Electric Vehicles and Novated Leases: Drive Down Your Tax Before the Rules Change
Why salary earners are looking at EVs
The 2026–27 Federal Budget changed the tax landscape for investors. The CGT discount is being replaced from 1 July 2027, negative gearing is being restricted, and family trusts face a proposed minimum tax. For many people, the traditional ways of reducing tax are harder to use.
That problem is sharpest for salary and wage earners. Your tax is withheld before you see your pay, and there are only a few legitimate ways to reduce it. One of the most effective has been to salary package an electric vehicle through a novated lease.
That concession is now being wound back. The full exemption remains available until 31 March 2027, so this is a good time to understand how it works and whether it suits you.
What is a novated lease?
A novated lease is a three-way agreement between you, your employer and a finance company. You choose a car and lease it from the financier. Your employer then agrees to make the lease payments on your behalf from your salary.
Most novated leases are fully maintained. Your employer pays the lease and the car’s running costs, including registration, insurance, servicing, tyres and charging or fuel, out of your pay. It is all bundled into one regular deduction.
You don’t need to use the car for work. A novated lease covers a car for your private use, including the weekend drive and the school run.
If you change jobs, the lease stays with you. You can transfer it to your new employer if they offer salary packaging. If they don’t, you take over the payments yourself from your after-tax income.
How novated leases work for tax purposes
A normal petrol or diesel car
When your employer provides you with a car for private use, fringe benefits tax (FBT) applies. FBT is charged at 47%, and it can easily wipe out the benefit of packaging.
To avoid that, most novated leases on petrol and diesel cars use the “employee contribution method.” You pay part of the cost from your after-tax salary, usually about 20% of the car’s value each year. That reduces FBT to nil. The rest is paid from your pre-tax salary.
The result is a partial tax saving, plus GST savings on the purchase price and running costs. It is useful, but modest.
An eligible electric vehicle
Since 1 July 2022, eligible electric cars have been exempt from FBT. With no FBT to offset, there is no need for an after-tax contribution. The entire cost of the lease and running costs can come from your pre-tax salary.
Every dollar you package is a dollar you don’t pay income tax on. If your marginal tax rate is 37% or 45% (plus Medicare levy), the savings can run to several thousand dollars a year, depending on the car’s price and your income.
Your employer can also claim GST credits on the purchase price, up to a cap, and on running costs. Those credits are passed back to you through the lease, which lowers the overall cost further.
Which cars qualify?
To qualify for the exemption, the car must:
- be a battery electric vehicle or hydrogen fuel cell vehicle
- have first been held and used on or after 1 July 2022
- have been priced below the luxury car tax threshold for fuel-efficient vehicles at its first retail sale. That threshold is indexed each year and is currently a little over $91,000.
Plug-in hybrids no longer qualify. The exemption for plug-in hybrids ended on 1 April 2025. PHEV arrangements already in place before that date keep the exemption.
Charging costs
If you charge at home, you can include the electricity cost in your package. The ATO provides a cents-per-kilometre rate for calculating home charging costs, so you don’t have to separate your car’s usage from your household power bill.
Reportable fringe benefits
Even though no FBT is payable, the value of the car still appears as a reportable fringe benefit on your income statement. It doesn’t increase your income tax. It is, however, counted for some income tests, including:
- HELP/HECS repayments
- the Medicare levy surcharge
- the private health insurance rebate
- family tax benefit and the child care subsidy
This can reduce or offset the saving for some families, so it should be modelled before you sign.
When the concessions are being wound back
On 5 May 2026, the Government announced that the full FBT exemption would be phased out and replaced with a permanent 25% FBT discount. Draft legislation has now been released. It still needs to pass Parliament, but the timetable is clear:
| Period | EVs valued at $75,000 or less | EVs valued above $75,000 (up to the LCT threshold) |
|---|---|---|
| Now to 31 March 2027 | Fully FBT-exempt | Fully FBT-exempt |
| 1 April 2027 to 31 March 2029 | Fully FBT-exempt | 25% FBT discount |
| From 1 April 2029 | 25% FBT discount | 25% FBT discount |
The 25% discount works by reducing the FBT statutory rate from 20% to 15%. It still leaves a benefit, but it is much smaller than the full exemption.
Existing arrangements are protected. Leases already in place keep the treatment that applied when they started, for as long as that arrangement continues. In practice, this means:
- If you’re considering an EV priced above $75,000, you need an arrangement in place before 1 April 2027 to lock in the full exemption.
- If you’re looking at an EV under $75,000, the full exemption stays available until 1 April 2029, so you have more time.
Novated lease providers are expecting a rush before each deadline. Allow plenty of time for vehicle delivery and paperwork.
The pros and cons
Advantages
- Pay for your car with pre-tax dollars: both the lease and running costs come out of your salary before tax.
- No FBT on eligible EVs: there is no after-tax contribution, unlike petrol and diesel cars.
- GST savings: GST credits on the purchase price and running costs are passed back to you.
- One simple payment: registration, insurance, servicing, tyres and charging are all budgeted and paid automatically.
- Lower running costs: EVs are generally cheaper to charge than petrol cars are to fuel, and have fewer parts to service.
- Locked in for the lease term: once your lease starts, the existing concession continues even as the rules tighten.
- Superannuation isn’t reduced: employers must calculate superannuation guarantee on your salary before sacrifice.
Disadvantages
- Your employer must offer it: not every employer provides novated leasing.
- The residual payment: at the end of the lease there is a balloon payment, set by ATO guidelines. You pay it from after-tax money, refinance it, or sell the car.
- Changing jobs: if your new employer won’t take on the lease, you continue the payments from after-tax income and lose the tax benefit.
- Fees and finance costs: interest rates, administration fees and bundled insurance vary widely. Comparing providers is essential.
- Reportable fringe benefits: these can affect HELP repayments, government payments and the Medicare levy surcharge.
- Less benefit on lower incomes: the saving is largest for people on higher marginal tax rates.
- The rules are changing: new arrangements from April 2027 (above $75,000) and April 2029 (all EVs) get the smaller 25% discount.
- It is still a car: a novated lease reduces the cost of a car, but it doesn’t make an expensive car a good investment. Buy a vehicle you actually need.
Is an EV novated lease right for you?
For many salary and wage earners, packaging an electric vehicle is one of the most effective ways to reduce tax legitimately. With the full exemption for more expensive EVs ending on 31 March 2027, the timing of your decision matters.
The right answer depends on your income, your family’s circumstances, the car you want and the terms of the lease. At Blackfox Financial Group, we can model the after-tax cost of an EV novated lease against buying outright or financing a car yourself. We can also check the impact on HELP repayments and family payments, and help you compare lease providers.
For business owners, we can also review how providing EVs to employees, including working directors, fits into your FBT and payroll arrangements.
Contact our team today or call us on 03 8910 8940 for a holiday home tax review before you lodge your next return.
Mike Carter
Managing Director
BLACKFOX Financial Group
General advice warning: This article contains general information only and does not take into account your personal objectives, financial situation or needs. The proposed changes to the FBT treatment of electric cars are not yet law and may change. Seek personal tax and financial advice before entering into any lease or salary packaging arrangement.