1. Improving your after-tax disposable income

For cars used privately, the combination of concessionary FBT law statutory formula valuation and employee (post tax) contribution method ECM can result in after tax package gains for the employee. When you take out a novated lease, part of your overall lease deductions (which includes the car and associate running costs) is post-tax ECM (to extinguish any FBT taxable value and negate any FBT liability) and the balance using pre-tax salary. This is known as salary packaging. Your pretax payments reduce your taxable income, which lowers your PAYG income tax and Medicare Levy. The impact of reduced personal taxation liability via the pre-tax deductions is less costly than private ownership and operation of the car. The exact package benefit will depend on your personal situation.   

Example: To see how a novated lease might work for you, visit our Novated Lease Calculator

2. GST benefits

Under a novated lease, the finance company is able to claim the GST portion of the vehicle purchase price (but GST claims on luxury vehicles are subject to a limit or cap) , meaning you finance the purchase price of the vehicle effectively on a GST exclusive basis. 

In addition, your employer can claim GST credits on the vehicle’s pre-tax deductions. These credits reduce the employer’s effective cost with most employers passing on the GST savings to the employee. In contrast, private ownership and operation of the car has the employee financing a GST inclusive vehicle purchase price and GST inclusive running costs.  

3. Electric vehicle Fringe Benefit Tax (FBT) exemption

If you choose a Battery Electric Vehicle (BEV) to use in a novated lease the car fringe benefit will be exempt from FBT if:   

1. The car’s first retail sale when New was after 1 July 2022

2. It has never been subject to LCT in its life history. Any retail sale in the vehicle’s life history must have been under the prevailing Luxury Car Tax threshold for fuel efficient vehicles   

This moves the lease from a combination or pre and post-tax to solely pre-tax (with accompanying increased GST credits) and may make very substantial packaging gains. However, employees carry a full reportable fringe benefits amount RFBA for the BEV novated lease regardless of the employer FBT exemption.  

Want more information about novated leasing with EV’s? Try this article EV Novated lease requirements

4. Opportunity to lease a luxury vehicle

If your employer’s policy permits, an employee may lease a luxury vehicle. Where the vehicle is an income tax luxury vehicle (finance amount over $69,674 for FY26), the employee will make additional pre-tax sacrifice to compensate the employer for the income tax detriments to the employer of the lease being subject to the income tax luxury leasing rules. Note that Luxury Vehicle Adjustment (LVA) for a Novated Lease is different to the calculation for Luxury Car Tax (LCT) paid on a new car bought through a dealer.  

5. FBT-exempt and rebatable employers

If you work for a public benevolent institution, a public/not-for-profit hospital or ambulance service, or other qualifying not-for-profits, you may be eligible for FBT exemptions or rebate caps.   

This can make novated leasing more cost-effective for you if you choose to apply the applicable exemption or rebate cap first against the novated lease.  

Employees using the caps against novated lease will compensate their employer 100% pre-tax for lease rents and services (and in the case of rebatable employers, the employee will also compensate pre-tax for the rebated FBT liability).  

Packaging for an employee of a rebatable using the rebatable cap may be a marginal proposition unless the employee is actually sustaining marginal tax liability in the highest two personal tax brackets.  

Employees who use the exempt or rebate caps against novated leases will carry a full reportable fringe benefits amount RFBA for the car fringe benefit regardless of the exempt or rebatable FBT liability outcome for the lease.   

6. Opportunity to make an offer to buy the car

In a TFM Novated Finance Lease, the employee always carries a contractual residual value indemnity obligation (risk), which is set in line with reference to ATO minimum residual value rules.  

If the lease runs to term, where the employee makes an offer to buy the vehicle at the GST excl residual value plus GST, and if that offer is accepted by TFM, then the residual value indemnity obligation is also discharged (upon settlement).

This may be an attractive means to acquire the vehicle, depending on conditions in the second-hand car markets at lease end.  

To be eligible for a Novated Lease it must be a car with a payload of under 1000kg and having seating capacity of 8 or less to be is considered a car fringe benefit under Australian tax law. This means your employer must account for Fringe Benefits Tax (FBT) on the value of the benefit provided.   

Most arrangements use the Employee Contribution Method (ECM), which is designed to extinguish the FBT taxable value of the car and therefore results in no FBT liability by deducting some rent and services costs from your post-tax salary. If an employee’s actual highest marginal tax rate sustained is lower than the FBT rate (which is aligned to highest combined personal income tax and Medicare levy rate), using ECM will optimise package gains (where not eligible for Electric Vehicle FBT Exemption). Employees bearing the highest marginal rate would also not be disadvantaged using ECM. Where ECM has extinguished the FBT taxable value of a vehicle, an employee will carry a nil $0 reportable fringe benefit amount RFBA for that car fringe benefit.   

Employee post tax ECM salary contributions will result in a 1/11 GST liability for the employer on those contributions, which the employee will compensate the employer through additional pretax sacrifice.  

How FBT is calculated

• Statutory Formula Method:A flat 20% of the car’s base value determines FBT taxable value (Cars GST inclusive Price before On Road Costs like Registration, CTP and Stamp Duty). Any positive amount of FBT taxable value not extinguished through ECM is grossed up and then subjected to the 47% FBT rate. Best suited for cars fully or primarily used for personal driving (ie private non business use).   
• Operating Cost Method:Based on business vs private use. A compliant 12 week logbook required. Considered for vehicles used primarily for work purposes (generally 60-70% and above). FBT taxable value is determined by totalling actual GST incl rent and services costs and multiplying those costs by the private use percentage. Any positive amount of FBT taxable value not extinguished through ECM is grossed up and then subjected to the 47% FBT rate.   
  

1. No direct FBT cost (in most cases)

Using ECM results in no FBT liability, meaning the employer generally avoids any additional FBT expense.   

2. GST advantages

Salary packaging providers can help support employer claims for input tax credits on lease costs, by providing a consolidated invoice for the GST on Lease rents & services provided for each employee's lease.  

3. Cash flow neutral usually with no additional costs to the employer

All GST exclusive lease and running costs are funded by deductions from the employee’s salary , so there’s no cash flow burden for the employer. Employees compensate the employer for employer GST liability on employee post tax contributions and for income tax detriments of luxury leases.   

Further, with a TFM Novated Lease, an employer is only liable for rents and services while the employee remains an employee of that employer.   

Depending on the payroll tax law and workcover law of the State or Territory jurisdiction, where ECM is used and in the case of employer FBT exempt battery electric vehicles, there may be modest payroll tax and workcover levy savings for the employer through reductions in taxable wages for the purposes of payroll tax and workcover.  

Employer superannuation guarantee obligations are impacted and usually fall with pre-tax sacrifice components of packaging thus potentially disadvantaging employees. Employers and employees may wish to consider the implications of entering into arrangements where employer superannuation is fixed at an amount that would be required as if there was no packaging of any fringe benefit as part of a total remuneration cost to employer approach (combined fixed total remuneration inclusive of salary, employer superannuation costs and fringe benefits costs).  

A novated lease can help employees improve their after-tax disposable income, reduce taxable income, access GST-related benefits, and manage car costs with one regular payment. For employers, it’s a cost neutral tool to attract, reward and retain talent.  

The above commentary is general in nature and does not cover every aspect of novated leasing. Employees and employers should obtain their own independent advice on whether novated leasing is suitable for their own facts and circumstances.