Fringe Benefits Tax (FBT)
& Novated Leasing

What Is Fringe Benefits Tax?

Fringe Benefits Tax (FBT) is a tax levied on employers who provide certain non-cash benefits to their employees or their employees’ associates (such as family members). FBT was introduced in Australia in 1986 to ensure that non-cash benefits are taxed in a similar way to salary and wages. The tax is paid by the employer, not the employee, though in practice the cost is often passed through to the employee via the Employee Contribution Method.

FBT is assessed at the top marginal tax rate plus the Medicare Levy, which is currently 47% (45% + 2%). This rate applies regardless of the employee’s actual income level. The FBT year runs from 1 April to 31 March, and employers must lodge an FBT return and pay any FBT liability by the due date (typically 21 May for paper returns, or a later date through a tax agent).

How Does FBT Apply to Novated Leases?

When a vehicle is salary packaged through a novated lease, the private use of that vehicle is classified as a “car fringe benefit” under the Fringe Benefits Tax Assessment Act 1986 (Cth). The taxable value of this fringe benefit is calculated using one of two methods: the Statutory Formula Method or the Operating Cost Method. The employer is responsible for the FBT liability, but in most novated lease arrangements, the liability is managed through the Employee Contribution Method (ECM).

It is important to understand that FBT does not eliminate the savings of a novated lease for conventional vehicles — the income tax savings and GST savings still apply. However, the post-tax employee contributions required under ECM do reduce the net benefit compared to an EV novated lease where FBT is exempt.

The Statutory Formula Method

The Statutory Formula Method is the simpler of the two FBT valuation methods and is used by the majority of novated lease participants. Under this method, the taxable value of the car fringe benefit is calculated as a fixed percentage of the vehicle’s base value, regardless of how many kilometres are driven or how much of the driving is for personal versus business purposes.

How It Works

The formula is straightforward:

The statutory rate was simplified to a flat 20% from 1 April 2014 (previously it varied based on kilometres driven). This rate applies regardless of whether you drive 5,000km or 50,000km per year, and regardless of the split between personal and business use.

Example Calculation

Consider a vehicle with a base value (cost price) of $55,000 that is available for the full FBT year:

This FBT liability is managed through the Employee Contribution Method — the employee makes post-tax contributions of $11,000 to offset the taxable value, reducing the employer’s FBT to nil.

The Operating Cost Method

The Operating Cost Method calculates the FBT taxable value based on the actual costs of operating the vehicle during the FBT year, multiplied by the percentage of private use. This method can result in a lower FBT taxable value if you have significant business use, but it requires maintaining a valid logbook.

How It Works

Under the operating cost method, the taxable value is calculated as:

Operating Costs Included

The following costs are included in the operating cost calculation:

• Fuel or electricity — actual fuel or charging costs during the FBT year
• Insurance — comprehensive motor vehicle insurance premiums
• Registration and CTP — all registration and compulsory third-party insurance costs
• Servicing and repairs — all maintenance and repair costs
• Tyres — cost of tyre replacement
• Deemed depreciation — calculated at 25% per year on a diminishing value basis (regardless of actual depreciation)
• Deemed interest — calculated on the original purchase price at the statutory benchmark interest rate (published by the ATO each year)

The Logbook Requirement

To use the operating cost method, you must maintain a logbook for a minimum of 12 consecutive weeks that records every trip, distinguishing between business and private use. The logbook must include the date, odometer reading at start and end of each trip, kilometres travelled, purpose of the trip, and whether it was business or private. Once a valid logbook period is completed, the business-use percentage established can be applied for up to 5 years, provided your driving patterns remain materially the same.

When Is the Operating Cost Method Better?

The operating cost method is generally more favourable when:

• You have a high percentage of business use (above 60-70%)
• You drive a high-value vehicle where 20% of the base value produces a high taxable amount
• You are willing to maintain a detailed logbook
• Your actual operating costs are relatively low compared to the vehicle’s value

For employees who use their car primarily for personal purposes (commuting, errands, family), the statutory formula is typically simpler and produces a predictable result.

Statutory Formula vs Operating Cost Method: Comparison

The Employee Contribution Method (ECM)

The Employee Contribution Method (ECM) is the mechanism used in most novated lease arrangements to manage the employer’s FBT liability. Under ECM, the employee makes post-tax contributions from their salary that are equal to the FBT taxable value of the vehicle fringe benefit. These contributions reduce the taxable value of the fringe benefit, and when the contribution equals the full taxable value, the employer’s FBT liability is reduced to nil.

How ECM Works in Practice

Using the example of a $55,000 vehicle with a statutory formula taxable value of $11,000:

• The employee makes post-tax contributions totalling $11,000 per year (approximately $423 per fortnight from after-tax pay)
• These contributions offset the $11,000 taxable value, reducing the employer’s FBT to nil
• The post-tax contributions are in addition to the pre-tax salary deductions for the lease and running costs
• Despite the post-tax contribution, the novated lease is still financially beneficial because of the income tax saving on the pre-tax deductions and the GST savings

FBT Exemption for Electric Vehicles

The most significant recent change to FBT law affecting novated leases is the Electric Car Discount, introduced through the Treasury Laws Amendment (Electric Car Discount) Act 2022. This legislation provides a full FBT exemption for eligible zero and low-emission vehicles when provided as a fringe benefit, including through a novated lease.

