Quick answer: A novated lease lets your employer deduct car payments from your salary before tax — but the tax maths is subtler than providers advertise. You still pay 47% fringe benefits tax on the car (20% of its value each FBT year), unless you wipe it out with a separate post-tax contribution (the ECM method) or unless the car is an eligible EV (currently FBT-exempt — though the wind-back is at exposure-draft stage, not law). And a sting almost no provider mentions: even a $0-FBT EV can land ~$20,755 on your payment summary as a reportable fringe benefits amount, pushing up your HELP repayments and Medicare levy surcharge liability. On a $95,000 salary with a $30,000 petrol car, the honest 2026–27 maths: absorbing the FBT beats a car loan by about $1,658 a year, while the full-ECM approach most providers default to comes out roughly $353 a year worse than the loan.
How a novated lease actually works (and what your payslip shows)
A novated lease is a three-way agreement: you, your employer, and the finance company. You choose the car, the employer takes the lease payments out of your salary package, and the finance company owns the vehicle until the end of the term. If you leave your job, the “novation” ends and the lease reverts to you personally.
The tax attraction is that the lease payment and running costs come from pre-tax salary — out of salary before PAYG is calculated, the same salary-sacrifice mechanic as super. That part everyone understands. What confuses people — the single most-asked question on forums — is why a second, post-tax deduction then appears on the payslip. So here’s your payslip decoder:
- Pre-tax salary sacrifice: the lease payment plus bundled running costs (fuel, insurance, servicing, rego), deducted before tax. This lowers your taxable income.
- Post-tax ECM contribution: a separate deduction from your after-tax pay. This is the Employee Contribution Method — the only thing that reduces the FBT on the car, dollar for dollar. Pre-tax sacrifice does not count as an employee contribution, no matter what the lease quote implies.
- Adjusted PAYG withholding: calculated on your reduced taxable income after the pre-tax sacrifice.
The post-tax line isn’t double-dipping; it’s the mechanism that wipes out the employer’s 47% FBT bill on the car. Whether you should want to wipe that bill out is a genuine question — the numbers say sometimes you shouldn’t (see the worked examples).
The official numbers for 2026–27
Every figure below is verified against ato.gov.au guidance or official government sources as at 16 October 2026. If a provider quote uses different numbers, ask why.
FBT mechanics
| Item | 2026–27 figure |
|---|---|
| FBT year | 1 April 2026 – 31 March 2027 |
| FBT rate | 47% |
| Car statutory formula | 20% of base value per FBT year |
| Type 1 gross-up (GST-creditable) | 2.0802 |
| Type 2 gross-up (non-GST-creditable) | 1.8868 — also used for RFBA |
| Reportable threshold | $2,000 per FBT year |
| Car limit (max GST credit $6,353) | $69,883 |
| Luxury car tax thresholds | $91,661 (fuel-efficient); $80,809 (other) |
| EV home-charging shortcut rate | 5.47c/km |
Two freshness notes: the car limit rose to $69,883 (max GST credit $6,353 — a guide still quoting $6,334 is using 2025–26 figures), and the “fuel-efficient” definition for the higher LCT threshold tightened to under 3.5 L/100 km from 1 July 2025, so many conventional hybrids no longer qualify for the $91,661 threshold.
2026–27 income tax brackets (resident) — plus the 15% correction
If any guide quotes a 16% second bracket for 2026–27, it’s stale: the legislated cost-of-living cut reduced it to 15% from 1 July 2026 (16% was 2025–26).
| Taxable income | Rate |
|---|---|
| $0 – $18,200 | Nil |
| $18,201 – $45,000 | 15% |
| $45,001 – $135,000 | 30% |
| $135,001 – $190,000 | 37% |
| $190,001+ | 45% |
Plus the 2% Medicare levy on taxable income. So the $95,000 salary used in the examples below sits in the 30% bracket, making a 32% marginal rate once Medicare is included.
ECM vs absorbing the FBT: the crossover no provider publishes
The conventional wisdom — echoed by every lease provider — is that you use ECM to “eliminate” FBT. But look at what that actually costs.
Take a $30,000 car. The FBT taxable value is 20% × $30,000 = $6,000. Two ways to deal with it:
- ECM: you pay $6,000 from post-tax salary. Taxable value falls to $0; FBT $0; reportable fringe benefits amount $0. Cost to you: $6,000 of take-home pay.
