Understanding Fringe Benefits Tax and the Employee Contribution Method
If you've started exploring novated leasing, you've probably come across terms like Fringe Benefits Tax (FBT), pre-tax deductions, post-tax deductions and the Employee Contribution Method (ECM).
While the terminology can seem confusing at first, the concepts are simpler than they sound.
Understanding the basics can help you make a more informed decision about whether a novated lease is right for you.
Nathan WhiteNovated Leasing Consultant
03 Aug 20263 min read
What is Fringe Benefits Tax (FBT)?
Fringe Benefits Tax (FBT) is a tax that applies when an employer provides certain non-cash benefits to an employee, such as the private use of a vehicle.
Because a novated lease is provided through your employer, it is generally subject to FBT unless an exemption applies.
Although FBT is an employer tax, the cost is generally factored into the novated lease arrangement.
What is the Employee Contribution Method (ECM)?
The Employee Contribution Method (ECM) is one way of managing Fringe Benefits Tax within a novated lease.
Rather than paying an additional separate amount for FBT, you make a contribution towards your vehicle costs from your after-tax salary. This after-tax contribution reduces the taxable value of the vehicle benefit and in turn, can reduce the employer's FBT liability to nil.
For many employees, this can be a more tax-effective approach than paying FBT directly.
The way your lease is structured will depend on your individual circumstances, your employer’s vehicle policy (if any), and current Australian Taxation Office (ATO) requirements.
Why are there both pre-tax and post-tax deductions?
One of the most common questions about novated leasing is why lease payments sometimes come from both pre-tax and post-tax salary.
The answer is that each type of deduction serves a different purpose.
Pre-tax salary deductions are generally used to pay for eligible lease costs before income tax is calculated.
Post-tax salary deductions, often referred to as an employee contribution under the Employee Contribution Method, help reduce the taxable value of the vehicle benefit for FBT purposes.
The balance between pre-tax and post-tax deductions will vary depending on your lease and personal circumstances.
How does ECM work?
While every lease is different, the process generally follows these steps:
Your novated lease is established through your employer.
Eligible lease costs are deducted from your salary.
A portion of the lease may be paid using an after-tax employee contribution.
That contribution reduces the taxable value of the vehicle benefit for FBT purposes.
The result is a lease structure designed to comply with current tax legislation while helping manage the FBT associated with the vehicle.
Your personalised quote will explain how your lease has been structured.
What about electric vehicles?
Eligible battery electric vehicles may qualify for a Fringe Benefits Tax exemption under current Australian Government legislation.
Where the exemption applies, the Employee Contribution Method is generally not required because there's no FBT liability to offset. The exemption applies even when the vehicle is provided under a novated lease, provided the legislative eligibility requirements are met.
While eligible EVs may be exempt from FBT, the benefit may still need to be reported for taxation purposes.
Eligibility depends on factors including the type of vehicle, its value and current legislation.
If you're considering an electric vehicle, our team can help explain the current requirements.
Will ECM save everyone money?
It depends on your circumstances. Every employee's financial situation is different, and the way a novated lease is structured depends on a range of factors, including:
Your taxable income
The vehicle you choose
The lease term
Estimated annual kilometres
Current tax legislation
For many employees, the Employee Contribution Method can provide a more tax-effective way of managing Fringe Benefits Tax than paying FBT directly. However, the benefits will vary based on your individual circumstances.
A personalised quote is the best way to understand how a novated lease may work for you.
Frequently asked questions
Why do I have post-tax deductions? Post-tax deductions are commonly used as part of the Employee Contribution Method to help manage Fringe Benefits Tax on a novated lease.
Is the Employee Contribution Method mandatory? Not every novated lease is structured in the same way. Whether the Employee Contribution Method is used depends on your vehicle, your circumstances, your employer’s vehicle policy, and current legislation.
Can Custom Fleet tell me how much tax I'll save? We can prepare a personalised quote showing how your novated lease may be structured.
Because tax outcomes depend on your individual circumstances, we recommend obtaining independent financial advice if you're unsure how a novated lease may affect your personal situation.
Is novated leasing right for you?
A novated lease isn’t the only way to finance a car, and it won’t be the right solution for everyone.
Your income, employment, driving habits and financial goals all play a part in determining which vehicle finance option best suits your circumstances.
If you’re buying your first new car, it’s worth comparing your options before making a decision.