How a lease can make an electric car more affordable

22 May 2023 By: Toby Hagon

The Fringe Benefits Tax (FBT) exemption allows salaried employees to take out a novated lease on an electric car (EV) and pay for it wholly from their pre-tax income but not pay the fringe benefits tax that would normally be incurred.

In announcing the FBT exemption Treasurer Jim Chalmers said it could save employees up to $4700 a year on a $50,000 vehicle and employers up to $9000 annually.

Some have described the fringe benefits tax exemption on electric cars as a game changer for the industry, such is its ability to offset the price premium attached to most EVs.

But there’s lots you need to know about this new tax break.

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What is a novated lease?

A novated lease is a way of financing a vehicle that uses salary sacrificing with the aim of providing tax benefits to the person taking out the loan.

It allows you to pay for the financing of a car and its running costs from your pre-tax salary. The financing is arranged with an external leasing company through your employer. But the lease belongs to you, so if you leave your employer, it’s up to you to transfer the lease, refinance or continue repayments.

You’ll need to contact the lease provider and let them know you’ll be leaving your current employer and will be managing the lease yourself in the interim. If you’re switching to a new employer, they may be able to take over managing the lease. Your lease provider will manage that process with your new employer.

If your new employer won’t manage the lease for you, you’ll need to keep making payments directly to the lease provider, but of course, these payments won’t be from your pre-tax salary. You can also sell the vehicle to pay out the remainder of what you owe, provided the car is worth more than or is at least equal to the amount left to pay off.

It’s worth considering Lease Protection Insurance as part of the arrangement with your lease provider. It will cover you if you’re unable to make repayments for a number of covered circumstances, including involuntary redundancy. Check for the circumstances that are covered under the policy, the time period they’ll cover you for and what exclusions apply.

Once you come to the end of a lease, having paid out the full amount, there will be a one-off payment, with the size of that payment dependent on the original purchase price and the term of the lease.

Fringe Benefits Tax

If the car is not provided by your company as a tool of trade vehicle but is instead one chosen by you for your personal use, it would typically attract fringe benefits tax. That’s the Australian Taxation Office’s way of taking a cut because the vehicle is treated as a different form of payment.

FBT is paid by your employer, but most novated leases are structured with after-tax contribution payments that eliminate the requirement for the company to pay FBT. Having to pay for some of the lease from after-tax earnings means less in an employee’s take-home pay.

With the new FBT exemption on EVs, there is no need for that after-tax payment, allowing employees to fund the purchase and running costs of the vehicle wholly from their pre-tax salary.

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“Prior to the [FBT] exemption some of the costs associated with a lease were coming out pre-tax and some of it was coming out after tax to offset fringe benefits tax liability,” explains Steven Ogle, the group product manager, employee benefits for SG Fleet, Australia’s largest vehicle leasing and fleet management company. 

With this exemption, all of the payments are from pre-tax income, so the income tax savings are a lot better.”

The FBT exemption is not available to everyone

For those wanting to purchase an EV for private use, the FBT exemption only applies to those taking out a novated lease.

People paying cash for a car or taking out a separate loan – including borrowing against their home loan – will not get any benefit.

A novated lease requires the employer to be open to facilitating the financing through its payroll system but given there is no financial penalty to the company it is a matter of paperwork.

There can also be minor benefits in payroll tax to the employer given the amount of money being paid to the employee will be less once the leasing payments are deducted.

The higher the tax rate, the bigger the savings

Because of the structure of a novated lease – whereby payments are made from your pre-tax income – the benefits are usually greater for those paying a higher tax rate.

Anyone earning over $180,000, for example, is paying 45 cents per dollar earned whereas those earning $45,001-$120,000 pay 32.5 cents.

If you’re funding your car from your pre-tax income, anyone on the top tax rate will effectively be saving 45 cents in the dollar, whereas those earning an average wage will only save 32.5 cents per dollar.

Not all cars are eligible for the FBT exemption

The FBT exemption only applies to certain vehicles and for a limited time.

They must be either battery electric vehicles (the things people generally refer to as EVs) or a fuel cell EV (which converts hydrogen into electricity), with the government saying it will “complete a review into this exemption by mid-2027”.

Until the end of March 2025, the exemption also applies to plug-in hybrid electric vehicles, which can be recharged externally but have a petrol engine for longer journeys.

It does not apply to regular hybrids, which includes the most popular models sold by Toyota.

Stay below the luxury car tax threshold

While the FBT exemption is applicable across new and used vehicles, it can only be utilised on cars sold on or after 1 July 2022.

The FBT exemption only applies to cars that have never paid any luxury car tax (LCT); in the 2022/2023 financial year, the LCT threshold for EVs is $84,916, inclusive of GST, dealer delivery and accessories but exclusive of government charges such as registration and stamp duty.

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At the time of writing there are 42 battery electric vehicles currently available in Australia, and of those only 20 can be purchased to take advantage of the FBT exemption in the 2022/2023 financial year.

Even then, not all models within the range will apply. With the Tesla Model Y, for example, the base Rear-Wheel Drive and white examples of the Long Range model are currently eligible for the exemption, but the Performance variant is not.

