How a Novated Lease Works
A novated lease is a three-way agreement between:
- The employee — chooses and drives the vehicle
- The employer — agrees to make lease payments from the employee's salary
- The finance company (lessor) — owns the vehicle and leases it to the employee
The word "novation" means transferring an obligation. The employee's obligation to make lease payments is novated to the employer — who deducts the payments from the employee's pre-tax salary. This is commonly called salary sacrifice or salary packaging.
Key Features
- Pre-tax payments: Lease payments are deducted from your gross salary before income tax is calculated
- GST savings: GST is not charged on the salary-sacrificed portion — effectively a 10% saving
- Bundled running costs: Fuel, insurance, registration, tyres, and servicing can all be included in one regular deduction
- Portable: The lease can transfer to a new employer, or you can continue payments privately if you change jobs
- FBT applies: Your employer pays Fringe Benefits Tax on the vehicle — this cost is usually passed back to you as a deduction
How Salary Sacrifice Reduces Your Tax
When you salary-sacrifice a vehicle through a novated lease, the lease payments come out of your pre-tax salary. This lowers your taxable income — so you pay less income tax.
Example: $90,000 Salary, $50,000 Vehicle
| Metric | Without Novated Lease | With Novated Lease |
|---|---|---|
| Gross Salary | $90,000 | $90,000 |
| Salary Sacrifice (annual lease + running costs) | — | ~$15,000 |
| Taxable Income | $90,000 | ~$75,000 |
| Income Tax (incl. Medicare) | ~$22,167 | ~$17,017 |
| Net Tax Saving | — | ~$5,150 / year |
| GST Saving on Vehicle | — | ~$4,545 (one-off) |
Illustrative only. Actual savings depend on your marginal tax rate, vehicle price, kilometres driven, and FBT method used. Use our calculator for personalised estimates.
See Your Novated Lease Savings
Model your salary, vehicle price, and running costs to see exactly how much a novated lease could save you.
Open Calculator →Fringe Benefits Tax (FBT) Explained
When an employer provides a vehicle to an employee (including via novated lease), it's classified as a fringe benefit and attracts FBT. The employer is technically liable, but in a novated lease arrangement the FBT cost is typically passed back to the employee as part of the salary deduction.
Two FBT Methods
| Method | How It Works | Best When |
|---|---|---|
| Statutory Formula | FBT is calculated as 20% of the vehicle's base value, regardless of kilometres driven. Simple to administer. | High-kilometre drivers (15,000+ km/year). Less paperwork. |
| Operating Cost (Logbook) | FBT is based on actual running costs minus the business-use percentage (proven by a 12-week logbook). | Mostly business use (60%+). More paperwork but can reduce FBT significantly. |
The statutory formula method is used by most novated lease providers because it's simpler and works well for typical commuter + personal use patterns.
What's Included in a Novated Lease?
A fully maintained novated lease bundles the vehicle finance and all running costs into a single regular deduction. This is the most common type. Typical inclusions:
| Included | Details |
|---|---|
| Vehicle Finance | Lease payments for the car itself |
| Fuel | Budgeted annual fuel cost, often via a fuel card |
| Comprehensive Insurance | Full cover, often at fleet rates (cheaper than retail) |
| Registration & CTP | State registration and compulsory third party insurance |
| Servicing & Maintenance | Scheduled servicing based on manufacturer intervals |
| Tyres | Replacement tyres when needed (budget included) |
| Roadside Assistance | 24/7 breakdown cover |
Because these costs come from pre-tax salary, you effectively pay for them at a discount equal to your marginal tax rate. An employee on the 32.5% tax bracket saves 32.5 cents on every dollar of running costs.
Who Is a Novated Lease Best For?
- Employees earning $70,000+ — higher marginal tax rates mean bigger savings through salary sacrifice
- Drivers doing 15,000+ km/year — higher running costs = more pre-tax savings; also reduces FBT under the statutory method
- People wanting a new or near-new car — novated leases work for new and used vehicles (typically under 7–10 years old at end of term)
- Employees whose employer offers salary packaging — not all employers do, so check first
- Anyone wanting one simple payment — lease, fuel, insurance, servicing, and rego in a single deduction
Who Should Consider Other Options?
