Are electric vehicle novated leases exempt from FBT in Australia in 2026?

Eligible battery electric and hydrogen fuel-cell vehicles can qualify for the Australian electric car FBT exemption if they were first held and used on or after 1 July 2022, are used by a current employee or associate, and luxury car tax was never payable on their importation or sale. Plug-in hybrids generally stopped qualifying for new arrangements from 1 April 2025, subject to transitional rules.

What is the luxury car tax threshold for fuel-efficient vehicles in Australia in 2026-27?

The ATO indexes the luxury car tax threshold each financial year. Eligibility for the electric car FBT exemption depends on whether LCT was ever payable, not merely the current purchase price. Buyers should confirm the applicable 2026-27 fuel-efficient vehicle threshold in the current ATO determination and include dealer delivery and relevant accessories in the calculation.

Does an FBT-exempt electric car create a reportable fringe benefit in Australia?

Yes. Although the employer may pay no FBT on an eligible electric car, the taxable value is generally included when calculating the employee's reportable fringe benefits amount if the reporting threshold is exceeded. It is grossed up and can affect HELP repayments, Medicare levy surcharge, child support, private health rebate and some income-tested benefits.

Can Australian employees claim tax deductions for a novated lease?

Employees generally cannot separately claim deductions for running costs paid through a salary-packaged novated lease because those costs are paid by the employer under the arrangement. The tax benefit usually arises through pre-tax salary packaging and any FBT exemption, not a personal car-expense deduction. Business owners and sole traders face different rules.

What happens to an Australian novated lease when employment ends?

The novation normally ends and the employee remains responsible for the underlying finance lease. Options may include paying costs personally, transferring the arrangement to a new employer, refinancing or paying out the lease. Exit fees and negative equity can be substantial, so Australians should read the finance and novation contracts before signing.

Is an electric vehicle novated lease always cheaper in Australia?

No. Savings depend on taxable income, vehicle price, kilometres, finance rate, fees, running costs, resale value and continued eligibility for the FBT exemption. A higher-priced vehicle, inflated finance rate or weak residual value can outweigh tax savings. Compare the total after-tax cash cost with buying the same vehicle using cash or a conventional loan.

Electric Vehicle Novated Leases in Australia: The 2026 Tax, FBT and Cost Guide

Electric vehicle novated leases have become one of Australia’s most promoted salary-packaging strategies. The appeal is understandable: an eligible battery electric vehicle can be provided by an employer without fringe benefits tax, and lease payments and running costs may be deducted from pre-tax salary.

That does not make every quote a bargain. A novated lease combines a vehicle purchase, finance agreement, employer arrangement, tax calculation, running-cost budget and resale risk. A quote can show an impressive “tax saving” while the employee still pays more overall than buying a cheaper car.

This guide explains the Australian rules applying in 2026, including the electric car FBT exemption, reportable fringe benefits, residual values and the questions to ask before signing.

What Is a Novated Lease?

A novated lease is a three-party arrangement between an employee, employer and finance provider. The employee chooses a vehicle and enters a finance lease. A novation agreement transfers payment obligations to the employer while employment continues. The employer deducts agreed amounts from salary and pays the provider.

A fully maintained package can include:

finance payments;
registration;
comprehensive insurance;
servicing and tyres;
electricity or charging;
roadside assistance; and
administration fees.

Unused running-cost budgets are normally reconciled, but contract terms differ. The employee remains economically responsible for the vehicle and usually takes back the finance obligation if employment ends.

The Australian Electric Car FBT Exemption

The exemption was introduced under the Treasury Laws Amendment (Electric Car Discount) Act 2022. Under current ATO guidance, an eligible car benefit can be exempt where:

the vehicle is a zero or low emissions vehicle of an eligible type;
it was first held and used on or after 1 July 2022;
it is provided to a current employee or their associate; and
luxury car tax has never been payable on its importation or sale.

Eligible vehicle types include battery electric vehicles and hydrogen fuel-cell electric vehicles. A qualifying vehicle must also meet the tax definition of a car, generally designed to carry fewer than nine passengers and less than one tonne.

Plug-in hybrid rules changed from April 2025

Plug-in hybrid electric vehicles generally ceased to be eligible from 1 April 2025. Transitional treatment may preserve the exemption where use of the vehicle was exempt before that date and there was a financially binding commitment to continue providing it.

