Novated leasing is an Australian salary-packaging arrangement that lets you pay for a car and its running costs from your pre-tax salary through a three-way agreement between you, your employer, and a finance company. Because the payments come out of your gross pay, your taxable income drops, and the finance company can strip the GST out of the car’s purchase price and running expenses. If the car is an eligible electric vehicle, Fringe Benefits Tax falls away entirely, which is why the arrangement has become so popular for EVs.
How the Arrangement Is Structured
Three parties sign on. You are the employee who will drive the car. The finance company is the lessor and legally owns the vehicle for the length of the lease. Your employer sits in the middle, taking the lease payments out of your salary each pay cycle and forwarding them to the finance company.
The document that binds it together is called a novation deed. It formally transfers your obligation to make lease payments across to your employer for as long as you work there. The employer carries no financial risk in a standard novated lease, but they do need payroll systems that can handle the deductions, which is why some smaller businesses decline to participate.
The word doing the heavy lifting in that structure is “employed.” The novation only holds while you are on the payroll. If you resign or your job ends for any other reason, the deed terminates and the lease obligation lands back with you in full.
Who Can Use a Novated Lease
You need to be a salaried employee and your employer needs to agree. Self-employed people and independent contractors cannot use novated leasing because there is no employer to sign the deed. Contract and casual employees can sometimes qualify, but employers often set conditions such as minimum working hours or a minimum remaining contract term.
Where the Savings Come From
Three tax effects stack up.
Pre-Tax Salary Sacrifice
You agree to receive less gross pay, and your employer redirects that portion to your lease payments and vehicle running costs. Because the sacrifice happens before income tax is calculated, your taxable income drops and you pay less tax.1Australian Taxation Office. Salary Sacrificing for Employees The higher your marginal tax rate, the more each sacrificed dollar is worth.
GST on the Car
Because the finance company is a GST-registered business, it can claim back the 10% GST included in the car’s purchase price and pass the saving on to you. For 2025-26 the maximum GST credit is $6,334, calculated as one-eleventh of the car cost limit of $69,674.2Australian Taxation Office. Changes to Car Thresholds from 1 July On a car priced at or below that limit, the effect is roughly a 10% discount off the purchase price from day one. Above the limit, the GST credit on the purchase price is capped at $6,334.
GST on Running Costs
The same GST recovery applies to fuel, servicing, tyres, insurance, and registration paid through the lease. Your employer claims the GST on those expenses and the credit flows through to reduce your overall cost.3Australian Taxation Office. Purchasing a Motor Vehicle GST on running costs is not subject to the car cost limit cap.
Fringe Benefits Tax and How It Gets Neutralized
A car provided through salary sacrifice is a fringe benefit, and FBT applies at 47%.4Australian Taxation Office. Fringe Benefits Tax – Rates and Thresholds The tax sits on the employer, but in practice it gets passed to you through the lease structure. Reducing it is the whole game.
Most novated leases calculate the FBT taxable value using the Statutory Formula Method, which is 20% of the car’s GST-inclusive base value each year, regardless of kilometres driven.5Australian Taxation Office. Taxable Value of a Car Fringe Benefit The Operating Cost Method is an alternative based on actual running costs and a logged business-use percentage, which can work out cheaper for high-business-use drivers willing to keep a 12-week logbook.6Australian Taxation Office. Deductions for Motor Vehicle Expenses – Logbook Method
The usual way to bring the FBT bill to zero is the Employee Contribution Method. You make a post-tax contribution from your salary equal to the taxable value of the car benefit, and that contribution reduces the taxable value dollar for dollar. Match the two and the FBT liability falls to zero.7Australian Taxation Office. Fringe Benefits Tax – A Guide for Employers You still keep the pre-tax savings on running costs and the GST benefits, and that is where the net advantage sits.
