A worked example: an electric car on $100,000
Take a $55,000 electric car (below the luxury car tax threshold for fuel-efficient vehicles, $91,661 in 2026-27) on a salary of $100,000. The finance company claims the $5,000 GST on the car, so $54,000 is financed including on-road costs and fees. Over five years at 8.5% with the minimum 28.13% residual, the lease payment is about $899 a month excluding GST. Add running costs and fees and the package is about $14,720 a year, all from pre-tax pay because the car is FBT-exempt.
- Pre-tax deduction: $566.14 a fortnight.
- Tax and Medicare levy saved: about $4,710 a year (32% of the package).
- Take-home pay falls from $2,980.00 to $2,595.03 a fortnight: the car, its charging, registration, insurance, servicing and tyres cost you $384.97 a fortnight.
- At the end, the residual is $15,050 plus GST: $16,555 to keep the car.
- Total over five years including the residual: about $66,600, against about $91,320 with an 8% car loan and the same running costs.
Worked figures come from this calculator with: 2026-27 tax rates and Medicare levy, a five-year lease at 8.5% interest, the ATO minimum residual (28.13%), a $500 establishment fee and $15 monthly fee, $3,500 on-road costs, 15,000 km a year, NSW registration of $1,100 and insurance of $1,500, paid fortnightly. Your provider's rate and fees will differ; change them in the calculator.
How a novated lease works
A novated lease is a three-way agreement between you, your employer and a finance company. The finance company leases you a car; your employer agrees to make the payments out of your salary for as long as you work there. Your employer also pays the running costs (fuel or charging, registration, insurance, servicing and tyres) from the same budget. Because these come out of your pay before tax, your taxable income falls, and because your employer is registered for GST, it claims back the GST on the car and its running costs. At the end of the lease you pay a lump sum, the residual, to own the car, or you refinance or sell it.
The catch is fringe benefits tax (FBT). A car your employer pays for is a fringe benefit. For petrol and hybrid cars, providers cancel the FBT by having you pay part of the cost out of your after-tax pay: the employee contribution method (ECM). For eligible electric cars there is no FBT at all, so the whole cost can come out of pre-tax pay. That is why novated leases have become popular for electric cars.
Who it suits
- Employees whose employer offers salary packaging, with a stable job for the lease term.
- People buying an eligible electric car, where the FBT exemption makes the saving large.
- People who drive a lot, since running costs are also paid pre-tax and GST-free.
It suits less well if your income is low (less tax to save), your job is uncertain, or you would buy a cheap used car outright.
The employee contribution method (ECM)
Under the statutory formula the taxable value of a car benefit is 20% of the car's base value (its price including GST, but not registration or stamp duty) each year. A $40,000 car has a taxable value of $8,000. FBT on that would be about $7,822 a year (the value grossed up at 2.0802 and taxed at 47%). Instead, the provider takes $8,000 a year from your after-tax pay. That contribution reduces the taxable value to nil, so there is no FBT, and the rest of the cost comes from your pre-tax pay. Your employer has to remit one-eleventh of your contribution as GST. After four full FBT years the base value drops by a third, so the post-tax contribution falls in year 5.
The electric car exemption
Battery electric and hydrogen cars first held and used from 1 July 2022, priced below the luxury car tax threshold for fuel-efficient vehicles, are exempt from FBT. The whole package comes from pre-tax pay. The benefit is still reportable: an amount appears on your income statement that counts for HELP repayments and some income tests. The electric car page explains the side effects.
Residuals
The ATO sets minimum residual values by term: 65.63% for one year down to 28.13% for five. You can choose a higher residual to lower the deductions. See residual values explained.
What providers don't show, and how to read a quote
- The interest rate. Many quotes show only a weekly or fortnightly deduction. Ask for the interest rate, the amount financed and the residual in writing; with those, this calculator reproduces the lease payment.
- Fees. Establishment fees, monthly management fees and "budget" fees for running costs add up over five years. Enter them all.
- Running-cost budgets. Quotes often include generous fuel, tyre and servicing budgets that inflate the per-pay deduction. Unspent budgets are usually returned, but check how and when.
- Insurance and extras. Gap insurance, extended warranties and paint protection are often bundled. They are optional.
- The residual. It must be at least the ATO minimum for the term. A higher residual lowers your deductions but leaves more to pay at the end.
- Discounts on the car. Providers negotiate fleet prices, but compare the drive-away price with what a dealer would offer you directly.