A novated lease is one of the most tax-effective ways for Australian employees to pay for a car. In short: your employer takes your lease payments and car running costs out of your salary before tax is applied, which shrinks your taxable income and can leave thousands of dollars more in your pocket each year. The savings are even bigger for electric vehicles, which are currently exempt from Fringe Benefits Tax entirely.
But novated leases are not free money. There are fees, restrictions, and one serious risk — what happens when you change jobs. In this guide we explain how novated leasing works in 2025-26, how the tax savings are calculated, the electric vehicle exemption, the genuine pros and cons, and how to work out whether one is right for you.
What Is a Novated Lease?
A novated lease is a three-way agreement between you (the employee), your employer, and a finance company. It works like this:
- You choose a car — new or used — and a novated lease provider arranges the finance.
- Your employer deducts the lease payments and your budgeted running costs (registration, insurance, servicing, tyres, fuel or charging) from your gross salary before income tax is calculated.
- You pay less income tax because your taxable salary is now lower, and the lease provider pays the car’s bills out of the deducted amount.
The word “novate” means the lease obligation is transferred to your employer while you work there — but the lease is still your commitment, funded from your salary. The power is in the tax treatment: instead of paying for your car with after-tax dollars, you pay with pre-tax dollars.
Typical terms run 1 to 5 years, no deposit is usually required, and both new and used cars are eligible. At the end you can pay the residual (the balloon amount) to keep the car, refinance it, upgrade, or return the vehicle.
How the Tax Savings Work
Under Australian tax law, your employer providing you with a car is a fringe benefit, and fringe benefits normally attract Fringe Benefits Tax (FBT) at 47%. The taxable value of the car benefit is usually calculated under the statutory method at 20% of the car’s base value per year.
Here is how the two scenarios compare:
| Lease type | Pre-tax salary deduction | FBT treatment | Net tax position |
|---|---|---|---|
| Non-EV novated lease (e.g. petrol or diesel) | Lease payments plus running costs deducted from gross salary, reducing taxable income | FBT of 47% applies to the car benefit, valued at 20% of base value under the statutory method | Usually managed with post-tax employee contributions that offset the FBT liability |
| Eligible EV novated lease | Entire lease and running costs deducted from gross salary | Fully FBT-exempt under the Electric Car Discount | No FBT payable at all — maximum pre-tax benefit |
For a non-electric car, the FBT has to be dealt with — typically by making post-tax “employee contributions” that reduce the taxable value of the benefit to zero. In other words, part of the benefit ends up being funded from after-tax salary, which dilutes (but does not eliminate) the tax advantage.
For an eligible electric vehicle, there is no FBT at all. Every dollar of lease and running costs comes from pre-tax salary. This is why novated leases on EVs are currently some of the most popular salary packaging arrangements in the country.
The Electric Vehicle FBT Exemption
Since the Electric Car Discount legislation took effect in December 2022, eligible battery electric and hydrogen fuel cell vehicles provided through a novated lease are fully exempt from Fringe Benefits Tax. The conditions for 2025-26 are:
- The vehicle must have first been held and used on or after 1 July 2022.
- The car’s price must be below the luxury car tax threshold of $91,387 for 2025-26 (the threshold for fuel-efficient vehicles).
- Only battery electric and hydrogen fuel cell vehicles qualify.
Importantly, plug-in hybrid vehicles lost eligibility for new leases from 1 April 2025. If you had a binding commitment for a plug-in hybrid novated lease before that date, it is grandfathered and keeps the exemption — but any new arrangement on a plug-in hybrid now attracts normal FBT.
One obligation remains: even though the benefit is FBT-exempt, your employer must still report it as a reportable fringe benefit on your payment summary. It does not increase your taxable income, but it can affect means-tested calculations such as the Medicare levy surcharge and HELP/HECS repayment income.
Example: How Much Can You Save?
The saving scales with your marginal tax rate — higher earners keep more, because each pre-tax dollar shelters more tax. As a rough guide, on a $60,000 EV the FBT exemption can save around $5,000 a year, with higher-income earners saving more.
Here is how the dollars flow in a typical EV novated lease arrangement:
| Component | What happens | Tax effect |
|---|---|---|
| Lease payments | Deducted from gross salary before tax | Reduces taxable income dollar-for-dollar |
| Running costs (rego, insurance, servicing, tyres, charging) | Budgeted amount deducted pre-tax; provider pays the bills | Reduces taxable income further |
| FBT on the car benefit | $0 — fully exempt for eligible EVs | No offsetting post-tax contribution needed |
| Reportable fringe benefit | Shown on your payment summary | Not taxed, but counted for some means tests |
For a petrol or diesel car the FBT must be neutralised — usually with post-tax contributions — so the net saving is smaller. The EV exemption removes an entire layer of cost and complexity.
Want a number tailored to your salary and car? Try our novated lease calculator to model the pre-tax and post-tax split, or use the salary sacrifice calculator to see how any pre-tax packaging arrangement changes your take-home pay.
Pros of a Novated Lease
- Lower taxable income. Paying for the car and its running costs from pre-tax salary reduces the income tax you pay. For eligible EVs the saving is maximised with zero FBT.
