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EV FBT exemption phase-out — 2026 Budget announcement explained

Policy change announced — 4 May 2026

The treasurer has announced a phased wind-back of the EV FBT exemption, effective across the next three FBT years. Existing leaseholders are largely protected, with meaningful lead time before changes take effect. Full details below.

On 4 May 2026, the federal treasurer announced the modification — and eventual phase-out — of the Fringe Benefits Tax (FBT) exemption for electric vehicles. The changes are structured across three stages, with different rules applying depending on when your lease commenced and the value of the vehicle.

Notably, the announcement provides genuine lead time rather than an immediate rug-pull: most people currently committed to a lease are not affected until at least 1 April 2027, and many existing leases are grandfathered through to their conclusion.

The complete picture: who is affected, and when

The table below sets out every scenario depending on lease start date, vehicle FBT value, and FBT year:

Lease entered Vehicle FBT value 1 Apr 2027 – 31 Mar 2029 1 Apr 2029 onward
1 Jul 2022 – 1 Apr 2027 ≤ $91,387 1 FBT-exempt 2 FBT-exempt 2
1 Jul 2022 – 1 Apr 2027 > $91,387 1 FBT-applicable (100%) FBT-applicable (100%)
1 Apr 2027 – 31 Mar 2029 ≤ $75,000 FBT-exempt 2 FBT-exempt 2
1 Apr 2027 – 31 Mar 2029 $75,001 – $91,661 3 FBT-discounted (75%) FBT-discounted (75%)
1 Apr 2027 – 31 Mar 2029 > $91,661 3 FBT-applicable (100%) FBT-applicable (100%)
1 Apr 2029 or later ≤ EV LCT threshold at time of purchase n/a FBT-discounted (75%)
1 Apr 2029 or later > EV LCT threshold at time of purchase n/a FBT-applicable (100%)

In all scenarios, two additional criteria applies to qualify for any FBT-exemption or FBT-discount, i.e.

  • it must have been first held and used after 1/7/22
  • it has never paid LCT throughout its history.

Key observations from the table

Existing leases entered before 1 April 2027 are substantially protected. If your car's FBT base value was at or below the applicable LCT threshold when you signed, your lease continues FBT-exempt until it concludes — regardless of whether that end date falls after 2027 or 2029.

New leases entered between 1 April 2027 and 31 March 2029 face a sliding scale. Cars valued at $75,000 remains FBT-exempt. Cars between $75,001 and the LCT threshold are subject to the 75% discount from the outset. Cars above the LCT threshold remain fully FBT-applicable, as they always have been.

New leases entered from 1 April 2029 onward the full FBT-exemption is no longer available. Cars valued under the LCT threshold at the time of purchase will attract a have FBT-discount (i.e. 75% of the standard FBT liability applies), while cars above the LCT threshold attract the full FBT rate.

What does "FBT-applicable" actually mean for your out-of-pocket costs?

As discussed in What is a novated lease, FBT is technically a tax payable by the employer — but employers almost universally pass this obligation on to the employee via the Employee Contribution Method (ECM), making it cost-neutral for the employer.

How ECM works in practice

Under a fully FBT-exempt novated lease, the entire fortnightly or monthly lease payment is funded from pre-tax income. The effective discount you receive is for any spending in this structure therefore equal to your marginal tax rate plus the 2% Medicare levy — i.e. 47% for top-bracket earners, 39% for the next bracket, and so on.

Under an FBT-applicable lease, the ECM rule requires that 20% of the car's pre-on-road purchase price be converted from pre-tax to post-tax payment each year. This substantially reduces the proportion of the lease that can be funded pre-tax — and therefore materially reduces the tax benefit.

Example: For a car with an FBT base value of $75,500:

  • Under the FBT-exempt structure, let's say $19,000 per year is paid pre-tax for a 5-year lease (which was my actual figure).
  • If this becomes a FBT-applicable structure, approximately $15,100 per year must instead be paid post-tax, with only around $4,000 remaining as a pre-tax deduction.4

The consequence is a dramatically lower saving, because much less of the lease payment is sheltered from income tax.

Quantifying the impact: FBT-applicable (100%) vs FBT-exempt

Let c = the car's pre-on-road purchase price, and t = your marginal tax rate plus the 2% Medicare levy (i.e. 0.32, 0.39, or 0.47 for the three upper brackets).

Under ECM, 0.2c of the lease payment must be converted from pre-tax to post-tax each year. The lost tax benefit on this component is 0.2c × t.

In addition, there is a GST component payable on the same figure, equal to 1/11 of 0.2c — but this is paid pre-tax, so its net cost is 0.2c × (1/11) × (1 − t).

