Quick answer: With a novated lease, your employer takes money out of your salary each pay cycle and sends it to a finance company to cover your car and its running costs. Because part of it comes out before tax, you pay less income tax — and the finance company buying the car saves you the GST on the purchase price. At the end of the lease, you pay a final lump sum (the residual value) to own the car, or hand it back and start again. It is a type of salary packaging.
If you already know what a novated lease is and just want to see how the whole thing plays out in practice, this guide walks you through it from start to finish. For the basics first, read our plain-English explainer of what a novated lease is.
The three parties involved
A novated lease is always a three-way deal:
- You — you pick the car and drive it.
- Your employer — takes the payments from your salary and passes them on.
- The finance company (lease provider) — buys the car, owns it during the lease, and collects the payments.
The word “novated” just means your employer takes on your lease payment obligations under the agreement. If you leave the job, the agreement changes — more on that below.
Step 1: Check your employer offers salary packaging
This is the step people forget. A novated lease only works if your employer offers salary packaging. Many large employers, government departments, hospitals and not-for-profits do — but it is not automatic. Ask your payroll or HR team, and find out which salary packaging provider your employer uses, because your lease will usually need to be arranged through them (or alongside them).
Step 2: Choose the car
With a novated lease you can choose almost any new or used car — petrol, diesel, hybrid or electric. A few limits apply:
- It has to be a passenger vehicle with a carrying capacity under one tonne, which rules out some heavier commercial vehicles.
- Used cars are fine, but providers set age limits — generally the car cannot be older than around 12 years when the lease ends.
- Electric cars get the best tax deal right now (see step 5), so they are the most popular choice for new leases.
Step 3: Agree the package and get a quote
The provider works out what the lease will cost you: the finance for the car itself, plus a budget for running costs — fuel or charging, insurance, registration, servicing, tyres and roadside assistance. Lease terms usually run one to five years. The quote also shows your estimated tax saving and what it does to your take-home pay, so you can see the real cost before you commit.
You can choose a fully maintained lease (running costs bundled in) or a non-maintained lease (finance only, running costs stay with you). Most people take the fully maintained option because it turns every car bill into one automatic payment.
Step 4: Sign the novation agreement
Once you are happy with the quote, you sign a three-way novation agreement with your employer and the finance company. The provider then buys the car of your choice — and here is a neat detail: because the company is buying it rather than you, you do not pay GST on the purchase price — an effective saving of close to 10% of the car’s price straight away.
During the lease the car is registered in your name and you drive it like your own car. You just do not legally own it yet.
Step 5: Watch your pay work differently
This is where the savings happen. Each pay cycle, your employer deducts an agreed amount from your salary and sends it to the lease provider. For most cars the deduction is a mix:
- Pre-tax dollars — taken before income tax is calculated, which lowers your taxable income and your tax bill.
- Post-tax dollars — for petrol and diesel cars, part of the payment comes out after tax. This wipes out the fringe benefits tax (FBT) bill your employer would otherwise face.
Eligible electric cars are currently exempt from FBT, so an EV lease can be paid almost entirely from pre-tax dollars — the reason EV novated leases are such good value at the moment. (The rules for EVs are changing from 2027, which we explain in our novated lease explainer.)
Step 6: Run the car on autopilot
Day to day, nothing much changes for you — you just drive. The running-cost budget was estimated at the start based on how much you expect to drive. When the car needs servicing or the insurance comes due, the provider pays from the budget account. If you drive more than expected, the budget can be adjusted up; if you drive less, it can come down — and anything left over at the end of the lease is returned to you through payroll (taxed as salary).
You are free to choose your own insurer and service centre; you are not locked into the provider’s picks.
Step 7: Reach the end of the lease
You never fully pay off the car during the lease. When the term ends, a final lump sum remains — the residual value. At that point you have three choices:
- Pay the residual and keep the car. Once it is paid, ownership transfers to you.
- Refinance into a new lease — 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 any leftover.
The residual is set at the start and must meet minimum percentages set by the ATO. For the exact figures and a worked example, see our guide — and if you are weighing a novated lease against a normal loan, our novated lease vs car loan comparison runs the numbers side by side.
What happens if you change jobs?
The novation with your old employer ends. If your new employer offers salary packaging, the lease can usually be re-novated — it moves with you. If they do not, the lease stays in your name and you keep paying it from after-tax income, which means the tax benefit stops. This is the main risk of a novated lease, and it is worth thinking about before you sign.
Quick answers
Who owns the car during a novated lease?
The finance company owns it. It is registered in your name and you have full personal use of it, but legal ownership only passes to you when you pay the residual at the end.
Do I have to drive a lot of kilometres for it to be worth it?
No. People driving as little as 5,000 km a year still get the GST and income tax savings; higher kilometres just make the benefit bigger because more running costs are packaged.
Can I get a novated lease on a car I already own?
Often, yes — through a “sale and lease back”, where the finance company buys your car and leases it back to you. You miss out on the GST saving on the purchase price, but the income tax savings work the same.
Still deciding? Our honest look at whether a novated lease is worth it lays out who it suits — and who should walk away.