Renewing, extending or materially changing an arrangement can affect transitional eligibility. Do not assume a used plug-in hybrid qualifies because it was originally delivered before April 2025. Obtain written advice based on the contracts and dates.

The luxury car tax test

The FBT exemption does not apply if luxury car tax was ever payable on the vehicle. The ATO publishes a higher LCT threshold for fuel-efficient vehicles each year.

The test is more complicated than comparing the drive-away price with an online threshold. LCT value can include dealer delivery, accessories and GST, while excluding some statutory charges. Discounts and trade-ins can also be treated differently from what a consumer expects.

Ask the dealer and packaging provider to confirm in writing:

the vehicle’s LCT value;
the financial year threshold used;
that LCT was not payable when the car was first sold or imported; and
whether accessories fitted before delivery alter the result.

If a car falls just below the threshold, adding premium paint, wheels or dealer accessories can be consequential.

FBT-Free Does Not Mean Tax-Invisible

An eligible electric car can be exempt from FBT while still producing a reportable fringe benefits amount. If reportable benefits exceed the relevant threshold, the grossed-up value appears on the employee’s income statement.

The RFBA is not added to taxable income and is not taxed at the employee’s marginal rate. However, it is used in several income tests. It can affect:

compulsory HELP and other study-loan repayments;
Medicare levy surcharge;
private health insurance rebate;
child support assessments;
Child Care Subsidy and other family assistance;
Division 293 tax calculations; and
some superannuation and government benefit thresholds.

This is one of the most frequently overlooked costs.

A simplified RFBA example

Assume an eligible EV has an annual taxable value of $12,000 before the exemption. Applying the type 2 gross-up rate of 1.8868 produces an illustrative RFBA of $22,642.

Item	Illustrative amount
Underlying taxable value	$12,000
Type 2 gross-up factor	1.8868
Reportable fringe benefits amount	$22,642
FBT paid by employer if exemption applies	$0

The employee does not pay ordinary income tax on $22,642, but a study-loan repayment calculation may use an adjusted income that includes it. The exact taxable value depends on the statutory formula or operating-cost method and employee contributions.

Before signing, request an estimate of the RFBA for each financial year, then model the effect on every relevant income-tested obligation.

How Salary Packaging Can Produce Savings

Australian resident individual tax rates for 2025-26 were:

Taxable income	Marginal rate excluding Medicare levy
$0-$18,200	0%
$18,201-$45,000	16%
$45,001-$135,000	30%
$135,001-$190,000	37%
Above $190,000	45%

From 1 July 2026, the lowest rate was legislated to fall from 16% to 15%. The Medicare levy is generally 2%, subject to thresholds and exemptions.

If $15,000 of eligible annual vehicle costs is deducted pre-tax, an employee in the 30% bracket plus Medicare levy might avoid about $4,800 of tax, before considering RFBA effects, fees and differences in vehicle cost. Someone in the 45% bracket plus Medicare levy might avoid about $7,050.

These figures are not the net benefit. The employee must still pay the $15,000 package cost and may face:

finance interest above competitive car-loan rates;
establishment and monthly administration fees;
insurance commissions or mark-ups;
excess running-cost budgets;
residual value risk;
early termination costs; and
income-test consequences.

A Worked Five-Year Comparison

Consider a $60,000 battery electric vehicle held for five years. The following simplified example is designed to show the method, not recommend a product.

Option A: buy with cash

Cost over five years	Amount
Purchase price	$60,000
Registration, insurance, service and charging	$18,000
Sale proceeds after five years	-$25,000
Net nominal cash cost	$53,000

Cash buying also has an opportunity cost. If the $60,000 could have earned 4.5% before tax, forgone returns may be material.

Option B: FBT-exempt novated lease

Cost over five years	Amount
Lease and finance payments	$70,500
Running costs and administration	$21,500
Residual payment	$16,875
Sale proceeds	-$25,000
Gross package and ownership cost	$83,875
Illustrative income-tax saving	-$24,000
Net illustrative cost	$59,875

Under these assumptions, cash is cheaper despite the tax saving. Change the finance rate, marginal tax rate, GST treatment, purchase discount or resale value and the result can reverse.

The key is to compare the same vehicle, same period and same running costs. Some sales comparisons misleadingly compare a novated new EV with keeping an existing paid-off petrol car, or compare only monthly cash flow.

