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Novated leases, adjusted taxable income, and childcare subsidy — a deep dive

One of the least understood consequences of a novated lease — particularly an FBT-exempt EV novated lease — is its impact on means-tested government payments.

The most common example is childcare subsidy (CCS).

This page focuses on the mechanics and calculations behind adjusted taxable income (ATI), with a particular emphasis on how novated leases affect childcare subsidy, and why hospital and NFP workers are subject to a different (but often misunderstood) rule.

Taxable income vs adjusted taxable income

Everyone starts with taxable income.

Taxable income is:

all assessable income minus all deductions

This is the bolded figure on your annual tax return, and it is what the ATO uses to calculate:

  • income tax, and
  • the Medicare levy.

What a novated lease does to taxable income

When you take out a novated lease, part of your pre-tax income is diverted to pay for the lease.

This reduces your taxable income.

For example:

  • Pre-NL taxable income: $100,000
  • Annual lease payments funded pre-tax: $19,065.98
  • Post-NL taxable income:

    $100,000 − $19,065.98 = $80,934.02

Income tax and Medicare levy are calculated using this lower figure.
This reduction is a major source of the headline “tax saving” from a novated lease.

Reportable fringe benefits (RFBA) is added back to produce adjusted taxable income (ATI)

With EV novated leases, the car benefit is FBT-exempt.

Even though no tax is payable, the benefit is still considered a reportable fringe benefit, and the grossed-up value is added back when calculating adjusted taxable income (ATI).

ATI is used for means-testing, including:

  • childcare subsidy,
  • HECS / HELP repayments,
  • child support,
  • Division 293 tax, and
  • some Centrelink assessments.

This is the part most novated lease marketing quietly glosses over.

How RFBA is calculated for EV novated leases vs ICE novated leases

For most EV novated leases, RFBA is calculated using the statutory formula:

RFBA = Vehicle dutiable value × 20% × 1.8868 × proportion of FBT year available for private use

Where:

  • Vehicle dutiable value is the car’s GST-inclusive value for FBT purposes
  • 20% is the statutory fraction for car fringe benefits
  • 1.8868 is the current type-2 gross-up rate
  • Proportion of FBT year is usually close to 1 unless the lease starts mid-year

ICE novated leases RFBA is usually ZERO

For ICE novated leases, the Employee Contribution Method (ECM) is usually used to reduce the employer’s FBT liability to zero.

When ECM fully offsets FBT (which is the usual structure for ICE leases):

  • RFBA becomes zero, and
  • adjusted taxable income always ends up lower than pre-NL income.

In other words:

  • EV novated leases are usually cheaper for the car itself, but worsen ATI-based outcomes.
  • ICE novated leases are usually more expensive for the car, but are often better for ATI-based means testing.

Worked example: why ATI can increase above your original salary in an EV

Consider the following example:

  • Vehicle dutiable value: $75,500
  • Pre-NL taxable income: $100,000
  • Annual lease payment (pre-tax): $19,065.98

Step 1: taxable income after novated lease

Post-NL taxable income = 100,000 − 19,065.98 = 80,934.02

This is the figure used to calculate income tax and Medicare levy.

Step 2: calculate RFBA

RFBA = $75,500 × 0.2 × 1.8868 = $28,490.68

(Assuming the vehicle is available for private use for the full FBT year.)

Step 3: calculate adjusted taxable income

Adjusted taxable income = $80,934.02 + $28,490.68 = $109,424.70

Important:
Your adjusted taxable income is now higher than your original $100,000 salary, even though your income tax went down.

This is the number used for childcare subsidy, HECS/HELP, child support, and Division 293.

Worked example: how to estimate the increase in HELP / HECS repayments

If you have a HELP or HECS debt, you can estimate the additional repayment caused by a novated lease as follows:

  1. Ensure the “total taxable income” you start with reflects your true taxable income as per ATO rules (all income minus all deductions).
  2. In Section 3 of the spreadsheet’s main calculation page, look under the adjusted taxable income column.
  3. The spreadsheet calculates ATI for each year based on your lease details.

  4. Suppose:

    • Original taxable income: $100,000
    • Calculated adjusted taxable income: $109,424
      Note: This may still not be your final ATI if you have other components (e.g. rental losses, overseas income). Always sanity-check with your accountant.

  5. Look up the HELP repayment table for the relevant year.

  6. If your repayment rate was previously:

    • ATI of $100,000 → $4950, and is now
    • ATI of $109,424 → $6,363.60.

    Then $1,413.60 is your increased HELP repayment.

  7. Repeat this process for any other ATI-based liability or subsidy relevant to you.

EV novated leases' impact on childcare subsidy

Childcare subsidy is calculated on adjusted taxable income. (strictly speaking, it's the sum of adjusted taxable income of both parents)

For childcare subsidy (as well as other family assistance and youth income support payments), employees of public hospitals and PBIs are subject to further modification to the RFBA value which complicate this calculation further.

Childcare subsidy for hospital and PBI employers: the special rule

There is a special concession for family assistance (including childcare subsidy) when the employee works for an FBT-exempt employer, including:

  • public benevolent institution
  • health promotion charity
  • public or not-for-profit hospital
  • public ambulance service.

Specifically:

  1. For family assistance purposes, only 53% of RFBA is counted for employees of FBT-exempt employers.
  2. In practice, this means the CCS-relevant RFBA is calculated as:

RFBA (for CCS) = Vehicle dutiable value × 20% × proportion of FBT year available for private use

  1. The 53% factor effectively cancels out the usual 1.8868 gross-up.
  2. This concession applies only for this specific means-testing purpose and only for this employer category.

Using the same example as previous:

Step 3: adjusted taxable income figure for childcare subsidy purpose for FBT-exempt employees:

Adjusted taxable income for this purpose: = 80,934.02 + 28,490.68 x 0.53 = 96,034.08

which is now lower than the $100,000 original income.

The joy of Australian tax laws.

Taxable income vs ATI vs childcare-subsidy ATI (FBT-exempt employers)

Using the same example above, we end up with three different income figures, each used for a different purpose:

1. Taxable income after novated lease: $80,934.02

  • Used for income tax and Medicare levy calculations.

2. Adjusted taxable income (ATI): $109,424.70

  • Used for most means-tested liabilities and assessments, including:
    • HELP / HECS repayments
    • child support
    • Division 293 tax
  • Excludes childcare subsidy for eligible FBT-exempt employers.

3. Childcare-subsidy ATI for FBT-exempt employers: $96,034.08

  • Applies only to eligible employees (e.g. public hospitals, PBIs), and
  • Only for childcare subsidy means-testing.

Key takeaway

If you remember nothing else:

Government subsidy and liability are assessed on adjusted taxable income, not taxable income. Childcare subsidy has convoluted calculations.

This does not make an EV novated lease “bad”, but it does mean the true cost must be evaluated across tax, subsidies, and liabilities together, not in isolation.

Optional Support

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