Total extra out-of-pocket cost per year (FBT-applicable 100% vs FBT-exempt):

0.2ct + c/55 − ct/55 = c(0.181818t + 0.0181818)

As a percentage of the car's pre-on-road cost, this equates to approximately:

  • 7.64% per year for the 30% + 2% Medicare levy bracket
  • 8.91% per year for the 37% + 2% bracket
  • 10.36% per year for the 45% + 2% bracket

For an $80,000 car, the additional annual out-of-pocket cost compared to an equivalent FBT-exempt lease would be:

Tax bracket Extra cost per year
30% + 2% Medicare levy $6,109
37% + 2% Medicare levy $7,127
45% + 2% Medicare levy $8,291

You may substitute your own car price c and marginal rate t into the formula above.

Quantifying the impact: FBT-discounted (75%) vs FBT-exempt

The 75% discount structure applies the same ECM logic, but scaled by 75% — that is, only 0.15c (rather than 0.2c) of the lease payment is redirected from pre-tax to post-tax.

Total extra out-of-pocket cost per year (FBT-discounted 75% vs FBT-exempt):

0.15ct + 3c/220 − 3ct/220 = c(0.136364t + 0.0136364)

For an $80,000 car, the additional annual out-of-pocket cost compared to an equivalent FBT-exempt lease would be:

Tax bracket Extra cost per year
30% + 2% Medicare levy $4,582
37% + 2% Medicare levy $5,346
45% + 2% Medicare levy $6,218

Again, substitute your own values of c and t for your specific situation.

What this means in practice

The financial impact of the transition from FBT-exempt to FBT-applicable or FBT-discounted is significant — in the thousands of dollars per year for most mid-range EV novated leases. The more expensive the car and the higher your marginal tax rate, the larger the dollar impact.

For people already in a lease, the key message is clear: if your car was at or below the LCT threshold when you entered the lease prior to 1 April 2027, you are protected. There is no immediate action required.

For people considering a new lease between April 2027 and March 2029, the calculus changes materially depending on vehicle price:

  • Cars at $75,000 or below remain a strong proposition through to their lease conclusion.
  • Cars between $75,001 and the LCT threshold attract a 25% effective FBT cost from day one, meaningfully reducing (though not eliminating) the pre-tax benefit.
  • Cars above the LCT threshold continue to be structured as fully FBT-applicable leases, as they were before.

For people planning a lease from April 2029 onward, the full EV FBT exemption will no longer be available. A residual 25% discount (for cars within the LCT threshold) remains — but the headline benefit of EV novated leases will be substantially diminished compared to what has been available since 2022.

Key takeaways

  • The FBT exemption wind-back is phased: existing leases are largely protected, with the transition beginning for new leases from 1 April 2027.
  • From 1 April 2029, no new EV novated lease will be fully FBT-exempt, regardless of vehicle price.
  • For a top-bracket earner driving an $80,000 EV, the transition from FBT-exempt to fully FBT-applicable adds over $8,000 in out-of-pocket costs per year.
  • The 75% discount structure (FBT-discounted) provides a meaningful but partial buffer — roughly 75% of the original saving is retained.
  • If you are currently in a qualifying lease, no action is required — your exemption is locked in until the lease concludes.

Published: 4 May 2026. Based on the treasurer's announcement. This article will be updated as further legislative detail becomes available.

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If it has helped you think more clearly, avoid a costly mistake, or saved you meaningful money, you're welcome to support its ongoing maintenance and improvements:

I'm backing Dr Michael Keane's fight for salary packaging transparency

Workplaces with an exclusive salary packaging provider tend to have noticeably higher effective interest rates on novated leases — yet the commercial terms behind these exclusive arrangements are rarely disclosed to employees.

Dr Michael Keane, a Melbourne anaesthetist, is taking a Victorian health service to the Victorian Supreme Court to obtain the unredacted contract between the hospital and its exclusive salary packaging provider. The unredacted version may shed light on alleged sign-on fees associated with exclusive access to hospital employees — an arrangement whose financial terms employees are rarely privy to.

To date, Dr Keane has personally spent around $15,700 pursuing this case, with further legal costs anticipated. I believe this matters to anyone in a workplace with an exclusive provider. If you agree, consider supporting his GoFundMe GoFundMe.

  1. Or the applicable LCT threshold at the time of purchase if the lease commenced in an earlier financial year. It is projected to be $91,661 from 1/7/26. ↩↩

  2. Protected until end of lease, provided there is no change in circumstances. ↩↩↩↩

  3. The upper limit is projected to be $91,661 from 1 July 2026; thereafter it will be further indexed against the LCT threshold from 1 July 2027 and from 1 July 2028 respectively. ↩↩

  4. Within an FBT-applicable structure, there is an additional component where GST on the post-tax contribution must also be paid — though this GST component itself is funded pre-tax. This detail is explained in the second half of this article. ↩