Salary sacrificing for an electric vehicle through a novated lease can lower your taxable income and provide savings if the arrangement meets legal requirements and is structured correctly.

A novated lease is a three-way agreement between an employee, employer and a leasing company. The employer deducts lease payments from the employee’s pre-tax salary, pays the lease instalments to the leasing company, and allows the employee to make full private use of the car. If the car qualifies, the car benefits arising from the lease are exempt from fringe benefits tax.

For example, if an employee earns $100,000 and salary sacrifices $15,000 annually for a novated lease, their taxable income could be reduced to $85,000. Depending on their marginal tax rate, this may save around $4,500 in income tax per year. Over five years, the total tax savings could exceed $22,500.

While novated electric vehicle leasing can offer substantial tax savings, it is important to factor in ongoing costs. Charging using grid electricity typically costs around $500 per year for 12,000 kilometres of driving. Home solar charging can reduce this further, while public fast chargers may cost $30 to $40 per full charge. Insurance premiums for electric vehicles can be higher due to the complexity of repairs and the availability of parts, typically costing around $1,500 annually. However, servicing costs are generally lower because these vehicles have fewer moving parts, averaging about $1000 annually. Registration fees vary by state, and many offer discounts. For example, in Queensland, the annual registration fee for a small electric vehicle is approximately $720.

Category                                     Electric vehicle            Petrol vehicle

Charging / Fuel                            $2,500                           $7,500–$10,000

Insurance                                     $5,000–$10,000            $4,000–$8,000

Servicing                                      $500–$1,500                 $2,000–$3,500

Registration & Road Fees            $3,500–$5,000              $4,000–$6,000

Depreciation                                 33%–50%                       40%–60%

Over five years, a typical electric vehicle owner might spend $2,500 on charging, $7,500 on insurance, $1,250 on servicing and $3,600 on registration and road fees. These costs can also be bundled into a novated lease, simplifying budgeting and potentially offering further tax advantages. Depreciation also plays a role. Some electric vehicles retain up to 60-70 per cent of their value after five years, while others may lose more.  Including these factors in your decision-making ensures the lease delivers genuine savings and aligns with your financial goals.

To qualify for this exemption, the car must be either a battery electric vehicle or a hydrogen fuel cell vehicle. From 1 April 2025, plug-in hybrid vehicles are excluded unless the car was used or available for use before that date and the lease includes a binding commitment to continue. The car must be below the luxury car tax threshold at first sale. For the financial year 2025–26, that threshold is set at $91,387 for fuel-efficient vehicles. Electric vehicles are fuel-efficient.  

The car must meet all Tax Office conditions, including being first held and used on or after 1 July 2022, and not subject to luxury car tax at any point. Even if exempt from FBT, the benefit is reportable and may affect eligibility for government benefits or income-tested obligations.

If employment ends, the novated lease does not automatically terminate. The employee remains responsible for the lease payments and must either take over the lease personally, transfer it to a new employer or terminate it early.  Early termination can involve payout costs, including the residual value and applicable fees. Once employment ceases, the employer has no further obligations.

Before proceeding, request a detailed quote from a leasing provider that outlines all bundled costs. Consult a tax adviser to confirm your eligibility and calculate the net benefits. Employees should consider job stability, while business owners need to evaluate how novated leasing fits into their employee benefits strategy.