Novated Lease Fringe Benefits Tax (FBT)

Q: How is FBT applied on a novated lease?

For the 2022/23 financial year, FBT on a novated lease is charged at 47% on the taxable value of the benefit. That’s the equivalent of the highest tax bracket rate of 45%, plus the Medicare levy of 2%. The taxable amount is calculated on motor vehicles under a novated lease in one of two ways, according to the ATO: Statutory formula - a flat 20% rate on the cost of the vehicle (excluding state charges such as stamp duty, registration and CBT); operating cost - generally only applied to vehicles with a high percentage of business use where a log book will be be maintained.

Q: What is the FBT electric vehicle exemption?

From 1 July 2022, FBT was removed from zero and low emissions vehicles (up to the luxury car tax threshold), including for salary packaging. That includes: battery electric vehicles; plug-in hybrid electric vehicles; hydrogen fuel cell electric vehicles.

How FBT works
How to minimise it
How to pay $0 FBT

Guide to Novated Lease Fringe Benefit Tax (FBT)

In our FBT guide:

Written byShaun McGowanReviewed bySean Callery

Last updated22 December 2023

Fringe Benefits Tax (FBT)

Fringe Benefits Tax (FBT) is applied to any fringe benefit received by an employee or their associates (e.g. family members) from their employer.

Novated leasing (also known as salary sacrificing a car) is a fringe benefit, as are most non-wage benefits you may receive, such as:

Company vehicles for personal use
Private health insurance
Accommodation allowance
Entertainment allowance
Discounted loans

How is FBT applied on a novated lease?

For the 2022/23 and 2023/24 financial years, FBT on a novated lease is charged at 47% on the taxable value of the benefit.

That’s the equivalent of the highest tax bracket rate of 45%, plus the Medicare levy of 2%.

FBT applies regardless of whether you're buying new or a via used car novated lease.

The taxable amount is calculated on motor vehicles under a novated lease in one of two ways, according to the ATO:

Statutory formula: A flat 20% rate on the cost of the vehicle (excluding state charges such as stamp duty, registration and CBT)

Operating cost: Generally only applied to vehicles with a high percentage of business use where a log book will be be maintained

Let’s look at a very simple example of how FBT might be calculated:

The cost of the car is $55,000
Using the statutory formula, FBT is calculated at 20 per cent
The taxable value amount is $11,000
This amount is taxed at 47%

Your employer is liable for paying the FBT on a novated lease.

But the cost is often passed on to the employee. This is one of the potential disadvantages of a novated lease for employees.

But…

how to reduce fringe benefits tax on a novated lease

It’s possible to reduce the FBT liability to zero through post-tax contributions to the vehicle’s running costs.

This is done through what’s called the Employee Contribution Method, which is applied to your novated lease deal is being established.

How the Employee Contribution Method (ECM) works

The Employee Contribution Method (ECM) will be set up between you and your employer when creating the salary packaging agreement.

Using the ECM, contributions made from your after-tax salary will reduce FBT obligations when used to pay for running costs on the car.

Running costs can include:

Registration & CTP insurance
Servicing
Comprehensive car insurance
Fuel
New Tyres

In many cases, you can eliminate FBT liability completely. This is possible because every dollar paid from your after-tax salary reduces the FBT liability by the same amount.

That means you’re paying tax at your marginal tax rate, instead of the FBT rate of 47%. For a lot of people, the marginal tax rate will be lower.

Let’s look at the same basic example from earlier, this time incorporating the ECM:

The cost of the car is $55,000
Using the statutory formula, FBT is calculated at 20 per cent
The taxable value amount is $11,000
This amount is included in the employee's lease payments and deducted from their after-tax salary.
The FBT amount is reduced to $0

Note: This is a basic example of how the FBT base may be calculated on a lease. You will need to speak to your leasing company to determine your exact post-tax deductions.

Solar panels are all about renewable energy

Another way to avoid paying any FBT on your novated lease is to lease an electric vehicle.

From 1 July 2022, FBT was removed from zero- and low-emission vehicles (up to the luxury car tax threshold), including for salary packaging.

That includes:

Battery electric vehicles
Plug-in hybrid electric vehicles
Hydrogen fuel cell electric vehicles.

Not only is the cost of the car itself exempt from FBT, so are eligible running costs:

Registration
Insurance
Repairs or maintenance
Electricity to charge and run electric cars (but not the cost of a home charging station).

This exemption means you would be able to pay for your car running costs from your pre-tax salary without any FBT liability for your employer (and therefore you).

This is a potential tax saving in the thousands of dollars each year of the novated lease compared to a car loan.

Here’s an example:

This comparison shows the novated lease savings on an electric vehicle with the FBT exemption factored in. The example is based on a 5-year term and compares a novated lease to financing the exact same vehicle with a car loan or paying for it outright with cash.

The comparison includes car running costs for five years (based on 15,000km driven annually).

The example is based on a purchase of a 2023 Tesla Model 3 RWD in NSW, with a purchase price of $66,100 and assumes an annual salary of $120,000.

Some vehicle types are excluded from the electric vehicle exemption:

Cars designed to carry a load of more than 1 tonne
Cars that carry 9 or more passengers (including the driver)
Motorcycles and scooters (even if they are electric)
Vehicles with a value over the luxury car tax (LCT) threshold ($89,332 in 2023/24 for fuel efficient vehicles)

It's important to get tax advice from a qualified professional to understand how FBT and any reductions or exemptions may apply to your situation.