EV FBT exemption phase-down explained

Novated lease FBT exemption: What exactly is changing?

In the May 2026 Federal Budget, the Government announced a proposal to phase down the FBT exemption on electric vehicles. The exemption initially came into effect in 2022 and makes it much cheaper to drive an eligible electric car through a novated lease.

Basically it means you can cover 100% of your eligible lease payments and running costs using pre-tax salary. Without the exemption, novated leases are subject to FBT (a tax on employee benefits), which reduces the savings available. That’s because a portion of the lease payment generally needs to be made using after-tax money to offset the FBT.

The FBT exemption has been a wildly popular EV incentive, and has contributed to a big increase in EV sales. According to the Government’s figures, 22.9% of new cars sold in March 2026 were electric or plug‑in hybrids, compared to around 1.8% in March 2022, before the incentive launched.

(Note, plug-in hybrid vehicles were eligible under the scheme previously, but no longer are. The current exemption only applies to eligible fully-electric vehicles.)

But all good things must come to an end, right? Well, sort of. There’s no ‘end date’ for the FBT incentive as such. Instead, it will be phased down gradually, with a slimmed-down version remaining in place under the proposal beyond the timeline outlined.

Phase 1: Until 31 March 2027 (as you were)

The current status quo is the first phase and will run until 31 March 2027. During this period, it’s as you were. In other words, the full FBT exemption will be available for novated leases on electric vehicles priced up to the LCT threshold ($91,661 for FY 2026/27).

So this ‘phase’ is effectively a countdown period for drivers looking to take full advantage of the EV discount. That’s because if you start a novated lease on an eligible EV up until 31 March 2027, you’ll get a 100% FBT exemption for the duration of that lease, even after the policy more broadly is phased down for new leases.

This deadline is particularly important for the more premium EVs that are currently eligible for an exemption. If you want one with the full discount, the clock is ticking.

Phase 2: From 1 April 2027 - 31 March 2029 (Premium EVs lose full exemption)

From 1 April 2027, the full FBT exemption will only be available on EVs valued at $75,000 or below. Vehicles priced above that level that were previously eligible for the full FBT exemption will instead get a 25% FBT discount.

This change will impact new novated leases on EVs priced between $75,000 and $91,661 (the LCT threshold for FY 2026/27). At current pricing, that’ll include the likes of the BMW iX1 xDrive30, Kia EV6 GT-Line RWD and Polestar 2 Long range Dual motor with Performance pack.

So how much will this impact the cost of driving a novated lease?

Well, as an example calculation, someone earning $160,000 a year and driving an $80,000 EV could pay around $445 more per month under the proposed rules from 1 April 2027, versus the current full exemption.^

For models priced above the cutoff but below the LCT threshold, the 25% FBT discount will be available for the life of the lease. This will still mean a decent saving on the car and eligible running costs, but starting your lease before 1 April 2027 could mean paying considerably less for the exact same car and inclusions.

Phase 3: From 1 April 2029 (25% FBT discount for all eligible EVs)

In the final phase of the proposed roll out, the Government will remove the full FBT exemption for new leases on all EV models that were eligible up to that point. Instead, from 1 April 2029, any EV priced below the LCT threshold will get a 25% FBT discount only.

In other words, there will still be a tax break, but it’ll be a good bit less than it is today. For example, someone earning $160,000 leasing a $60,000 EV would pay around $330 more per month under the proposed 25% FBT discount than under the full exemption.^

Vehicles priced above the LCT threshold will remain ineligible for any FBT discount.

So what do I need to do now?

While the Government’s planned changes to the EV FBT exemption have not yet been passed by parliament and things could change, it’s a good idea to start thinking now about how the proposal could affect you. After all, 1 April 2027 will be here before we know it.

Here’s what to consider doing before the phase-down begins:

I have an existing FBT-exempt lease

You don’t need to do anything other than remind yourself of when your current lease is due to end. If that date is close to 1 April 2027, it’d be worth chatting to your novated lease consultant sooner rather than later to discuss your options. You don’t want to get the timing wrong and miss out on an opportunity to extend your lease or start a new one before the changes kick in.

I’m considering an EV

Particularly if the vehicle you have your eye on is valued above $75,000 and is currently eligible for an FBT exemption, now’s the time to take action. Your lease will need to have started before 1 April 2027 if you want to enjoy the full exemption.

Talk to your lease provider about what that will actually mean in terms of timing and logistics. Depending on the model you have in mind, delivery times can be lengthy, so you’d want to get the wheels in motion, so to speak. Just ordering the car before the deadline is unlikely to be enough.

If the vehicle you’re considering is valued comfortably below $75,000, there’s less urgency as vehicles at that price point will be eligible for the existing incentive until 31 March 2029.

*Estimates are illustrative only. Actual costs differences will vary depending on your individual circumstances, including your financial situation and marginal tax rate.