• Some novated leases are subject to fringe benefits tax, which is a tax applied to most employee perks.

• It’s the employer, not the employee, who pays FBT where it applies.

• Usually there is no FBT payable, as novated leases are generally set up to include a portion of employee contributions (using post-tax salary to offset the FBT liability. This is known as the employee contribution method.

• Novated leases on eligible electric vehicles (EVs) are completely exempt from FBT.

If FBT is applied to a novated lease, it is charged at 47% (the highest tax bracket rate of 45%, plus Medicare levy of 2%) of the taxable value of the benefit, according to the ATO.

• Statutory formula - a flat 20% of the base cost of the car (including non-business accessories fitted, dealer delivery, GST and luxury car tax if applicable, but excluding registration and stamp duty). This is the method typically used when the vehicle is primarily used for the employee’s private use.

• Operating cost - based on the actual percentage of private use of the vehicle. The operating cost method is generally only applied to vehicles with a high percentage of business use. You can only use the operating cost method if you keep adequate records (e.g. log books) to demonstrate the proportion of private use.

• An employer will need to agree to the salary sacrifice car arrangement that allows a staff member to obtain a vehicle through a novated lease.

• The employer makes lease repayments to the finance supplier on behalf of the employee from their pre-tax salary.

• Because it’s a fringe benefit, there’s an FBT liability for the employer.

• The amount of the FBT liability should be reduced to $0 for the employer if sufficient post-tax contributions are made by the employee.

• Expenses incurred in arranging and maintaining the lease (not the lease repayments) are tax-deductible for the employer for the period the lease is active.

• The end of the employment relationship also ends the novated lease repayment commitment for the employer, as lease obligations revert to the (former) employee.

• When you lease the vehicle from the finance company, you can claim a GST credit for the GST included in the lease charges. However, you generally can’t claim GST credits if you make input taxed supplies.

• The employee can choose the vehicle they want to lease, and has exclusive use of it.

• Salary sacrificed novated lease payments reduces the employee’s taxable income, as the amount is paid from pre-tax salary.

• As the car is a fringe benefit, FBT must be paid, although the employer is liable for this payment.

• Generally, FBT is based on a portion of the purchase price of the vehicle.

• Alternatively, the operating cost method is based on vehicle running costs, with a percentage usually determined by how much the car is used for business versus personal use (recorded via logbook).

• Making post-tax contributions to the costs of running the vehicle can reduce the FBT liability by the same amount contributed. This typically means there is $0 FBT to be paid.

• Even with FBT, a novated lease can be a very cost-effective way to pay for a car because some of the payments are made pre-tax and there is a GST saving on the vehicle purchase amount (up to a maximum of $6,334 in FY 2025-26). 

• If you opt for a self-managed novated lease, it can still be a good idea to get professional help with establishing the lease with fringe benefits tax in mind.

• As we’ll see below, leasing an eligible EV is one way of completely side-stepping FBT.

For a jargon-free explanation of the other aspects of a novated lease that make it unique, read our simple to how a novated lease works.