By Catherine Mulholland
There's a particular way people shop for a novated lease, and it's almost the reverse of how they shop for anything else. Nobody buys a fridge by asking what the fortnightly payment feels like. But a novated lease arrives pre-packaged as a deduction from your pay, quoted in dollars per fortnight, with the fuel and the rego and the tyres folded in — and the number looks so manageable that the question of what the car actually costs never quite gets asked. Then someone mentions the electric vehicle tax break, and the conversation drifts even further from the budget. Here are the numbers that decide the size of the lease.
Quick answer
A novated lease bundles a car's finance and running costs into deductions from pre-tax salary, so the right size is set by household cashflow rather than by the car. As at August 2026, eligible battery electric vehicles priced under the ATO's fuel-efficient luxury car tax threshold of $91,661 for 2026–27 remain exempt from fringe benefits tax.
What is a novated lease, actually?
It's a three-way arrangement, and the third party is the reason it works differently from a car loan.
You, your employer and a finance provider agree that the employer will take the lease payments from your salary and pass them on. The car is yours to use for anything, private driving included. If you change jobs, the lease can generally travel with you, provided the new employer agrees to take over the novation — and if nobody does, the payments become yours to make personally.
Because the payments come out of salary, the arrangement sits in the space governed by fringe benefits tax rather than ordinary consumer finance. That's the whole reason novated leasing exists, and it's also why the rules change whenever a government revisits FBT.
Why the size of the lease is a cashflow question, not a car question
Because the deduction is fortnightly and permanent for the term, and the household budget it lands in is neither.
A novated lease is one of the few commitments that quietly reduces your take-home pay for three to five years with no easy exit. Ending one early generally means paying out the finance, and the arrangement doesn't flex when a household's circumstances do — a reduced income, a new baby, a mortgage rate change. That's not an argument against leasing. It's an argument for sizing it against the money that's genuinely spare rather than the money that's theoretically spare.
One approach many households find useful is to stop looking at the lease in isolation and put every transport cost in one line — lease payments, charging or fuel, insurance, registration, parking, tolls, the second car if there is one — and then test that single line against what's actually left after essentials. A novated lease bundles most of those costs, which is genuinely convenient, and also makes it easy to lose track of how much of the budget the car has quietly claimed.
The three numbers that size a novated lease
Three figures tell you more than any quote will.
- The fortnightly deduction against the household surplus. Not against gross pay, and not against the surplus in a good month. Against the surplus in an ordinary one.
- The residual. Almost every novated lease ends with a lump sum owing — the residual or balloon — and it's set by reference to ATO guidance based on the lease term. A five-year lease typically carries a residual of around 28% of the vehicle's cost. On an $80,000 car, that's roughly $22,000 landing in one go at the end, to be paid, refinanced, or covered by selling the car.
- The total cost across the full term. Add the deductions over the whole lease, then the residual, then the provider's fees. That number is the price of the car under this arrangement, and it's the one comparison worth making — against buying the same car outright, or a cheaper car outright.
Do those three, and the question in the headline usually answers itself.
What does the EV FBT exemption change?
It removes fringe benefits tax on an eligible electric car provided through a novated lease, which is why EV leases became so widely discussed.
The exemption came in under the Treasury Laws Amendment (Electric Car Discount) Act 2022. To be eligible as at August 2026, according to the ATO, a car generally needs to be a battery electric or hydrogen fuel cell vehicle, first held and used on or after 1 July 2022, designed to carry under one tonne and fewer than nine passengers, and valued below the fuel-efficient luxury car tax threshold — $91,661 for 2026–27. Where the car qualifies, running costs bundled into the lease, including charging, are generally covered by the exemption too.
Two eligibility points regularly trip people up.
Plug-in hybrids no longer qualify. From 1 April 2025, PHEVs are generally not treated as eligible low-emissions vehicles, although a grandfathering rule can preserve the exemption where a PHEV was both held and used before that date under a financially binding commitment.
