Novated leases and the EV tax exemption

Salary packaging an electric car through a novated lease has become a common way for employees to get an EV, largely because of the fringe benefits tax (FBT) exemption for eligible electric cars. It can make a big difference to the effective cost, but it comes with conditions, it changed for plug-in hybrids in 2025, and leases themselves vary widely. This guide explains the rules as the ATO sets them out. It is general information, not tax or financial advice.

What FBT and novated leases are

Fringe benefits tax is a tax employers pay on certain non-cash benefits they provide to employees, such as private use of a car. A novated lease is a three-way arrangement between you, your employer and a finance company. You lease the car, and your employer makes the lease and running cost payments from your salary, often partly from your pre-tax pay. Because a car provided this way is a fringe benefit, FBT would normally apply, and the cost is usually passed on to the employee in some form.

The electric car exemption removes FBT for eligible vehicles, which is why it has such a big effect on the cost of packaging an EV.

The four conditions

The ATO says you don't pay FBT if you provide private use of an electric car that meets all of the following conditions:

1. The car is a zero or low emissions vehicle. This covers battery electric vehicles and hydrogen fuel cell vehicles. Plug-in hybrids are no longer included from 1 April 2025, with limited exceptions (see below).
2. The first time the car is both held and used is on or after 1 July 2022. This can include used cars, as long as the car was first held and used on or after that date.
3. The car is used by a current employee or their associates, such as family members.
4. Luxury car tax has never been payable on the importation or sale of the car. The ATO says the car's value must be below the luxury car tax threshold for fuel-efficient vehicles when it is first sold in a retail sale and in any later sale.

The ATO confirms that benefits provided under a salary packaging arrangement are included in the exemption.

What running costs are covered

According to the ATO, the following car expenses are exempt from FBT when provided for an eligible electric car:

• registration;
• insurance;
• repairs or maintenance;
• fuel, including the cost of electricity to charge the car.

Home charging can be part of this. The ATO publishes an EV home charging rate that can be used in working out the value of electricity used to charge an eligible car at home.

The plug-in hybrid change

From 1 April 2025, the ATO says a plug-in hybrid electric vehicle is not considered a zero or low emissions vehicle under FBT law and isn't eligible for the exemption. It can continue to be exempt only if both of these apply:

• use of the plug-in hybrid was exempt before 1 April 2025; and
• there is a financially binding commitment, made before 1 April 2025, to continue providing private use of the car on and after that date.

The ATO notes that an option to extend an agreement exercised on or after 1 April 2025 isn't considered binding. If the pre-existing commitment changes on or after 1 April 2025, the exemption stops from the date of the new commitment. The ATO also says it has no discretion to extend the date, including for delivery delays.

If you're considering a new lease on a plug-in hybrid, assume the exemption doesn't apply and get advice on the full cost.

Reportable fringe benefits

Although private use of an eligible electric car is exempt, the ATO says it is still a reportable fringe benefit. Your employer has to work out the notional taxable value of the benefit and whether it needs to be reported on your income statement.

A reportable fringe benefits amount doesn't change the income tax you pay, but it can be counted in some income tests, such as for certain government payments, the Medicare levy surcharge, and some deductions and obligations. Ask your employer or a tax adviser how it may affect you.

The government review

The ATO says the government will complete a review of the exemption by mid-2027 to consider electric car take-up. Rules may change after that, so check the ATO website for the latest information before you commit, and ask the leasing provider what happens if rules change during your lease.

Questions to ask before signing a novated lease

Novated leases vary a lot. Before signing, ask the provider for a clear written quote, and check:

• The car price and finance rate, and whether you can get competing quotes.
• What running costs are bundled (registration, insurance, servicing, tyres, charging) and how budgets are set and reconciled.
• All fees, including establishment, management, and early termination fees.
• The residual (balloon) payment at the end of the lease, which is set by ATO guidelines, and your options then: pay it out, refinance or sell.
• What happens if you change jobs or your employer stops offering salary packaging.
• Whether a home charger is included and how electricity costs are handled.
• How the car's eligibility for the exemption has been checked, including the luxury car tax threshold.

Compare the total cost of the lease, including the residual, with buying the car outright or with a standard car loan. Your employer's payroll team, a licensed financial adviser or a registered tax agent can help you understand your situation.

Choosing an eligible car

To qualify, an electric car must be a battery electric or hydrogen fuel cell vehicle priced under the luxury car tax threshold for fuel-efficient vehicles. The threshold is set each financial year; check the ATO's current figure. Our guides to types of electric vehicles and EV running costs can help you narrow down what suits you.

Key points

• Eligible electric cars provided by employers, including via novated leases, are exempt from FBT.
• The car must be zero or low emissions, first held and used on or after 1 July 2022, used by a current employee or associate, and below the luxury car tax threshold.
• Plug-in hybrids lost eligibility from 1 April 2025, except some pre-existing arrangements.
• The benefit is still reportable and can affect some income tests.
• Compare full lease costs and get independent advice before signing.