Beginner’s guide to novated car leasing

Novated leasing – what is it? You’ve heard the term bandied about but what does it mean, and is it right for you? And why ‘novated’? Isn’t leasing a car just that – leasing it? 

Well, not exactly. The term ‘novated’ refers to the fact that the leasing agreement is a particular type of lease: a novation agreement. This means that your company takes on board the obligations of the lease under the contract. 

In the case of electric vehicles (EVs), the benefits can be even greater, because the Australian Government waives fringe benefits tax (FBT) when acquiring certain EVs under a novated lease. 

So how do novated leases work? Put simply: 

• You (the employee) lease a vehicle through a finance company.
• You then enter a novation agreement with your employer and the finance company.
• Under this agreement, your employer takes on the responsibility of making the lease payments from your pre-tax salary — this is called salary packaging.
• If you leave your job, the lease reverts back to you.
  
  

What are the advantages of novated leasing?

• Tax Savings: Because lease payments are paid out of your pre-tax income, your taxable income is reduced and you may pay less income tax. This is part of what’s known as salary packaging or salary sacrifice.
• Convenience: Costs like registration, insurance, maintenance, servicing, tyres, and fuel can be bundled into the lease. This creates predictable monthly payments and fewer unexpected expenses. The employer handles the payments directly, which simplifies budgeting.
• No upfront cost: Unlike buying a car outright or getting a car loan, you usually don’t need a large upfront payment or deposit.
• Flexible vehicle choice: You can typically lease any new or even used vehicle (depending on the leasing provider). This gives more freedom to drive a car that suits your needs, including electric vehicles.
• GST savings: The employer may be able to claim input tax credits on the GST paid on the vehicle and running costs, which can reduce the lease cost. You effectively don’t pay GST on the car purchase price (or at least not the full amount).
• Option to own or upgrade: At the end of the lease, you can buy the vehicle by paying out the residual value, upgrade to a new lease, or simply walk away.

Quick summary on buying versus leasing a car

When is it better to buy a car with cash or loan rather than by novated lease?

There are a number of reasons that acquiring a vehicle via novated leasing may not be right for you. Consider purchasing via cash or loan if:

• You prefer frequent car changes: A novated lease typically runs for several years. If you like upgrading cars regularly, locking yourself into a long-term lease could restrict your flexibility.
• You expect to change jobs or are relocating overseas: If you're thinking about switching employers or moving abroad, bear in mind that your new employer isn't obligated to take on your existing lease. This could create complications, or force you to pay out the lease early.
• You are planning to retire soon: A novated lease is only valid while you’re employed. If you plan to retire within the next few years, you’ll be required to either pay out the lease or take over the payments yourself, which could derail your plans.
• Your employer calculates superannuation on post-lease income: A small but important detail: some employers calculate the Super Guarantee based on your income after lease deductions. If that’s the case, you could end up with lower super contributions, reducing the financial upside of the lease.
• You own a business or operate under a company structure: If you have a company and are eligible for FBT-exempt EV purchases through it, structuring the purchase via your business might offer better financial outcomes than a novated lease. This way, you can keep the tax benefits without handing a cut to lease administrators. Check with your accountant.
• Close to the Division 293 tax threshold: If your income is near the Division 293 threshold, adding a novated lease could push your reportable income over the limit ($250,000 as of the 2024-2025 financial year.) This would trigger additional superannuation tax liabilities, eroding your tax savings.
• Paying child support: Fringe benefits from a novated lease are counted as reportable income, which can increase your child support obligations. This may also affect other income-tested government supports like the childcare subsidy,  though the impact on child support tends to be more significant.
• Focused on long-term financial security: If your financial priorities include maximising borrowing power for investments such as property, be aware that a novated lease counts as a liability. Even though it might save you money upfront on an EV, it could significantly reduce how much you can borrow, potentially costing you more over the long term in missed investment opportunities. 

What about leasing an EV?

You may have heard that acquiring an electric vehicle via a novated lease is more advantageous than acquiring a vehicle with an internal combustion engine (ICE). Is it true?

Currently, yes, because the Australian Government waives the FBT for EVs with a dutiable value less than the Luxury Car Tax (LCT) threshold. This is a huge saving compared to getting an ICE vehicle via a novated lease, because they still attract the full FBT, which can add thousands of dollars per year to the tax you pay. 

