Novated leases explained: how they work, FBT, EVs and the pros and cons
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. Our novated lease calculator runs the numbers for your own salary and car.
This guide explains what goes into the package, how novated lease FBT works, the GST savings, the electric car exemption, the pros and cons, who benefits most, what happens at the end of the lease or if you change jobs, and how to decide between leasing and buying.
By Better Rate Mate Editorial Team · Last reviewed
General information only. It doesn't take into account your objectives, financial situation or needs. Check the lender's key facts sheet, credit guide and TMD before you apply. We don't compare every lender, and we may earn a commission if you apply through our links.
See what a lease would cost your take-home pay, and how it compares with a car loan or paying cash.
Novated lease calculatorWhat 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
Novated lease FBT: how the tax works
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.
This is where petrol and electric cars part ways. The pre-tax part of the package lowers your taxable income; the post-tax part doesn't. The larger the post-tax contribution, the smaller the saving. Our salary sacrifice car calculator works out the split for your own salary and car.
| Electric car (FBT-exempt) | Petrol or hybrid (FBT applies) | |
|---|---|---|
| Package cost a year (lease, running costs; ex GST) | $13,530 | $13,530 |
| Paid from pre-tax salary | $13,530 | $4,439 |
| Paid from after-tax salary | $0 | $10,000 |
| Income tax and Medicare levy saved a year | $4,329 | $1,420 |
| Estimated saving vs a car loan over 5 years | $27,962 | $8,871 |
GST savings on a novated lease
GST savings apply to every novated lease, petrol or electric. Under a full novation the finance company claims back the GST in the car's purchase price, capped at 1/11 of the car limit, so it finances only the rest. The car limit for 2026-27 is $69,883, which caps the GST credit at about $6,353; on a $50,000 car the credit is $4,545.
Your employer also claims GST credits on the lease payments and on running costs that include GST, such as fuel, servicing and insurance, so the package is priced ex GST. Registration and compulsory third party insurance don't include GST, so there's no credit on those.
The electric car FBT exemption, in short
Private use of an eligible electric car is exempt from FBT, so the whole package, running costs included, can come from pre-tax pay. To qualify, the car must be a battery electric or hydrogen fuel cell car, first held and used on or after 1 July 2022, and luxury car tax must never have been payable on it, which means its value at first retail sale was under the fuel-efficient threshold ($91,661 for 2026-27). Plug-in hybrids stopped qualifying for new arrangements from 1 April 2025. The exempt benefit still shows on your income statement as a reportable fringe benefit.
The government has announced a phase-down for leases committed to from 1 April 2027, but it isn't law yet. Our guide to the EV novated lease covers every test, the luxury car tax threshold by year, used EVs and the proposed changes, with a checker for your car, and the EV novated lease calculator shows what the exemption is worth on your salary.
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.
Novated lease pros and cons
The trade-off is a tax saving, largest on an eligible electric car, against a lease that's tied to your job and ends with a lump sum.
Pros
What a lease can do that a loan can't:
- Part or all of the package comes out of pre-tax pay, so you pay less income tax. On our $50,000 electric car example that's about $4,329 a year.
- GST credits on the car's price (up to the cap) and on running costs that include GST.
- Running costs are budgeted and paid for you from each pay, which smooths out big bills such as registration and insurance.
- For an eligible electric car, no FBT, so the whole package can be paid before tax.
Cons
The biggest downside is that the lease is tied to your job. The others are the lump sum at the end, fees that can eat the tax saving, and the cost of getting out early:
- It's tied to your job. If you resign or are made redundant, the lease reverts to you and the payments come from after-tax pay until a new employer takes it on or you pay it out.
- The residual is a real debt: at least 28.13% of the car's cost, plus GST, at the end of a 5-year lease, paid in one lump sum.
- Fees and the interest rate can cancel much of the tax saving, especially on a petrol car. In our example a $500 establishment fee and $15 a month in management fees cut the electric car's saving from $27,962 to $27,016.
- An electric car's reportable fringe benefit (about $18,868 a year on a $50,000 car) counts in income tests such as the Medicare levy surcharge, study loan repayments, child support and family payments.
- Getting out early costs money: you pay out the lease, including any break costs, or sell the car and cover any shortfall.
- Running-cost budgets are estimates, reconciled at the end of the lease, so you may get a refund or a bill.
Who benefits most from a novated lease?
Someone leasing an eligible electric car, on a middle or higher income, in a secure job, who'd keep the car for the lease term. The tax saving grows with your marginal tax rate: in our $50,000 petrol example the saving against a car loan is about $8,871 on a $100,000 salary but $9,204 on $50,000. Moneysmart notes that salary packaging usually works best for people on middle to high incomes.
It suits people least if they may change jobs soon, want nothing owing at the end, or would be leasing a petrol car on a lower income with high provider fees.
Should you lease or buy?
Price the same car three ways before you decide: on a novated lease, on a car loan and paying cash. Which comes out cheapest depends mostly on the type of car, your tax rate and how secure your job is. The novated lease calculator prices all three on the same car.
| Your situation | Price these first | Why |
|---|---|---|
| An eligible electric car, a middle or higher income and a secure job | A novated lease, against cash | No FBT, so the whole package comes from pre-tax pay |
| A petrol or hybrid car | Cash or a car loan, against a lease | A large part of the package has to come from after-tax pay to cancel the FBT |
| A lower income | A car loan or cash | The lower your tax rate, the less a lease saves |
| You may change jobs soon | A car loan or cash | A lease reverts to you when you leave, and the payments then come from after-tax pay |
| You want nothing owing at the end | A car loan with no balloon, or cash | A lease ends with a residual to pay, refinance or sell the car to clear |
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 $27,962 ahead of a car loan over 5 years in our example. For a petrol car the same example saves about $8,871, and on a $50,000 salary that falls to $9,204. 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
General information only. It doesn't take into account your objectives, financial situation or needs. Check the lender's key facts sheet, credit guide and TMD before you apply. We don't compare every lender, and we may earn a commission if you apply through our links.
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 $27,962 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.
Is FBT payable on a novated lease?
On a petrol, diesel or hybrid car, FBT would apply to your private use, so providers structure the lease to remove it: you pay an amount equal to the car's taxable value (20% of its base value a year under the statutory formula) from after-tax pay. On an eligible electric car no FBT is payable.
How do you avoid paying FBT on a novated lease?
Most leases use the employee contribution method: part of the package is paid from your after-tax salary, equal to the car's taxable value, which reduces the FBT to nil. That's why less of a petrol car's package comes from pre-tax pay. An eligible electric car doesn't need it.
Is novated leasing a good option to benefit your taxes?
It lowers your taxable income by the pre-tax part of the package, so the higher your tax rate, the bigger the saving. The saving is largest for an eligible electric car, which can be paid entirely before tax. Weigh it against the interest rate, fees and the residual, and remember the reportable fringe benefit on an EV counts in some income tests.
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.
What is the biggest downside to leasing a car?
For a novated lease, the tie to your job: if you leave, the lease reverts to you and the payments come from after-tax pay unless a new employer takes it on. The residual at the end, provider fees and the cost of getting out early are the other big ones.
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.