- Absorb the FBT: the employer pays FBT of $6,000 × 2.0802 × 47% = $5,866.16, funded from pre-tax salary. Cost to you in take-home terms: roughly $5,866.16 × (1 − 0.32) ≈ $3,989 at a 32% marginal rate — plus a reportable fringe benefits amount of $6,000 × 1.8868 = $11,320.80 lands on your payment summary.
On pure income-tax arithmetic, paying $6,000 of post-tax money to avoid $5,866 of pre-tax cost is backwards — you pay more to save less. ECM’s genuine wins are elsewhere: RFBA of $0 (no income-test fallout — see the trap below) and simplicity for the employer. Most employers and providers default to ECM precisely because nobody wants to administer FBT. Now watch the full comparison.
Worked example: $30,000 petrol car on a $95,000 salary
Assumptions: Australian resident, 2026–27 brackets (15/30% + 2% Medicare), 4-year lease at 8% p.a., $6,000/yr running costs, car under the $69,883 car limit (full GST credit: $30,000 × 1/11 = $2,727.27), 100% private use, admin fees excluded unless noted.
Option 1 — Novated lease with ECM wiping FBT
- Financed principal ex-GST: $27,272.73 → lease payment $666.03/month = $7,992.36/yr
- Running costs ex-GST: $6,000 incl. GST → $5,454.55
- Pre-tax package: $13,446.91 → taxable income $81,553.09
- Income tax: $4,020 + 30% × $36,553.09 = $14,985.93; Medicare 2% = $1,631.06
- Cash in hand after tax and the $6,000 ECM: $58,936.10, car fully funded
Option 2 — Same lease, absorb the FBT
- FBT $5,866.16 funded pre-tax → total pre-tax package $19,313.07 → taxable income $75,686.93
- Tax + Medicare: $13,226.08 + $1,513.74 = $14,739.82 → cash in hand $60,947.11
- But $11,320.80 is reported as RFBA on the payment summary
Option 3 — Ordinary car loan, post-tax
- Tax on full $95,000: $19,020 + $1,900 Medicare = $20,920 → take-home $74,080
- Loan $30,000 at 8%/4 yrs: $732.60/month = $8,791.20/yr, plus $6,000 running costs post-tax
- Cash left: $59,288.80
The verdict
| Option | Cash in hand | vs loan |
|---|---|---|
| Lease + absorb FBT | $60,947.11 | +$1,658.31/yr |
| Car loan | $59,288.80 | — |
| Lease + full ECM | $58,936.10 | −$352.70/yr |
Yes: the full-ECM lease — the version most providers quote — finishes roughly $353 a year behind a plain car loan (before ~$300–$400/yr provider admin fees widen the gap further), while absorbing the FBT beats the loan by ~$1,658. The difference is that the ECM version spends $6,000 of post-tax money to kill a tax bill that only cost ~$3,989 of take-home pay. Nobody in the provider ecosystem will show you this table. The RFBA is ECM’s real justification — and that brings us to the trap.
The RFBA trap: your “$0 FBT” EV still puts ~$20,755 on your payment summary
Under the Treasury Laws Amendment (Electric Car Discount) Act 2022, an exempt electric-car benefit is added back for reportable fringe benefits purposes: the notional taxable value (as if the exemption didn’t exist) × 1.8868 is reported on your payment summary. That reported amount counts as “income” for the Medicare levy surcharge, HELP/HECS repayments, Child Care Subsidy, Family Tax Benefit and various offsets — even though no FBT was paid and (with ECM, or with an exempt EV) no tax applies to the benefit itself.
Worked: the full-FBT petrol lease vs a HELP debt
Take the absorb-the-FBT lease above (taxable income $75,686.93, RFBA $11,320.80). Repayment income for HELP = $75,686.93 + $11,320.80 = $87,007.73. Using the 2026–27 HELP marginal rate figures circulating from third-party calculators (15c per $1 over $67,000 — verify current ATO figures before relying on them): 0.15 × $20,007.73 = $3,001.16/yr. Without the RFBA it would be 0.15 × $8,686.93 = $1,303.04. The reportable benefit alone adds $1,698.12 a year in HELP repayments — almost entirely wiping out the lease’s $1,658/yr edge over the loan. With full ECM, taxable value = $0 → RFBA = $0 → no trap. That’s ECM’s actual financial justification, and it’s worth more than the headline tax saving to anyone with a HELP debt or a borderline Medicare levy surcharge.
