Novated leases explained: how they work, EVs and whether one is worth it
A novated lease is a three-way agreement between you, your employer and a lease provider: your employer pays for a car and its running costs out of your salary, partly before tax, for as long as you work there. It usually beats a car loan for an electric car that qualifies for the fringe benefits tax (FBT) exemption. For a petrol or hybrid car the advantage is much smaller and can disappear once fees and the interest rate are counted.
This guide explains what goes into the package, how the tax works, the electric car exemption and the changes announced from 1 April 2027, what happens at the end of the lease or if you change jobs, and how to check a quote. Our novated lease calculator, linked at the end of this page, runs the numbers for your own salary and car.
By Better Rate Mate Editorial Team · Last reviewed
What is a novated lease?
You choose a car and a lease provider. A finance company buys the car and leases it to you, and a deed of novation transfers the lease payments to your employer while you work there. Your employer then deducts the lease payments and a budget for running costs from your pay, some before tax and some after, and pays the bills.
The ATO describes it as a three-way agreement between employer, employee and lease provider. Terms usually run from one to five years. Your employer has to agree to offer it, so check your salary packaging policy first. If you leave the job, the lease doesn't disappear: the obligations come back to you unless a new employer agrees to take it on.
What goes into the package
A fully maintained lease bundles the finance and a budget for running costs into one deduction from your pay. A finance-only lease covers just the car. Typical items in a fully maintained package:
- Lease payments on the car (finance and interest)
- Fuel or electricity for charging
- Servicing, repairs and tyres
- Registration and compulsory third party insurance
- Comprehensive car insurance
- The provider's establishment and monthly management fees
How the tax works: pre-tax and post-tax
The finance company claims back the GST in the car's price (capped at 1/11 of the car limit, which is $69,883 for 2026–27), so it only finances the rest. Your employer claims GST credits on the lease payments and on running costs that include GST. That GST saving applies to every novated lease.
The rest of the saving comes from paying from pre-tax salary, and this is where petrol and electric cars part ways. A car your employer lets you use privately is a car fringe benefit. Under the statutory formula its taxable value is 20% of the car's base value each year, and FBT is charged at 47% on the grossed-up amount. To avoid it, providers have you pay that 20% from your after-tax pay (the employee contribution method), and only the remainder comes out before tax. An eligible electric car has no FBT, so the whole package can come from pre-tax pay.
| Electric car (FBT-exempt) | Petrol or hybrid (FBT applies) | |
|---|---|---|
| Package cost a year (lease, running costs; ex GST) | $13,498 | $13,498 |
| Paid from pre-tax salary | $13,498 | $4,407 |
| Paid from after-tax salary | $0 | $10,000 |
| Income tax and Medicare levy saved a year | $4,319 | $1,410 |
| Cost to take-home pay per fortnight | $353 | $500 |
| Residual owed at the end (incl. GST) | $14,065 | $14,065 |
| Estimated saving vs a car loan over 5 years | $27,895 | $8,804 |
The electric car FBT exemption
Private use of an eligible electric car is exempt from FBT, and so are its running costs such as registration, insurance, repairs and electricity. To qualify, the car must be a battery electric or hydrogen fuel cell car, first held and used on or after 1 July 2022, used by a current employee or their family, and luxury car tax must never have been payable on it. In practice that last test means its value at first retail sale was under the fuel-efficient luxury car tax threshold, which is $91,661 for 2026–27.
Plug-in hybrids stopped qualifying from 1 April 2025. A plug-in hybrid already on an exempt lease can keep the exemption while a financially binding commitment made before that date continues, but an optional extension, a change to the payments or residual, or a new employer ends it.
The exemption removes the tax, not the paperwork. Your employer still reports the benefit on your income statement as a reportable fringe benefits amount, grossed up at 1.8868. On a $50,000 electric car that's about $18,868 a year. You don't pay tax on it, but it counts in income tests such as the Medicare levy surcharge, the private health insurance rebate, study loan repayments, family assistance and child support.
The proposed changes from 1 April 2027
In the 2026–27 Budget the government announced it will phase the exemption down, and Treasury consulted on draft legislation in September 2026. It is not law yet. Under the proposal, leases committed to before 1 April 2027 keep the full exemption until the commitment ends, but refinancing, changing the residual or term, adding accessories or changing employer would end that protection.
| Lease committed | Base value up to $75,000 | Base value above that, up to the LCT threshold |
|---|---|---|
| Before 1 April 2027 | Full exemption until the lease ends | Full exemption until the lease ends |
| 1 April 2027 to 31 March 2029 | 100% FBT discount | 25% FBT discount (15% statutory rate) |
| From 1 April 2029 | 25% FBT discount (15% statutory rate) | 25% FBT discount (15% statutory rate) |
Can you get a novated lease on a used car?
