Novated leasing is an Australian salary packaging arrangement that lets you pay for a car and its running costs out of your pre-tax salary through a three-way agreement between you, your employer, and a finance company. Because the payments come off your gross pay, your taxable income drops and you keep more of what you earn. How much you actually save depends on your marginal tax rate, the vehicle you pick, and whether that vehicle qualifies for the electric car FBT exemption.
How the Arrangement Works
Three parties sit inside a novated lease. You are the employee who drives the car. A finance company is the lessor and legally owns the vehicle for the duration 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 financier.
The document that ties this together is called a novation deed. It formally shifts your obligation to make lease payments across to your employer for as long as you remain employed there. The word “employed” is doing heavy lifting. If you resign, are made redundant, or your job ends for any reason, the novation deed terminates and the full lease obligation returns to you.
Who Can Set One Up
You need to be a salaried employee working for an employer willing to participate. Self-employed people and independent contractors are shut out because there is no employer to sign the deed. Contract and casual employees can sometimes qualify, but employers often impose minimum hours or a minimum remaining contract term before they will agree.
Employers carry no direct financial risk in a standard novated lease, yet some smaller businesses still decline because they lack the payroll systems to administer it. The arrangement only works if your workplace is set up for it.
Where the Savings Come From
Three mechanisms do the work: salary sacrifice, GST credits, and (for eligible electric vehicles) exemption from Fringe Benefits Tax.
Salary Sacrifice
You agree to receive less gross pay, and in return your employer directs that portion toward 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 overall.1Australian Taxation Office. Salary Sacrificing for Employees The benefit grows with your marginal tax rate, so higher-income earners typically save more on the same vehicle.
The sacrifice usually splits into two parts: a pre-tax component covering finance and running costs, and a post-tax component used to offset the FBT liability through what’s known as the Employee Contribution Method.
GST Credits
Because the finance company is a GST-registered business, it can claim back the 10% Goods and Services Tax built into the vehicle’s purchase price and pass that saving on to you. For the 2025-26 financial year, the maximum GST credit on the purchase 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 vehicle priced at or below that limit, you effectively save around 10% off the purchase cost from day one.
The same GST benefit applies to running costs paid through the lease, including fuel, servicing, tyres, and insurance. 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 purchase-price cap.
The Electric Vehicle FBT Exemption
This is where novated leasing has become particularly attractive. Since 1 July 2022, battery electric vehicles and hydrogen fuel cell vehicles that meet certain conditions are completely exempt from Fringe Benefits Tax.4Australian Taxation Office. Electric Cars Exemption The exemption removes the single biggest cost drag on a novated lease, which makes the total savings substantially larger for an EV than for a petrol or diesel car.
To qualify, the vehicle must be a battery electric or hydrogen fuel cell car, first held and used on or after 1 July 2022, provided for private use by a current employee or their family, and priced below the fuel-efficient Luxury Car Tax threshold, which is $91,387 for 2025-26.5Australian Taxation Office. Luxury Car Tax Rate and Thresholds
Plug-in hybrids lost their eligibility from 1 April 2025 unless they were already running under a financially binding commitment before that date. Even then the grandfathering is strict: any change to the lease terms, a break in the novation, or a change of employer ends the exemption for that PHEV permanently.6Australian Taxation Office. FBT on Plug-in Hybrid Electric Vehicles For a new novated lease started in 2026, the exemption is only available for fully electric and hydrogen fuel cell vehicles. The government has flagged a review of the EV exemption by mid-2027, so the rules could change.
Fringe Benefits Tax on a Non-Exempt Car
If you lease a petrol, diesel, or non-exempt vehicle, Fringe Benefits Tax applies. FBT is levied on the employer at 47%,7Australian Taxation Office. Fringe Benefits Tax – Rates and Thresholds but in practice the employer passes the cost back to you through the lease structure, so keeping FBT low is directly in your interest.
Most novated leases calculate the FBT taxable value using the Statutory Formula Method, which multiplies the car’s base value (generally the GST-inclusive purchase price, excluding registration and stamp duty) by a flat 20%, regardless of how far you drive.8Australian Taxation Office. Taxable Value of a Car Fringe Benefit An alternative Operating Cost Method is available if you keep a logbook for at least 12 continuous weeks,9Australian Taxation Office. Deductions for Motor Vehicle Expenses – Logbook Method and it can produce a lower taxable value when business use is high.
