A novated lease is a popular way for Australian employees to finance a car through salary packaging. According to the Australian Taxation Office (ATO), it's a three-way agreement that can offer significant tax benefits, especially for electric and plug-in hybrid vehicles.
Important Tax Disclaimer
This guide provides general information only. Tax laws are complex and your individual circumstances matter. Always consult with a qualified accountant or tax professional before entering into a novated lease. Information is current as of January 2025.
What is a Novated Lease?
A novated lease is a three-way agreement between you (the employee), your employer, and a finance company. The word "novation" means the transfer of an obligation from one party to another. In this case, your employer takes on the obligation to make lease payments from your salary.
The Three-Way Agreement
You (The Employee)
Choose the car, negotiate the price, and use the vehicle. You're responsible for running costs and the car goes with you if you leave your job.
Your Employer
Deducts payments from your pre-tax and/or post-tax salary and pays the finance company on your behalf. They must agree to offer salary packaging.
The Finance Company
Provides the lease finance, owns the vehicle during the lease term, and receives payments from your employer on your behalf.
Key Benefits
- Pay for your car with pre-tax dollars
- Potential income tax savings
- GST savings on purchase price
- Include running costs in the package
- Car is yours, not the employer's
What Can Be Included?
- Lease payments (the car itself)
- Fuel or electricity charging
- Registration and CTP insurance
- Comprehensive car insurance
- Servicing and maintenance
- Tyres and roadside assistance
How Salary Packaging Works
Salary packaging, also known as salary sacrificing, allows you to pay for certain expenses with your pre-tax salary. This reduces your taxable income and can result in significant tax savings.
The Payment Structure
- 1Your employer deducts payments from your salary before and/or after tax
- 2Pre-tax deductions reduce your taxable income (saving you income tax)
- 3Post-tax contributions may be used to reduce or eliminate FBT
- 4Your employer pays the lease company directly on your behalf
Example Savings
If you earn $100,000 and salary package $15,000 for your car, your taxable income becomes $85,000. At the 32.5% marginal rate, you could save approximately $4,875 in income tax (before considering FBT). However, FBT may apply, which is why the method of structuring payments matters.
Note: Actual savings depend on your tax bracket, FBT liability, and specific circumstances.
Fringe Benefits Tax (FBT) Explained
Fringe Benefits Tax is a tax paid by employers on certain benefits they provide to employees. For novated leases, the car is considered a fringe benefit because your employer is helping you pay for a personal vehicle.
FBT Rate: 47%
The FBT rate is currently 47%, which is the top marginal tax rate including the Medicare levy. This sounds high, but it's calculated on the "taxable value" of the benefit, not the full car cost. And there are ways to reduce or eliminate it.
Two Methods to Calculate FBT
1Statutory Formula Method
The most commonly used method. It applies a flat 20% rate to the car's base value, regardless of how many kilometres you drive.
Taxable Value = Base Car Value x 20% x Days Available / 365
Best for: Employees who drive less than approximately 15,000km per year for work.
2Operating Cost Method
Calculates FBT based on actual running costs and the percentage of private use. Requires a logbook to be maintained for at least 12 weeks.
Taxable Value = Total Costs x Private Use %
Best for: Employees with high business use (low private use percentage).
Which method is better? Most novated lease packages use the Statutory Formula Method because it's simpler and doesn't require ongoing logbook records. However, if you use your car extensively for work, the Operating Cost Method may result in lower FBT.
Employee Contribution Method (ECM)
The Employee Contribution Method is a strategy used to reduce or completely eliminate FBT on a novated lease. It involves making post-tax contributions that directly offset the taxable value of the fringe benefit.
How ECM Works
When you make a contribution from your post-tax salary equal to the FBT taxable value, the FBT liability is reduced to zero. A common benchmark is contributing approximately 20% of the GST-inclusive vehicle price as post-tax payments over the FBT year.
Example:
For a $50,000 car (including GST), approximately 20% = $10,000 per FBT year in post-tax contributions could eliminate the FBT liability. The remaining payments can come from pre-tax salary, providing income tax savings.
Benefits of ECM
- Can eliminate FBT entirely
- Still get pre-tax salary benefits
- No FBT payable by employer
- May reduce RFBA (see below)
Considerations
- Post-tax contributions reduce take-home pay
- Need to balance pre/post-tax split
- Requires proper structuring by provider
EV FBT Exemption
Since 1 July 2022, eligible electric vehicles and plug-in hybrid vehicles have been exempt from FBT, making novated leases for EVs significantly more attractive. This can result in substantial savings compared to petrol or diesel vehicles.
