Novated Lease Explained: How It Works and Who It's Best For
July 24, 2026
A novated lease is a three-way agreement between you, your employer, and a finance company that lets you pay for a car and its running costs from your pre-tax salary. This lowers your taxable income and can save you thousands. It works best for salaried employees on a decent income, and the savings are largest on eligible electric vehicles, which are currently exempt from Fringe Benefits Tax.
That is the short version. Below is exactly how the arrangement works, the tax rules that make it worthwhile, and how to tell whether it suits your situation.
Key Takeaways
- A novated lease bundles your car finance and running costs into one pre-tax salary deduction.
- The tax benefit comes from reducing your taxable income, so higher earners save more.
- Eligible electric vehicles are exempt from Fringe Benefits Tax (FBT) until at least 31 March 2027, making them the standout choice right now.
- Every lease ends with a residual (balloon) payment set by ATO minimum percentages.
- It suits salaried (PAYG) employees whose employer offers salary packaging. If you are self-employed or between jobs, a competitive car loan is often the better path.
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What Is a Novated Lease?
A novated lease is a car finance arrangement built around your salary. Instead of paying for a vehicle with your after-tax pay, your employer deducts the lease and running costs from your salary before tax is calculated.
The word “novated” refers to a novation deed, the legal document that transfers your lease obligations to your employer while you work there. Three parties are involved: you (the employee), your employer, and a financier, usually coordinated by a salary packaging provider.
You choose the car, not your employer. The financier owns the vehicle during the lease term, your employer makes the payments from your pay, and you get full private use. If you leave your job, the lease travels with you, though your new employer must agree to take on the payments.
How Does a Novated Lease Work?
The mechanics are simpler than the jargon suggests. Here is the process from start to finish:
- Choose your car and lease term. Terms typically run one to five years. You pick the vehicle, whether new, demo, or used.
- Get a quote. A salary packaging provider calculates your fortnightly deduction, bundling the finance plus estimated running costs.
- Sign the novation deed. You, your employer, and the financier formalise the agreement.
- Payments come from your pay. Your employer deducts the packaged amount from your salary, splitting it between pre-tax and post-tax as needed.
- Running costs are bundled in. Fuel or electricity, servicing, tyres, registration, and insurance are paid from a running-costs account, so you rarely face a surprise car bill.
- Settle the residual at the end. You pay a final lump sum, refinance it, or trade the car in on a new lease.
The convenience is a genuine drawcard. As one salary packaging principle puts it, you never have to budget for fuel or a service again because it is all handled inside a single deduction.
The Tax Side: FBT, ECM and the Statutory Method
The tax benefit is the whole point of a novated lease, so it is worth understanding the three terms that drive it.
Fringe Benefits Tax (FBT) is a tax employers pay on non-cash benefits given to staff, including a packaged car. FBT is charged at a flat 47% on the benefit’s grossed-up taxable value, and it is assessed over the FBT year of 1 April to 31 March, not the normal income-tax year.
The statutory formula method is how most novated leases value that benefit. It sets the taxable value at a flat 20% of the car’s base value, regardless of how many kilometres you drive. This flat rate has applied to arrangements entered into since 10 May 2011. On a $40,000 car, the taxable value works out to $8,000.
The Employee Contribution Method (ECM) is what stops FBT from eating your savings. By paying part of the lease from your post-tax salary, you reduce the FBT taxable value dollar for dollar. When your post-tax contribution matches the taxable value, the FBT bill is reduced to nil. According to the ATO’s car leasing and FBT guidance, the arrangement must be a genuine “bona fide” lease to be treated this way.
There is a GST bonus too. Your employer claims the GST credit on the vehicle and running costs, so you effectively buy the car without paying GST on it, up to the ATO car limit. Combined with the income-tax saving on pre-tax deductions, this is where the real value sits.
Electric Vehicles and the FBT Exemption
The biggest reason novated leases have surged in popularity is the electric car FBT exemption. Since 1 July 2022, eligible zero and low-emissions vehicles provided through a novated lease have been fully exempt from FBT.