Eligibility Criteria

To qualify for the FBT exemption, the vehicle must:

• Be a battery electric vehicle (BEV), plug-in hybrid electric vehicle (PHEV), or hydrogen fuel cell vehicle
• Have a value at or below the fuel-efficient luxury car tax threshold ($91,387 for 2024-25)
• Be first held and used on or after 1 July 2022
• Be provided as a car fringe benefit (through salary packaging or direct employer provision)

Impact on Novated Lease Savings

The FBT exemption has a dramatic impact on novated lease economics. For an eligible EV, the elimination of FBT means:

• No post-tax employee contributions are required (saving $5,000 to $11,000+ per year depending on vehicle value)
• The entire novated lease deduction (finance + running costs) comes from pre-tax salary
• Total savings compared to buying an EV with after-tax income can reach $8,000 to $15,000+ per year
• The novated lease is significantly more attractive than any other method of acquiring an EV

See our complete EV salary packaging guide for eligible vehicles, popular choices, and detailed savings comparisons.

How to Minimise FBT on a Novated Lease

If you are salary packaging a conventional (petrol or diesel) vehicle and want to minimise the FBT impact, consider the following strategies:

1. Choose an Electric Vehicle

The most effective way to minimise FBT is to choose an eligible electric vehicle. With the FBT exemption, there is zero FBT to manage, and your savings are maximised. If you are flexible on vehicle choice, this is the single biggest lever for improving your novated lease outcome.

2. Consider the Operating Cost Method

If you have significant business use of your vehicle and are willing to maintain a logbook, the operating cost method may produce a lower FBT taxable value than the statutory formula. This is particularly relevant for sales representatives, field workers, and others who drive extensively for work purposes.

3. Choose a Lower-Value Vehicle

The statutory formula FBT taxable value is directly proportional to the vehicle’s base value. A less expensive vehicle means a lower taxable value and lower post-tax employee contributions under ECM. The income tax and GST savings still apply regardless of the vehicle price.

4. Maximise Pre-Tax Deductions

Ensure all eligible running costs are included in your novated lease package — fuel, insurance, registration, servicing, tyres, and roadside assistance. While these do not directly reduce FBT, they increase the pre-tax deduction component and the associated income tax and GST savings, which help offset the FBT impact.

5. Review Your FBT Position Annually

Work with your novated lease provider to review your FBT position each year. Changes in your driving patterns, vehicle value (which reduces over time for some calculation purposes), or legislative amendments may present opportunities to reduce your FBT. You can switch between the statutory formula and operating cost method from one FBT year to the next.

Reportable Fringe Benefits

Even when FBT is managed to nil through ECM (or is exempt for EVs), the value of the fringe benefit may still be reported on your income statement (formerly payment summary) as a “reportable fringe benefit amount.” This reporting does not affect your income tax liability, but it can affect:

• HECS-HELP repayments — the reportable fringe benefit is added to your income for HECS-HELP repayment threshold purposes, potentially increasing your compulsory repayment
• Medicare Levy Surcharge — the reportable fringe benefit is included in the income test for the Medicare Levy Surcharge, which applies if you earn above the threshold and do not have private health insurance
• Child Support — reportable fringe benefits are included in the income definition for child support assessment purposes
• Government benefits — some income-tested government payments and concessions may be affected by the reportable fringe benefit amount

It is worth considering these impacts when deciding on the value of the vehicle to salary package, particularly if you are close to any of these income thresholds. A qualified tax advisor can help you assess the full impact for your specific circumstances.

FBT Year Dates and Deadlines

The FBT year does not align with the standard Australian financial year. Key dates to be aware of:

• FBT year — 1 April to 31 March
• Running cost reconciliation — typically occurs shortly after 31 March, when actual running costs are compared to the budgeted amounts
• Employer FBT return due — 21 May (paper) or later date if lodged through a tax agent
• Employee income statement — reportable fringe benefit amounts are included on your annual income statement (available after 1 July)

Getting Professional Advice

While this guide provides a comprehensive overview of FBT and novated leasing, FBT law is complex and your specific circumstances may warrant professional advice. We recommend consulting a qualified tax professional if you:

• Are unsure which FBT valuation method is best for your situation
• Have significant business use of your vehicle and want to explore the operating cost method
• Are close to income thresholds for HECS-HELP, Medicare Levy Surcharge, or government benefits
• Have multiple salary-packaged benefits and want to understand the cumulative FBT impact
• Want to understand the full tax implications of novated leasing for your specific income and circumstances

Our team can also help you understand the FBT implications of your novated lease and model different scenarios to optimise your outcome. Use our novated lease calculator to see the FBT impact for different vehicle types and prices, or request a personalised quote with a full FBT breakdown.