Novated Lease Pros and Cons

What is a novated lease in Australia?

A novated lease is a way to finance a car without taking out a traditional car loan, instead making the payments from your-pre tax salary.

“Novated leasing is an increasingly popular and efficient way to finance a car that’s approved by the ATO and has been around for decades,”  National Automotive Leasing and Salary Packaging Association (NALSPA) CEO Rohan Martin tells Canstar. “With employer support, workers can pay less tax by using their pre-tax income to cover vehicle lease payments and running costs. By taking out a novated lease, workers could save thousands of dollars, and benefit from the budgeting tool of predictable, regular payments instead of facing large upfront costs.”

Cars purchased under a novated lease allows an employee to effectively avoid paying the Goods and Services Tax (GST) on the purchase price and most ongoing running costs, as the finance provider or employer, being GST-registered, can claim input tax credits. That said, it’s crucial to note that if the employee chooses to purchase the vehicle at the end of the lease term, the residual value (or balloon payment) is subject to GST, and this component cannot be salary packaged.

Novated leases are considered a ‘fringe benefit’ from your employer and are subject to Fringe Benefits Tax (FBT), with some key exemptions for eligible electric vehicles.

How does a novated lease work?

The steps to setting up a novated lease are typically as follows:

1. Choose a vehicle: Generally speaking, you can get a novated lease on a new or used car, or even a car you already own. Whatever car you choose, though, it’s worth keeping in mind that certain tax exemptions are only available for EVs.
2. Choose a novated lease provider: There are various banks and lenders in Australia that provide novated leases, and your employer may already work with one of these.
3. Set up a salary sacrifice arrangement: If your employer is happy to work with your chosen lender, then you arrange for your employer to deduct a portion of your pre-tax salary and pay it directly to the novated lease provider.
4. Consider extras you’d like included: In addition to car repayments, you can also salary sacrifice the running costs of your car, meaning that fuel, registration, servicing and roadside assistance can also come out of your pre-tax salary.
5. Commence the lease: Once your novated lease is up and running, your employer will make payment direct to the provider, from your salary. Your pay packet will be smaller, but this will also mean your taxable income is smaller at tax time.
6. Reevaluate when your lease is up: The average novated lease term in Australia is around four years, according to Martin. When your term is up, you’ll need to speak to your lender about your options for renewing the lease, purchasing the car or trading to a new vehicle.

How much can you borrow for a novated lease?

The value of the car you can acquire through a novated lease will vary, depending on your pre-tax salary and the finance provider, but Martin tells Canstar that the average car value for a novated lease is close to $50,000. As a guide to the range you might expect, Novated Lease Australia indicates that the minimum vehicle value for a novated lease is typically between $5,000 and $10,000. While the upper limit will be dependent on your salary, they note that novated lease agreements can exceed $100,000 but rarely get higher than a value of $150,000.

What happens if you leave your job during a novated lease?

If you leave or are let go from a job and you have a novated lease, the responsibility for making your car payments still rests with you. If you do not have another job lined up, or your new employer will not allow you to continue with a novated lease, then your current agreement can be de-novated.

When a lease is de-novated, this means that the agreement will be unbundled, any running costs like servicing and roadside assistance will be removed, and you’ll be required to make repayments yourself, as you would with a standard car loan.

If you find a new job with an employer who is happy for you to enter into a salary sacrifice agreement, then your lease can be re-novated. If you move from one job to the next and both employers allow salary sacrifice, you may even be able to transition your novated lease seamlessly. It’s important to check with your lender to find out if this is possible.

What are the benefits of a novated lease?

Tax savings through pre-tax salary deductions: One potentially appealing aspect of a novated lease is that the reduction in your pre-tax salary can allow you to save come income tax time.

GST savings on vehicle purchase: When a car is purchased for a novated lease from a registered dealer, the finance provider pays the GST component and is able to claim it back as a tax credit. This effectively means the employee avoids paying GST on the car’s purchase price, leading to potential savings.

It’s important to note, though, that if the employee chooses to purchase the vehicle at the conclusion of the lease term, the residual value (or balloon payment) is subject to GST. This particular GST component cannot be salary packaged and must be paid out-of-pocket by the employee.

Potential fringe benefits tax (FBT) exemptions: A novated lease counts as a fringe benefit, and these are currently taxed at the very high rate of 47% of their value, but the federal government allows fringe benefits tax exemptions for certain zero or low emissions vehicles. Purchasing a qualifying vehicle could help you avoid this tax.

Bundled vehicle expenses: When you opt to salary sacrifice for your vehicle, you can bundle a variety of running costs into the agreement. That everything from fuel and registration to servicing can come out of your salary, allowing the convenience of a single pre-tax payment that covers a variety of expenses, and is also GST-free.

What are the potential drawbacks of a novated lease?

Liability if employment ends: A novated lease is tied to you, not your employer, so if you leave a job while you have one, you will still be required to meet your repayment obligations. Typically, the lease will be ‘de-novated’ and converted to a standard car loan, on which you’ll need to make regular repayments, losing the benefits of your novated lease. You can, however, re-novate a lease if your next employer allows.

Residual value obligations: If you have arranged to purchase a vehicle at the end of your lease term, then the residual value is the amount that you’ll need to pay – this is sometimes known as a balloon payment. For a shorter lease period, it can be very high – per the ATO, the minimum residual value of a car after a one-year lease is 65.63% of its original value. Keep in mind that you can also choose to trade your car in, or renew your lease if you don’t wish to purchase.

Impact on take-home pay: While a novated lease can lower your taxable income for the year, one fairly clear disadvantage of this is that you’ll have less cash in your pocket with each pay. You’ll need to think carefully about your financial situation and whether the benefits of having your car payments (and associated expenses) deducted from your salary is worth the reduction in take-home pay.

