May 22, 2026
Luxury Cars on a Novated Lease: What You Need to Know in 2026
1
min read
Luxury Car Tax adds 33% above $91,387, but Leaselab helps you slash thousands through novated leasing on eligible EVs. With the proposed EU FTA lifting the threshold to $120,000, European EVs are about to get a lot cheaper.
Luxury Car Tax (LCT) can add thousands to the price of your vehicle, but understanding how the LCT threshold works in tandem with novated leasing could actually save you some serious cash. It’s an intriguing proposition.
Right now, the standard LCT threshold sits at $91,387, and eligible EVs under this limit qualify for full FBT exemption through novated leasing. That’s maximum tax savings for you.
There’s also a potential game-changer on the horizon. The Australia-EU Free Trade Agreement could raise EV LCT threshold to $120,000 once ratified (though timing is uncertain). Yeah, it’s a pretty big deal. So, knowing where vehicles sit and how novated leasing can amplify your tax savings matters a lot.
Here's everything you need to know about LCT, how it affects novated leasing and whether the so-called "luxury car tax loophole" actually exists.
In Summary:
- Luxury Car Tax (LCT) adds 33% to every dollar above threshold limits when purchasing a vehicle. The 2025/26 threshold is $91,387.
- Novated leasing doesn't avoid LCT: It's calculated on the vehicle's GST-inclusive value regardless of finance method. However, novated leasing delivers massive tax savings through salary sacrifice, particularly on EVs under the LCT threshold that qualify for FBT exemption.
- The proposed Australia-EU FTA could raise the EV threshold to $120,000, making previously expensive European EVs suddenly LCT-free and saving buyers serious money.
What is Luxury Car Tax (LCT)?
Luxury Car Tax is a federal tax applied when you purchase a vehicle valued above specific thresholds. It's designed to tax "luxury" vehicle purchases, though many family SUVs and dual-cab utes now trigger it due to price increases.
How does it work?
LCT is charged at 33% on every dollar your vehicle's value exceeds the threshold. It's calculated on the vehicle's GST-inclusive price before you add on-road costs like registration and stamp duty.
What are the 2025/26 Luxury Car Tax thresholds:
The Proposed Australia-EU Free Trade Agreement Changes
On 25 March 2026, Prime Minister Anthony Albanese announced a new Australia-European Union Free Trade Agreement with two significant impacts on vehicles coming Down Under:
- A new LCT threshold of $120,000 for European zero-emission vehicles
Up from $91,387, this would exempt European EVs previously hit with substantial LCT.
- Scrapping the 5% import tariff on European vehicles
Applies to all vehicles, potentially reducing prices across European brands.
The deal requires formal ratification through Australian and European authorities. Industry estimates suggest implementation could take "a couple of years" before the LCT threshold change becomes effective.
Translation, please?
European EVs currently priced between $91,387 and $120,000 would be much more in reach for Australians.
These models are set to have the biggest savings:
Got your eye on something? Explore some of our European cars here:
How does LCT affect novated leasing?
Novated leasing does NOT avoid Luxury Car Tax. It’s a common misconception.
LCT is calculated on the vehicle's GST-inclusive value at the point of purchase, regardless of how you finance it. Whether you buy outright, take a car loan or use a novated lease, LCT applies the same way if the vehicle exceeds the threshold.
BUT novated leasing comes out on top thanks to the ongoing savings…
- Re-payments and running costs are made from pre-tax salary
- You won’t need to pay GST on the car and running costs
- Eligible EVs under the LCT threshold can be exempt from Fringe Benefits Tax (FBT)
So while LCT may apply at purchase, the total tax savings over the lease term often outweigh the initial cost, especially for EVs.
What is the impact of LCT on the residual in novated leasing?
LCT affects your lease residual (balloon payment) because it's part of the vehicle's purchase price.
How does the residual (balloon payment) work?
The ATO sets residual percentages based on the lease term:
The LCT is added into this residual calculation, so you're effectively financing the LCT cost over the lease term.
What happens when the lease ends?
If market value exceeds the residual, you profit. If you've paid LCT on a vehicle that depreciates heavily, the LCT portion effectively becomes sunk cost.
For vehicles just over the threshold, LCT can tip the scales toward choosing an EV model just under $91,387 instead, especially if the lower-priced vehicle holds value better.
How this works in action: Tesla Model Y & Mazda CX-30
Here’s a question: How can you get a more expensive SUV for almost double the price on basically the same repayment?
Looking at this case study:
Annual salary of $150,000, 15,000km driven per year, 80% business usage and 5-year lease length
When we look at the maths, you can see that even though the Kia Sportage is $20,410 less than a Tesla Model Y, the weekly repayment is actually $20 more.
Explore our full spectrum of cars to compare your own repayments and see pricing.
Here, when you’re ready to start
We’re on a mission to get more people plugged into the benefits of novated leasing. We’re shouting it from the rooftops and unriddling all the complexities for working Australians.
Punch your details into our calculator or get a tailored quote to compare your options and find the right novated lease for you. It really is that easy to get started.
Does novated leasing avoid Luxury Car Tax?
No. LCT is calculated on the vehicle's GST-inclusive value at purchase, regardless of finance method. Whether you buy outright, take a loan, or use a novated lease, LCT applies identically if the vehicle exceeds $91,387.
However, novated leasing delivers substantial tax savings through salary sacrifice and GST exemptions that often exceed the LCT cost over your lease term.
What's the LCT threshold for electric vehicles in 2026?
Currently $91,387 for the 2025/26 financial year. However, the proposed Australia-EU Free Trade Agreement would raise this to $120,000 for zero-emission vehicles once ratified (estimated mid-2027 or later).
Plug-in hybrids remain excluded from the higher threshold.
Can I claim LCT as a tax deduction on my novated lease?
No. LCT is part of the vehicle's purchase price, not a separate deductible expense. With novated leasing, your tax benefits come from salary sacrificing the lease payments and running costs using pre-tax income, which reduces your taxable salary. The LCT amount is simply “built” into the total vehicle cost you're financing.
How does LCT affect my residual payment at lease end?
LCT is included in your vehicle's purchase price, which determines your residual (balloon payment). For example, a $100,000 vehicle with $2,842 LCT has a total cost of $102,842. On a 3-year lease (46.88% residual), you'd owe $48,212 at lease end.
The LCT is effectively financed over the lease term as part of the total vehicle cost.
Is it worth buying a luxury car over the LCT threshold on a novated lease?
Depends on your priorities. Vehicles over $91,387 face two challenges:
- LCT adds 33% to every dollar over the threshold, and
- They don't qualify for the EV FBT exemption even if electric. However, novated lease tax savings through salary sacrifice can still offset much of this cost.
For those in higher tax brackets, the savings across a 3-5 year long novated lease often exceed the LCT paid, especially on vehicles just slightly over the threshold.
When will the new $120,000 LCT threshold for EVs take effect?
No confirmed date yet. The Australia-EU Free Trade Agreement, announced in March 2026, requires formal ratification through both Australian and European authorities. Industry estimates suggest implementation could take "a couple of years," meaning mid-2027 at the earliest.
Additionally, the FBT exemption threshold ($91,387) may need updating separately, which the government is reportedly reviewing.
If you have questions, you can call us at any time on 1300 888 594, or request a callback or email us.