GST Treatment and Why Quotes Look Different

Employers registered for GST may generally claim input tax credits on eligible lease and running costs, subject to the normal rules. Packaging providers often reflect this in the quote. GST treatment is one reason the financed amount may differ from the retail drive-away price.

However, GST savings are not unlimited. Restrictions can apply around the car limit, private use and particular costs. The residual payment generally includes GST. Employees should ask for a quote that separately identifies:

vehicle purchase price excluding and including GST;
financed amount;
interest or rental charges;
administration fees;
each running-cost budget;
tax savings;
residual including GST; and
total net reduction in take-home pay.

Do not rely only on a fortnightly “cost after tax” headline.

Residual Values and End-of-Lease Choices

The ATO publishes minimum residual-value percentages commonly used for bona fide car leases. Typical percentages include 65.63% after one year, 56.25% after two, 46.88% after three, 37.5% after four and 28.13% after five years.

For a $60,000 base value, 28.13% is $16,878 before considering the quote’s precise GST treatment and rounding.

At the end, an employee may be able to:

pay the residual and keep the car;
sell or trade the car and pay the residual;
refinance the residual; or
enter a new arrangement.

If the car sells for $13,000 but the payout is $17,000, the employee must fund the $4,000 shortfall. EV resale values are uncertain because new models, battery technology and manufacturer price reductions can change used prices quickly.

Charging, Electricity and Home Equipment

Electricity used to charge an eligible packaged EV can form part of running costs where properly substantiated. The ATO provides a cents-per-kilometre home-charging method in specified circumstances. Alternatively, actual electricity costs may be used with adequate records.

The cost of buying and installing a home charging station is generally not part of the exempt car benefit in the same way as electricity. It may create a separate fringe benefit. Ask the provider how equipment, installation, public charging and solar-generated electricity will be treated.

Keep odometer readings, charging records, electricity bills and provider statements. If two EVs use one household meter, reasonable allocation becomes especially important.

Employment Changes Are the Biggest Contract Risk

A novated lease relies on an employer participating. If the employee resigns, is made redundant, takes unpaid leave or moves to an employer that does not support packaging, the novation may end.

The employee normally remains liable under the finance lease. Payments then come from after-tax money until the arrangement is transferred, refinanced or paid out.

Before signing, ask:

What is today’s early payout figure?
How is the payout calculated in years one, two and three?
Can a new employer adopt the lease?
What fees apply to re-novation?
What happens during parental leave or workers compensation?
Is insurance for involuntary unemployment included, and what are its exclusions?

Someone expecting to change jobs soon may value flexibility more than the projected tax benefit.

Who Is Most Likely to Benefit?

The arrangement can be attractive for an employee who:

wants an eligible EV below the LCT threshold;
has stable employment with a participating employer;
pays a meaningful marginal tax rate;
would buy the same car anyway;
receives competitive finance and transparent fees; and
understands the RFBA impact.

It may be less attractive for a low-kilometre driver, someone in a low tax bracket, a person with uncertain employment, or anyone choosing a more expensive car mainly because the fortnightly figure looks affordable.

Self-employed sole traders cannot novate a lease with themselves as employer and employee. Companies and trusts may provide vehicles under different FBT arrangements, requiring tailored accounting advice.

Questions to Ask Before Signing

Request the complete finance contract, not just the packaging illustration. Confirm the interest or implicit rental rate and compare it with a secured car loan and mortgage redraw, while considering tax and deductibility consequences.

Ask for three scenarios:

employment and lease continue to term;
employment ends after 12 months; and
the car’s resale value is 20% below the quoted estimate.

Also verify that comprehensive insurance permits the finance arrangement and nominated drivers. Compare insurance independently rather than assuming the bundled quote is competitive.

Finally, check superannuation. Salary sacrifice should not reduce ordinary time earnings used for compulsory super, but confirm payroll treatment. Ensure the arrangement does not unintentionally affect employer benefits, leave loading, bonuses or income protection.

The Bottom Line

Australia’s electric car FBT exemption can create a genuine tax advantage, particularly for higher-income employees who already intend to buy an eligible EV. But an exemption is not the same as a free car.

The correct comparison includes finance, fees, running costs, residual risk, resale value, GST, reportable benefits and employment flexibility. A transparent five-year calculation is more reliable than a sales quote’s fortnightly saving.

Before committing, find an Australian accountant to review the tax and RFBA consequences, or compare financial advisers through WealthWorks for advice on the wider cash-flow decision.