How does Fringe Benefits Tax (FBT) work on a novated lease?

What is Fringe Benefits Tax?

 

Fringe Benefits Tax, or FBT, is a tax on certain benefits provided to employees outside of their salary and wages.

A vehicle provided through a novated lease is considered a fringe benefit, which means FBT may apply.

The purpose of FBT is to ensure that benefits provided through employment are taxed appropriately. But while this may sound concerning, it doesn’t automatically mean you’ll receive an unexpected tax bill.

Novated lease arrangements often include mechanics to manage for the impact of FBT as part of the overall lease structure, so that the FBT can be managed through regular payroll salary packaging deductions rather than as a separate tax bill.

 

Is FBT payable on a novated lease?

 

FBT can apply to most traditional novated lease vehicles, but the actual impact depends on several factors, including:

• the type of vehicle
• your novated lease structure
• your income
• whether the vehicle qualifies for any available exemptions
• how payments are split between pre-tax and post-tax salary

 

This means two employees choosing similar vehicles could receive different quotes based on their individual circumstances.

For many employees, FBT is managed through the Employee Contribution Method (ECM), which may help reduce the FBT liability.

In addition, some eligible^ electric and hydrogen vehicles may qualify for an FBT exemption, potentially increasing the overall benefit of a novated lease.

 

What is the Employee Contribution Method (ECM)?

 

The Employee Contribution Method, commonly known as ECM, is one of the most common ways to manage FBT on a novated lease.

Under the ECM, a portion of your vehicle expenses is paid from your post-tax salary. These contributions are then used to help reduce the taxable value of the fringe benefit.

In simple terms, the ATO recognises that you’ve personally contributed towards the running costs of the vehicle. Because you’ve contributed using after-tax income, the FBT liability may be reduced accordingly.

For many employees, this means the impact of FBT is managed as part of their regular payroll deductions rather than becoming a separate end-of-the year liability.

 

Why does my quote include post-tax deductions?

 

While a substantial portion of lease costs may be deducted from your pre-tax salary, many novated lease arrangements include post-tax contributions through ECM.

This isn’t an additional expense, it’s a portion of your total novated lease deductions. It’s an important mechanism used to help manage FBT liability while still allowing you to benefit from salary packaging.

You do not need to calculate this yourself. Smart can help you understand how the proposed deductions are structured and what they mean for your individual novated lease arrangement.

 

Is a novated lease FBT exempt?

 

Not every novated lease is exempt from FBT. Many petrol, diesel and hybrid vehicles may be subject to FBT.

However, eligible battery electric vehicles and hydrogen fuel cell vehicles^ may qualify for an FBT exemption when the relevant legislative requirements are met.

Whether the exemption applies depends on factors including the vehicle type, when the vehicle was first held and used, and whether Luxury Car Tax has ever been payable on its sale or importation.

 

How does the electric vehicle FBT exemption work?

 

Many Australians researching novated leasing are also interested in electric vehicles because of the current FBT exemption available for many eligible EVs^. When an eligible EV qualifies for the exemption, the car fringe benefit is exempt from FBT.

This means the novated lease may be structured differently from a lease for a petrol or diesel vehicle.

For an eligible EV^ novated lease, lease payments and eligible running costs may be packaged from pre-tax salary, subject to the relevant rules and employer arrangements.

The exemption can apply to qualifying:

• battery electric vehicles
• hydrogen fuel cell vehicles

 

The vehicle must also satisfy the applicable eligibility requirements. See the Australian Taxation Office website for full eligibility criteria.

For many Australians considering their next vehicle, the EV FBT exemption is one of the most significant novated leasing advantages currently available.

 

Does driving more kilometres reduce FBT?

 

This is a misconception that continues to circulate today.

Historically, kilometres travelled could impact the calculation of vehicle-related FBT obligations. However, modern novated leasing arrangements generally aren’t structured around annual driving distance in the way many people may assume.

That means choosing a novated lease shouldn’t depend on trying to reach a specific kilometre threshold to achieve tax benefits.

Instead, it’s important to choose a vehicle and lease structure that suits your driving habits, budget and lifestyle.

 

Is FBT something you need to calculate yourself?

 

Usually, no. While it is helpful to understand the basics of FBT, most employees do not need to work through the calculations themselves.

Smart can help you understand how the taxable value of the car benefit is treated and how the proposed deductions are structured within your novated lease quote.

It's also important to understand:

• whether the quote includes both pre-tax and post-tax contributions
• whether the vehicle may qualify for a FBT exemption
• which costs are included in your novated lease payments
• what assumptions have been used to calculate your novated lease quote, and
• how the arrangement may affect your personal circumstances

 

A personalised Smart novated leasing quote can show how these elements work together for your chosen vehicle.

 

Why is FBT important when comparing a novated lease?

 

FBT can influence how a novated lease is structured and how much is deducted from pre-tax and post-tax salary.

However, FBT is not the only factor that determines whether a novated lease may suit you.

Your income, chosen vehicle, expected running costs, employer arrangements and the terms of the lease can all affect the overall result.

That's why it's important to compare the complete arrangement rather than making a decision based on FBT alone.