Key Points
- Removal of EV FBT exemption are unlikely, however tweaks are expected
- Targeted reforms: Lower price caps and possible income limits are changes being considered
- Changes will be announced when the budget is revealed on 12 May 2026
Australia’s popular tax break (EV FBT Exemption) for electric vehicles purchased through novated leases is facing growing pressure, with industry participants expecting the Albanese government to tighten the scheme rather than abolish it outright as budget costs rise.
The Electric Car Discount, introduced in 2022, exempts eligible battery electric vehicles and plug-in hybrids purchased through salary packaging arrangements from fringe benefits tax (FBT), often delivering savings worth thousands of dollars a year for employees.
The policy has helped drive a surge in EV purchases, particularly among middle and higher income earners via novated leasing. NALSPA, the peak body for Novated Leasing in Australia claim: “at least an estimated half of all EV purchases in the Australian market occurred through novated lease arrangements”.
When the scheme launched, the government estimated it would cost $90 million a year. That figure has since blown out to $1.4 billion in 2025-26. By 2028-29, the cost is projected to reach $3 billion annually.
Treasury is now reviewing whether the concession remains fit for purpose as EV sales rise and more lower-cost models enter the market. While no final decision has been announced, salary packaging providers, fleet groups and automotive executives are expecting changes to be announced from the 2026 Budget onward.
What changes are considered most likely?
Industry participants speculate two realistic options to be under consideration although none of these has been formally confirmed by the government.
1. Lower vehicle price threshold
Currently, eligible vehicles must sit below the annual fuel-efficient luxury car tax threshold ($91,387 for 2025/2026). The threshold includes vehicle base price, GST, options, and dealer delivery). That threshold rises each year and now captures a broad range of EVs, including many ‘premium’ models.
Critics argue that subsidising vehicles up to this level increases the cost to government per vehicle, with limited additional emissions reduction benefit at higher price points.
A reduced threshold would mean less EV models would be eligible for the FBT exemption however this should not materially impact emissions reduction at a vehicle level. A kilometre covered in small electric SUVs such as the MG MGS5 ($40,490) or BMW iX2 ($79,900) have the same emissions reduction potential.
A more targeted cap of say $60,000 would preserve support for many mainstream EVs while removing subsidies for higher-priced premium vehicles.
That could place some variants of vehicles such as the Tesla Model Y RWD, XPENG G6 Long Range, and Zeekr 7x RWD ineligible for the EV FBT exemption depending on future pricing and fleet discounts available.
Of the ~260 EV variants currently available for sale in Australia, over 70 would likely be eligible under a reduced price cap of $60,000.
A lower threshold will reduce the cost of the scheme to government, as:
- Lower vehicle values reduce the maximum potential tax savings under a novated lease; and
- The amount of tax revenue forgone per lease is reduced.
Those most impacted would be higher-income earners purchasing higher-priced models. We break down the impact across different scenarios in the following section.
The counterargument is that lowering the threshold could exclude vehicles with significant emissions reduction potential, particularly electric vans and utes. The current limit of $91,387 already captures only a small number of these vehicles, and a lower threshold would likely exclude them entirely.
2. Means testing for higher income earners
Another option would be limiting access for employees above a certain taxable income threshold. For example, those in the highest tax bracket $190,000+, comprised 30.6% of novated leases in FY24 and FY25 but only comprise ~4% of tax payers.
Critics of the current scheme argue the largest dollar benefits often flow to higher earners with the capacity to salary sacrifice. Means testing the scheme to those earning under 190,000 would mean up to 96% of the population would still be eligible.
In the example below (Worked Example 2), an individual on $230,000 annual income will have 45% higher tax savings than an individual on $115,000 for the same vehicle and use case.
The argument against means testing the highest income earners is that this would disincentivise these buyers from purchasing EVs and as a result have an adverse impact on the government’s decarbonisation goals.
Of the possible scenarios it would appear that lowering the vehicle price threshold would be more likely than means testing.
3. What About Existing Novated Leases?
The consensus is that any rule changes would apply only to new novated leases, rather than existing contracts already in place.
That would reduce political backlash and avoid disrupting current arrangements.
What it means in dollars
The attraction of the exemption has been the ability to package vehicle costs using pre-tax salary while avoiding FBT that would normally apply to private vehicle use.
Below are indicative examples of the impact of a reduced price threshold scenario. Actual outcomes vary by salary, lease term, state charges and provider fees.
Worked Example 1: Employee on $150,000 salary
| Field | Details |
| Model | Tesla Model Y Long Range AWD |
| Price | $70,700 (MSRP + Delivery charges) |
| Lease Term | 5 years |
Current rules: Estimated total savings of $35,405 or $7,081 p.a.
If cap reduced to $70,000: This vehicle model would fall outside the threshold, they would need to look for a lower priced model.
If means tested at $200,000: Still eligible
Worked Example 2: Employee on $230,000 salary
| Field | Details |
| Model | Tesla Model Y Long Range AWD |
| Price | $70,700 (MSRP + Delivery charges) |
| Lease Term | 5 years |
Current rules: Estimated total savings: $43,5232 or $8,646 p.a. Compared to a $115,000 salary, they are $13,077 better off over 5 years from higher tax savings.
If means tested at $200,000: Would lose all tax benefits from EV purchase.
Why the government may move now
When the scheme was announced, EVs were more expensive and represented a small share of new vehicle sales. In 2022, EVs comprised just 3.1% of total new car sales.
That has changed drastically, driven by a wave of more affordable models, particularly from Chinese brands, alongside strong growth in novated leasing.
The policy question for the government is whether taxpayer support should continue unchanged now that a broader range of affordable EVs are available, in some cases at price parity with petrol equivalents. There are now two models priced under $30,000 and around 15 under $40,000.
With structural spending pressures building, particularly in the NDIS and housing, and renewed scrutiny of tax concessions such as negative gearing and capital gains, Treasury is under pressure to identify savings ahead of future budgets.
That is placing the EV FBT exemption firmly in scope for potential tightening.
Key dates to watch
There are three dates to be aware of in regards to potential rule changes:
12 May 2026 Federal Budget
The government will announce changes to the Electric Car Discount including any changes to the EV FBT exemption.
1 July 2026
Clean start for income tax year. New rules could take effect from this date, albeit this leaves little time for buyers to make a purchase using the existing rules.
1 April 2027
Aligns with the FBT year. This provides significantly more time for the buyers to purchase under the existing rules.
What buyers are doing now
Salary packaging providers report some buyers are moving quickly to ensure purchases are locked in prior to any potential rule changes.
When the FBT exemption for PHEVs was ended, to be exempt, the PHEV must have been delivered and in use before April 1, 2025. This would mean if a 1 July 2027 date is set for the new rules vehicles would need to be delivered by this date.
For employees already considering an EV, locking in under current rules could prove valuable if grandfathering applies to signed leases.
What happens next?
Few industry participants expect the government to scrap the concession entirely, particularly in light of ongoing geopolitical tensions, including the oil situation in Iran, which have reinforced EV demand and sharpened the focus on fuel security and affordability.
A tighter, more targeted scheme aimed at mainstream buyers, however, remains a real possibility. Thousands of Australians will be watching closely for any changes announced on budget night next week.
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About the author
Danny is a consultant and entrepreneur working at the cutting edge of the electric vehicle and energy transition. He is passionate about educating and helping consumers make better decisions through data.
