If you’re considering salary packaging a vehicle, understanding how Fringe Benefits Tax and novated leases work together is critical. A novated lease offers tax advantages but also introduces reporting and compliance obligations for both employers and employees. Here’s what you need to know to stay compliant and minimize tax.

What Is a Novated Lease?
A novated lease is a three-way agreement between an employee, employer, and financier. The lease is “novated” to the employer, who makes lease payments from the employee’s pre-tax income. Since the vehicle is typically available for private use, it’s considered a car fringe benefit under the Fringe Benefits Tax Assessment Act 1986.
Bona Fide Lease Conditions
The ATO outlines specific requirements for a novated lease to be accepted as a bona fide car fringe benefit:
- Commercial Terms: The lease must follow arm’s-length principles with no sweetheart deals.
- Residual Value Benchmarks: The residual value at the end of the lease should align with ATO depreciation guidelines.
- No Hidden Equity: The lease structure shouldn’t result in extra ownership equity for the employee.
If these conditions aren’t met, the ATO may treat the lease under property fringe benefit rules, increasing the FBT liability.
Choosing the Right Valuation Method
To determine the FBT payable, employers can choose between two methods:
Method | Best When | Data Required |
---|---|---|
Statutory Formula | Low to moderate kilometres | Car’s base value, days available |
Operating Cost | High business use | Logbook, receipts, fuel, repairs, rego |
Many employers opt for the statutory method at a flat 20% rate of the base value due to simplicity.
Use the ATO FBT Car Calculator to compare outcomes.
Fringe Benefits Tax Rate and Gross-Up Factors
- FBT Rate: 47% on the taxable value
- Gross-Up Type 1 (with GST credits): 2.0802
- Gross-Up Type 2 (no GST credits): 1.8868

The grossed-up value is what appears on the employee’s Single Touch Payroll (STP) income statement as a reportable fringe benefit, potentially impacting government benefit eligibility.
How to Reduce FBT Payable
You can reduce your FBT exposure with several strategies:
1. Employee Contributions
Paying for some vehicle expenses (e.g., fuel, insurance) from after-tax salary reduces the taxable value dollar-for-dollar.
2. Electric Vehicle (EV) Exemption
From 1 July 2022, eligible EVs (battery or hydrogen) under the Luxury Car Tax (LCT) threshold are FBT-exempt. However, they must still be reported for means testing.
3. High Business Use
If the vehicle is used more than 50% for business, the operating cost method often yields a lower FBT liability—especially for sales roles or frequent travel.
FBT Compliance Calendar
Date | Task |
31 March | FBT year ends—record odometer readings |
21 May | Lodge FBT return (25 June for tax agents) |
14 July | Report fringe benefits in STP |
Ongoing | Maintain logbooks, retain receipts |
Victorian Road-User Charges
In Victoria, Zero Emission Vehicles (ZEVs) incur a road-user charge based on kilometres driven. This complicates payroll packaging when combining with FBT EV exemptions.
Check with the State Revenue Office for the latest per-kilometre rates and whether your business qualifies for exemptions.
Employee Perspective: What It Means for You
While the FBT liability rests with the employer, a novated lease reduces your gross salary, which may:
- Lower your superannuation guarantee contributions
- Impact your borrowing capacity for home loans
- Affect Centrelink or private health rebate entitlements
It’s essential to weigh these impacts before entering a lease. A well-structured lease can still result in significant net savings.
Real-World Scenario
Example: Nathan’s Sales Role
- Salary: $100,000
- Packages a $35,000 car via novated lease
- Drives 60% for business
- Uses operating cost method
Results:
- Taxable value is reduced due to high business use
- Contributes $2,000 after-tax for fuel, reducing FBT further
- Employer reports $5,000 on STP income statement
Nathan saves on tax and drives a new car while remaining compliant.
Common Pitfalls to Avoid
- Failing to record odometer readings annually
- Choosing the wrong valuation method
- Assuming EVs are tax-free without checking LCT thresholds
- Not submitting employee declarations on time
Call to Action
Want to make sure your novated lease is tax-efficient and compliant with current Fringe Benefits Tax rules? Contact us for a personalized FBT consultation and don’t forget to read our latest guide Tax Planning for Victorians: 10 Smart Ways to Save Tax for more ways to save.