expense, and paying via a pre-tax salary deduction doesn't count twice.
Electric vehicles: what the FBT exemption means for a novated lease
An eligible EV can be exempt from FBT entirely under the FBTAA electric cars exemption if it is: a zero or low emissions vehicle (battery electric or hydrogen fuel cell — PHEVs stopped qualifying for new arrangements from 1 April 2025, unless a financially binding commitment pre-dated the change); first held and used on or after 1 July 2022; used by a current employee or their associates; and priced below the fuel-efficient LCT threshold ($91,387 for FY2025–26), since luxury car tax must never have been payable on the car.
For a genuinely eligible EV, the calculated taxable value is exempt from FBT — no ECM post-tax contribution is needed to bring FBT to nil, so the arrangement can typically carry a larger pre-tax component.
What the exemption doesn't remove: even at $0 FBT payable, the notional taxable value of an exempt electric car benefit must still be calculated and reported as a Reportable Fringe Benefit Amount (RFBA) once it exceeds $2,000 for the FBT year. RFBA doesn't add to taxable income, but it's added back for HECS/HELP repayment income and Medicare Levy Surcharge testing — an EV novated lease with a HECS debt can still raise compulsory repayments despite $0 FBT payable.
What's changing: the 2026–27 Federal Budget (announced 5 May 2026) proposes a three-step wind-back: full exemption to 31 March 2027; from 1 April 2027, full exemption only up to $75,000 (a 25% discount above that, up to the LCT threshold); from 1 April 2029, the 25% discount is all that remains. Existing leases are flagged as unaffected, but this is a Budget announcement rather than passed legislation. For the full dollar-figure calculation at different price points, see our EV FBT exemption phase-out guide.
What happens at the end of the lease
Every novated lease ends with a residual (balloon) payment. The ATO sets minimum residual percentages by lease term so the arrangement counts as a genuine lease, not a disguised purchase:
| Lease term | ATO minimum residual value |
|---|---|
| 1 year | 65.63% |
| 2 years | 56.25% |
| 3 years | 46.88% |
| 4 years | 37.50% |
| 5 years | 28.13% |
At the end of the term you generally have three options: pay out the residual and keep the car, trade it in against a new lease, or sell it and check any balancing-adjustment or CGT implications.
Records to keep
- Novated lease / salary packaging agreement, showing the pre-tax and post-tax (ECM) split
- Payslips showing each cycle's salary sacrifice and post-tax deductions
- Annual FBT statement from your provider, plus your myGov income statement (the RFBA shown reflects the FBT year ending the previous 31 March)
- 12-week logbook and odometer readings, only if your employer uses the operating cost method
- Documentation of the residual (balloon) value and your end-of-lease decision
- For an EV, evidence of first retail price against that year's fuel-efficient LCT threshold
Quick checklist
- Confirm your employer offers novated leasing / salary packaging
- Ask which FBT method and ECM split applies, and whether your post-tax contribution fully or only partially offsets the taxable value
- If you carry a HECS/HELP debt or sit near the Medicare Levy Surcharge threshold, ask what RFBA the arrangement will generate
- For an EV, check the first retail price against the current year's fuel-efficient LCT threshold before assuming the exemption applies
- Get the residual (balloon) figure in writing and understand your three end-of-lease options before signing
If your income statement shows a reportable fringe benefit amount from a novated lease, it's worth confirming what that does to your HECS/HELP repayment income and Medicare Levy Surcharge position before you lodge, not after — AusTax AI's partner network of TPB Registered Tax Agents can check the figures against your actual return.
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.*
*Disclaimer: general information only — not personal tax advice.*