EV Novated Lease Tax Savings Explained (Australia 2025-26)

General information only. This is not tax or financial advice. Consult a registered tax agent for advice specific to your situation.

Australia’s fringe benefits tax (FBT) exemption for electric vehicles has made novated leases one of the most tax-effective ways to get behind the wheel of an EV. If you are on a decent salary, the savings can amount to thousands of dollars a year compared with buying the same car outright. Here is how it works in 2025-26.

What is the FBT exemption for EVs?

From 1 July 2022, eligible zero- and low-emission vehicles provided under a novated lease arrangement are exempt from fringe benefits tax. This means your employer does not have to pay FBT on the car benefit, and that saving is passed directly to you in the form of lower lease costs.

To qualify, the vehicle must meet all of these conditions:

• It is a battery electric vehicle (BEV), hydrogen fuel cell electric vehicle (FCEV), or an eligible plug-in hybrid electric vehicle (PHEV)
• The car’s value at the first retail sale is below the fuel-efficient vehicle luxury car tax threshold — $91,387 for 2025-26
• It is held under a financially-binding novated lease arrangement (salary sacrifice)
• The car was first held and used on or after 1 July 2022

PHEV eligibility cut-off

Plug-in hybrid electric vehicles are only eligible if they were part of a financially-binding novated lease arrangement committed to before 1 April 2025. PHEVs entering a new lease arrangement on or after 1 April 2025 no longer qualify for the FBT exemption. Pure battery EVs and hydrogen FCEVs are not affected by this cut-off.

How salary packaging an EV works

A novated lease is a three-way agreement between you, your employer, and a finance company. Your employer deducts lease payments and running costs from your pre-tax salary, which lowers your taxable income. Normally the employer would owe FBT on the benefit, but the EV exemption eliminates that liability entirely for qualifying vehicles.

Here is the flow:

1. You choose an eligible EV and get a novated lease quote
2. Your employer agrees to a salary sacrifice arrangement
3. Lease repayments, registration, insurance, tyres, servicing, and electricity charging costs are deducted from your gross salary before PAYG tax is calculated
4. Because the vehicle is FBT-exempt, there is no FBT gross-up or reportable fringe benefit amount on your income statement

The result: you pay for the car with pre-tax dollars, and the ATO does not add the benefit back to your assessable income.

Worked example: $55,000 EV on a $120,000 salary

Let’s compare two scenarios for a taxpayer earning $120,000 who wants to buy a $55,000 battery electric vehicle.

Assumptions

Item	Value
Gross salary	$120,000
EV drive-away price	$55,000
Lease term	5 years
Annual lease repayment (principal + interest)	$12,400
Annual running costs (insurance, rego, tyres, servicing, charging)	$3,100
Total annual vehicle cost	$15,500
Residual value at end of lease (28%)	$15,400

Scenario A: Buy outright (no salary packaging)

You buy the car with after-tax income. On a $120,000 salary in 2025-26:

Item	Amount
Gross salary	$120,000
Less: Tax + Medicare (no private health surcharge)	$31,167
Net salary	$88,833
Less: Car loan repayments (after-tax dollars)	$12,400
Less: Running costs (after-tax dollars)	$3,100
Cash remaining after car costs	$73,333

You spend $15,500 per year in after-tax dollars on the vehicle.

Scenario B: Novated lease with FBT exemption

The $15,500 is deducted from your gross salary before tax:

Item	Amount
Gross salary	$120,000
Less: Novated lease deductions (pre-tax)	$15,500
Taxable salary	$104,500
Less: Tax + Medicare on $104,500	$25,342
Cash remaining after car costs	$79,158

Annual saving

Metric	Buy Outright	Novated Lease	Difference
Tax paid	$31,167	$25,342	-$5,825
Cash after car costs	$73,333	$79,158	+$5,825

By salary packaging the EV, you save $5,825 per year — or roughly $29,125 over the five-year lease term. The saving comes entirely from the reduction in income tax and Medicare levy because the lease payments and running costs are deducted before tax is calculated.

At a marginal tax rate of 32.5% plus 2% Medicare, every dollar moved into the novated lease saves you 34.5 cents in tax. For higher-income earners on the 37% or 45% brackets, the savings are even larger.

What about the employee contribution method (ECM)?

Many novated lease providers use a structure called the Employee Contribution Method, where you make a post-tax contribution equal to the FBT value of the car. For FBT-exempt EVs, no ECM contribution is required because the FBT liability is zero. This is a significant advantage over novated leases on petrol or diesel vehicles, where the ECM post-tax contribution reduces the overall tax benefit.

Vehicles that do NOT qualify

• Internal combustion engine (ICE) vehicles — petrol, diesel, non-plug-in hybrids
• PHEVs entering a new novated lease arrangement on or after 1 April 2025
• Any vehicle with a first retail sale price above $91,387 (2025-26 fuel-efficient luxury car limit)
• Cars provided as part of a salary that are not held under a novated lease (e.g., company fleet cars without salary sacrifice)

Key takeaways

• The FBT exemption for eligible EVs under novated leases is one of Australia’s most generous salary packaging concessions in 2025-26
• A $55,000 EV on a $120,000 salary can save roughly $5,825 per year in income tax and Medicare levy
• PHEVs are only eligible if committed to a novated lease before 1 April 2025 — pure BEVs and FCEVs remain eligible regardless
• The vehicle must be priced below $91,387 at first retail sale to qualify
• Running costs (insurance, registration, charging, servicing) can also be salary-packaged pre-tax under the same arrangement
• Use the EV Novated Lease Calculator to model savings for your specific salary, vehicle price, and lease term

Related tools

• EV Novated Lease Calculator — model your tax savings for any EV and salary combination