How Fringe Benefits Tax (FBT) applies to novated leases

With perks like novated leases employers usually have to pay fringe benefits tax, but there are exceptions.

Key takeaways

  • If you offer car leasing through novated leases as an employee perk, fringe benefits tax (FBT) typically applies.
  • If your employee chooses an electric vehicle however, FBT does not apply.
  • FBT can be calculated 2 different ways, either by the statutory formula method or the operating cost method.

What is fringe benefits tax?

Fringe benefits tax is a tax paid by employers when they provide certain benefits to employees.

Examples of fringe benefits to employees include paying an employee's gym membership, car parking and salary sacrifice arrangements. This last example is where novated leasing comes in.

What is a novated lease?

A novated lease is an agreement where an employee sacrifices part of their salary towards car lease repayments.

The employer arranges a lease with a third party provider and pays them directly. The employer then takes the cost of those repayments out of the employee's pre-tax salary.

Because it is pre-tax, it reduces the amount of income tax they pay.

These payments can cover just the cost of the lease or it can cover the lease plus maintenance costs like insurance and servicing.

How does FBT work with novated leasing?

Because novated leasing is seen as a fringe benefit by the Australian Taxation Office (ATO), the employer must pay FBT.

There are some situations where novated leasing could be seen as a property fringe benefit instead and this gets taxed differently. For example, if there's an agreement where the lease will end in ownership.

The difference between whether a novated lease is a fringe benefit or a property fringe benefit comes down to whether or not it is a 'bona fide lease'.

What's a bona fide novated lease?

To be considered a bona fide lease the novated lease must:

  • Not have an upfront agreement that the employee will own the car at the end of the lease (this then becomes a property benefit).
  • Not be through a lease provider with a commercial relationship or influence.
  • Be based on the residual value of the car, from a reasonable valuation of the estimated market value at the end of the lease.
Promoted
carbar offers novated leasing options for employees looking to drive away with lower tax, fuss-free repayments and a vehicle that suits their needs and their budget.

What exemptions are there for paying FBT for novated leases?

If your employee chooses an electric vehicle for their novated lease, these are exempt from fringe benefits tax.

Any costs included as part of the novated lease, like maintenance and insurance, will also be exempt from FBT.

You can read our full guide on novated leasing electric vehicles here.

Scott Maynard's headshot
Expert insight: Huge benefits for EV purchases

"The Fringe Benefit Tax (FBT) exemption makes it cheaper for anyone entering a novated lease as part of an electric vehicle purchase.
Beyond the initial saving on the retail sticker price for any electric vehicle under the LCT threshold, there are huge benefits to going electric for Australian businesses.
Maintenance costs on electric vehicles tend to be lower than on internal-combustion vehicles, and downtime is significantly reduced thanks to longer servicing intervals and less moving parts.
With scheduled charging, fleet operators are able to take advantage of cheap power to save on fuel costs, even before you consider the benefits available with dedicated EV power plans or solar and battery setups."

Managing director, Polestar

How is FBT calculated?

Fringe Benefits Tax has a rate of 47%, applied to the 'taxable value' of the car. There are 2 ways this taxable value can be calculated:

Statutory formula method:

This is based on the purchase price of the car.

How it's calculated:

Take the base value of the car and multiply it by 0.2. This value is the amount that is taxed the FBT rate.

This is the most common way to calculate FBT.

Example: The Statutory Formula Method

Here's an example of how FBT on a novated lease might be calculated using the statutory formula method, the most common way to calculate FBT on a novated lease:

Erica takes out a novated lease on a car with a purchase price of $50,000. $50,000 x 0.2 = $10,000.

The FBT rate of 47% will be charged on that $10,000, totalling $4,700.

Operating cost method:

This is based on the cost of operating the car, where a log book can show the time the car is used for business vs personal use.

How it's calculated:

Step 1: Work out the costs both the employee and employer have incurred from operating the car over the previous year while the car was being leased. This includes any repairs, fuel, maintenance and service costs, and payments for registration and insurance.

Note that you must have incurred those costs, repairs to the vehicle if they were made by an insurance claim does not count for example. It also does not include the purchase cost or costs for road tolls, parking fees or improvements to the car.

Step 2: Work out the proportion of time the car is used for personal use and the time it's used for business use.

Step 3: Multiply the costs by the percentage of personal use.

Step 4: Subtract that cost by any payments the employee has made. This value is the taxable value.

Frequently asked questions about fringe benefits tax and novated leasing

Rebecca Pike's headshot
Written by

Senior Money Writer

Rebecca Pike is Finder’s senior money writer, with over 10 years of experience in mortgages and personal finance. A frequent TV and radio commentator, she frequently appears on Sunrise, A Current Affair, 9News, and Sky News, and contributes expert analysis to publications like Yahoo Finance and The Latch. Rebecca previously served as Editor of Mortgage Professional Australia. She has a Master’s degree in Journalism as well as ASIC-recognised certifications in Tier 1 Generic Knowledge and Tier 2 General Advice Deposit Products, which comply with ASIC guidelines. See full bio

Rebecca's expertise
Rebecca has written 234 Finder guides across topics including:
  • Home loans
  • Cost of living
  • Budgeting

Ask a question

You are about to post a question on finder.com.au:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com.au is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, or seek advice before you decide to act on our content. By submitting a question, you're accepting our Terms Of Service and Finder Group Privacy & Cookies Policy.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

More guides on Finder

  • Compare car loans for classic cars

    Want to buy a classic car but don't have the ready money? There are still financing options available for classic vehicles. Find out what loans you have to choose one and which one will work best for you.

  • Tesla Superchargers Map: Where you can charge in Australia

    Find out the extent of Australia's Tesla Supercharger network with our complete map of every charging station.

  • Refinance Car Loans

    If you are unhappy with your current car loan, refinancing it could be the right choice for you. Most people refinance their car loan to get a lower interest rate, get more flexibility in their car loan or get more additional features. Read our guide to see if it's right for you.

  • Used car buying tips

    Learn what you need to know about the used car buying process, ranging from how to finance your vehicle to what you need to check on the car.

  • Car loan repayment calculator

    Our car loan repayment calculator will help you work out how much your monthly, weekly or fortnightly car loan repayments will be to help you budget.

  • Secured Car Loans Australia

    If you're looking to a buy a car you can consider a secured car loan to help finance your vehicle purchase. The loan is guaranteed so you can enjoy a lower interest rate – compare your options and apply today.

  • Used car loan rates Australia

    You can still get a car loan if you want to finance a used car. Find out how you can get a used car loan and see what rates are available for the used car you want. Learn how to best compare lenders and apply for your loan today.

  • New Car Loan Interest Rates

    Whether you're upgrading your current car or looking for a new vehicle for your first car purchase, a new car loan can help you finance your set of wheels. Find out everything you need to know about new car loans to help you find the right loan for you.

  • Low interest car loans

    Don't pay an outrageous interest rate on your next car loan – compare loans before you buy.

Go to site
Compare your car loan options in seconds