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 calculated taxable value of the car benefit, and that contribution reduces the taxable value dollar for dollar. When the two match, the FBT liability drops to zero.10Australian Taxation Office. Fringe Benefits Tax – A Guide for Employers You still keep the pre-tax savings on running costs and the GST benefits, which is where the net financial advantage sits.
Costs and Catches Most People Miss
Luxury Car Tax
If the vehicle’s value exceeds the Luxury Car Tax threshold, LCT of 33% applies to the portion above the threshold. For 2025-26, the threshold is $80,567 for standard vehicles and $91,387 for fuel-efficient vehicles including EVs.5Australian Taxation Office. Luxury Car Tax Rate and Thresholds Going above the fuel-efficient threshold on an EV not only triggers LCT but also disqualifies the car from the FBT exemption, which is a steep financial cliff. Staying below the threshold is one of the most consequential decisions you make when selecting the vehicle.
HELP Debt and the Medicare Levy Surcharge
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 to FBT-exempt electric vehicles. That amount gets added back when the ATO calculates several other obligations.
If you carry a HELP, VSL, or other study loan, your repayment income includes reportable fringe benefits, which can push you into a higher repayment bracket than your taxable income alone would suggest.11Australian Taxation Office. Study and Training Loan Repayment Thresholds and Rates The same applies to the Medicare Levy Surcharge: income for MLS purposes includes reportable fringe benefits, and if you don’t hold private hospital cover, crossing the $101,000 threshold for singles in 2025-26 triggers the surcharge.12Australian Taxation Office. Medicare Levy Surcharge Income, Thresholds and Rates These effects don’t erase the benefit of a novated lease, but anyone with a student loan or without private health cover should model the impact before committing.
How Running Costs Are Handled
Your novated lease payment usually bundles the finance repayment with a budgeted amount for fuel, scheduled servicing, comprehensive insurance, registration, and tyre replacement. The budget is based on the lease term and your expected annual kilometres, then folded into the total salary sacrifice.
A fully maintained lease rolls everything into a single deduction managed by the finance company, which typically provides a fuel card and pays bills directly. A non-maintained lease covers only the finance repayment through the novation; you manage running costs yourself. The fully maintained option is more common because it simplifies budgeting and ensures the GST credits on running costs are captured automatically.
The budget is reconciled periodically. If you spend less than projected, any surplus is returned to you at the end of the lease, though it comes back as taxable income. If you overshoot, you cover the shortfall with a lump sum before the lease can be finalised.
What Happens If You Leave Your Job
This is where novated leasing catches people off guard. When your employment ends, the novation deed terminates and the lease reverts entirely to you. The finance company doesn’t care why you left; the employer is simply out of the arrangement.
You have a few options from there. If you start a new job quickly, you can ask your new employer to enter a fresh novation deed and continue the lease without interruption. Most novated lease providers handle this transfer routinely, and it’s the cleanest outcome. If you cannot find a new employer willing to novate, you are responsible for the regular payments out of your after-tax income until you either pay off the balance, sell the vehicle to clear the debt, or refinance into a standard car loan.
Early termination before the lease term expires can attract 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 offer lease protection insurance that covers 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 usually apply.
The Residual Payment at the End
Every novated lease has a mandatory balloon payment due at the end of the term, called the residual value. The ATO requires this to ensure the arrangement qualifies as a genuine lease rather than a disguised purchase. Setting the residual too low causes the ATO to reclassify the arrangement as a property benefit instead of a car benefit, which changes the tax treatment entirely.13Australian Taxation Office. Car Leasing and FBT
The ATO sets minimum residual percentages based on the vehicle’s eight-year effective life. For a five-year lease the minimum is 28.13% of the original cost; for a three-year lease it is 46.88%.14Australian Taxation Office. ATO ID 2002/1004 – Car Lease Residual Values On a $50,000 car with a five-year lease, that works out to roughly $14,065 to deal with when the lease matures.
When the final payment falls due, you have three paths. Pay the residual with after-tax funds and take full ownership. Refinance the residual into a new novated lease (provided you are still employed) to extend the salary sacrifice benefits. Or sell or trade the vehicle, use the proceeds to cover the residual, and keep any amount above it tax-free. A lower residual means higher regular payments and a smaller balloon; a higher residual keeps fortnightly deductions down but leaves a bigger lump sum to resolve. Three-to-five-year terms are the most common choice because they balance manageable repayments against a residual that roughly tracks the car’s market value.