Additionally, EVs are significantly cheaper to run per kilometre than petrol or diesel. EVs also have fewer moving parts, no oil changes, and generally fewer consumables (tyres being an exception), resulting in less maintenance and lower service costs. 

Lastly, with an EV, you aren’t exposed to fluctuating fuel costs. All these savings can be packaged into the lease, reducing your monthly running costs. Check with your lease provider for more details. 

What else should I consider before entering into a novated lease?

Got this far and still think a novated lease is for you? Great! But before you take the next step, make sure you understand these additional considerations:

1. You don’t own the car (unless you pay the residual)

• At the end of the lease term (typically 2–5 years), you’ll need to pay a residual (balloon) amount to own the car.
• This can range from 28% to 47% of the car’s value, depending on the lease duration.
• Alternatively, you can roll into a new lease or walk away — but you won’t automatically own the car.

2. The residual value is set by ATO guidelines

• The minimum residual values are determined by the ATO and are not negotiable.
• These are designed to prevent the lease from being treated as a disguised purchase.
• For example, a 5-year lease must leave at least 28.13% of the vehicle's value unpaid.

3. The depreciation risk sits with you

• If the car’s market value at lease-end is lower than the residual, and you want to buy it, you may overpay.
• Conversely, if the market value is higher, you can make a tidy profit by selling it privately after payout.

This risk/reward sits with the employee, not the leasing company.

4. Break costs can be high

• Leaving your job or ending the lease early can trigger significant payout penalties.
• These include unpaid lease amounts, early termination fees, and possibly the residual.
• Some providers offer “portable leases” that can be transferred to a new employer, but it’s not guaranteed.

5. Bundled running costs must be used

• If you opt for a fully maintained lease, your pre-tax deductions will include budgeted amounts for fuel, tyres, servicing, insurance, and registration.
• If you don’t use the full budget, you may be eligible for a refund — but only at the end of the FBT year, and not all providers do this promptly.

6. You can lease a used car (sometimes)

• While most novated leases are for new cars, some providers allow leases on near-new or demo vehicles.
• These must typically be less than 7–10 years old at the end of lease term and meet certain condition thresholds.

7. You can lease EVs and claim FBT exemption

• For EVs under the LCT threshold, this is a huge tax advantage — no FBT means your lease is significantly more affordable.
• This applies to both new and eligible second-hand EVs first registered on or after 1 July 2022.

8. Not all employers support it

• Employers are not obligated to offer novated leasing. It requires payroll integration, admin, and FBT reporting.
• Some industries (e.g. government, education, mining) offer more competitive lease structures than others.

9. May affect other government payments

• Reportable fringe benefits can affect means-tested entitlements like:
  • Childcare subsidy
  • Family tax benefit
  • HECS/HELP repayments
  • Medicare levy surcharge
• These flow-on effects can reduce the real value of the tax savings if not planned carefully.

10. Lease company agreements vary widely

• Fees, interest rates, transparency, and admin quality can differ significantly between providers.
• It’s worth getting multiple quotes or using a novated lease broker to compare deals.

Where can I found out more about novated leasing?

The Australian Tax Office provides several guides to help you get started with a novated lease, and to understand your tax obligations. 

Here’s a useful list:

• Car leasing and FBT: Find out how the type of car lease affects the amount of FBT you pay.
• Taxable value of a car fringe benefit: Use the FBT car calculator or work out taxable value manually with the statutory method or operating cost method.
• Electric cars exemption: You don't need to pay fringe benefits tax (FBT) on eligible electric cars and associated car expenses.
• Fringe benefits tax – car calculator: The fringe benefits tax (FBT) car calculator helps employers calculate the FBT payable of a car fringe benefit.

In short, novated leasing can be a smart and tax-effective way to access a new car, particularly if you’re looking at an electric vehicle under the current FBT exemption. It offers convenience, tax savings, and a flexible path to vehicle access without the upfront costs of buying outright. But it’s not a one-size-fits-all solution.

Before signing anything, it’s worth weighing up your employment stability, long-term financial goals, and whether your employer’s lease provider gives you a good deal. Like any financial commitment, a novated lease works best when you go in with your eyes open, and a clear understanding of the fine print.

If in doubt, speak to an accountant or financial adviser who understands novated leases. And don’t be afraid to shop around — the right lease structure can make a big difference to your take-home pay and future flexibility.