Fringe Benefits Tax (FBT) Exemption: A Game Changer for EV Leasing
The Fringe Benefits Tax (FBT) exemption allows salaried employees to finance an electric vehicle (EV) through a novated lease, paying for it entirely from their pre-tax income. This arrangement helps employees save significantly by avoiding the fringe benefits tax, which typically applies when an employer provides a vehicle for personal use.
This blog applies to your team members if you operate a family business in Perth. If you, as a business owner, are looking for a car, you can purchase it with cash or a straight loan. A family business owner has a range of flexible tax strategies they can adopt through their Perth tax advisor.
Under current regulations, plug-in hybrid electric vehicles (PHEVs) have also been eligible for the FBT exemption. However, this benefit is set to expire on 31 March 2025. In contrast, fully electric vehicles will continue to enjoy the FBT exemption until mid-2027.
Federal Treasurer Jim Chalmers has emphasised the financial advantages. An employee could save up to $5,200 annually on a $55,000 EV, while employers may benefit by up to $9,500 yearly.
The Limitations: Who Can Benefit from the FBT Exemption?
It is important to note that the FBT exemption applies only to EVs purchased via a novated lease. Individuals who buy an EV outright, secure personal financing, or refinance through a home loan cannot take advantage of these tax benefits.
The novated lease means that a business is involved. The benefit is only enjoyed by a business with employees. A family business owner has more flexibility in structuring their electric vehicle with fringe benefits tax planning strategies as they often operate as shareholders, directors, and employees. A family business owner often has a Perth tax accountant guiding them on vehicle tax structuring.
What is a Novated Lease?
A novated lease is a salary packaging arrangement where an employee finances a vehicle through their employer. The employer deducts lease payments directly from the employee’s pre-tax salary and remits them to a leasing provider. While the lease is linked to the employer, the employee remains responsible. If employees change jobs, they can transfer the lease, refinance, or continue making payments directly.
Employers play a facilitating role in novated leasing but are not financially impacted, apart from minor payroll tax benefits arising from the reduction in taxable salaries.
Understanding the Fringe Benefits Tax (FBT)
FBT is a tax levied on certain non-cash benefits employers provide to their employees. When a company supplies a vehicle for personal use rather than for work-related purposes, it generally incurs an FBT liability.
However, most novated leases are structured to minimise or eliminate this liability by requiring employees to make after-tax contributions. With the FBT exemption for EVs, these post-tax contributions are no longer necessary, allowing employees to fund their vehicles entirely from their pre-tax income.
Which EVs Are Eligible for the FBT Exemption?
The FBT exemption applies to new and used EVs built on or after 1 July 2022. Eligible vehicles include battery electric vehicles and hydrogen fuel cell EVs.
However, there is a crucial restriction: the exemption only applies to vehicles that have never been subject to the Luxury Car Tax (LCT). The LCT applies to fuel-efficient cars exceeding a certain price threshold, which is adjusted annually. For the 2024–2025 financial year, the LCT threshold for fuel-efficient vehicles is $91,387 (including GST and dealer delivery but excluding government charges).
Buyers should be mindful when selecting optional extras, as adding costly upgrades could push the vehicle’s total price above the LCT threshold, making it ineligible for the FBT exemption.
Potential Savings with a Novated Lease
The financial benefits of a novated lease increase with higher tax brackets. Since lease payments are deducted from pre-tax income, higher-salary employees experience more significant tax savings. For instance:
- An individual earning $100,000 annually could save approximately $4,500 annually on an EV lease.
- Those earning $150,000 may see savings of around $7,200 annually.
- Employees with an income of $200,000 could save close to $9,500 annually.
A side-by-side comparison of leasing an EV versus an internal combustion engine (ICE) vehicle demonstrates the advantage:
| Vehicle Model | Purchase Price | Annual Lease Cost (Pre-Tax) | Take-Home Pay Impact |
| MG4 Excite 51 (EV) | $36,500 | $13,800 | $8,000 |
| Tesla Model 3 RWD (EV) | $52,000 | $19,500 | $11,500 |
| Toyota RAV4 Cruiser (Petrol) | $47,000 | $10,000 (Pre-Tax) + $10,500 (Post-Tax) | $16,800 |
| Ford Ranger Wildtrak V6 (Diesel) | $70,000 | $14,000 (Pre-Tax) + $15,500 (Post-Tax) | $23,500 |
Figures are estimates and depend on specific lease terms, running costs, and tax rates.
What Happens If You Change Employers?
If an employee changes jobs, they have several options:
- Transfer the Lease: If the new employer supports novated leasing, the lease can be transferred.
- Continue Making Payments: Employees can make direct payments to the lease provider, though they lose the pre-tax benefit.
- Early Payout or Sale: The employee may choose to pay off the lease early or sell the vehicle to cover the remaining amount.
Some lease providers offer insurance protection in case of job loss, ensuring that payments can continue under covered circumstances.
Alternative Vehicle Financing Options
While novated leasing provides significant tax savings, other financing methods exist, including personal loans and mortgage refinancing. Traditional car loans often have fluctuating interest rates, while novated leases typically have fixed rates.
For example, financing a $60,000 vehicle through a conventional lender at a 6.5% interest rate would result in approximately $4,200 in annual interest payments, not including registration, insurance, and maintenance. Over four years, this could amount to $36,000 in expenses before even considering loan principal repayments.
Consideration of Additional Tax Implications
If you are a family business and you buy cars for your team, you can likely enjoy the FBT exemption but not the FBT obligations. You must still show the value of the cars provided to your team and complete a fringe benefits tax return for your business.
Although the FBT exemption provides direct financial benefits, employees should be aware of potential indirect tax implications. Reportable fringe benefits may affect calculations for:
- Private health insurance rebates
- Parental leave payments
- Childcare subsidies
- HECS/HELP repayments
- Medicare levy surcharge obligations
Tax advisors recommend assessing these potential impacts before committing to a novated lease.
Conclusion: Is a Novated Lease the Right Choice?
A novated lease on an EV presents a compelling financial case, offering substantial tax savings and reduced running costs. However, prospective lessees should carefully consider factors such as employer participation, long-term employment plans, and potential tax implications. If you are a family business owner you also have multiple options on how to structure your cars properly for tax.
For many Australians, leveraging the FBT exemption for EV leasing is an effective way to transition to electric mobility while maximising financial benefits.
If you are looking at a novated lease, talk to your employer. The tax advisors should be supporting your employer structure their cars for their employees. This is where Westcourt can help- we are an independent tax-focused practice that only supports families in business, so why not give us a call?
