Novated Leases Explained: EV FBT Rules 2026

A novated lease lets you pay for a car, and its running costs, out of your salary before tax. For electric cars it's become one of the most valuable perks available to Australian employees, thanks to a fringe benefits tax (FBT) exemption. But it isn't free money, and the rules are about to change. Here's how it works.

Run your own numbers

How a novated lease works

"Novated" means the lease is transferred. You lease a car from a finance company, then you, your employer and the financier sign an agreement that makes your employer responsible for the payments while you work there. Your employer deducts the lease and a budget for running costs (fuel or charging, insurance, registration, servicing and tyres) from your pay, usually through a salary packaging provider.

The savings come from three places:

Pre-tax pay. Payments made before tax cost you less than the same amount from your take-home pay. At a 30% tax rate plus Medicare, every $1,000 from pre-tax pay costs about $680 in take-home pay.
GST. The lease is priced on the car's cost excluding GST (up to a cap), and GST is removed from running costs too.
FBT treatment. For an eligible electric car there's no FBT at all. For a petrol or hybrid car, FBT is usually removed by paying part of the cost from after-tax pay.

The electric car FBT exemption

An electric car is exempt from FBT if it's a battery electric or hydrogen fuel cell car, it was first held and used on or after 1 July 2022, and its value is below the luxury car tax threshold for fuel-efficient vehicles. That threshold is $91,661 for 2026–27 (up from $91,387 in 2025–26). With the exemption, the whole lease and running budget can come from pre-tax pay.

The benefit still shows up as a reportable fringe benefit on your income statement. It isn't taxed, but it counts for HECS-HELP repayments, the Medicare levy surcharge, some Centrelink payments and child support.

Plug-in hybrids lost the exemption on 1 April 2025

From 1 April 2025, plug-in hybrids are no longer treated as zero or low emissions vehicles for FBT. A plug-in hybrid only keeps the exemption if it was already being used (or available for use) under an exempt arrangement before 1 April 2025 and there was a financially binding commitment to keep providing it. A new plug-in hybrid lease today is taxed like a petrol car.

Announced changes from 1 April 2027

The 2026–27 Federal Budget announced a phase-down of the exemption. This isn't law yet, and existing leases won't be affected.

Until 31 March 2027: no change.
From 1 April 2027: electric cars costing $75,000 or less stay fully exempt. Cars above $75,000 but below the luxury car tax threshold get a 25% discount on the FBT instead.
From 1 April 2029: all eligible electric cars get a 25% FBT discount rather than a full exemption.

What it's worth: an example

Here's our calculator's estimate for a $60,000 drive-away car on a three-year lease at 8.5%, with $4,500 a year of running costs and a $500 management fee, for someone earning $120,000:

	Electric car	Petrol car
Paid from pre-tax pay each year	$17,740	$6,831
Paid from after-tax pay each year	$0	$12,000
Drop in take-home pay per fortnight	$464	$640
Cost per year if you bought it with a loan	$18,964	$18,964
Saving per year with the lease	$6,901	$2,319
Residual owing at the end	$28,128	$28,128

The electric car comes out about $6,901 a year ahead of buying the same car with a loan, mostly because there's no FBT. The petrol car still saves money through GST and pre-tax payments, but $12,000 a year has to come from after-tax pay under the employee contribution method, so the benefit is much smaller. A cheaper $45,000 electric car for someone on $90,000 saves about $5,329 a year.

Residual (balloon) payments

At the end of the lease you owe a residual, a lump sum set by the ATO's minimum residual values. You can pay it, refinance it into a new lease, or sell or trade the car to cover it.

Lease term	Minimum residual	Residual on a $50,000 cost
1 year	65.63%	$32,815
2 years	56.25%	$28,125
3 years	46.88%	$23,440
4 years	37.50%	$18,750
5 years	28.13%	$14,065

The percentages apply to the car's cost excluding GST, and GST is added to the residual when you pay it.

A shorter lease means a bigger residual. If the car is worth less than the residual at the end, you'll need to cover the gap.

Pros and cons

Pros

Big savings on eligible electric cars while the exemption lasts.
Running costs are budgeted and paid for you, GST-free.
No large upfront deposit needed in most cases.

Cons

Fees and add-ons. Interest rates, management fees and bundled insurance or extras vary a lot between providers. Compare the total cost, not the fortnightly figure.
Changing jobs. If you leave, the lease reverts to you. You can ask your new employer to take it on, otherwise you pay from after-tax income.
Reportable benefits can raise your HECS repayments and affect income-tested payments.
The residual is still debt you have to deal with at the end.
For petrol cars on modest incomes, the saving can be small once fees are included.

Frequently asked questions

Are plug-in hybrids still FBT exempt?

Only if the car was already used under an exempt arrangement before 1 April 2025 and a financially binding commitment to keep providing it continues. New plug-in hybrid leases aren't exempt.

What is the price limit for the electric car FBT exemption?

The car's value must be below the luxury car tax threshold for fuel-efficient vehicles, which is $91,661 in 2026–27.

Will my existing EV novated lease be affected by the 2027 changes?

The ATO says existing leases won't be affected by the announced changes. The changes are not yet law, so check the final rules before signing a new lease.

Sources

More guides

Last reviewed October 2026. This guide is general information only. It isn't financial, tax, credit or legal advice and doesn't consider your circumstances. Rules change, so check the official sources below or speak to a licensed professional before you make a decision.

Novated leases explained: how they work and what you save

Key points