What Is Novated Leasing?

Novated car leasing is a cost-effective financial arrangement which allows businesses to lease vehicles for, or on behalf of, their employees with use of salary packaging. It simply means the employer is deducting lease payments and running cost from a combination of the employee’s pre-tax and post-tax salary. This in turn enables the employee to avail tax benefits of leasing a vehicle without holding an ABN.

Read our helpful page on Novate Car Leasing to learn more.

Fringe Benefit Tax (FBT)

In short, the FBT is generated when an employer, or an “associate” of the employer, provides a benefit (e.g. motor vehicle, parking or gym membership) to an employee in lieu of salary. However, the FBT is best known for its impact on novated car leases.

When an employer agrees to enter a novated lease arrangement, where he or she is subsequently paying for an employee’s business vehicle from pre-tax salary, it is considered a “fringe benefit” by the Australian Tax Office (ATO). This tax was implemented to hinder employers to provide non-taxable perks as part of an employee’s salary, and to ensure the ATO gets payed the correct income tax amount from the employee.

The fringe benefit tax year runs from 1 April to 31 March, and is assessed on an annual basis. While the tax is payed by the employer, or “associate” of the employer, the charges are passed on to the employee. It is the employer’s responsibility to ensure the FBT payed is less than the income tax the employee would have paid.

FBT is calculated on the taxable value of the fringe benefit, and is separate to the income tax. Employers must themselves work out their FBT liability for the FBT, and subsequently lodge an FBT return.

How to Calculate Your FBT

It is important to know how to calculate your novated lease FBT to ensure it is lower than the income tax you would have paid on your salary. FBT status can also vary depending on the industry. Charitable organisations or government employees might be exempt for dollar limits on salary packaging. Calculating your FBT will also help you determine whether you’re actually getting the best deal on your car finance arrangement.

Generally, there are two methods in which novated lease FBT is calculated – the Statutory Formula method (the most commonly used), and the Operating Cost method. We explain both methods below:

1. Statutory Formula

Using this method, you will base the taxable value on a percentage of how far you travelled (in kilometres) during the FBT year. You will have to take into account both private and business-related travels. The ATO will then calculate a flat rate of 20% of the total kilometres.


If your car is valued at $30,000, minus road coast, stamp duty and registration to a value of $2,000, and the applicable statutory percentage is 20%, you will then owe the ATO a total of $4,000.

Rather use a Fringe Benefit Tax Car Calculator?

This method is most popular for personal novated leases as many employee’s use their car for little or no business use. If the novated lease vehicle is primarily used for business use, the Operating Costs method may be more effective.

2. Operating Cost

This method calculates the total cost of operating the vehicle over the FBT year including fuel, oil, servicing, etc and the percentage of use. You will have to differentiate between business and private use as the total operating cost is reduced by the percentage of private travels. The lower the private use percentage, the lower the taxable value.


If your vehicles’ total operation cost is valued at 20,000 and the percentage of private use is 10%, your employee contributions adds up to $1,000. You then owe the ATO a total of $1,000.

This method is best suited to employee’s who use their car predominantly for business use as it can end up more cost-effective than the Statutory Formula.

How to Best Pay Your FBT

You are able to contribute towards the running cost of your novated lease vehicle after tax dollars. This subsequently lower the fringe benefit liability of your novated lease vehicle and is called the Employee Contribution Method (ECM).

By way of ECM, you will maximise the tax benefits of a novated lease as it removes the need to pay FBT and improves the tax effectiveness of the arrangement. The post-tax amount required to remove novated lease FBT is approximately 20% of the GST inclusive price of your vehicle annually.

Interested in Novated Leasing?

At Aussie Car Loans, our novated leases are tax-effective because the savings made on income tax will always be greater than the required novated lease FBT.

To see how novated leases can work practically for you, view our car loan calculator for a guide to what your repayments would be, or view our other business car loan options to see what suits your requirements.

To speak with one of our finance professionals for more information, please call us on 1300 889 669.