The Electric Vehicle FBT Exemption
Since 1 July 2022, battery electric and hydrogen fuel cell vehicles that meet the ATO conditions are completely exempt from FBT.8Australian Taxation Office. Electric Cars Exemption The vehicle must be a zero or low emissions car, first held and used on or after 1 July 2022, used by a current employee or their family, and its value at first retail sale must have been below the fuel-efficient Luxury Car Tax threshold ($91,387 for 2025-26).9Australian Taxation Office. Luxury Car Tax Rate and Thresholds
Plug-in hybrids stopped qualifying from 1 April 2025 unless already under a financially binding commitment before that date, and even then any change to the lease terms, break in the novation, or change of employer ends the exemption permanently.10Australian Taxation Office. FBT on Plug-in Hybrid Electric Vehicles For a new lease started in 2026, the exemption applies only to fully electric and hydrogen fuel cell cars. The government has flagged a review of the exemption by mid-2027.
What the Payments Actually Cover
A novated lease payment typically bundles the finance repayment with a budgeted amount for running costs: fuel, scheduled servicing, comprehensive insurance, registration, and tyre replacement. The running-cost budget is built from the lease term and your expected annual kilometres.
A fully maintained lease rolls everything into a single deduction managed by the finance company, usually with a fuel card and direct bill payments. A non-maintained lease covers only the finance repayment through the novation, and you handle running costs yourself. Fully maintained is more common because it captures the GST credits on running costs automatically.
The budget gets reconciled periodically. Underspend the running-cost budget and the surplus is returned to you at the end of the lease as taxable income. Overspend and you cover the shortfall with a lump sum before the lease can be finalised.
Costs That Can Eat Into the Savings
Two thresholds and two income tests are worth checking before you sign.
The Luxury Car Tax threshold for 2025-26 is $80,567 for standard cars and $91,387 for fuel-efficient cars.9Australian Taxation Office. Luxury Car Tax Rate and Thresholds Above the threshold, LCT of 33% applies to the portion above it, and for an electric car, crossing the fuel-efficient threshold also disqualifies the vehicle from the FBT exemption. That is a steep cliff.
Even when a novated lease reduces your taxable income, your employer must report a Reportable Fringe Benefits Amount on your income statement, and this applies even for FBT-exempt EVs. That amount is added back for several income tests. If you have a HELP, VSL, or other study loan, your repayment income includes reportable fringe benefits, which can push you into a higher repayment bracket.11Australian Taxation Office. Study and Training Loan Repayment Thresholds and Rates The same add-back applies to the Medicare Levy Surcharge, where crossing the $101,000 singles threshold for 2025-26 without private hospital cover triggers the surcharge.12Australian Taxation Office. Medicare Levy Surcharge Income, Thresholds and Rates
What Happens If You Leave Your Job
When your employment ends, the novation deed terminates and the lease reverts to you. The finance company is not concerned with the reason you left; the employer simply drops out.
From there, a few paths are open. If you start a new job quickly and the new employer is willing, you can sign a fresh novation deed and continue the lease without interruption. Most novated lease providers can transfer the arrangement across employers. If no new employer will novate, you cover the payments yourself out of after-tax money until you pay out the balance, sell the car to clear it, or refinance into a standard car loan.
Early termination inside the lease term can trigger additional fees from the finance company, and any early payout amount will include GST that would otherwise have been effectively offset during an active novation. Some providers sell lease protection insurance covering payments for a limited period (typically up to ten months) if you are made involuntarily redundant. It does not cover resignation or voluntary redundancy, and waiting periods apply.
The Residual Payment at the End
Every novated lease finishes with a mandatory balloon payment called the residual value. The ATO requires it so the arrangement qualifies as a genuine lease rather than a disguised purchase. Set the residual too low and the ATO reclassifies the arrangement as a property benefit, which changes the tax treatment.13Australian Taxation Office. Car Leasing and FBT
The ATO sets minimum residuals as a percentage of the original cost, based on lease term. A one-year lease requires at least 65.63%; a five-year lease requires at least 28.13%.14Australian Taxation Office. ATO ID 2002/1004 – Car Lease Residual Values On a $50,000 car over five years, the minimum residual is $14,065. A lower residual means higher regular payments and a smaller balloon; a higher residual means lower payments and a bigger lump sum at the end.
When the final payment comes due, you have three choices. You can pay the residual with after-tax funds and take full ownership. You can refinance the residual into a new novated lease, provided your employment continues, extending the salary sacrifice benefits. Or you can sell or trade the car, use the proceeds to cover the residual, and keep any surplus tax-free.