Is a Novated Lease Still the Right Choice?

Novated leasing has become an increasingly popular salary packaging option, particularly following the introduction of the fringe benefits tax (FBT) exemption for eligible electric vehicles (EVs). While novated leases can deliver significant tax savings, they are not the right solution for every employee. Understanding the key issues can help employers and employees make informed decisions.

When Does a Novated Lease Make Sense?

A novated lease may be worthwhile where an employee travels regularly, intends to keep the vehicle for several years and can comfortably meet the lease commitments. Employees should also consider the total cost of ownership, including finance, insurance, servicing and residual value, rather than focusing solely on the estimated tax savings.

EVs versus Petrol Vehicles

For eligible EVs, the FBT exemption can make novated leasing particularly attractive, often reducing the after-tax cost of running the vehicle. By contrast, petrol and diesel vehicles generally remain subject to the normal FBT rules, meaning the tax benefits may be more limited.

Employees should also be aware that the exemption is subject to specific eligibility requirements, including the Luxury Car Tax threshold that applied when the vehicle was first sold.

Note that changes to the EV exemption will commence 1 April 2027 following the recent May Federal Budget. Our previous article, Electric vehicles and the FBT exemption – the road ahead outlines the proposed changes and we will advise our member base of further details as they emerge.

Don’t Forget the Exempt Employer Cap

For charities, public benevolent institutions and public hospitals, the value of benefits provided under a novated lease may count towards the employer’s per employee FBT exemption cap. A large salary-packaged vehicle can therefore reduce the amount of other tax-effective benefits an employee is able to package during the FBT year.

Understanding how a novated lease fits within an employee’s overall salary packaging arrangement is essential.

Working with Salary Packaging Providers

Many employers rely on specialist salary packaging providers to administer novated leases. While providers manage much of the administration, the employer remains responsible for meeting its FBT obligations.

Employers should ensure there are clear processes for verifying vehicle eligibility, maintaining supporting documentation and communicating the financial implications of salary packaging to employees.

Common Misconceptions

Some employees assume that:

• every EV qualifies for the FBT exemption;
• novated leasing always produces tax savings; or
• all vehicle costs are automatically exempt from FBT.

In reality, the outcome depends on the type of vehicle, the employee’s salary packaging arrangements and the applicable FBT rules.

Key Takeaway

A novated lease can be an effective employee benefit, particularly where an eligible EV is involved. However, employers should encourage employees to consider the broader financial implications—including exempt employer caps and ongoing lease costs—before entering into an arrangement.

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This article provides a general summary of the subject covered as at the date it is published. It cannot be relied upon in relation to any specific instance. TaxEd Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.