When a car is FBT-exempt, your entire lease payment can come from pre-tax salary with no offsetting post-tax contribution needed. That is what pushes the savings on an EV well beyond those on a petrol or diesel car. Some providers report total savings exceeding $15,000 over a lease on higher-value electric models.
To qualify, the vehicle must meet all of these conditions:
- It is a battery electric vehicle (BEV) or hydrogen fuel cell vehicle (FCEV).
- It was first held and used on or after 1 July 2022.
- Its value sits below the fuel-efficient luxury car tax (LCT) threshold, which is $91,661 for 2026-27 (up from $91,387 in 2025-26).
- LCT has never been payable on the car at any point in its history.
Two important changes are worth knowing. First, plug-in hybrids (PHEVs) stopped qualifying for new arrangements from 1 April 2025, so only full electric and hydrogen models now make the cut. Second, the government has confirmed a phased wind-back: the current rules run until 31 March 2027, then the exemption begins to taper, narrowing toward a 25% discount from 2029. Existing leases are grandfathered, meaning if you sign before a change takes effect, you generally keep the current treatment for the full term. You can read the detail in this PwC summary of the phased FBT changes.
One catch often missed: even an FBT-exempt EV lease creates a Reportable Fringe Benefits Amount (RFBA) on your income statement. It is not extra tax, but it counts toward your adjusted taxable income, which can affect HELP/HECS repayments, the Medicare levy surcharge, Division 293 tax, and means-tested payments like childcare subsidy. Factor this in before you commit.
Novated Lease vs Car Loan
A novated lease is not automatically better than a car loan. It depends on your employment, income, and vehicle choice. Here is how the two compare:
Feature | Novated Lease | Car Loan |
|---|---|---|
Who can get it | Salaried (PAYG) employees with an employer scheme | Almost anyone, including self-employed |
Paid from | Pre-tax salary (plus some post-tax) | After-tax income |
Running costs | Bundled in (fuel, rego, insurance, servicing) | Paid separately by you |
GST on the car | Employer claims it, you save it | You pay it |
Tax benefit | Reduces taxable income; EVs can be FBT-exempt | None on a personal loan |
Ownership | Financier owns it; you settle a residual to keep it | You own it from day one |
If you change jobs | Lease transfers, or you cover payments | Unaffected |
End of term | Pay or refinance the residual | Loan simply ends |
For many employees, especially those choosing an EV, the lease wins. For the self-employed, casual workers, or anyone whose employer does not offer packaging, a car loan is usually simpler and cheaper. See our guide to secured versus unsecured loans to understand the alternatives.
End of Lease: Your Options
Every novated lease finishes with a residual payment, a lump sum the ATO requires so the deal counts as a genuine lease rather than a disguised purchase. The minimum residual is a set percentage of the car’s base value, scaled to the term:
Lease Term | Minimum Residual |
|---|---|
1 year | 65.63% |
2 years | 56.25% |
3 years | 46.88% |
4 years | 37.50% |
5 years | 28.13% |
When the term ends, you generally have three choices. You can pay out the residual and own the car outright. You can trade it in and roll into a new lease on a fresh vehicle. Or you can sell the car, pay the residual, and keep any surplus.
If you want to keep the vehicle but do not have the lump sum on hand, you can refinance the residual into a straightforward car loan. This is a common service, and it is exactly the kind of tailored financing a broker arranges.
Who Is a Novated Lease Best For?
A novated lease rewards the right circumstances and penalises the wrong ones. It tends to suit you if:
- You are a salaried (PAYG) employee whose employer offers salary packaging.
- You earn enough that a higher marginal tax rate (30% or 37%) makes the pre-tax saving meaningful.
- You want an electric vehicle and can take advantage of the FBT exemption.
- You value bundled running costs and predictable budgeting.
- You have stable employment.
