How Novated Leases Work in Australia and the EV FBT Exemption Explained

Novated leases have become one of the most popular salary packaging arrangements in Australia — and the introduction of the electric vehicle FBT exemption has made them even more attractive. For brokers with an understanding of this product, it opens a referral stream from employers, HR professionals, and employees that most brokers completely ignore.

What Is a Novated Lease?

A novated lease is a three-way arrangement between an employee, their employer, and a financier. The employer leases a vehicle on behalf of the employee, and the lease repayments come out of the employee's pre-tax salary. This reduces the employee's taxable income — and therefore their income tax — by the amount of the lease payments.

The word "novated" refers to the assignment of the lease obligation from the employee to the employer. If the employee changes jobs, the lease can be "de-novated" back to the employee or "re-novated" to the new employer.

How the Three Parties Work Together

• The employee selects a vehicle and enters a salary sacrifice arrangement with their employer
• The employer enters the lease agreement with the financier and makes the repayments from the employee's pre-tax salary
• The financier funds the vehicle purchase and registers a security interest

The employee effectively drives a vehicle funded with pre-tax dollars — paying less income tax while the employer makes the repayments on their behalf. At the end of the lease term, the employee can purchase the vehicle at the residual value, return it, or enter a new lease.

The Tax Benefit — How the Saving Works

The tax saving from a novated lease comes from salary sacrificing — reducing your taxable income by the amount of the lease repayments before income tax is calculated.

Example: An employee earning $95,000 per year with a novated lease costing $15,000 per annum has their taxable income reduced to $80,000. At a marginal tax rate of 32.5% (including Medicare), the annual tax saving is approximately $4,875. The employee is effectively paying for part of their vehicle with money that would have gone to the ATO.

Fringe Benefits Tax — The Traditional Catch

Traditionally, novated leases attracted Fringe Benefits Tax (FBT) — a tax paid by the employer on non-cash benefits provided to employees. FBT is calculated at 47% (the top marginal rate plus Medicare) on the taxable value of the benefit, which significantly reduced the net tax saving for employees using novated leases for petrol and diesel vehicles.

Under the statutory formula method, FBT is calculated as a percentage of the vehicle's original cost — meaning the FBT liability does not reduce as the vehicle depreciates, which made long-term novated lease arrangements less efficient over time.

The EV FBT Exemption — The Game Changer

This means an employee who novated leases an eligible EV pays zero FBT on the arrangement — and their employer has no FBT liability. Combined with the salary sacrifice tax saving, this makes EV novated leases extraordinarily tax-effective for employees in middle to high income brackets.

Eligibility requirements for the EV FBT exemption:

• The vehicle must be a car (not a ute or commercial vehicle above certain thresholds)
• The vehicle's purchase price must be below the luxury car tax (LCT) threshold — currently $91,387 for fuel-efficient vehicles in 2026
• The vehicle must be first held and used on or after 1 July 2022
• The arrangement must be a genuine novated lease through the employer

The Broker Opportunity in Novated Leasing

Novated leasing is technically facilitated by specialist salary packaging companies rather than traditional asset finance brokers — but understanding the product opens referral relationships with:

• Employers who want to offer EV novated leasing as a staff benefit — particularly relevant as EV adoption accelerates
• HR and payroll professionals who field questions about salary packaging from employees
• Accountants who advise clients on salary structuring and tax minimisation
• Fleet managers transitioning commercial fleets to EVs — a major asset finance opportunity

A broker who understands how novated leasing works can have intelligent conversations with these referral sources and position themselves as a credible, knowledgeable finance professional — even if the novated lease itself is facilitated through a specialist provider.