Novated Lease in Australia: Complete Guide

How a novated lease works mechanically

1. Employee selects a car. Most providers cover new and used vehicles under any major brand.
2. Finance company funds the car. Usually a finance lease (sometimes a closed‑end operating lease in tone). The financier owns the car; the employee uses it.
3. Employer signs a novation deed. Lease payment obligations are "novated" to the employer for the period of employment. The employer pays the financier directly and reduces the employee's salary accordingly.
4. Running costs are typically bundled. Fuel/charging, servicing, tyres, insurance, registration and roadside assistance are budgeted by the provider and paid from the employee's salary on the same pre‑tax/post‑tax split.
5. End of lease. The employee can pay the residual to keep the car, refinance, trade for a new lease, or hand the car back. The residual is set under the ATO's minimum residual schedule, which depends on lease term.
6. Change of employment. If the employee leaves the employer, the novation ends. The employee can transfer the lease to a new employer who agrees to novate, or take over the payments personally for the remainder of the term.

Pre‑tax vs post‑tax: how the salary‑sacrifice split works

Novated lease payments and running costs usually come out of the employee's salary in two streams:

• Pre‑tax (salary sacrifice). Reduces the employee's taxable income. The amount covers the bulk of the lease and running costs.
• Post‑tax (Employee Contribution Method, or "ECM"). Paid out of after‑tax salary, applied against the FBT taxable value of the car so the employer's FBT liability falls to zero.

The post‑tax portion typically equals roughly 20% of the car's GST‑inclusive value each year (the standard FBT taxable value under the Statutory Formula Method). For an EV that's FBT‑exempt, no post‑tax contribution is required — this is why EV novated leases save more than petrol/diesel leases.

FBT and the EV exemption

FBT (Fringe Benefits Tax) applies to "car fringe benefits" provided to employees. Under the Statutory Formula Method, the FBT taxable value is typically 20% of the car's value, grossed up, and the FBT rate is 47%.

From 1 July 2022, the Federal Government introduced an FBT exemption for eligible electric vehicles provided through a novated lease, subject to conditions:

• The car must be a battery electric vehicle (BEV), plug‑in hybrid electric vehicle (PHEV) entered into a binding agreement before 1 April 2025, or hydrogen fuel cell vehicle.
• The car's first retail price must be below the Luxury Car Tax fuel‑efficient threshold — $91,387 for 2025–26.
• The car must be first held and used after 1 July 2022.
• The exemption applies to the car and most associated running costs (charging, servicing, registration, insurance).

The PHEV cut‑off date matters: new PHEV novated leases entered into after 1 April 2025 are no longer eligible for the FBT exemption, although arrangements committed before that date continue to qualify for the duration of the original lease.

Source: ATO — FBT and electric cars.

Who benefits most from a novated lease

• Employees on higher marginal tax rates. The pre‑tax salary‑sacrifice benefit scales with marginal rate. The 37% and 45% brackets get the biggest income‑tax saving per dollar packaged.
• Employees buying an eligible EV. The combination of pre‑tax salary sacrifice + FBT exemption + GST savings on the purchase price means the savings can be substantial — commonly $5,000–$9,000 per year on a $55,000–$70,000 EV.
• Employees who would buy the car anyway. The benefit is highest when the lease replaces a car you were going to buy. It is lower if you're packaging a car you wouldn't otherwise need.
• Employees with stable employment. Job changes complicate the lease; not impossible, but worth factoring in.

Where it works less well

• Low‑income earners. If your marginal rate is the 16% or 30% bracket (2025–26), the pre‑tax saving is smaller and the post‑tax ECM contribution erodes the benefit on non‑EV cars.
• Self‑employed and contractors. Novated lease requires an employer to novate the agreement. Sole traders and contractors without a PAYG employer can't access it — consider a chattel mortgage or operating lease for business use instead.
• People who change jobs often. Each transition requires a new novation deed (or the employee absorbs the payments). Not a deal‑breaker, but adds friction.
• Cars above the LCT fuel‑efficient threshold. EVs above $91,387 (2025–26) lose the FBT exemption, which substantially reduces the benefit.

Novated lease vs other structures — quick comparison

Worked example: $55,000 EV vs $55,000 petrol equivalent (illustrative)

Illustrative comparison for an employee on a $120,000 salary in 2025–26 (37% marginal rate + 2% Medicare), 5‑year lease, running costs ~$5,000 p.a.

Illustrative only. Actual savings depend on car cost, your income, FBT calculation method, residual settings, running costs and ATO measures current at the time. Speak with a registered tax agent for personalised analysis.

Costs and pitfalls to check before signing

• Residual value. Set by ATO minimum residuals (e.g. 46.875% for a 1‑year lease; ~37.5%/28.13%/18.75% for 2/3/4 years; 25% min for 5 years). A high residual reduces monthly cost but creates a balloon‑style payment at the end.
• Management / packaging fees. Providers typically charge $10–$25 per pay period. Compare across providers.
• Implied interest rate. Lease rates aren't always front‑and‑centre. Ask the provider for the implicit rate of interest in the lease.
• Insurance bundling. Bundled insurance is convenient but not always the cheapest option. Compare against shopping the insurance separately.
• End‑of‑lease shortfall. If the car is worth less than the residual at end of term, you may owe the difference (depending on the lease type).
• FBT method choice. Most providers default to the Statutory Formula Method. The Operating Cost Method can be better for very high‑km drivers, but requires a logbook.

Where novated lease sits in the Asset Finance Help universe

Novated lease isn't strictly "asset finance" in the business‑asset sense — it's an employee benefit that uses a lease instrument. We cover it because readers often weigh novated lease against business‑owned options for the same car, and the choice depends on whether the user is an employee, a sole trader, or a company that wants to provide vehicles to staff.

If you're a business owner considering vehicles for the business, see vehicle finance or our overview of asset finance. If you're an employee, talk to your HR/payroll team about whether novated lease is offered, and to a licensed adviser about whether it's the right call for you.

Frequently asked questions

Related

Authoritative sources

• ATO — FBT and electric cars (FBT exemption rules, eligibility, PHEV cut‑off)
• ATO — Salary sacrifice arrangements
• ATO — Car fringe benefits
• ATO — Reportable fringe benefits

Get a real novated lease quote

Novated lease decisions depend on your specific employer arrangement, marginal tax rate, and the car you're considering. We can introduce you to an accredited novated lease provider who can run real numbers for your situation.

Asset Finance Help is an independent information publisher. We don't provide credit assistance or arrange finance ourselves. We make optional introductions to accredited Australian asset finance brokers on our partner panel. See our Disclosures.