It is usually not the best fit if:
- You are self-employed or a sole trader with no employer to novate the lease. A business vehicle loan or chattel mortgage is generally better.
- You are a lower-income earner, where the tax saving is smaller.
- You change jobs frequently or expect a career break, since you cover payments during any gap.
- You want to own a car outright as cheaply as possible and drive very few kilometres.
Because the numbers hinge on your salary, vehicle price, and lease term, this is general information rather than personal advice. Run your own figures and speak to a licensed tax or financial professional before committing.
How Tow Finance Solutions Can Help
Tow Finance Solutions is an independent finance broker with over 10 years of experience and a panel of more than 40 lenders. While a novated lease is arranged through your employer and a salary packaging provider, deciding whether to lease or simply finance a car is where expert, unbiased guidance pays off.
If a novated lease is not available to you, or the numbers do not stack up, the team can find a competitive car loan tailored to your situation, with approvals in as little as one hour. Your application is checked against more than 1,000 lender policies before it reaches a lender, which helps protect your credit score.
Tow Finance Solutions can also refinance a lease residual, arrange finance for a used EV, or structure business vehicle finance for self-employed buyers. New to borrowing? Start with our guide to the loan application process for first-time borrowers, or explore options for recreational vehicles in our leisure finance overview.
Frequently Asked Questions
How does a novated lease work in simple terms? Your employer pays for your car and its running costs directly from your salary before tax is deducted, using a three-way agreement between you, your employer, and a finance company. This lowers your taxable income. At the end of the term you pay a residual lump sum to keep the car, or trade it in.
Do you save money with a novated lease? Often yes, but it depends on your income and car choice. Savings come from paying with pre-tax salary, avoiding GST on the vehicle, and bundling running costs. Higher earners save more. Electric vehicles save the most because they are currently exempt from Fringe Benefits Tax.
What is FBT on a novated lease? Fringe Benefits Tax is charged at 47% on the grossed-up taxable value of a packaged car. Most leases use the statutory method, valuing the benefit at a flat 20% of the car’s base value. The Employee Contribution Method offsets this, and eligible EVs are exempt from FBT entirely.
Are electric cars FBT-exempt on a novated lease? Yes. Eligible battery electric and hydrogen vehicles first used on or after 1 July 2022 and priced below the fuel-efficient luxury car tax threshold ($91,661 for 2026-27) are FBT-exempt. Plug-in hybrids no longer qualify for new leases from 1 April 2025, and the exemption phases down from 2027.
What happens at the end of a novated lease? You pay the residual (balloon) value to own the car, refinance that residual into a car loan, trade the car in on a new lease, or sell it and keep any surplus after paying the residual. The residual is a fixed percentage set by ATO rules, based on your lease term.
Can I get a novated lease if I am self-employed? Generally no. A novated lease requires an employer to make the pre-tax deductions, so sole traders and self-employed people usually cannot use one. A business car loan or chattel mortgage is the standard alternative and can offer its own tax advantages.
What happens to my novated lease if I change jobs? The lease travels with you. Your new employer needs to agree to take over the salary deductions. Until that is set up, or if you are between jobs, you make the lease payments directly yourself, so stable employment makes the arrangement smoother.
Does a novated lease affect my HECS or government benefits? It can. Even an FBT-exempt EV lease produces a Reportable Fringe Benefits Amount on your income statement. This is not extra tax, but it is included in your adjusted taxable income, which can raise HELP/HECS repayments and reduce some means-tested payments.
Ready to Work Out Your Best Option?
Weighing a novated lease against a straightforward car loan? Contact us for a fast, no-pressure comparison across 40+ lenders, and get a finance solution matched to your situation. Call (07) 4410 3375 or apply online in minutes.
Disclaimer
This article is general information only and does not take into account your personal circumstances, financial situation, or needs. It is not tax, financial, or legal advice. Tax rules, thresholds, and FBT settings change and may have changed since publication. Speak to a licensed tax agent, accountant, or financial adviser, and confirm current rules with the ATO before making any decision.
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