Yes, many providers will lease a used car, usually within an age limit they set, and the tax works the same way. The catch is the electric car exemption: a used EV only qualifies if it was first held and used on or after 1 July 2022 and was under the luxury car tax threshold when first sold. An electric car that was on the road before July 2022 attracts FBT like any other car. Because used cars cost less, the residual and the tax saving are smaller in dollar terms.
What happens at the end of a novated lease?
When the lease ends you owe the residual, a lump sum set when you signed. The ATO expects it to be at least a minimum share of the car's cost: 65.63% for a 1-year lease, 46.88% for 3 years and 28.13% for 5 years. GST is usually added when you pay it. You can then:
- Pay the residual and keep the car
- Refinance the residual with a car loan or a new lease on the same car
- Sell the car, pay out the residual and keep (or make up) the difference
- Trade the car in and start a new novated lease on another car
What if you leave your job or the car is written off?
If you resign or are made redundant, the novation ends and the lease reverts to you. You keep making the payments, now from after-tax income, until a new employer agrees to take the lease on (if it offers salary packaging) or you pay it out. Paying out early can mean break costs, so ask what they would be before you sign.
If the car is written off, the insurer pays out its value and that goes towards the lease. If the payout is less than what you owe, you cover the gap. Some providers sell gap insurance for this; Moneysmart warns that add-on insurance sold with car finance is often poor value, so compare it with what your comprehensive policy already covers.
Is a novated lease a good idea?
It depends on the car, your salary and the quote. For an eligible electric car the numbers are usually strong: about $27,895 ahead of a car loan over 5 years in our example. For a petrol car the same example saves about $8,804, and on a $50,000 salary that falls to $9,135. Fees matter too: a $500 establishment fee and $15 a month in management fees trim the electric example from $27,895 to $26,950.
Moneysmart notes that salary packaging usually works best for people on middle to high incomes. A lease also ties the car to your job, commits you to a residual, and reduces the flexibility you'd have owning the car outright with a loan.
- Good fit: an eligible electric car, a middle or higher income, secure employment, and you'd keep the car for the lease term
- Weaker fit: a petrol car on a lower income, high provider fees, a quote with no disclosed interest rate, or a job you may leave soon
What to watch for
- Quotes that show only a per-pay deduction. Ask for the interest rate, every fee and the residual in writing, then compare with a car loan.
- Running-cost budgets are estimates. Unspent money is usually reconciled at the end of the lease, but ask how and when.
- The residual is a real debt. Plan how you'll pay, refinance or sell before you sign.
- An electric car's reportable fringe benefit can affect the Medicare levy surcharge, study loan repayments, child support and family payments.
- Refinancing, extending or changing a lease can end the protected EV exemption under the proposed rules.
- Add-on insurance sold with the lease is optional. Dealers and brokers must wait four days before selling add-on insurance.
Common questions
Is a novated lease a good idea?
For an electric car that qualifies for the FBT exemption, usually yes: in our $50,000 example it comes out about $27,895 ahead of a car loan over 5 years. For a petrol car the saving is much smaller and depends on your salary, the interest rate and fees. Get a written quote and compare it with a car loan at the same term.
What happens after 5 years of a novated lease?
You owe the residual, which on a 5-year lease is at least 28.13% of the car's cost plus GST. You can pay it and keep the car, refinance it, sell the car to pay it out, or trade in and start a new lease.
Can I get out of a novated lease early?
Yes, but it can cost you. You'd normally pay out the lease, including any break costs, or sell the car and cover any shortfall. If you change jobs, the lease reverts to you and you keep paying from after-tax income unless your new employer takes it on.
Are plug-in hybrids still FBT-exempt?
Not for new arrangements. Plug-in hybrids stopped being zero or low emissions vehicles for the exemption from 1 April 2025. One already on an exempt lease can stay exempt while a financially binding commitment made before that date continues.
Is the EV novated lease exemption ending?
The government has announced a phase-down from 1 April 2027, but it isn't law yet. Under the proposal, leases committed to before then keep the full exemption until they end; later leases on cars with a base value of $75,000 or less would still get a 100% discount until 31 March 2029, and a 25% discount after that.
Does a novated lease affect my home loan borrowing power?
Lenders count the lease payments as a commitment when they assess what you can borrow, and your pre-tax income is reduced. Tell the lender about the lease and give them your payslips showing the deductions.
General information only
This page explains how novated leases work under current law and the announced (not yet legislated) EV changes. It isn't tax or financial advice. For advice on your situation, speak to a registered tax agent. We don't recommend lease providers.
