The electric vehicle (EV) transition in Australia has moved from niche to mainstream in a few short years. Beyond environmental benefits, recent tax settings have made EV ownership financially attractive – particularly for salaried (PAYG) employees who use a novated lease. At the heart of this shift is the Fringe Benefits Tax (FBT) exemption for eligible zero‑ or low‑emission vehicles, which – when combined with the mechanics of a novated lease – can deliver substantial savings over the life of an agreement.

This article breaks down how the FBT exemption works, who qualifies, the mechanics of a novated lease, the tax and GST advantages, practical considerations and what to check before signing. It also offers plain-English action steps and answers common questions for Australian drivers weighing up an EV under a salary‑packaging arrangement.

What is the FBT exemption for electric cars?

Fringe Benefits Tax (FBT) is normally a tax employers pay on non‑cash benefits provided to employees (for example, a company car made available for private use). From 1 July 2022 the Australian Government introduced an FBT exemption for eligible electric vehicles provided under a salary sacrifice arrangement. In short: where the rules are met, employers do not pay FBT on those electric cars and – crucially – employees can package the vehicle and its running costs pre‑tax without needing after‑tax contributions to offset an FBT liability.

This change fundamentally alters the economics of salary‑packaged EVs compared with petrol or non‑eligible vehicles.

Eligibility: which cars qualify?

Key eligibility points (overview – always verify current ATO guidance before committing):

• Vehicle type: Generally applies to Battery Electric Vehicles (BEVs) and Hydrogen Fuel Cell Electric Vehicles (HFCEVs). Historically, Plug‑in Hybrid Electric Vehicles (PHEVs) have been treated differently and the policy settings have evolved. From 1 April 2025 PHEVs were expected to be excluded from “zero/low emissions” status for the purpose of the exemption, although existing eligible arrangements entered prior to that date can be grandfathered – check current ATO rules for latest status.
• First held and used: The vehicle must have first been held and used on or after 1 July 2022.
• Luxury Car Tax (LCT) threshold: The car must be below the LCT threshold for fuel‑efficient vehicles. This threshold is indexed and updated annually by the ATO (for example, it was cited around $91,387 for the 2024/25 year). If LCT was payable on the vehicle, the vehicle is not eligible.
• Other technical requirements and record keeping: Standard novated lease record keeping applies (e.g. business use logs where relevant). Confirm any additional ATO or employer requirements with your novated provider and payroll team.

What running costs are covered?

Where the vehicle qualifies, the exemption commonly applies not only to the vehicle benefit itself but to associated running costs packaged into the lease, including:

• Registration and compulsory third party (CTP) insurance
• Comprehensive vehicle insurance
• Servicing, repairs and tyres
• Charging costs (electricity) and other energy costs associated with running the vehicle

Because these items can be salary‑sacrificed pre‑tax, the combined tax effect is a significant reduction in the overall cost of ownership.

How a novated lease works (the mechanics)

A novated lease is a three‑party agreement between the employee, the employer and a finance/lease provider. Principal steps:

1. Employee selects the vehicle and agrees lease terms with a novated lease provider.
2. The provider purchases the vehicle and leases it to the employee.
3. The employer agrees to make lease payments on the employee’s behalf by deducting the cost from the employee’s salary – typically before income tax (salary sacrifice).
4. At lease end the employee usually has options: pay out the residual (balloon), refinance, trade in or extend the lease, depending on the agreement.

Why the FBT exemption multiplies the benefit of a novated lease

Under normal circumstances (non‑exempt vehicles), an employer would face FBT on the private use of a car. Employers and employees typically use the Employee Contribution Method (ECM) – the employee makes after‑tax contributions – to reduce or eliminate FBT exposure. Those after‑tax contributions reduce the pre‑tax benefit the employee could otherwise obtain.

With an eligible EV and the FBT exemption:

• There is no FBT on the vehicle benefit – so there is no requirement for an after‑tax ECM payment.
• This allows 100% of the lease payments and running costs to be paid from pre‑tax salary, maximising income tax savings.
• The effect is to lower your assessable income and therefore your income tax liability, increasing net take‑home pay relative to financing the same vehicle after tax.

Dual tax advantages: income tax and GST

Two distinct tax advantages typically apply:

1. Income tax reduction: Salary package amounts are taken out of your gross pay before income tax is applied, lowering your taxable income. The higher your marginal tax rate, the larger the absolute income tax saving.
2. GST benefit: The lease/finance provider can usually claim GST credits on the purchase price and on packaged running costs. The provider passes a portion of that saving on to the employee through lower lease payments. Practically, this can deliver an effective ~10% saving on GST‑inclusive costs (subject to the GST treatment and any statutory caps).

Because both mechanisms apply simultaneously, the combined saving can be material – often enough to offset the higher purchase price of many EVs compared with petrol equivalents.