- One bundled payment. Lease, registration, insurance, servicing, tyres and fuel or charging are rolled into a single regular salary deduction. Budgeting becomes almost automatic.
- Potential GST savings. The finance company claims the GST on the car’s purchase price, and the benefit of that saving is typically passed to you in lower lease payments.
- Discounted running costs. Lease providers often negotiate fleet discounts on insurance, servicing and tyres that are hard to get as an individual buyer.
- No deposit required. Unlike many car loans, novated leases usually need no upfront deposit, preserving your cash.
- New or used. You are not restricted to brand-new cars; used vehicles can be novated too, widening your options.
Cons and Risks of a Novated Lease
- Changing jobs ends the novation. This is the biggest risk. When you leave your employer, the novation ends and you must either re-novate the lease with your new employer, pay out the lease in full, or keep making the payments from after-tax income. If none of those work, you may have to sell the car.
- Fees eat into savings. Lease providers charge establishment and ongoing management fees. On cheaper cars or for lower-income earners, fees can absorb a meaningful share of the tax benefit.
- You may pay for a car you drive less than expected. Running-cost budgets are estimates. If you over-budget, you tie up salary unnecessarily; if you under-budget, you face a shortfall at reconciliation.
- The residual is real debt. At the end of the term the balloon payment must be dealt with — paid, refinanced or rolled into a new car. It does not vanish.
- Reportable fringe benefits can bite. Even FBT-exempt amounts appear on your payment summary and can push you over thresholds for the Medicare levy surcharge, HELP/HECS repayments and some family payments.
- Not every employer offers it. Novated leasing depends on your employer agreeing to participate and to salary-sacrifice the amounts. Some employers decline or only offer it through a preferred provider.
- Lower-income earners save less. Because the benefit scales with your marginal tax rate, someone on a lower tax bracket gets a smaller dollar saving from the same arrangement.
Novated Lease vs Other Ways to Pay for a Car
| Option | Tax treatment | Flexibility | Best for |
|---|---|---|---|
| Novated lease | Pre-tax salary deductions; FBT applies (or exempt for eligible EVs) | Tied to your employer | Employees wanting bundled, tax-effective car costs |
| Car loan | Paid from after-tax income; interest not deductible for private use | Fully portable — yours to keep | People who want ownership and no employer dependence |
| Cash purchase | After-tax dollars | Total freedom | Buyers with savings who want simplicity |
| Chattel mortgage (business use) | Interest and depreciation deductible for the business-use portion | Business-owned | Sole traders and businesses, not employees |
A novated lease usually beats a car loan on pure cost for employees, especially on EVs — but only while you stay with a participating employer. If you change jobs every year or two, weigh that risk before signing a 5-year lease.
Frequently Asked Questions
Is a novated lease worth it in 2025-26?
For many employees it is — particularly for eligible electric vehicles, where the FBT exemption means the entire lease and all running costs come from pre-tax salary with no FBT at all. On a $60,000 EV that can save roughly $5,000 a year, more for higher earners. Run your own numbers in the novated lease calculator before deciding.
What happens to my novated lease if I change jobs?
The novation ends when your employment ends. You generally have three options: re-novate the lease with your new employer (if they agree to participate), pay out the lease in full, or continue making the payments from your after-tax income. Make sure you understand your exit options before you sign.
Are plug-in hybrids still eligible for the EV FBT exemption?
No — not for new leases. Plug-in hybrids lost eligibility for arrangements entered into from 1 April 2025. Only binding commitments made before that date are grandfathered. New leases must be battery electric or hydrogen fuel cell vehicles priced under the $91,387 luxury car tax threshold for 2025-26 to qualify.
Does a novated lease affect my HELP/HECS debt?
It can. Even FBT-exempt amounts are reported on your payment summary as reportable fringe benefits, and HELP/HECS repayment income includes reportable fringe benefits. A large reportable amount could push you into a higher compulsory repayment bracket.
Can I get a novated lease on a used car?
Yes. Both new and used cars are eligible, and the EV FBT exemption applies to used eligible EVs too, provided the vehicle was first held and used on or after 1 July 2022 and is priced below the $91,387 threshold. Lenders may set their own age and kilometre limits.
Do I need a deposit for a novated lease?
Usually no. Most novated lease arrangements require no upfront deposit, which is one of their attractions. The trade-off is the residual (balloon) payment due at the end of the term, which you must pay, refinance or roll into a new lease.
The Bottom Line
A novated lease lets you pay for a car — and everything that keeps it running — from pre-tax salary, cutting your taxable income and your tax bill. In 2025-26 the deal is at its best for eligible electric vehicles: the FBT exemption removes a 47% tax that would otherwise apply, potentially saving around $5,000 a year on a $60,000 EV, with higher earners saving more. For petrol and diesel cars the benefit is real but smaller, since the FBT has to be managed with post-tax contributions.
The main catch is portability: changing jobs forces you to re-novate, pay out or fund the lease from after-tax income. Fees, the end-of-term residual and the reportable fringe benefit on your payment summary all deserve a hard look too.
If the numbers stack up for your salary and your car, a novated lease — especially on an EV — remains one of the smartest salary packaging moves available to Australian employees. Model your exact saving with our free novated lease calculator, and compare it with other options using the salary sacrifice calculator.