Understanding Novated Leases and FBT Exemption for Electric Cars in 2024

A novated lease is a three-way car agreement between an employer, an employee and a financing company.

Novated leases are typically offered by your employer as a perk or employee benefit similar to staff discounts on various products and services e.g. health insurance, gift cards. You can check whether your company has a novated lease program for employees by searching the intranet or contacting payroll or HR.

The main benefit of novated leases is that it reduces the overall cost of car ownership (through various tax deductions) while also operating as a lease. The evolution of taxation rules throughout the years however has resulted in the financial case for cars procured under traditional novated leases to be questionable in many cases.

How Do Novated Leases Work?

Under a novated lease you enter into a finance lease and novation agreement which transfers the obligations under the finance lease to an employer. This arrangement remains in place for the duration of the employment.

Your employer takes on the responsibility of the lease payments and operating costs (fuel, service, maintenance, insurance, registration). These are paid for via a salary sacrifice arrangement (explained below) by deducting these expenses from your pre-tax salary.

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Like any lease or loan, it enables the purchase of a car by spreading the cost over multiple scheduled repayments. Car lease terms typically range from 3 to 5 years.

Key things to know about novated leases:

• Underlying interest rates can be higher than other financing options
• Additional management fees are payable to the novated lease provider

Salary Sacrifice Explained

Salary sacrifice or packaging is an arrangement that allows an employee to receive part of their income in another form — like shares, child care costs, car expenses — rather than as wages or salary.

Salary sacrifice works by ‘sacrificing’ the lease repayment and the car operating expenses from your pre-tax income. This lowers your taxable income, reduces your income tax and increases your take-home pay. The catch, however, is that fringe benefits tax (FBT) is generally payable on the items that are salary packaged.

To illustrate how this work let's assume your pre-tax monthly income is $10,000 and your lease repayments are $2,000/month. Under salary sacrifice, your pre-tax income will be reduced by the amount of the lease to $8,000 a month. Assuming your tax rate is 30%, you've reduced your monthly tax payable by $600 (30% x $2,000) or $7200 p.a. In many cases however the FBT payable will wipe out most of these tax savings.

The passing of the electric car discount bill now means salary sacrifice electric cars in Australia are now exempt from FBT.

The FBT Exemption for Electric Vehicles now makes Novated Leases considerably more financially viable

An FBT exemption is available for electric cars that are both first held and used on or after 1 July 2022. This removes one of the significant costs of a car under a novated lease - fringe benefits tax.

The FBT EV exemption applies to salary sacrifice electric cars that fall below the luxury car tax (LCT) threshold for fuel-efficient (electric) vehicles of $89,332 for 2023/24. Any cars above this value will be subject to the standard FBT treatment in place prior to the introduction of this legislation.

Historically the financial case for novated leases has been a ‘grey’ area. In general, the following rule of thumb applies:

Novated leases generally make more financial sense the higher running costs and your level of income, which increases the amount of income tax that can be offset.

There are many instances where you would be financially worse off on a novated lease compared to an outright purchase.

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With the FBT exemption for electric vehicles, the financial case will in most cases be in favour of a novated lease compared to other financing options.

We recommend you seek advice from a qualified accountant before you make this decision.

An Electric Car Novated Lease will result in tax savings, reducing the overall cost of owning the car.

When you enter into a novated lease you can save money in three main areas:

• GST is not paid on the cost of the car, the lease repayments will be GST free.
• Lease expenses are 'salary sacrificed', meaning they are deductible against your pre-tax income and reduce your income tax payable.
• Residual balloon payment - at the end of the lease, if you sell your car to fund the balloon payment, you keep any upside.

Furthermore, your novated lease provider may be able to obtain bulk buy discounts on the price of the car and other services (insurance, servicing, fuel/energy) but given the current tight supply of EVs, this is unlikely to be significant.

➡️MORE: How You Save Money on an Electric Car Novated Lease

Case Study: EV Novated Lease vs. Outright Ownership

To illustrate the benefit of an FBT exempt electric car on a novated lease we’ll compare it to other purchase and finance options in the following example.

Jane works as a Sales Representative for a New South Wales (NSW) based company.

• Drives 15,000 km per annum
• Earns $100,000 gross income per annum
• Procure a Tesla Model 3 RWD ($63,900 MSRP) through a novated lease and a salary packaging arrangement through her employer.

We have compared the costs of procuring the Model 3 through various finance arrangements over three years below. Note the total costs also reflect the potential tax benefits of each respective option.

The FBT exempt novated lease provides the best financial return for Jane. After three years, she will be $12,166 better off compared to an outright purchase. The exclusion of FBT substantially improves the affordability of an electric car under a novated lease.

Under a traditional novated lease (with or without post-tax contribution), Jane is better off purchasing outright. This is due to the interest costs, lease fees, and FBT payable.

If she requires financing, a novated lease with post-tax employee contributions would provide a slightly superior outcome compared to drawing under her mortgage.

The chart below provides a detailed breakdown of the costs and benefits across the different finance options over a three-year period. The big swing factor for novated leases is the absence of FBT payable.

We recommend reading this step-by-step breakdown of how you can save money on an electric car novated lease.

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Total Cost of Ownership Electric vs Petrol

One of the main barriers of electric car uptake is the higher upfront cost. While we are at a point where the total cost of ownership of an electric car is often lower than its petrol equivalent, the higher upfront cost still remains a barrier - actual and perceived.

How would the total cost of ownership of an electric car if it was procured through an FBT exempt novated lease? To give you an idea, we’ll compare the Tesla Model 3 from the above case study to a Toyota Camry Hybrid, which is $17,000 cheaper (28%) at $46,990 before on-road costs.

Key insights:

• The savings from the FBT exemption (~$5k) brings forward the time to recoup the ‘electric premium’ by ~20 years to 3.1 years
• Over 5-years, an additional $11.3k of savings are realised.

Monthly lease payments

Using the same case study we've calculated the monthly lease payments of each option. As the Tesla Model 3 has higher upfront costs its lease payments are higher. Once the FBT exemption is accounted for, the net -monthly payments if the Model 3 fall below that of the Toyota Camry. Over the duration of the novated lease, the Model 3 will be cheaper to 'own'.

Enquire with your employer whether it has novated lease or salary packaging arrangements in place. There will typically be a single provider who provides the financing as well as managing the payments and reporting for the novated lease.

Smaller businesses may not have an arrangement in place as typically novated leases have been a niche offering in the landscape of vehicle finance. There should be nothing precluding your employer from setting up a novated lease program. It is however up to their discretion.

Get a Quote for an EV Novated Lease Today

Over 90 electric car models are currently eligible for the FBT Exemption

As noted earlier only electric cars that fall under the luxury car tax (LCT) threshold of $89,332 for 2023-24 will be eligible. The LCT threshold typically includes; options, accessories, dealer delivery, and GST.

DISCLAIMER: zecar is not a financial adviser. You should consider seeking independent legal, financial, taxation or other advice to check how the website information relates to your unique circumstances.

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