Skip to content

Glossary of novated lease terms

A quick reference for the terminology used throughout this guide. Terms are listed alphabetically.

Adjusted taxable income (ATI) A figure used for means-testing of government subsidies and obligations — including HECS/HELP repayments, childcare subsidy, child support, Division 293 tax, and some Centrelink assessments. ATI is not the same as "updated taxable income": it adds back certain amounts that were excluded from income tax, including RFBA. For EV novated leases, ATI often ends up higher than before the lease, which can reduce means-tested benefits. See FBT, RFBA, and ATI explained.

Balloon payment See Residual value.

Budgeted running costs The portion of pre-tax salary set aside each pay cycle to cover the ongoing costs of running the car — fuel or electricity, tyres, servicing, registration, and insurance. This money sits in a dedicated account and is claimed as expenses are incurred. Unspent amounts are returned at end of lease; shortfalls are billed as post-tax top-ups. See Running costs as a piggy bank.

Division 293 tax An additional 15% tax on concessional superannuation contributions for high earners (currently those with income and super contributions exceeding $250,000). Because EV novated leases increase ATI, some employees near this threshold can be pushed over it by taking an EV novated lease.

ECM — Employee Contribution Method The mechanism used in FBT-applicable (ICE) novated leases to eliminate the employer's FBT liability. Under ECM, a portion of the lease or running costs is paid from the employee's post-tax income rather than pre-tax. This post-tax contribution reduces the "taxable value" of the car benefit to zero, meaning the employer owes no FBT. For FBT-exempt (EV) leases, ECM is generally not required. See FBT, RFBA, and ATI explained.

EV FBT exemption A legislated exemption (introduced October 2022) under which eligible electric and plug-in hybrid vehicles provided under a novated lease are exempt from Fringe Benefits Tax. This significantly reduces the cost of an EV novated lease compared with an ICE vehicle lease. The exemption is subject to an ongoing government review. PHEVs that were not on order before 1 April 2025 are no longer eligible. See EV vs ICE novated leases compared and EV FBT exemption review timing.

FBT — Fringe Benefits Tax A tax paid by employers when they provide non-cash benefits (fringe benefits) to employees instead of salary. For novated leases, the car and associated running costs constitute a fringe benefit. FBT is legally the employer's obligation — not the employee's — but in practice it is either eliminated via ECM (ICE vehicles) or exempt altogether (eligible EVs). See FBT, RFBA, and ATI explained.

FBT base value The value of the car used to calculate both the taxable value of the benefit and (therefore) RFBA. For most novated leases this is the vehicle purchase price before stamp duty, compulsory third party insurance, and registration. Sometimes listed on quotes as "vehicle price", "vehicle RRP", or "vehicle subtotal".

FBT exemption cap (NFP / hospital employees) Employees of certain not-for-profit organisations can have fringe benefits provided up to a legislated cap before any FBT is payable by the employer. The cap is $9,010 per FBT year for public hospitals and ambulance services, and $15,900 for public benevolent institutions (PBIs) and other eligible charities. For ICE novated leases, this cap allows the employee's post-tax ECM contribution to be eliminated (or significantly reduced), improving the financial case compared with a for-profit employer. However, if the cap could already be used for other salary-packaged living expenses (eg rent or mortgage), it cannot be considered a source of additional saving for a novated lease — a common source of double-counting savings in quotes. See Don't double count the FBT exemption cap.

FBT year The FBT year runs from 1 April to 31 March — different from the income tax year (1 July to 30 June). This matters when calculating RFBA for a lease that starts or ends partway through a year, and when claiming electricity costs under the ATO 4.2c/km shortcut method.

Financed amount The total amount financed under the lease — typically the car's drive-away price plus documentation fee minus GST saved. Occasionally this can be altered by bundled accessories, repair services, first year comprehensive car insurance, lease protection insurnace etc. This amount determines the base from which lease repayments are calculated.

Fringe benefit A non-cash benefit provided by an employer to an employee — in lieu of or in addition to salary. A car under a novated lease is the most common example.

GST — Goods and Services Tax A 10% broad-based tax on the supply of goods and services in Australia. Businesses registered for GST can claim back GST credits on purchases used for business purposes. A novated lease provider / the employer can claim back GST on the car purchase and running costs, and the saving can be passed on to the employee. This GST saving is a genuine financial benefit of novated leasing — but is sometimes not passed on. See Some employers do not pass on GST saving.

HECS / HELP Higher Education Contribution Scheme / Higher Education Loan Program — the Commonwealth student loan scheme. Repayment amounts are assessed against ATI, not taxable income. Because EV novated leases can increase ATI, HECS/HELP repayments can increase even though take-home pay also increases.

