The three-way arrangement
A novated lease adds your employer into a lease between you and a finance company. Your employer takes over the lease payments and deducts them from your pay before you ever see the money, split into two parts: a pre-tax (salary sacrifice) portion that lowers your taxable income, and often a post-tax portion.
Because the car is now technically a benefit your employer provides, it can trigger fringe benefits tax (FBT) for them. That's where the post-tax portion usually comes in.
The employee contribution method (ECM)
The ECM is how most novated leases avoid that FBT bill. You contribute part of the lease cost from your after-tax pay, and every after-tax dollar you put in reduces the taxable value of the car benefit by the same amount. Contribute enough, and the taxable value (and the FBT owed on it) reaches zero.
The taxable value itself is worked out either as 20% of the car's base value (the statutory formula, the more common approach) or from actual running costs and business-use percentage (the operating cost method).
The electric vehicle FBT exemption is winding down
Eligible battery electric and hydrogen fuel-cell vehicles under the luxury car tax threshold have been fully exempt from FBT, which is why EV novated leases became popular. That full exemption is scheduled to change:
- Until 31 March 2027: full exemption continues as it stands today.
- From 1 April 2027: full exemption only up to $75,000, with a 25% discount above that.
- From 1 April 2029: only the 25% discount remains.
Even where FBT payable is zero, the notional value can still show up as a reportable fringe benefit on your income statement, which feeds into HECS/HELP repayment income and the Medicare levy surcharge test, so it's not entirely invisible to the tax system.
Questions people actually ask
How does a novated lease reduce my tax?+
Part of it comes from pre-tax salary, lowering your taxable income, and the after-tax portion (the ECM) offsets the FBT your employer would otherwise owe.
What is the employee contribution method?+
A post-tax contribution toward the car's costs that reduces the taxable value of the benefit dollar for dollar, potentially bringing FBT payable to zero.
Is the EV FBT exemption still available?+
Yes in full until 31 March 2027, then it scales back to a $75,000 cap plus a 25% discount above that, and from 2029 only the 25% discount remains.
General information only, based on ATO and Treasury guidance current as of September 2026, not personal financial advice. FBT rules and exemption schedules can change; confirm current details at ato.gov.au and speak with your novated lease provider or a tax agent about your specific vehicle and income.