FBT, RFBA, and adjusted taxable income — explained clearly

Many people understand that a novated lease can reduce income tax — but are surprised later when their HECS repayment increases, their childcare subsidy drops, or Division 293 tax applies (especially in the case of FBT-exempt novated leases).

All of that flows from the interaction between FBT, RFBA, and adjusted taxable income.

What Fringe Benefits Tax (FBT) actually is

Fringe Benefits Tax (FBT) is not a tax you pay personally.

FBT is a tax that applies when an employer provides a non-cash benefit to an employee, instead of paying that value as ordinary salary. A car provided under a novated lease is the most common example.

FBT exists to stop people from avoiding income tax by being paid in “stuff” (i.e. fringe benefit) rather than money.

Without FBT:

an employer could pay a low salary, and
provide a car, fuel, insurance, and other benefits instead

FBT closes that loophole.

Who pays FBT — and what is its relationship with ECM

Legally:

FBT is payable by the employer

In practice:

employers generally do not want to absorb this cost
novated leases are therefore structured to eliminate this tax liability despite continued provision of fringe benefit.

This is usually done via the Employee Contribution Method (ECM):

part of the lease or running costs are paid from post-tax income instead of pre-tax
this reduces the taxable value of the benefit
bringing the employer’s FBT liability down to zero

When people say “I’m paying FBT for this lease”, what they actually mean is:

“I’m making post-tax contributions so my employer doesn’t have to pay FBT.”

What changed for electric vehicles (EVs)

For eligible electric vehicles:

the car benefit itself is exempt from FBT

This exemption dramatically reduces the cost of a novated lease because:

there is no need for ECM to neutralise FBT
far more of the lease can be paid using pre-tax income

However — and this is where most confusion begins — even though the fringe benefit tax is exempt, the fringe benefit itself is still recorded and taken into account for certain means-tested assessments.

What is RFBA?

Even when FBT is exempt, the car is still a fringe benefit.

The value of that benefit is reported on your income statement as a Reportable Fringe Benefits Amount (RFBA).

Important things to understand about RFBA:

it is not a tax
it does not increase your income tax
you do not pay Medicare levy on it

But RFBA is used by other systems to assess your economic capacity.

How is RFBA calculated?

RFBA is calculated using a standardised formula set by the ATO.¹ It is not negotiated, and novated lease providers do not get to invent this number.

For car fringe benefits, the reportable amount is broadly calculated as:

RFBA
= Taxable value of the car benefit × 20% × 1.8868 × proportion of FBT year car is available

The factor 1.8868 is the gross-up rate used to convert the taxable value of a fringe benefit into its reportable equivalent for means-testing purposes.

Two important points follow from this:

The taxable value is driven primarily by the car’s value, not by how the car is financed.
The lease interest rate / repayment does not affect RFBA. i.e. for the same car, a lease with 6% effective interest rate would have the same RFBA as a lease with 12% effective interest rate.

What determines the taxable value?

For most novated leases, the taxable value of the car benefit is the car’s FBT base value (which is typically the vehicle purchase price prior to stamp duty, compulsory third party insurance and registration).

If listed on your car quote, it is also sometimes called vehicle price, vehicle RRP or vehicle subtotal.

Why RFBA exists

Different parts of government have different objectives.

The Australian Taxation Office administers income tax and FBT.
HECS / HELP, Centrelink, Child Support, and Division 293 operate under means-testing frameworks.

When the government introduced the EV FBT exemption, it was a deliberate choice to:

reduce the cost of low-emission vehicles
encourage EV uptake

That required the ATO to give up tax revenue.

However, other systems take the view that:

Converting part of your salary into a fringe benefit does not mean your ability to pay obligations has fallen.

RFBA exists to “patch that gap” between tax concessions and means-testing systems.

What is adjusted taxable income (ATI)?

Adjusted taxable income is not your taxable income.

It is instead a figure used for means-testing of:

HECS / HELP repayments
Childcare subsidy
Child support
Division 293 tax
some Centrelink assessments

For novated leases, a simplified way to think about ATI is:

Taxable income after novated lease
≈ assessable income − other deductions − pre-tax novated lease deductions

Adjusted taxable income
≈ taxable income after novated lease + RFBA (+ other add-backs used in means testing)

This is why surprises occur.

Note that there are other components forming ATI that are not part of taxable income. Read more in the ATI page.

Why EV novated leases often increase ATI

With an EV novated lease:

income tax usually goes down
but RFBA is added back for ATI purposes

Because EVs are FBT-exempt:

there is often no post-tax ECM
the RFBA can be large relative to the salary reduction

The result is that:

Depending on the lease duration and the effective interest rate, ATI can often end up higher than your pre-lease taxable income even though your take-home pay increases
With EV novated leases, you often end up with worse childcare subsidy, HECS repayment etc.

This is one of the main reasons headline tax savings can be misleading.

Why ICE novated leases usually have zero RFBA

For internal combustion engine (ICE) vehicles:

the car benefit is not FBT-exempt
ECM is usually required
more of the cost is paid post-tax

As a result:

RFBA is usually zero (as long as the ECM fully reduces the FBT to zero)
but the lease itself is usually more expensive

This is one of the many reasons EV and ICE novated leases should be analysed as different products.

Who is most affected by ATI increases in EV NL

ATI increase (in the case of EV novated lease) matter most if you:

have HECS / HELP debt
receive childcare subsidy
pay child support
pay medicare levy surcharge
are near the Division 293 threshold
rely on other means-tested benefits

If none of these apply, RFBA may be largely irrelevant.

If one or more apply, RFBA can materially change the outcome. You can use the novated lease spreadsheet to simulate changes to ATI and the downstream impact on government liabilities and subsidies.

Why this is often poorly explained

Most novated lease providers focus on:

headline tax savings
take-home pay comparisons

RFBA is often:

buried in fine print
mentioned briefly
or not explained at all

This often leads to shock tax bills and forms a major reason behind some of the "novated lease is a scam" feedback.

This issue forms part of the caveats in considering "is a novated lease right for me?".

Key takeaway

If you remember nothing else:

FBT exemption reduces the cost of EV novated leases, but paradoxically can worsen means-tested government subsidies and liabilities.

FBT-applicable novated lease i.e. non-EV is usually more expensive in lease repayment, however it usually improves government subsidies and liability with the typical ECM.

Optional Support

Both this guide and the spreadsheet are free. If they prove helpful, consider:

Using my Tesla referral link for a $350 discount if you’re ordering a Tesla, or
Buying me a cuppa at BuyMeACoffee.com

This "statutory formula" method is the most common. If you have adequate record you may opt for "operating cost method" which is not discussed in this guide. ↩