Novated Lease

What Is a Novated Lease?

A novated lease is a three-way agreement between an employee, their employer, and a finance company. You choose and finance a vehicle through the lease company, then novate (transfer) the lease obligations to your employer. Your employer deducts lease payments and approved running costs from your pre-tax salary, pays the lease company on your behalf, and reports a fringe benefit for tax purposes. At the end of the lease term, you may have the option to buy the car, refinance, or return it depending on the residual value and contract terms.

Novated leasing is a form of salary packaging — the same mechanism used for laptops, phones, and super contributions. The key benefit is paying for your car with dollars that have not yet been taxed at your marginal rate. For someone on a 30% marginal rate plus 2% Medicare, packaging $15,000 in car costs pre-tax could save around $4,800 in income tax compared to paying from after-tax income. The actual saving depends on FBT, your employer's policy, and the total packaged amount.

How Novated Lease Tax Savings Work

Without a novated lease, you pay for your car from take-home pay that has already been reduced by income tax, Medicare, and possibly HECS. With a novated lease, the lease payment and running costs are deducted from your gross salary before PAYG withholding is calculated. Your taxable income drops, so you pay less income tax. The employer then uses your pre-tax dollars to pay the lease company.

Our novated lease calculator models this by comparing your total tax on your full salary versus your tax after deducting the packaged amount (lease plus running costs). The difference is your annual tax saved. The effective after-tax cost of the car is the total packaged amount minus the tax saved. For example, packaging $18,000 per year with $5,400 in tax saved means the car effectively costs you $12,600 from a cash-flow perspective — though your gross salary is $18,000 lower.

• Lease payments deducted from pre-tax salary
• Running costs (fuel, rego, insurance, servicing) often included
• Income tax calculated on reduced taxable income
• Fringe Benefits Tax may apply depending on the arrangement
• Employer must offer salary packaging for the arrangement to work

What Costs Can Be Packaged?

A typical novated lease package includes the finance lease payment (covering the car purchase price, interest, and residual), fuel or charging costs, registration, full insurance, scheduled servicing, tyres, roadside assistance, and sometimes car washes or other maintenance. The lease company or salary packaging provider manages these payments from your packaged amount, simplifying budgeting into a single regular deduction from your pay.

Not every employer allows full packaging of all running costs. Some cap the packaged amount or restrict vehicle types. Electric vehicles (EVs) received favourable FBT treatment from July 2022 — eligible zero or low-emission vehicles may be exempt from FBT up to the luxury car tax threshold, significantly improving the economics of novating an EV. Petrol and diesel vehicles are generally subject to FBT calculated using the statutory formula or operating cost method.

Fringe Benefits Tax and Novated Leases

When your employer provides a car benefit through a novated lease, it may be subject to Fringe Benefits Tax at 47%. However, many employers pass the FBT cost to the employee as part of the packaged amount, or use employee contributions (your post-tax payments) to reduce the taxable value to zero. The standard approach in the novated lease industry is to structure employee contributions so the FBT taxable value is eliminated, meaning the FBT cost is effectively neutralised.

For electric vehicles below the luxury car tax threshold ($91,387 for fuel-efficient vehicles in 2025–26), the FBT exemption can make EV novated leases particularly attractive. The exempt benefit still reduces your taxable income for income tax purposes while avoiding FBT entirely. Our calculator provides a simplified tax saving estimate and does not model FBT in detail — for precise figures, request a quote from a novated lease provider that accounts for your specific vehicle and employer arrangement.

Step-by-Step: Using the Novated Lease Calculator

Enter your annual gross salary before any packaging. This is your employment income used for tax calculations — not including super, bonuses unless they are regular, or investment income. Enter the annual lease cost, which is the total finance payment for the year including interest and fees as quoted by your lease provider.

Enter annual running costs — fuel, registration, insurance, servicing, and tyres. The calculator adds lease and running costs to get the total packaged amount, then compares tax on your full salary versus tax on salary minus the package. Review the annual tax saved, effective after-tax cost, and take-home pay with and without the lease. If the effective cost seems high relative to tax saved, your marginal rate may be too low to make novating worthwhile.

