Fringe Benefits Tax (FBT) is applied to fringe benefits received by an employee or their associates - i.e. family members - from their employer. It’s core to understanding how a novated lease works.

Fringe benefits include any non-wage compensation or benefits you may receive, such as:

• Company vehicles for personal use
• Private health insurance
• Accommodation allowance
• Entertainment allowance
• Discounted loans

FBT is charged at 47% (the highest tax bracket rate of 45%, plus Medicare levy of 2%) and the taxable value amount is calculated on motor vehicles under a novated lease in one of two ways:

• Statutory formula - a flat 20 per cent rate on the cost of the car
• Operating cost - generally only applied to vehicles with a high percentage of business use

The difference between the taxable value and the total cost of the benefit will not be subject to FBT or income tax.

While the employer is liable for the FBT amount, the employee will usually agree to reduce the FBT amount payable to zero by making post-tax contributions to the vehicle’s running costs.

The main way to reduce and possibly eliminate FBT on a novated lease is through the Employee Contribution Method (ECM)

Using the ECM means the employee makes post-tax contributions towards the cost of running and maintaining the vehicle (e.g. fuel and servicing).

Every dollar paid in after-tax contributions by the employee reduces the taxable value of the benefit by the same amount. It’s possible to reduce the FBT liability to zero using this method.

The level of post-tax contributions will be agreed upon between the employer and the employee when creating the salary packaging agreement.

• The employee chooses the vehicle they want to lease, and has exclusive use of it.
• Salary sacrificing novated lease payments reduces the employee’s taxable income, as the amount is paid from pre-tax salary.
• As the car is a fringe benefit, FBT must be paid, although the employer is liable for this payment.
• Generally, FBT is based on a portion of the purchase price of the vehicle, as the statutory formula is the most commonly utilised method.
• Alternatively, the operating cost method is based on vehicle running costs, with a percentage usually determined by how much the car is used for business versus personal use (recorded via logbook).
• Making post-tax contributions to the costs of owning the vehicle can reduce the FBT liability by the same amount contributed.

Usually the vehicle is obtained more cost-effectively through a novated lease because:

• There is a GST saving on the vehicle purchase amount (up to a maximum of $6,191)
• Leasing companies usually get fleet discounts
• The employer may also get a corporate discount

For a jargon-free explanation of the other aspects of a novated lease that make it unique, read our simple novated leasing guide.

From 1 July 2022, eligible electric vehicles (EVs) and plug-in hybrid vehicles (PHEVs) are exempt from FBT in Australia.

Vehicles must be valued below the luxury car tax threshold to be eligible for the exemption ($89,332 in FY 2023/24).

There’s also no FBT payable on related running costs, including charging, registration and insurance for eligible vehicles.

This FBT exemption was introduced by the Australian federal government in 2022 to incentivise uptake of electric vehicles, with estimated annual savings for motorists in the thousands of dollars.

Where a vehicle is not used at all for private use, usually no FBT liability is incurred.

The work-related vehicle exemption covers situations where the employee stores the vehicle at home and the employer doesn’t allow the vehicle to be available for general private use.

To qualify as a work-related vehicle, all three criteria need to be satisfied:

• The vehicle must not be designed principally for the carriage of passengers.
• The employer’s name, logo or acronym be prominently and permanently displayed on the exterior of the vehicle.
• The employer must notify the employee in writing that the private use of the vehicle is limited to the following types of travel:

Where a vehicle is available for private use, the vehicle may still be exempt from FBT on particular days.

• Work travel - If an employee is required to travel, the travel including the day of departure and the day of return are exempt, provided the trip is longer than 24 hours.
• Private use of the vehicle that is incidental to the trip is exempt. However, if there is a significant element of private travel involved in the trip an FBT liability will arise.
• Emergency calls - If a vehicle is used to attend an emergency call-out the vehicle is exempt from FBT on that day. It is not sufficient to merely be on call on a particular day – there needs to be an actual call-out for the exemption to apply.
• Other non-availability - There are other times that a vehicle may be unavailable for private use by an employee and therefore not liable for FBT.

Any contributions made by the employee towards running costs (for instance, contributions towards petrol) will reduce the taxable value of the fringe benefit.

However, FBT isn’t your only financial consideration with a novated lease, as you’ll want to take into account how any potential balloon payments (residuals) and GST factor into your overall costs.