Fringe Benefits Tax
Explained
What is FBT?
Fringe Benefits Tax (FBT) is a tax paid by employers when they provide employees with certain non-cash benefits instead of salary.​
Common examples include company cars, expense accounts, or other benefits that an employee can use for personal purposes.
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When a vehicle is provided through a novated lease, the Australian Taxation Office (ATO) treats the car as a fringe benefit, because the employee can use the vehicle privately.
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To calculate whether FBT is payable, the ATO applies a formula based on the value of the vehicle and its private use. This determines the taxable value of the benefit provided to the employee.
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However, novated leases are typically structured so that FBT is minimised or eliminated through salary packaging arrangements. In many cases, a combination of pre-tax and after-tax contributions is used to offset the FBT liability.
In addition, eligible electric vehicles may be fully exempt from FBT, making them particularly attractive when packaged through a novated lease.
How FBT Applies to Novated Leasing
When a car is provided through a novated lease, the Australian Taxation Office (ATO) treats the private use of that vehicle as a fringe benefit. Because of this, FBT rules apply when calculating the tax treatment of the lease.
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The potential FBT liability is determined using a standard formula based on the value of the vehicle and the period it is available for private use. However, novated leases are typically structured so that this liability is reduced or eliminated by making a portion of the vehicle costs from after-tax salary. This approach, commonly known as the Employee Contribution Method (ECM), offsets the FBT amount and allows the remaining lease and running costs to be paid from pre-tax salary.
Electric Vehicles and the FBT Exemption
The Australian Government has introduced an FBT exemption for eligible electric vehicles (EVs) and plug-in hybrid electric vehicles (PHEVs) provided through a novated lease. If the vehicle’s value is below the Luxury Car Tax (LCT) threshold for fuel-efficient vehicles, the benefit may be fully exempt from Fringe Benefits Tax.
This means the lease payments and many running costs can be paid primarily from pre-tax salary, significantly increasing the potential tax savings compared with a petrol or diesel vehicle. As a result, novated leasing has become one of the most cost-effective ways for employees to transition to an electric vehicle.
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For many employees, this means an electric vehicle can deliver the largest tax savings available through a novated lease.
FBT Frequently Asked Questions
Do you pay FBT on a novated lease?
In many novated leases, no Fringe Benefits Tax is ultimately payable. This is because the lease is commonly structured using the Employee Contribution Method (ECM), where a portion of the vehicle costs is paid from after-tax salary. These after-tax contributions offset the FBT liability, allowing the remaining lease and running costs to be paid from pre-tax salary.
How is FBT calculated?
FBT on a car provided through a novated lease is usually calculated using the statutory formula method. Under this method, the taxable value of the car benefit is generally 20% of the vehicle’s base value, adjusted for the number of days the car is available for private use during the FBT year. This taxable value is then multiplied by the FBT rate (currently 47%) to determine the potential tax liability.
Are electric vehicles exempt from FBT?
Eligible electric vehicles (EVs) and plug-in hybrid vehicles provided through a novated lease may be exempt from Fringe Benefits Tax if the vehicle’s price is below the Luxury Car Tax threshold for fuel-efficient vehicles at the time it is first sold. When this exemption applies, the lease payments and many running costs can be paid primarily from pre-tax salary, increasing the potential tax savings.