ICE vehicle Internal Combustion Engine vehicle — a conventional petrol or diesel car. ICE novated leases are not FBT-exempt, so they require ECM, which reduces the income-tax saving compared with EV leases. However, ICE leases have zero RFBA (after full ECM), which means they generally do not worsen means-tested subsidies or HECS/HELP repayments.

LCT — Luxury Car Tax A tax applied to vehicles with a GST-inclusive value above a threshold set by the ATO each year (e.g. $91,387 for FY 2024–25 and 2025–26 for fuel-efficient vehicles; lower for other vehicles). EVs above the LCT threshold lose the FBT-exemption status.

Medicare Levy Surcharge (MLS) An additional levy of 1–1.5% applied to higher-income earners without private hospital cover. The surcharge is assessed against ATI. Because an EV novated lease can increase ATI, some individuals near the MLS threshold can be pushed over it. Note that this is separate from and in addition to Medicare Levy, which is a standard 2% levy applied to most tax payers to support universal healthcare in Australia.

Net saving The genuine financial benefit of a novated lease — calculated by comparing the global financial position against the total cost of a realistic alternative (cash purchase, car loan, or keeping the current car), over a specific period. The global financial position is defined by three components i.e. cashflow, asset and liability. This is the only meaningful measure of whether a novated lease is financially worthwhile. Contrast with tax saving. See Why "tax saved" is the wrong metric.

Novated lease A three-way arrangement between an employee, their employer, and a finance company (lessor). The employer "novates" (takes on) the lease obligations on behalf of the employee, and the lease repayments and running costs are deducted from the employee's pre-tax salary. This allows the employee to pay for the car using pre-tax dollars, reducing income tax. See What is a novated lease, really?

Novation The legal act of transferring a contract — in this context, the transfer of the car lease obligations from the employee to the employer. It is "novation" that gives a novated lease its name.

PBI — Public Benevolent Institution A type of charitable organisation that can provide employees with a higher FBT exemption cap ($15,900 per year, versus $9,010 for hospitals). PBI employees using an ICE novated lease can potentially access this cap without any out-of-pocket FBT cost. However, this cap cannot be double-counted if it is already being used for other salary-packaged benefits. See Don't double count the FBT exemption.

Pre-tax / post-tax Money paid before income tax is deducted (pre-tax) is worth more than money paid after tax (post-tax). For someone in the 39% income tax bracket (including Medicare levy), $1 pre-tax is equivalent to roughly $0.61 post-tax. Novated leases derive their income tax benefit by allowing lease payments to be made from pre-tax salary.

Residual value (balloon payment) The mandatory minimum balance that must remain at the end of a novated lease, set by the ATO as a percentage of the original vehicle cost. The employee must pay this amount at lease end — either by refinancing, extending the lease, or paying it outright. It is a real future liability and must be included in any honest cost comparison. Common ATO residual percentages: 65.63% (1 year), 56.25% (2 years), 46.88% (3 years), 37.50% (4 years), 28.13% (5 years). See All about residual values.

RFBA — Reportable Fringe Benefits Amount The value of fringe benefits reported on an employee's income statement at the end of the FBT year. RFBA is not a tax — it does not directly increase income tax or Medicare levy. However, it is included in adjusted taxable income (ATI), which affects HECS/HELP repayments, childcare subsidy, Division 293 tax, and other means-tested assessments. For FBT-exempt EV leases, RFBA is present and often large. For ICE leases using full ECM, RFBA is typically zero. See FBT, RFBA, and ATI explained.

Running costs The ongoing costs of operating the car: fuel or electricity, servicing, tyres, registration, and insurance. In a novated lease, these are bundled into the fortnightly deduction and paid from the running costs "piggy bank" account. GST on running costs can be claimed back by the employer and passed on to the employee — though not all employers do this. See Running costs as a piggy bank.

Salary packaging / salary sacrifice Broad terms for arrangements where part of an employee's salary is replaced by non-cash benefits. Novated leasing is a form of salary packaging. The terms are often used interchangeably, though "salary sacrifice" sometimes refers specifically to additional superannuation contributions.

SG — Super Guarantee The legislated minimum employer superannuation contribution — currently 12%. Some employers calculate SG on the post-novated-lease salary (i.e. after the pre-tax deductions), which reduces the super contribution. See Super guarantee and payroll risks.

Tax saving The reduction in income tax and Medicare levy resulting from the pre-tax salary deductions in a novated lease, plus the GST avoided on the car purchase. This figure is widely marketed by novated lease providers as the measure of value — but it consistently overstates the true financial benefit because it ignores the other cost of the lease (interest, fees, commissions) compared with alternatives. Contrast with net saving. See Why "tax saved" is the wrong metric.

Support this independent calculator & guide

This calculator and guide are built and continuously maintained as an independent project.

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: