What is fringe benefits tax (FBT)?
Fringe benefits tax (FBT) is a tax employers pay when they provide certain benefits to employees on top of their regular salary (like a car made available for personal use through a novated lease).
It’s separate from income tax and is calculated at a rate of 47% on the taxable value of the benefit.
FBT is applied quite broadly to employee benefits. For example, the ATO states if the car’s parked at or near your home, it’s considered available for personal use and is fair game for FBT. In other words, the tax is applied to the “personal” benefit you’re getting from the car, even if you mostly use it for work.
Other non-wage benefits you may receive that attract FBT include:
- Company vehicles for personal use
- Private health insurance paid for by your employer
- Accommodation allowance
- Entertainment allowance
- Discounted loans
Who pays FBT on a novated lease?
Any employee in Australia who salary packages their car will be subject to FBT. Your employer is liable for paying the FBT on a novated lease, but where it applies the cost is often passed onto the employee. This is one of the potential disadvantages of a novated lease.
The good news is there are ways to reduce or eliminate the FBT payable on a novated lease (explained in detail below).
How is FBT applied on a novated lease?
For the 2025/26 financial year, FBT on a novated lease is charged at 47% on the taxable value of the benefit. That’s the equivalent of the highest tax bracket rate of 45%, plus the Medicare levy of 2%.
FBT applies regardless of whether you’re buying a new or used car on a novated lease. The taxable amount is calculated on motor vehicles under a novated lease in one of two ways, according to the ATO:
Statutory formula
A flat 20% rate on the cost of the vehicle (excluding state charges such as stamp duty and registration).
Operating cost
Generally only applied to vehicles with a high percentage of business use where a log book will be maintained.
Novated lease FBT example
Let’s look at a very simple example of how FBT might be calculated:
- The cost of the car is $55,000
- Using the statutory formula, FBT is calculated at 20%
- The taxable value amount is $11,000
- This amount is taxed at 47%
It means the FBT payable is $5,170 ($11,000 × 47%).
How to reduce your novated lease FBT costs
It’s possible to reduce the FBT liability to zero through post-tax contributions to the vehicle’s running costs. This is done through what’s called the Employee Contribution Method (ECM).
The (ECM is calculated by the novated lease provider and set up as part of the salary packaging agreement agreement between you and your employer.
Using the ECM, a portion of the novated lease payment that covers car running costs is contributed by your employer on your behalf using your after-tax salary. This reduces the FBT that would otherwise be payable if all of the novated lease payment was made using pre-tax salary.
Running costs include:
- Registration and CTP insurance
- Servicing and maintenance
- Comprehensive car insurance
- Fuel (including charging for electric vehicle novated leases)
- Replacement tyres
In many cases, you can reduce your FBT bill to zero. This works because every dollar you pay from your after-tax salary directly reduces the FBT amount by the same dollar.
As a result, you are effectively taxed at your marginal tax rate instead of the FBT rate of 47%. For many people, that marginal rate is lower, which can mean a smaller overall tax bill. It’s best to speak to your novated lease provider to determine your exact post-tax deductions.
Eliminating FBT through the EV exemption
One way to avoid FBT on a novated lease is to lease an electric car. Since July 2022, FBT has been exempt for eligible low-emission vehicles (up to the luxury car tax threshold).
This means both the cost of the car and its running expenses are FBT-free, including registration, insurance, maintenance, tyres and the electricity to charge and run EVs (not the cost of a home charging station).
With the EV exemption on FBT, you can pay for these running costs entirely from your pre-tax salary, potentially saving thousands of dollars each year compared with financing the car through a loan.
EV FBT exemption example
This example shows a cost comparison between an EV and non-EV (i.e. petrol car). The Mitsubishi example would include post-tax contributions to offset the FBT which is why there is a much smaller overall tax saving.
Driveaway price | |
EV novated lease | $54,900 (BYD SEALION 7 Premium) |
Non-EV novated lease | $45,160 (Mitsubishi Outlander ES 5 Seat) |
GST saving on purchase price | |
EV novated lease | $4,991 |
Non-EV novated lease | $4,105 |
Monthly cost (finance and/or running costs) | |
EV novated lease | $864 |
Non-EV novated lease | $1,048 |
Cost over 5 years | |
EV novated lease | $51,940 |
Non-EV novated lease | $62,880 |
Residual payment | |
EV novated lease | $15,433 |
Non-EV novated lease | $12,704 |
Total cost to own car and run for 5 years | |
EV novated lease | $67,373 |
Non-EV novated lease | $75,584 |
FBT liability | |
EV novated lease | $0 (FBT exempt) |
Non-EV novated lease | $4,243 ($45,160 x 20% = $9,032 x 47%) but reduced to $0 using post-tax contributions |
Cost difference | |
EV novated lease | |
Non-EV novated lease | $8,211 |
Total tax saving over 5 years | |
EV novated lease | $37,042 |
Non-EV novated lease | $17,777 |
| EV novated lease | Non-EV novated lease | |
|---|---|---|
Driveaway price | $54,900 (BYD SEALION 7 Premium) | $45,160 (Mitsubishi Outlander ES 5 Seat) |
GST saving on purchase price | $4,991 | $4,105 |
Monthly cost (finance and/or running costs) | $864 | $1,048 |
Cost over 5 years | $51,940 | $62,880 |
Residual payment | $15,433 | $12,704 |
Total cost to own car and run for 5 years | $67,373 | $75,584 |
FBT liability | $0 (FBT exempt) | $4,243 ($45,160 x 20% = $9,032 x 47%) but reduced to $0 using post-tax contributions |
Cost difference | $8,211 | |
Total tax saving over 5 years | $37,042 | $17,777 |
Some vehicle types are excluded from the EV FBT exemption:
- Cars designed to carry a load of more than one tonne
- Cars that carry nine of more passengers (including the driver)
- Motorcycles and scooters (even if they are electric)
- Vehicles with a value over the luxury car tax (LCT) threshold ($91,387 for EVs in the 2025/26 financial year)
It’s worth getting tax advice from a qualified professional to understand how FBT and any reductions or exemptions may apply to your situation.
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