Illustrative impact (how the savings stack up)

Individual circumstances vary (income, fringe usage, employer arrangements and lease fees all matter). That said, common outcomes reported by novated lease providers and financial advisers include:

• A mid‑to‑high income PAYG employee can reduce the effective cost of a $60,000 eligible EV by several thousand dollars per year in pre‑tax benefits (over the lease term), and by tens of thousands of dollars across a typical 3-5 year lease.
• Over a 5‑year period, total cost‑of‑ownership savings versus a comparable petrol car financed after tax can range from the low five figures to more – the exact amount depends on purchase price, running costs, GST savings, and the employee’s marginal tax rate.

These are indicative, not guaranteed, figures. Always obtain formal quotes and run a personalised novated lease comparison.

Practical considerations and potential downsides

Before proceeding, consider these important points:

• Employer agreement: Your employer must agree to support a novated lease. Many medium and large employers already have novated providers and salary packaging policies; some small businesses may not.
• Lease fees and administration charges: Novated lease providers charge setup and administration fees which reduce net savings; compare providers.
• Residual (balloon) amount: A high residual reduces periodic payments but can leave a lump sum at the end to settle or refinance. Confirm contract terms and residual risk.
• Early termination: Exiting a novated lease early can be costly. Understand termination costs and obligations.
• Impact on other salary‑based entitlements: Salary packaging reduces assessable income and can alter entitlements or income tests for products (e.g., some government payments, HELP repayment thresholds, or superannuation contributions rely on gross salary figures). Seek personalised tax and financial advice if you rely on income‑tested benefits.
• Business usage and logbooks: If the vehicle is used for both private and business purposes, maintain accurate records. Business trips are usually treated differently for fringe benefits and tax.
• PHEV policy changes: If you’re considering a PHEV, confirm current ATO treatment. Policy settings regarding PHEVs have been subject to change and some vehicles may be grandfathered under earlier rules if leases commenced before a change date.

Steps to take if you’re seriously considering an EV novated lease

1. Check vehicle eligibility with the ATO and confirm the current LCT/fuel‑efficient threshold.
2. Speak to your employer’s payroll or HR team to confirm whether they offer novated leasing and which providers they work with.
3. Request quotes from multiple novated lease providers and ask for a detailed, line‑by‑line illustration showing pre‑tax vs after‑tax scenarios.
4. Compare total cost of ownership – lease payments, residual, running costs, insurance, and likely charging costs – against buying privately or financing via a standard car loan.
5. Consult a financial adviser or tax professional if you have concerns about impacts on super, government benefits or long‑term finances.

Conclusion

The FBT exemption for eligible electric vehicles has been a transformative policy for Australian salary‑packaged EVs. When combined with a novated lease, the exemption can allow PAYG employees to pay the full suite of vehicle and running costs from pre‑tax income, access GST benefits and materially reduce their total cost of ownership. That said, outcomes depend on individual circumstances, employer participation and contract terms – so do your homework, get comparative quotes and consider professional advice before committing.

When structured correctly, a novated lease for an eligible EV can turn what once felt like an expensive lifestyle choice into a compelling financial decision – accelerating Australia’s transition to cleaner transport while putting more money in the pockets of drivers.

Frequently asked questions

What exactly does “FBT exemption” mean for an employee?

It means that where a vehicle qualifies, the employer does not incur FBT on the provision of that car for private use. Practically, for the employee, it often allows 100% of the lease payments and running costs to be deducted from pre‑tax salary without needing after‑tax contributions to offset FBT.

Are plug‑in hybrids (PHEVs) eligible for the exemption?

Policy on PHEVs has evolved. Historically many PHEVs were excluded or treated differently. From 1 April 2025 there were proposals/announcements to restrict PHEV eligibility; however, some existing arrangements may be grandfathered. Always confirm the current ATO position before proceeding.

How much can I expect to save?

Savings vary widely. They depend on your marginal tax rate, the vehicle price, lease fees, expected running costs and GST treatment. Many employees report savings of thousands per year compared with after‑tax financing, and cumulative savings across a typical 3-5 year term in the low to mid five‑figure range in favourable cases. Obtain personalised quotes for an accurate estimate.

Do all employers offer novated leases?

No. Many medium to large employers do and some smaller employers participate, but it’s not universal. Employers must agree to enter the novation and payroll deductions.

Will salary sacrifice affect my superannuation, loans or government entitlements?

Potentially. Packaging reduces your assessable income which can influence income‑tested government benefits or payment thresholds (including HELP repayment and other obligations). It may also affect how salary‑based allowances or employer super contributions are calculated. Seek tailored advice if you rely on income‑tested entitlements.

What happens at the end of the lease?

Common options include: paying out the residual (balloon), refinancing the residual into a new loan, trading the vehicle in and using trade‑in proceeds to settle the payable amount, or extending the lease. Read your contract closely and plan for the residual.

About EV Evolution

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