Fringe benefits tax (FBT) is applied to fringe benefits (i.e. work perks) received by an employee or their associates - i.e. family members - from their employer.
Fringe benefits include any non-wage compensation or benefits you may receive, such as:
Put simply, these are benefits that are not subject to the standard income tax applied to an individual's salary, so fringe benefits tax applies instead, unless there is an exemption.
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.
The taxable value of a vehicle under a novated lease can be established in one of two ways:
The difference between the taxable value and the total cost of the benefit will not be subject to FBT or income tax.
While the employer is liable for the FBT amount, the novated lease is typically set up to reduce the FBT amount payable to zero. This happens through post-tax contributions to the vehicle’s running costs made by the employee.
This is only necessary if the vehicle is not an eligible EV or PHEV that’s exempt from FBT.
The main way to reduce and possibly eliminate FBT on a novated lease is through the Employee Contribution Method (ECM)
Using the ECM means the employee makes post-tax contributions towards the cost of running and maintaining the vehicle (e.g. fuel and servicing).
Every dollar paid in after-tax contributions by the employee reduces the taxable value of the benefit by the same amount. It’s possible to reduce the FBT liability to zero using this method.
The level of post-tax contributions will be agreed upon between the employer and the employee when creating the salary packaging agreement.
Vehicle cost (Toyota RAV4 Edge)
Fringe benefit value (statutory method)
Pre-tax novated lease salary deduction
Post-tax novated lease salary deduction
Total annual employee contribution
Fringe benefit tax liability
Total employee tax saving during novated lease (income tax & GST)
Usually the vehicle is obtained more cost-effectively through a novated lease because:
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.
In certain scenarios, it’s possible to avoid novated lease FBT completely. Here are the main examples, according to the ATO.