A novated car is a car fringe benefit: your employer is providing you a car as part of your pay, and fringe benefits are taxed, at 47%, the top marginal rate plus Medicare levy, on a grossed-up value. That rate is deliberately punitive: FBT exists to stop income being converted into untaxed perks. The entire craft of structuring a novated lease is keeping that tax from ever being payable.
Step 1: value the benefit (the statutory formula)
The default valuation is simple: taxable value =20% of the car's base value, flat, per full FBT year (1 April – 31 March), regardless of kilometres. Base value is essentially the car's GST-inclusive cost including dealer delivery, excluding registration and stamp duty. So a $55,000 car carries a taxable value of $11,000 a year.
The alternative is the operating cost method: actual running costs, plus deemed depreciation (25% diminishing value) and deemed interest (benchmark rate 8.27% for the FBT year ending 31 March 2027), multiplied by the private-use percentage from a 12-week logbook. It beats the statutory formula only when business use is genuinely high; for a commuter car the flat 20% usually wins, which is why it's the default in quotes.
Step 2: gross up and tax
FBT isn't charged on the taxable value directly. The value is grossed up to the pre-tax salary you'd have needed to buy the benefit yourself, factor 2.0802 where GST credits were claimable on the car (the usual case), 1.8868 otherwise, then taxed at 47%. For our $55,000 car: $11,000 × 2.0802 ≈ $22,882, × 47% ≈ $10,755 of FBT a year. Left unmanaged, that would wipe out any tax benefit of packaging the car, which is where step 3 comes in.
Step 3: make the FBT disappear (the employee contribution method)
After-tax contributions you make toward the car's costs reduce its taxable value dollar for dollar. Contribute the full $11,000 from post-tax salary across the FBT year and the taxable value hits zero: no FBT, and no reportable fringe benefits amount either. That's the employee contribution method (ECM), and it's why a standard novated quote splits your payments:
- Post-tax slice = 20% of the car's base value per year, sized to exactly cancel the FBT, nothing more.
- Pre-tax slice = everything else (lease rental, fuel, insurance, servicing): this is where the tax saving lives.
The trade inside every ECM lease: you give up the tax saving on the post-tax slice to avoid 47% FBT on the grossed-up value, always worth it, since your marginal rate is at most 47% and the gross-up makes the FBT bigger than the benefit. The net effect is that your tax saving comes only from the costs above 20% of base value, which is why cheaper cars with high running costs package relatively better than expensive cars driven gently.
Where EVs break the pattern
Eligible battery-electric cars under the luxury car tax threshold are currently exempt from FBT, no taxable value to cancel, so the whole lease can run pre-tax with no ECM slice at all. That is the main reason EV novated leases come out ahead. Two caveats from our EV FBT exemption guide: the exemption's phase-down has been announced (not yet law), and the notional taxable value is still reported, the RFBA survives and feeds HECS and other income tests. The $69,883 car cost limit also caps the lessor's GST and depreciation benefits on expensive cars, one reason quotes on six-figure vehicles look worse.
Reading your quote with this lens
- Post-tax contribution ≈ 20% of base value × term? Standard ECM, fine.
- No post-tax slice on a petrol car? Ask how FBT is being handled; if it's charged to the package, demand the calculation.
- Operating cost method proposed? Only sensible with a logbook showing high business use.
- EV with no ECM? Correct under the exemption, but ask for the RFBA estimate and check the HECS effect if you have a debt.
- Then run the whole package through our novated lease calculator against a car loan and cash: FBT structuring is only one piece of whether the lease wins.
Frequently asked questions
Who pays the FBT on a novated lease, me or my employer?
Legally the employer. Practically you: every novated arrangement passes the cost into your package, either as an FBT charge deducted from your salary or, far more commonly, by structuring the lease so no FBT is payable at all via after-tax contributions (ECM). Either way, the FBT design determines your pre-tax/post-tax split.
Sources
Figures on this page come from the following primary sources. The date is when we last checked the page against the source.
- Fringe benefits tax rates and thresholds (ATO), checked 25 August 2026.
- Electric cars exemption (ATO), checked 5 October 2026.
- Car thresholds from 1 July (ATO), checked 27 July 2026.
Related
Novated lease calculator: the full comparison with the balloon shown. EV FBT exemption: eligibility and the announced phase-down. Novated leases & HECS: what the RFBA does to repayments. Residual values: the ATO minimums behind the balloon.
Figures current as at 25 August 2026. Rates, gross-up factors and methods verified against the ATO's FBT rates and thresholds page (dated 20 May 2026); see our methodology. General information only, not financial advice.