The threshold is a hard ceiling, not a discount. A car priced above the fuel-efficient LCT threshold falls outside the concession entirely rather than getting a partial one, and the threshold is assessed on the value including GST, options and dealer delivery.
What's changing from 2027?
The exemption is being narrowed, though nothing has changed yet.
On 5 May 2026, following Treasury's Statutory Review of the Electric Car Discount, the government announced a three-phase wind-back. Under the announcement, the existing full exemption continues until 31 March 2027. From 1 April 2027, the full exemption would apply only to eligible EVs valued at $75,000 or less, with vehicles valued between $75,000 and the fuel-efficient LCT threshold receiving a 25% FBT discount instead. From 1 April 2029, the full exemption would be replaced by the 25% discount.
An important qualification, and it's the reason no figures in this section should be treated as settled. These are announced changes, not enacted law, and the transitional detail sits in amending legislation that hasn't passed. Arrangements entered into before the changes take effect are expected to be grandfathered, but the fine print is exactly where that expectation gets tested.
The catch that isn't a tax
No FBT payable doesn't mean no consequences on your income statement, and this is the part most people find out about afterwards.
The electric car exemption is unusual. Even though no fringe benefits tax is paid, the value of the exempt car benefit is still counted towards your reportable fringe benefits amount, which feeds into adjusted taxable income. That figure is used to work out a range of means-tested amounts — study and training loan repayments, the Medicare levy surcharge, the private health insurance rebate, some family assistance payments and child support obligations.
For higher earners there's a super angle too. Reportable fringe benefits are included in the income test for Division 293 tax, which applies an extra 15% to concessional super contributions once combined income and contributions exceed $250,000. A novated lease can push someone over that line who wasn't near it on salary alone — one of the reasons the arrangement is worth looking at alongside super rather than separately. That interaction is covered in for couples, do super contributions go further in the higher or lower earner's account.
Frequently asked questions
Does a novated lease affect how much you can borrow for a home loan?
Generally yes. Lenders typically treat the lease commitment as an ongoing liability and the pre-tax deduction as a reduction in available income, which affects borrowing capacity. How each lender treats it varies.
What happens to a novated lease if you lose your job?
The novation ends and responsibility for the lease payments generally reverts to you personally until a new employer agrees to novate it. The finance obligation doesn't disappear with the salary.
Is a novated lease cheaper than buying a car outright?
It depends on the vehicle, the term, the residual, the fees and your marginal tax rate. The comparison worth running is total cost across the full term including the residual, against the total cost of buying the same car outright.
Can you novate a used electric vehicle?
Often yes, subject to the provider's age and value limits. For FBT exemption purposes the car must have been first held and used on or after 1 July 2022, which rules out earlier vehicles even if they're now second-hand.
Where this leaves you
A novated lease is a good arrangement sized badly more often than it's a bad arrangement. The tax treatment is real, and it's also the part of the decision you control least — the eligibility rules have already changed once and are set to change again. What you do control is the fortnightly number, the residual and the total across the term. Otivo, a licensed Australian financial advice platform holding AFSL and Australian Credit Licence No. 485665, has a debt advice module that works from real household income and expenses, which is the right place to find out what the spare money actually is before a five-year commitment goes on top of it.
Sources
- Australian Taxation Office — electric cars exemption, FBT on plug-in hybrid electric vehicles, reportable fringe benefits, luxury car tax rate and thresholds, and Division 293 tax — ato.gov.au
- The Treasury — Statutory Review of the Electric Car Discount and the announced phased changes to the FBT electric car exemption — treasury.gov.au
- ASIC MoneySmart — car loans and leases — moneysmart.gov.au
Disclaimer
The information in this communication is current as at August 2026 and has been prepared by Otivo Pty Ltd ABN 47 602 457 732, AFSL and Australian Credit Licence No. 485665. This content is general information only and has been prepared without taking into account your objectives, financial situation or needs. It is not personal financial or taxation advice and should not be relied on as such. Before acting on any information, you should consider its appropriateness having regard to your personal circumstances. This material must not be reproduced in whole or in part, or posted on any social media platform, without the prior written consent of Otivo Pty Ltd.