Curious About Novated Leasing?
Maybe your HR team brought it up, or a colleague swears it was the smartest decision they ever made. But what exactly is a novated lease—and is it right for you?
A novated lease is essentially a vehicle finance arrangement facilitated through your employer. It’s a three-way agreement between you, your employer, and a finance provider. You choose the car, and instead of making repayments from your own pocket, your employer deducts them directly from your pre-tax salary. If you opt for a fully maintained lease, the arrangement also bundles the vehicle’s running costs—such as fuel, registration, insurance, and servicing—into a single, regular pre-tax deduction.
One of the main benefits of a novated lease is the potential for tax savings. Since repayments—and, in the case of a fully maintained lease, running costs—are made from your before tax salary, your taxable income is reduced and your take-home pay can be boosted. There are even perks for your employer. Novated lease payments carry GST and your employer can claim these GST credits, even though they are not incurring any costs for the car per se. The employee therefore gets an automatic discount on the car of the value of GST on these lease payments.
That said, novated leases aren’t a one-size-fits-all solution. While they can reduce your income tax, they may also trigger Fringe Benefits Tax (FBT) for your employer, which is 47% tax on the value of your private usage of the car. In many cases, the FBT cost is passed onto the employee through additional pre-tax or post-tax deductions from your salary. This can reduce—or even cancel out—the tax benefit, particularly if you're not in the highest tax bracket, or do not use the car for business purposes.
However, there’s a notable exception: eligible electric vehicles (EVs) under the Luxury Car Tax threshold (currently $91,387) are exempt from FBT. This makes novated leasing especially attractive for employees on lower or middle incomes considering an EV. Let’s do a back of beer coaster example: say you lease a $65,000 electric vehicle under a fully maintained novated lease. With the FBT exemption, none of the vehicle’s value is subject to the 47% Fringe Benefits Tax. That means your lease repayments, along with running costs like charging, servicing, insurance and registration, can all be paid from your pre-tax salary—potentially saving you thousands in income tax over the lease term. Compared to buying the same EV with a standard car loan, you may end up with a significantly better net cash position.
Another important consideration is what happens if you change jobs. You continue to use the vehicle and, effectively, still own it. If you change employers, the lease doesn’t disappear—you can either take over the repayments yourself, transfer the lease to your new employer, or pay it out. Keep in mind that the ATO requires minimum residual values on novated leases, so after a typical three-year term, the residual amount may be relatively high. If you're assuming the lease personally, you might consider refinancing to reset the residual to a more manageable level.
So, is a novated lease worth it? For some people, absolutely. If you’re on a steady income and want a tax-effective way to run a car—especially an EV—it can be a great fit. But its value really depends on your income level, job security, and long-term plans.
If you’re interested, start by asking your employer if they offer novated leasing. Don’t hesitate to bring up the novated lease conversation—it can also benefit your employer. When structured correctly, novated leasing enhances staff retention and attraction, all at no cost to the business. There’s no need for the employer to manage a fleet, and the administrative load is minimal, especially when supported by a reputable lease provider.
It’s also smart to get a personalised quote from a lease provider and speak with your accountant to compare your net cash position and tax savings against a standard car loan—so you can make sure it’s the right financial move for you.