Electric vehicle salary packaging remains one of the most powerful tax-saving strategies available to Australian employees in 2026. With the FBT exemption still in place for battery electric and hydrogen fuel cell vehicles, the opportunity to pay for your car from pre-tax income — with zero fringe benefits tax — continues to deliver substantial savings.
But the landscape has shifted. Plug-in hybrids lost their exemption from 1 April 2025, and the federal government launched a formal review of the Electric Car Discount in late 2025. Here is everything you need to know to make an informed decision this year.
How Salary Packaging an EV Works
Salary packaging (also called salary sacrifice) allows you to pay for certain expenses from your pre-tax income, reducing your taxable income and the amount of tax you pay.
When you salary package a car through a novated lease, a three-way agreement is set up between you, your employer, and a leasing company. Your employer deducts the lease payments and agreed running costs directly from your gross salary before tax is calculated.
For most cars, this arrangement triggers Fringe Benefits Tax (FBT) — a tax your employer pays on the benefit you receive. The FBT rate is currently 47%, which can significantly erode the savings.
However, for eligible electric vehicles, the FBT exemption changes the equation entirely.
The EV FBT Exemption: Why It Matters
Since 1 July 2022, the Australian Government’s Electric Car Discount has exempted eligible zero and low-emission vehicles from FBT. This means the entire lease cost and associated running expenses can be paid from your pre-tax salary with no FBT payable.
The financial impact is significant. For an employee on a marginal tax rate of 37% (plus Medicare levy), salary packaging an eligible EV can reduce the effective cost of the vehicle by 30-40% compared to purchasing it outright with after-tax dollars.
What Vehicles Are Eligible?
To qualify for the FBT exemption in 2026, a vehicle must meet all of the following criteria:
- Battery electric vehicle (BEV) or hydrogen fuel cell vehicle — these are the only vehicle types that qualify from 1 April 2025 onwards
- First held and used on or after 1 July 2022
- Value below the luxury car tax (LCT) threshold for fuel-efficient vehicles — currently $91,387 (GST-inclusive) for the 2025-26 financial year
- Designed to carry fewer than 9 passengers and a load of less than one tonne
- Never subject to luxury car tax at any point in the vehicle’s history
Popular eligible models in 2026 include the Tesla Model 3 and Model Y, BYD Atto 3 and Seal, MG4, Hyundai Ioniq 5 and 6, Kia EV6, and Volvo EX30.
Plug-in Hybrid Vehicles: What Changed from 1 April 2025
This is one of the most important changes for 2026. Plug-in hybrid electric vehicles (PHEVs) no longer qualify for the FBT exemption for new arrangements entered into from 1 April 2025.
Grandfathering Rules
If you had an existing PHEV salary packaging arrangement before 1 April 2025, you may be able to continue claiming the exemption, but only if:
- The vehicle was already being used for private purposes before 1 April 2025
- There was a financially binding commitment in place before that date to continue providing the vehicle
- No material changes have been made to the arrangement (refinancing, extending the lease term, or changing vehicles will cancel the exemption)
Delivery delays alone do not extend eligibility. If you ordered a PHEV before 1 April 2025 but it was not delivered and in use before that date, the exemption does not apply.
If you currently have a PHEV under a grandfathered arrangement, review the terms carefully with your employer and tax adviser to ensure the exemption is maintained.
What Costs Are Covered Under the Exemption?
The FBT exemption applies not only to the lease payments but also to associated vehicle running costs, including:
- Registration and insurance
- Servicing, repairs, and maintenance
- Tyres and roadside assistance
- Electricity for charging (including home charging)
- Tolls (when salary packaged)
For home charging, the ATO allows a shortcut method of 4.20 cents per kilometre for zero-emission EVs under Practical Compliance Guideline PCG 2024/2. This simplifies record-keeping if you charge at home.
The Reportable Fringe Benefits Catch
While no FBT is payable on an exempt EV, the benefit is still reportable. This means the grossed-up value appears on your income statement and may affect:
- Income-tested government benefits (Family Tax Benefit, child care subsidy, HECS-HELP repayment thresholds)
- Medicare levy surcharge assessments
- Centrelink payments and other means-tested entitlements
It is critical to model the full impact on your net position before committing to salary packaging. The tax savings may be partially offset if your reportable fringe benefits push you into a different threshold for income-tested obligations.
The Government Review: What It Means for You
In December 2025, the Australian Government announced a statutory review of the Electric Car Discount, conducted jointly by Treasury and the Department of Climate Change, Energy, the Environment and Water. Public submissions closed on 6 February 2026.
The review will examine whether the exemption should continue, be modified, or end. The government has committed to completing the review by mid-2027, though a decision could be made at any time.
What Does This Mean for Current and Prospective EV Buyers?
- Existing arrangements are protected. If you are already salary packaging an eligible EV, your current arrangement continues under the existing rules.
- New arrangements remain eligible under current law. The exemption has not been changed or ended — the review is examining future policy.
- There is no guarantee the exemption will continue indefinitely. If you have been considering an EV through salary packaging, acting sooner rather than later reduces the risk of policy change affecting your decision.
Treasury estimates that nearly 100,000 vehicles have benefited from the FBT exemption since its introduction, reaching that milestone sooner than expected.
Running Cost Savings: EVs vs Petrol Vehicles
Beyond the FBT savings, electric vehicles deliver significantly lower running costs:
| Cost Category | EV (est. annual) | Petrol Car (est. annual) |
|---|---|---|
| Fuel / Charging | ~$500-700 | ~$2,000-3,000 |
| Servicing | ~$300-500 | ~$800-1,200 |
| Registration (some states) | Reduced or rebated | Standard |
An employee driving 15,000 km per year could save $2,000-3,000 annually on running costs alone, before accounting for the pre-tax salary packaging benefit.
How to Get Started: Five Steps
- Check your employment agreement — confirm your employer offers salary packaging and novated leases
- Choose an eligible vehicle — battery electric or hydrogen fuel cell, valued below $91,387 (GST-inclusive)
- Get a novated lease quote — compare providers and ensure the quote includes all running costs
- Model your tax position — work with your accountant to assess the impact on your taxable income, reportable fringe benefits, and any income-tested obligations
- Set up the arrangement prospectively — salary packaging must be documented and agreed before the benefit period begins
If you would like personalised modelling or guidance on whether EV salary packaging genuinely improves your net position, contact our team for a confidential discussion.
Key FBT Rates and Thresholds for 2025-26
| Item | Amount |
|---|---|
| FBT rate | 47% |
| Type 1 gross-up rate (GST credits) | 2.0802 |
| Type 2 gross-up rate (no GST credits) | 1.8868 |
| LCT threshold (fuel-efficient vehicles) | $91,387 |
| LCT threshold (other vehicles) | $80,567 |
| Benchmark interest rate | 8.62% |
| Home charging shortcut rate (BEVs) | 4.20c/km |
Frequently Asked Questions
Related Reading
- FBT on Cars 2026: Rates, Calculation Methods and EV Exemptions
- FBT 2026: What You Need to Know Before 31 March
- R&D Tax Incentive – for EV and clean energy innovators
Speak to our team in North Sydney or Orange about salary packaging and EV strategies – contact us.