If you're considering a novated lease, you've probably heard about the employee contribution method and wondered what it actually means for your wallet. The good news? It's simpler than it sounds.
What Is the Novated Lease: Employee Contribution Method (ECM)?
The Employee Contribution Method (ECM) is a way to structure your salary packaging so that your employer doesn't cop a Fringe Benefits Tax (FBT) bill for providing you with a car.
Here's the basic idea. When you salary package a vehicle, the Australian Tax Office considers it a fringe benefit because you're using a company-provided car for personal purposes. That benefit has a taxable value, and your employer is normally liable to pay FBT on it.
With ECM, you agree to make regular post-tax contributions from your wages that offset this taxable amount. If your post-tax payments equal or exceed the car's taxable value over the FBT year (which runs from 1 April to 31 March), the FBT liability disappears.
How ECM Affects Your Pay Cycle
Your novated lease payments are usually split into two portions:
Pre-tax deductions that reduce your taxable income and help you pay less tax on your salary
Post-tax contributions (the ECM portion) are taken from your after-tax salary to cover the FBT liability
Both amounts come out of your pay each cycle, so you'll see one predictable deduction that bundles your lease costs together. The exact split depends on your car's value, your income tax bracket and how the taxable value is calculated.
Most employees find that even after making post-tax payments, they're still better off than buying a car the traditional way. That's because you're still capturing GST savings on the purchase price and running costs, plus you're reducing your taxable income through the pre-tax portion.
Running Costs You Can Include in the ECM
Your post-tax contributions can cover a range of vehicle expenses, not just the lease payments themselves. Common running costs included in an ECM novated lease are:
Fuel
Registration and insurance
Servicing and maintenance
Roadside assistance
Tyres
Bundling these costs into your novated leasing arrangement means you're paying for everything from your pre-tax salary and post-tax income in one streamlined payment. It's one less thing to think about each month.
What Is the Fringe Benefits Tax (FBT)?
The Fringe Benefits Tax (FBT) exists to make sure employees pay their fair share when they receive non-cash benefits from work. Cars are one of the most common fringe benefits, which is why the ATO has specific rules around how FBT applies to vehicles.
The taxable value of a car fringe benefit is calculated using the statutory formula, which applies a percentage to the car’s base value and accounts for the number of days it is available during the FBT year. On-road costs are not automatically included.
This means that, if you’re leasing a $50,000 car, the annual taxable value would be $10,000 before any employee contributions. Your employer may not pay FBT themselves; instead, ECM contributions from you reduce the taxable value and can bring the FBT to zero. That’s where ECM comes in. If you make $10,000 in post-tax contributions over the FBT year, the taxable value drops to zero, and so does the FBT bill.
The ECM Method vs Paying FBT Directly
Most employers do not pay FBT for employees, so ECM is the standard and cost-effective way to eliminate FBT. Paying FBT directly can make sense in workplaces where the benefit is seen as part of a broader remuneration package. But for most employees, the ECM method is more cost-effective because you're using your own post-tax salary to offset the liability, which usually works out cheaper than the employer wearing the full FBT cost and potentially reducing your overall package value.
If you're in the highest tax bracket rate (45% plus the 2% Medicare levy), the income tax savings from salary packaging often outweigh the post-tax payments you're making through ECM. That's especially true for people in industries like mining or resources here in WA, where salaries tend to sit well above the average.
Timing Your ECM Payments
The FBT year runs from 1 April to 31 March, so your post-tax contributions must be timed correctly to offset the full taxable value within that period.
If you're setting up a new car towards the end of the FBT year, your novated lease provider will calculate how much you need to contribute before 31 March to avoid an FBT liability. Then your payments reset for the new FBT year starting 1 April.
ECM payments are not automatically transferable if you change employers, so your new employer must approve the transfer, and your lease provider will adjust payroll accordingly.
Is the Employee Contribution Method Worth It?
For most people, yes. The combination of income tax savings, GST savings and bundled running costs usually means you're paying less overall than you would if you bought the same car with a traditional loan.
That said, your mileage will vary depending on your taxable income, the car you choose, and whether eligible electric vehicles first held after 1 July 2022 are below the luxury car tax threshold; if so, ECM may not be necessary. The best way to see how ECM affects your take-home pay is to run the numbers with a novated lease savings calculator.
Keep in mind that finance is subject to credit assessment criteria, and fees apply depending on the lender and the structure of your lease. It's also general information only, so you should seek professional independent tax advice to understand how novated leasing fits with your personal circumstances.
Ready to See How ECM Works With Easi?
The employee contribution method might sound technical, but with Easi, it’s a simple and effective way to structure your novated lease so everyone benefits. You get the car you want with potential tax savings built in, while your employer can reduce or eliminate an FBT liability.
If you're eyeing a new car from our range or just want to understand how novated leasing works in more detail, we're here to help. Get a quote today, and we'll show you exactly what your payments would look like with ECM factored in; tailored to your salary, vehicle choice, and lifestyle.
Frequently Asked Questions
How does FBT work on salary sacrifice?
When you salary package a car, the ATO treats it as a fringe benefit with a taxable value calculated at 20% of the vehicle's base value. Your employer is liable for FBT at 47% on that taxable value. Using the employee contribution method, you make post-tax payments that reduce the taxable value, which can bring the FBT liability down to zero.
Is salary sacrificing a novated lease worth it?
For most employees, yes. You'll typically save on income tax through pre-tax deductions and capture GST savings on the purchase price and running costs. Even after making post-tax contributions through ECM, most people come out ahead compared to a traditional car loan. Use a novated lease calculator to see the exact benefit for your situation.
What happens if you salary sacrifice more than $30,000?
The $30,000 cap applies to certain employers, like public hospitals and charities that have FBT rebates or exemptions. If you work for one of these organisations and package more than the cap, FBT will apply to the excess amount. That's when the employee contribution method becomes especially important to offset the liability. Check with your payroll team to see if a cap applies to you.