- Sole traders / business owners — chattel mortgage or finance lease is usually better (you can claim business deductions directly)
- Low-income employees — the FBT cost can outweigh the income tax savings if your marginal rate is low
- Low-kilometre drivers (<10,000 km/year) — bundled running costs may not justify the FBT
- Short-term employees — if you're likely to leave soon and your next employer doesn't offer packaging
Pros and Cons
| Pros | Cons |
|---|---|
| Income tax savings via salary sacrifice | FBT applies and is passed back to you |
| GST savings on vehicle + running costs | Locked into a term (early exit can be costly) |
| All running costs bundled in one deduction | Employer must agree to offer salary packaging |
| Fleet-rate insurance and servicing | Residual payment due at end of term |
| Portable between employers | Provider admin fees add to total cost |
| No impact on employer's balance sheet | Reduces your gross salary for loan applications |
| Both new and used vehicles eligible | Not suitable for sole traders or business owners |
Novated Lease vs Business Finance Structures
Novated leases are for employees. If you're a business owner or ABN holder, the other structures are designed for you:
| Feature | Novated Lease | Chattel Mortgage | Finance Lease |
|---|---|---|---|
| Who uses it | Employees | ABN holders / businesses | ABN holders / businesses |
| Payment source | Pre-tax salary sacrifice | Business cash flow | Business cash flow |
| Ownership | Finance co during term | You from day 1 | Finance co during term |
| Tax benefit | Salary sacrifice + GST saving | Depreciation + interest + GST upfront | 100% deductible payments |
| FBT | Yes — applies to vehicle | No (business use) | No (business use) |
| Running costs | Bundled in lease | Paid separately by business | Paid separately by business |
| Instant asset write-off | No | Yes (as owner) | No |
Read the Chattel Mortgage guide → | Read the Finance Lease guide →
What Happens at the End of a Novated Lease?
At the end of the lease term, you have several options:
- Pay the residual and keep the car — the residual (balloon) is set at the start. You pay it and own the vehicle outright.
- Refinance the residual — roll the residual into a new short-term loan if you want to keep the car but can't pay the lump sum.
- Start a new novated lease on a different car — trade in or sell the current vehicle, use any equity towards the new one.
- Sell the car privately — use the proceeds to pay the residual and keep any profit.
The residual is typically set between 25%–40% of the vehicle's purchase price, depending on the lease term.
Changing Jobs with a Novated Lease
One of the most common concerns. Here's what happens:
- New employer offers salary packaging: The lease novates (transfers) to your new employer seamlessly. Most major employers, government agencies, and NFPs offer this.
- New employer doesn't offer packaging: You continue making payments from your after-tax salary until you find an employer that does, or until the lease ends.
- Redundancy or extended leave: Same as above — payments continue from after-tax income. Some providers offer hardship provisions.
The lease doesn't end when the employment does. It's a finance contract between you and the lessor — the employer is simply the payment channel.
Model Your Novated Lease
Enter your salary, vehicle price, and estimated running costs — see your take-home pay impact and total savings.
Open Calculator →Worked Example
Sarah earns $95,000 and novates a $45,000 (inc GST) Toyota RAV4 on a 4-year fully maintained lease:
| Vehicle Price (inc GST) | $45,000 |
| GST Saving (not charged on salary sacrifice) | $4,091 |
| Effective Vehicle Cost | $40,909 |
| Annual Lease + Running Costs (bundled) | ~$16,200 |
| Pre-Tax Salary Sacrifice Per Fortnight | ~$623 |
| Actual After-Tax Cost Per Fortnight | ~$420 (after income tax saving) |
| Annual Income Tax Saving | ~$5,265 |
| Residual at End of Lease (30%) | $12,273 |
Illustrative only based on 2025-26 tax rates and statutory FBT method. Use our calculator for personalised estimates.
Electric Vehicles & Novated Leasing
Since July 2022, eligible electric vehicles (EVs) and plug-in hybrids under the Luxury Car Tax threshold for fuel-efficient vehicles ($91,387 for 2025-26) are exempt from FBT when novated through an employer. This makes novated leasing particularly attractive for EVs:
- No FBT — the biggest cost disadvantage of novated leasing is eliminated
- GST savings still apply — 10% off the purchase price
- Income tax savings still apply — pre-tax salary sacrifice as normal
- Lower running costs — electricity is cheaper than petrol; EVs have fewer serviceable parts
For many employees, an FBT-exempt EV novated lease is now the cheapest way to drive a new car in Australia.