• Step 1: Enter your gross annual salary
• Step 2: Enter annual lease finance payments
• Step 3: Enter estimated annual running costs
• Step 4: Review total packaged amount
• Step 5: Compare tax saved vs effective after-tax cost
• Step 6: Check take-home pay with and without the lease

Worked Example: $95,000 Salary, $12,000 Lease, $4,000 Running Costs

An employee earning $95,000 packages a total of $16,000 per year ($12,000 lease + $4,000 running costs). Without packaging, total tax (income tax plus Medicare) is approximately $22,067, leaving take-home pay of $72,933. With packaging, taxable income drops to $79,000. Total tax falls to approximately $17,547, saving $4,520 per year.

The effective after-tax cost of the car is $16,000 − $4,520 = $11,480 per year, or roughly $956 per month. Without the tax benefit, funding the same car from after-tax income would require $16,000 of take-home pay — equivalent to roughly $22,500 in gross salary at this tax rate. The novated lease delivers meaningful savings, though the employee's take-home pay drops by the packaged amount minus the tax saving.

Worked Example: $140,000 Salary, $15,000 Lease, $5,000 Running Costs

A higher-income employee on $140,000 packages $20,000 annually. Without packaging, total tax is approximately $38,347, with take-home of $101,653. With packaging, taxable income is $120,000 and total tax drops to approximately $31,147 — a saving of $7,200.

Effective after-tax cost: $20,000 − $7,200 = $12,800 per year. The higher marginal rate (30% plus 2% Medicare on most of the packaged amount) delivers greater tax savings than the $95,000 example. This illustrates why novated leases are most popular among middle-to-upper income earners. Employees below $45,000 see minimal benefit because their marginal rate is only 16% plus Medicare.

When a Novated Lease Makes Sense

Novated leasing works best for employees with stable employment, a supportive employer, and a marginal tax rate of at least 30%. If you drive a moderate to high annual distance, bundling running costs simplifies budgeting. If you want a new car every three to five years with predictable costs, the lease structure provides that. EV buyers benefit from FBT exemptions that can make the economics significantly better than petrol vehicles.

Novated leasing may not suit you if your employer does not offer salary packaging, you are on a low income where tax savings are small, you drive very few kilometres (making FBT statutory formula expensive), you want to own a car outright long-term, or you may change jobs soon (novation must be accepted by the new employer or the lease reverts to you personally). Compare the effective cost against buying outright or using a standard car loan from after-tax income.

Common Mistakes and Hidden Costs

Many employees focus only on tax saved and ignore the total packaged cost. A $25,000 annual package saving $7,500 in tax still costs $17,500 — you are not getting a free car. Another mistake is not comparing the lease interest rate and fees against market car loan rates. Novated lease finance can carry higher interest rates that erode tax benefits. Residual values at lease end can also surprise — you may owe a lump sum to keep the car.

Changing employers is a common pitfall. The new employer must agree to novate the lease. If they refuse, you become personally liable for payments from after-tax income. Some employees also forget that packaged amounts reduce super guarantee — employer SG is calculated on reduced salary after packaging, which slightly lowers super contributions. Use The super calculator above to check the impact on your retirement savings.

• Ignoring total packaged cost and focusing only on tax saved
• Not comparing lease finance rates to standard car loans
• Underestimating residual payment at lease end
• Assuming a new employer will novate your existing lease
• Forgetting that employer super is calculated on reduced salary

Novated Lease vs Salary Sacrifice Super

Both novated leases and salary sacrifice to super reduce taxable income, but they serve different purposes. Super sacrifice builds retirement savings taxed at 15% in the fund. Novated leasing funds a car with pre-tax dollars but does not build wealth — the car depreciates. Super is generally the more tax-effective wealth-building strategy; a novated lease is a lifestyle and convenience choice with tax benefits.

You can do both, subject to your employer's packaging limits and the concessional super cap of $30,000. If you are near the $250,000 Division 293 threshold, large packaging amounts may trigger additional super tax. Model your total package with our salary sacrifice calculator, Division 293 calculator, and this novated lease calculator to understand the combined impact on your take-home pay and tax position.