Worked: the $55,000 exempt EV
Base value $55,000 (under both the $69,883 car limit and the $91,661 LCT fuel-efficient threshold → eligible and exempt):
- FBT taxable value: 20% × $55,000 = $11,000 → exempt → FBT $0. No ECM needed; the whole package ($14,652.72 finance + $3,500 running costs = $18,152.72) is pre-tax.
- GST credit: $55,000 × 1/11 = $5,000. Taxable income: $76,847.28. Cash in hand: $61,736.15.
- The exemption’s core value: an equivalent petrol car would attract $11,000 × 2.0802 × 47% = $10,754.63/yr in FBT.
- The sting: the exempt $11,000 is added back for RFBA: $11,000 × 1.8868 = $20,754.80 reported on the payment summary. For a HELP debtor, repayment income becomes $97,602.08 → repayments $4,590.31/yr vs $1,477.09 without it — $3,113.22/yr extra, on an illustrative basis. “FBT-exempt” does not mean invisible to the tax system.
Note: only battery-electric and hydrogen fuel-cell vehicles qualify for new leases — new plug-in hybrid arrangements lost the exemption from 1 April 2025.
The EV FBT exemption wind-back: what’s actually law (and what’s not)
The 2026–27 Federal Budget (May 2026) announced a three-phase wind-back of the Electric Car Discount. The exposure draft — Treasury Laws Amendment Bill 2026: Phased Changes to the FBT Electric Car Exemption — closed submissions on 28 September 2026. As at 16 October 2026 it is not law. The proposed phases:
| Phase | Period | Treatment |
|---|---|---|
| Phase 1 | To 31 March 2027 | Full exemption continues for all eligible EVs under the LCT threshold |
| Phase 2 | 1 April 2027 – 31 March 2029 | EVs ≤ $75,000 keep the full exemption; EVs above $75,000 (but under LCT threshold) get a 25% discount on FBT payable |
| Phase 3 | From 1 April 2029 | Full exemption ends; all eligible EVs get the flat 25% FBT discount |
In dollars, for a lease signed 1 April 2027 or later on an $80,000 EV: FBT otherwise = 0.20 × $80,000 × 2.0802 × 47% = $15,643.10/yr; the 25% discount cuts that to $11,732.33/yr payable — the exemption’s value collapses by roughly three-quarters. From 1 April 2029, the $55,000 EV above would attract roughly $8,065.97/yr.
Grandfathering is fragile. The draft proposes that commitments entered before 1 April 2027 keep the full exemption for the life of the commitment — but CA ANZ warned on 13 October 2026 that the transitional language may not survive a change of employer, an intra-group transfer, or a lease variation. Signing “before the deadline” is not automatically safe if your employment changes. If you’re deciding between petrol and EV today, the RFBA add-back applies either way — and the exemption’s future is draft legislation, not certainty.
Changing jobs mid-lease: the dollar cost
When you resign, the novation ends: the lease reverts to you, paid from post-tax dollars, until you either re-novate with a new employer or exit the lease. For the $30,000-car lease above (pre-tax package $13,446.91/yr = $1,120.58/month), a 3-month gap between jobs costs roughly $1,212: the lost 32% tax shield (~$358.59/month) plus the lost GST-free running-cost treatment (~$45.45/month) on the $666.03/month lease.
Re-novation with a new employer is usually possible if they offer novated leasing and accept their provider panel — but it’s not guaranteed, and early-termination or payout costs apply if you exit instead. And now the EV kicker: under the draft wind-back law, a re-novated arrangement with a new employer may count as a new commitment — potentially losing grandfathered full exemption if the change happens after 1 April 2027. A job change could cost an EV lessee thousands per year in revived FBT, on top of the gap-month impost.
At the end of the term the ATO minimum residual applies (the longstanding indicative table has 37.5% for a 4-year term — about an $11,250 balloon on the $30,000 car; confirm the current table with the ATO before signing). You can pay it out, refinance, trade in or hand back — but any shortfall or surplus on disposal sits with you, not the employer.
Common mistakes
- Thinking pre-tax sacrifice wipes FBT. It doesn’t. Only the separate post-tax ECM line reduces the taxable value. If your payslip shows only pre-tax sacrifice, the employer is absorbing 47% FBT on 20% of the car’s value — which, per the maths above, may actually be fine.
- Assuming the RFBA is “nothing” because FBT was $0. Full-FBT petrol leases report $11k+; exempt EVs report ~$20.8k. Check where your HELP, MLS and CCS income tests land with the add-back.
