Quick answer: A novated lease is a way to pay for a car and its running costs out of your salary before tax. Your employer takes the payments from your pay and passes them to a finance company, which lowers your taxable income and can save you thousands in income tax and GST. You do not own the car until you pay the final lump sum, called the residual value, at the end of the lease.
If the words “novated lease” have come up at work and you nodded along without really knowing what they meant, this guide is for you. It is a form of salary packaging (also called salary sacrifice), and once you see how the money moves, it is not complicated at all.
How a novated lease works
A novated lease is a three-way agreement between:
- You — you choose the car and drive it.
- Your employer — takes the lease payments out of your salary and pays them to the finance company.
- The finance company — owns the car and receives the payments.
Each pay cycle, your employer deducts an agreed amount from your salary — a mix of pre-tax and post-tax dollars — and sends it to the financier. Because part of the cost comes out before income tax is calculated, your taxable income drops, and that is where the saving comes from.
Lease terms usually run from one to five years. One important catch: a novated lease only works if your employer offers salary packaging. It is arranged through your employer’s salary packaging provider, not through a bank or car dealer.
What you can bundle into the payments
With a fully maintained novated lease, almost every car cost can be bundled into that one salary deduction:
- the finance/lease cost of the car itself
- registration
- comprehensive insurance
- fuel or electric charging costs
- servicing and repairs
- tyres
A non-maintained lease covers the lease payments only, and you pay for running costs yourself. The fully maintained version is the more popular choice because it rolls everything into one simple payment.
Where the tax savings come from
There are three main savings:
1. Less income tax. This is the big one. Say you earn $90,000 and package $15,000 of car costs. You are then taxed on roughly $75,000 instead of $90,000, so you pay less income tax. The higher your income, the bigger this saving tends to be.
2. GST savings. You do not pay GST on the car’s purchase price, because the finance company buys the car and claims the GST. GST on running costs such as fuel, servicing and insurance can also be claimed back. That is effectively a 10% saving on those costs.
3. The electric car exemption. Eligible electric cars are currently exempt from fringe benefits tax, which makes EV novated leases especially cheap right now. More on this below.
Fringe benefits tax and the electric car exemption
A novated car counts as a fringe benefit, so fringe benefits tax (FBT) normally applies. FBT is legally your employer’s tax, charged at 47%, but in practice the cost is passed on to you. For petrol and diesel cars this is usually handled by paying part of the lease from your post-tax salary — a setup called the employee contribution method — which brings the FBT bill down to nothing.
Electric cars get special treatment. Eligible battery-electric and hydrogen fuel cell vehicles are currently fully exempt from FBT, so there is no need for post-tax contributions and more of the lease can be paid pre-tax. Plug-in hybrids lost this exemption on 1 April 2025.
Changes are coming for EVs. The Federal Government has announced a wind-back of the exemption (exposure draft legislation, not yet law at the time of writing):
- From 1 April 2027, the full exemption would apply only to EVs valued at $75,000 or less. EVs priced between $75,001 and the luxury car tax threshold (currently about $91,387) would move to a 25% FBT discount instead.
- From 1 April 2029, all eligible EVs would receive only the 25% discount.
- Leases entered into before 1 April 2027 are expected to be grandfathered, keeping the current rules for the life of the lease.
One more thing worth knowing: even when no FBT is payable, the benefit still appears on your income statement as a Reportable Fringe Benefits Amount (RFBA). This is not extra tax, but it is counted in income tests for things like HECS/HELP repayments, the childcare subsidy and the Medicare levy surcharge.
The residual value (balloon payment) explained
You never fully pay off the car during a novated lease. At the end of the term a lump sum remains, called the residual value or balloon payment. The ATO sets minimum residual values as a percentage of the car’s original price, based on the lease term:
| Lease term | Minimum residual value |
|---|---|
| 1 year | 65.63% |
| 2 years | 56.25% |
| 3 years | 46.88% |
| 4 years | 37.50% |
| 5 years | 28.13% |
For example, on a $50,000 car with a five-year lease, the minimum residual is $14,065 — the lump sum you need a plan for when the lease matures. Providers can set the residual higher than these minimums, but not lower.
What happens when the lease ends
You have three main options:
- Pay the residual and keep the car. Once it is paid, ownership transfers to you.
- Refinance the residual into a new lease. This works if you are still with an employer that offers salary packaging.
- Sell or trade in the car. The proceeds clear the residual, and you keep anything left over.
The pros and cons
Pros:
- Lower taxable income, which means less income tax
- GST savings on the car and its running costs
- All car expenses in one automatic payment — easy budgeting
- Free choice of car: new, used or electric
- Possible fleet discounts through the packaging provider
Cons:
- The residual lump sum at the end can be a nasty surprise if you did not plan for it
- It only works while your employer offers salary packaging
- FBT rules add complexity for petrol and diesel cars
- The reported fringe benefits amount can affect HECS, childcare subsidy and surcharge calculations
- Interest and fees can eat into the savings if you choose the wrong car or term
Who is a novated lease good for — and who should skip it
A novated lease tends to suit employees whose employer offers salary packaging, especially people on middle to higher incomes, since the tax saving grows with your marginal tax rate. Right now, EV buyers get the strongest deal because of the FBT exemption — though that window is narrowing from 2027.
It is probably not for you if your employer does not offer salary packaging, if you change jobs often, or if you are on a low income where the tax saving is small. Before signing anything, run your own numbers with a novated lease calculator and consider getting personal financial advice — the savings are real, but they depend entirely on your salary, the car and the lease structure.
Common questions
Is a novated lease the same as salary packaging a car?
Yes. A novated lease is simply one type of salary packaging arrangement.
Do I own the car during the lease?
No. The finance company owns it until you pay the residual value at the end.
What happens if I change jobs?
The novation with your old employer ends. If your new employer offers salary packaging, the lease can usually be re-novated. If not, the lease continues in your name and you pay it from after-tax income, which means the tax benefit stops.
Can I lease a used car?
Yes. You can generally novated-lease a new car, a used car, or in some cases even your existing car.
