A novated lease routes your car's lease and running costs through your employer's payroll instead of your own bank account, and the tax treatment splits sharply depending on what you drive. A battery electric or hydrogen fuel cell vehicle priced under the luxury car tax threshold is fully exempt from Fringe Benefits Tax, so the entire cost can be salary-sacrificed pre-tax, no post-tax contribution required to keep FBT off the table.
A standard petrol, diesel, or hybrid car doesn't get that exemption, so the Employee Contribution Method exists to bring the FBT bill back down. Roughly a fifth of the running cost gets paid from your post-tax pay as the "employee contribution," which offsets the taxable value of the car fringe benefit under the ATO's statutory formula method. The remaining four-fifths is still salary-sacrificed pre-tax, so you still get a real, if smaller, tax benefit compared with buying and running the same car privately.
This exemption isn't permanent. From 1 April 2027 the full EV exemption starts winding back on a sliding scale, and by 1 April 2029 no new lease gets a full exemption at all, only a 75% FBT discount at best. A lease signed before 1 April 2027 keeps its full exemption for the life of that arrangement, which is why timing matters if you're weighing an EV novated lease over the next couple of years.