Eligibility Criteria
- Vehicle Type: Must be a zero or low emissions vehicle (battery electric, hydrogen fuel cell, or plug-in hybrid)
- Price Cap: Car value must be below the luxury car tax threshold for fuel-efficient vehicles: $91,387 for 2024-25 FY
- First Use: The car must not have been held or used before 1 July 2022
Important: PHEVs After 1 April 2025
Plug-in hybrid electric vehicles (PHEVs) are only eligible for the FBT exemption if the novated lease arrangement was entered into before 1 April 2025. New PHEV arrangements from 1 April 2025 onwards will not qualify for the exemption. Battery electric vehicles (BEVs) remain eligible regardless of when the arrangement starts.
EV Charging Costs
The ATO has released Practical Compliance Guideline PCG 2024/2 which provides a shortcut method for calculating home charging costs for FBT purposes.
Shortcut Rate: 4.2 cents per kilometre
This rate can be used instead of tracking actual electricity costs, making it easier to claim home charging as part of your novated lease running costs.
Example Savings
For a $60,000 electric vehicle under a novated lease:
Without EV Exemption (ICE Vehicle)
- FBT taxable value: ~$12,000/year
- FBT at 47%: ~$5,640/year
- Plus income tax on pre-tax deductions
With EV Exemption
- FBT taxable value: $0
- FBT payable: $0
- Full pre-tax salary benefits apply
GST Savings
One of the often-overlooked benefits of a novated lease is the GST saving. When you purchase a car privately, you pay the full GST-inclusive price. With a novated lease, the finance company can claim back the GST, effectively giving you a discount.
How GST Savings Work
The lease provider claims the GST input tax credit on the vehicle purchase. This saving is passed on to you through lower lease payments.
Example:
On a $55,000 car (GST-inclusive), the GST component is approximately $5,000. This amount is effectively removed from your lease cost, representing a direct saving of up to 10% off the purchase price.
Note: GST savings also apply to running costs included in your novated lease package, such as servicing, tyres, and insurance (where applicable).
Reportable Fringe Benefits Amount (RFBA)
Even when FBT is reduced to zero (through ECM or the EV exemption), you may still have a Reportable Fringe Benefits Amount shown on your income statement. This is important to understand because it affects certain government benefits and obligations.
RFBA Still Reported for Exempt EVs
Even with the EV FBT exemption, the value of the benefit is still reported as RFBA on your income statement. While no FBT is payable, this amount is added to your taxable income when calculating your "adjusted taxable income" for certain purposes.
What RFBA Affects
Family Tax Benefit
RFBA is included in the income test for Family Tax Benefit Parts A and B. A higher adjusted taxable income may reduce your entitlement.
HECS-HELP Repayments
Your HECS-HELP repayment income includes RFBA. This could push you into a higher repayment bracket or trigger repayments if you're near the threshold.
Child Support
RFBA is considered when calculating child support obligations through the Child Support Agency.
Medicare Levy Surcharge
RFBA is included in the income test for the Medicare Levy Surcharge if you don't have private health insurance.
Important: The RFBA amount is "grossed up" by a factor (currently 2.0802 for Type 1 benefits or 1.8868 for Type 2). This means the reported amount is higher than the actual benefit value. Consult a tax professional to understand the full impact on your situation.
Who Can Get a Novated Lease?
A novated lease requires cooperation from your employer. Not all employers offer salary packaging, so this is the first thing to check.
Basic Requirements
- Employer offers salary packaging: Your employer must agree to set up salary deductions and make payments to the lease company
- Permanent employment: Most providers require permanent full-time or part-time employment (some accept fixed-term contracts)
- Adequate income: Your salary must be sufficient to cover the lease payments and still meet living expenses
- Credit approval: You'll need to meet the lender's credit criteria
Industries That Commonly Offer Salary Packaging
Healthcare
Hospitals, medical centres
Education
Schools, universities
Government
Federal, state, local
Not-for-Profit
Charities, NGOs
Large Corporates
Many large employers
Professional Services
Accounting, legal, consulting
What if you change jobs? If you leave your employer, the lease "un-novates" back to you. You'll need to either continue payments personally, novate the lease to your new employer (if they offer salary packaging), refinance, or pay out the lease.
Official Resources
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