- Comparing leases to loans on the headline monthly figure. Compare cash-in-hand after tax, as above — and add admin fees (~$300–$400/yr) to the lease side.
- Trusting stale figures. The 2026–27 car limit ($69,883), LCT thresholds ($91,661/$80,809), the 15% bracket and the 5.47c/km charging rate are all new. A quote using last year’s numbers is silently wrong.
- Assuming an EV signed today is exempt forever. The wind-back is at exposure-draft stage, and the draft grandfathering may not survive a job change.
- Forgetting the PHEV cutoff. New plug-in hybrid arrangements have been ineligible since 1 April 2025 — only BEVs and hydrogen cars qualify.
Tips: making the lease work for you
- Run the ECM-vs-absorb comparison at your marginal rate. The higher your bracket, the more absorbing FBT from pre-tax salary favours you — but weigh the RFBA income-test cost.
- If you have a HELP debt or sit near an income-test threshold, price the RFBA. Full ECM (RFBA $0) can be worth far more than its income-tax cost to these taxpayers.
- Negotiate the residual with your eyes open. A higher balloon lowers monthly payments but concentrates the end-of-lease risk on you.
- Get EV timing advice in writing. Until the wind-back is enacted, grandfathering and job-change scenarios are live policy risk — don’t let a quote assume the draft as fact.
- Use the car limit. Staying under $69,883 maximises the GST credit; above it, the GST credit is capped at $6,353.
FAQ
Why is there a post-tax deduction on my payslip if the lease is meant to save tax?
That’s the ECM contribution — only post-tax money reduces the car’s FBT taxable value, dollar for dollar. Pre-tax salary sacrifice funds the lease but doesn’t touch FBT. The post-tax line is the mechanism that gets FBT (and the reportable fringe benefits amount) to zero.
Is a novated lease worth it for a cheap petrol car?
Sometimes not. On a $30,000 car at a $95,000 salary, the full-ECM lease modelled above finishes ~$353/yr behind a car loan before admin fees. The lease wins clearly at higher car values, higher marginal rates, or when you absorb the FBT instead of ECM-ing it.
What happens if I change jobs mid-lease?
The novation ends and you pay the lease post-tax during any gap — about $404/month extra on the modelled lease. You can usually re-novate with a new employer, but early-termination costs apply if you exit. For EV leases, a job change may also break wind-back grandfathering under the draft law.
Does an FBT-exempt EV show up anywhere?
Yes — the exempt benefit is added back as a reportable fringe benefits amount: ~$20,755 on a $55,000 EV. It inflates income for HELP repayments, the Medicare levy surcharge, Child Care Subsidy and Family Tax Benefit. It does not affect your taxable income.
Are plug-in hybrids still eligible for the EV FBT exemption?
No — new PHEV arrangements lost the exemption from 1 April 2025. Only battery-electric and hydrogen fuel-cell vehicles qualify for new leases.
Is the EV exemption wind-back law yet?
No. Announced in the May 2026 Budget, exposed as draft legislation with submissions closing 28 September 2026 — not enacted as at 16 October 2026. Treat quotes that assume the new phases as fact with caution.
Bottom line
A novated lease in 2026–27 is genuinely useful for the right person — but the right structure depends on your salary, your debts and your tolerance for income-test surprises. Absorbing the FBT often beats the “FBT-eliminating” ECM version on cash-in-hand; ECM’s real value is keeping your payment summary clean. EVs remain exempt for now, but their exemption sits on draft legislation with fragile grandfathering — and the RFBA add-back means they were never invisible to the tax system. Model your own numbers against current ATO figures before you sign, and treat any quote that can’t show its working the way this guide has as a sales pitch, not advice.
This is general information about the Australian tax system, not personal advice. Figures are illustrative and based on 2026–27 settings as published at 16 October 2026; confirm current ATO rates and the status of the EV FBT wind-back before relying on them. See the ATO’s FBT rates and thresholds, individual income tax rates and the ATO employer guide on car fringe benefits.
Related: model your tax with our income tax calculator · see how salary sacrifice compares to super in Superannuation Tax & Salary Sacrifice 2026–27 · the full FBT picture in Fringe Benefits Tax Australia 2026–27 · car costs against the logbook method in Car Expenses Tax Deduction 2026–27 · brackets and cuts in Income Tax Rates Australia 2026–27 and Stage 3 Tax Cuts 2026–27.