Similarly, order the new Hyundai Ioniq 6 Techniq in seven of the eight available colours and you’ll just sneak in under the LCT threshold. But opt for Gravity Gold and you edge over the limit, in turn making the car ineligible for the FBT exemption (the threshold is increasing to $89,332 for FY24, which should make more cars eligible).

The next trick is getting hold of an EV, with some brands quoting extensive wait times.

Fortunately, many popular models are readily available. The Tesla Model 3, for example, can be delivered almost immediately while the Model Y SUV has a circa-three-month wait.

BYD is also suggesting its Atto 3 can be delivered within weeks, while the Polestar 2 is available for immediate delivery.

There can still be challenges getting hold of some models – including the Hyundai Ioniq 5 and Kia EV6 - due to limited supply.

Beware of other tax implications

The FBT exemption may be a great way to save money, but those signing up need to be aware of other implications.

While you won’t pay FBT on applicable vehicles, the FBT benefit still needs to be reported.

Depending on your income and reportable fringe benefits it can be used to determine your eligibility and entitlement for things such as the private health insurance rebate, parental leave, child care subsidies and child support obligations, among others. It can also be used to calculate things such as repayments for HECS or student loans and to establish whether you need to pay the Medicare levy. That’s why it’s important to discuss your circumstances with an accountant or tax advisor, because some or all of those savings may be lost elsewhere.

“Everyone's individual circumstance is different,” says Ogle. “There are great up-front tax savings but you still need to assess any flow-on effects.”

He says it’s crucial people go beyond the headline savings and “look at the holistic impact on your household, not just this year, but next year and the year after”.

Crunching the numbers

If all the stars align, then taking a novated lease on an EV can make plenty of sense.

Ogle describes the choice of selecting an EV over a cheaper petrol or diesel alternative a “no-brainer”.

“The figures really do stack up. Depending on your salary range and the vehicle you're getting, the income tax savings can be around $6,000 a year.”

While petrol and diesel vehicles still make up the bulk of novated lease applications, SG Fleet says enquiries on EVs since the introduction of the FBT exemption are up 500 per cent.

We asked SG Fleet to crunch the numbers on some popular new cars, half of them EVs.

The five EVs we chose were all eligible for the FBT exemption, whereas the petrol models were not. For these calculations the interest rate was set at a relatively high 9.5 per cent (the rate can vary depending on your credit history and the vehicle being purchased).

We also got quotes for four different salary ranges from $75,000 up to $200,000.

SG Fleet assumed a three-year lease term covering 15,000km annually. The figures include registration, insurance, servicing and tyre replacement costs. For the fossil fuel-powered vehicles it also includes fuel costs, but it doesn’t include charging costs for an EV. That’s in part because there’s no current tax office ruling on getting reimbursed from electricity at home (for those charging from the grid, though, an average EV would cost about $700 a year).

RELATED: How To Charge An Electric Car At Home »

The figures also don’t include the one-off payment at the end of the lease term. The ATO currently calculates that at 46.88 per cent of the purchase price plus GST and registration for the fourth year; it works out to a bit over half the original purchase price.

Given the solid residual values of most EVs recently, in many instances you would have a vehicle worth more than the final payment.

EV to ICE leasing comparison  - Annual income $75,000 and $100,000

EV to ICE leasing comparison  - Annual income $130,000

EV to ICE leasing comparison  - Annual income $200,000

Source: SG Fleet, figures provided as indication only List purchase prices exclude on-road costs and fleet discounts Indicative interest rate of 9.5% Lease inclusions: fuel (where applicable), mainteanance, tyres, insurance, roadside assistance EV charigng costs not included Impact to take home pay is how much less monthly income the employee would receive if leasing the vehicle

Leased EVs now cheaper than petrol/diesel

The numbers certainly look favourable for EVs. For someone earning $75,000 or $100,000 a BYD Atto 3 EV would mean about $907 less in the monthly pay packet.

For a smaller petrol-fuelled Mazda3 with a purchase price about $14,000 lower, the impact to the monthly pay packet would be more like $1114.

For anyone earning upwards of $180,000 the savings are even greater. A Tesla Model Y also works out to be a relatively affordable new vehicle purchase. It would cost between $1011 and $1229 per month, making it cheaper than many more affordable models – and that’s before the anticipated higher residual value.

Don’t be blinkered into a novated lease

Of course, there are other options for financing a vehicle, including cash, taking out a personal loan or borrowing against your house.

The latter, in particular, could yield a lower interest rate than you’d get through a leasing company, although keep in mind that a novated lease typically locks the financing rate at the point of sign-up, rather than jumping around with the cash rate set by the Reserve Bank.

And, of course, independent finance costs generally can’t be packaged in a tax effective way.

The Tesla Model Y again gives an idea of the benefits. If you were financing it through a traditional lender, you’d be up for about $4800 in annual interest repayments if you had a loan at 6.5 per cent (which could change during the loan term). There’s also upwards of a few thousand in registration, insurance and servicing.

So it would be something like $8,000 per year – or closer to $10,000 if you’re financing at 8 per cent interest.

Think something close to $30,000 over three years - before you go paying the loan principal.

With an FBT-exempt novated least the total annual cost would range from $12,134.04 to $14,747.04 – something around $40,000 after three years - and you will have paid off about half the vehicle at the end of the term.

All of which suggests a novated lease on an EV is at least worth considering.