Getting suitable insurance coverage: Your novated lease provider may have a default insurance company they prefer to work with which may not be the best value option. It’s likely that you’ll be able to choose another insurer but this could add an administrative burden in that you will need to pay the premiums with your take home pay and then seek reimbursement from the novated lease provider.

Likewise, your novated lease provider may recommend guaranteed asset protection (GAP) insurance, also known as motor equity insurance, to protect you if your car is written off during the lease term. The Australian Government’s MoneySmart cautions to consider whether you need add-on insurance of this type, and notes that you are not required to purchase it. Ensure you read the fine print and understand exactly what it is you’re buying.

Potential for limited choice of providers: While there are a variety of novated lease providers on the market in Australia, you may find that your employer has a preferred provider that they do business with. If they have an exclusivity arrangement with this provider, then you won’t be able to shop around for the provider of your choosing, and may be stuck with a less competitive option.

Unlocking savings: how a novated lease can benefit you

Considering a new car? A novated lease could be a smart financial move, potentially putting thousands of dollars back in your pocket compared to a traditional car loan. Let’s break down a hypothetical scenario to illustrate the potential savings.

Imagine you’re looking to purchase a $50,000 (including GST) vehicle, driving approximately 15,000 km annually, and your annual salary before tax is $80,000. Over a five-year lease term with an 8.00% annual interest rate (chosen as an illustrative example – the rate you’ll be offered will depend on your financial circumstances and your provider), here’s how a novated lease stacks up against a standard car loan:

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Important Disclaimer: The figures in this table are illustrative estimates only, not financial advice, quotes, or guaranteed savings. Actual savings vary based on individual circumstances, employer policies, interest rates, vehicle choice, and provider terms. Consult a qualified independent financial advisor and obtain formal quotes before making financial decisions. These estimates assume a $50,000 vehicle purchase, $80,000 annual salary, 15,000 km driven annually, a 5-year lease at 8.00% interest, a $29 monthly lease management fee, and estimated annual running costs of $2,531.25 for fuel, $364.29 for tyres, $450.00 for maintenance, and $1,500.00 for insurance & rego. The non-novated lease finance includes an equivalent balloon payment, with differences primarily due to upfront GST savings on the vehicle purchase with the novated lease.

As you can see, in this example, a novated lease could lead to an estimated saving of over $11,900 over the five-year period. This translates to approximately $2,385 in savings per year, or about $45.73 per week.

A key reason for these savings lies in the tax benefits. With a novated lease, a portion of your car and running costs can be paid for directly from your pre-tax salary, reducing your taxable income. For instance, in this scenario, your taxable income is reduced from $80,000 to $76,573.83 with a novated lease. This also leads to a reduction in income tax and Medicare paid.

How do novated leases for EVs work?

Novated leases for EVs work in the same way as they do for other vehicles in Australia, with the key difference being that you may be entitled to a FBT exemption for certain models. According to the ATO, you won’t be required to pay FBT on a car that meets the following eligibility conditions:

• The car must be a zero or low-emissions vehicle
• The car must be held and used for the first time after July 1, 2022
• The car is used by an employee or their associates
• Luxury car tax has never been payable on the vehicle.

It’s important to note that a zero-emissions vehicle is classified as a battery electric vehicle or a hydrogen fuel-cell vehicle. While Plug-in Hybrid Electric Vehicles (PHEVs) were FBT exempt until April 1, 2025, after this date, they are no longer eligible for the FBT exemption and will be subject to FBT like internal combustion engine (ICE) cars.

Put in place by the government to encourage the purchase of electric vehicles, this tax incentive has seen a spike in interest for novated leases in the EV space. Wholesale aggregator Local Motor Group (LMG) noted that they saw a 65% year-on-year rise in novated lease referrals for EVs in March 2025.

“The EV FBT exemption through novated leasing has been a key driver of electric vehicle uptake in Australia,” Martin tells Canstar.  “[NALSPA estimates] that around half of all new electric passenger vehicles and SUVs are supported by the FBT exemption and novated leases.”

Martin says that the tax exemption has also served to make EVs more affordable for working Australians, while helping reduce transport emissions and grow the second-hand EV market. “However, with EV adoption in Australian still remarkably low by global standards, the policy will need to continue to play a role in electrifying our car fleet for many more years to come,” he says.

Has the end of the FBT exemption for plug-in hybrids hurt their sales in Australia? While it’s still early to fully assess, Martin says that “there would be materially more on our roads if the exemption were still in place, especially as working motorists who need larger vehicles or who may be hesitant to move to an electrified vehicle, now lack the additional incentive required to make the transition.”

EV vs petrol: A comparison of novated lease savings

The FBT exemption for eligible Electric Vehicles can dramatically increase your savings through a novated lease. Let’s compare our previous petrol car scenario with an equivalent electric vehicle, assuming both have a $50,000 purchase price and an $80,000 annual salary over a five-year term at an 8.00% interest rate, covering 15,000 km annually.

While some running costs differ (e.g., electricity vs. fuel, and generally lower EV maintenance), the most significant factor driving the increased savings for the EV is the FBT exemption. This means that unlike the petrol car example where a post-tax contribution (ECM) was needed to offset FBT, no such contribution is required for the eligible EV, allowing more of the car’s costs to be paid from pre-tax income.

← Mobile/tablet users, scroll sideways to view full table → 

Important Disclaimer: The figures in this table are illustrative estimates only, not financial advice, quotes, or guaranteed savings. Actual savings vary based on individual circumstances, employer policies, interest rates, vehicle choice, and provider terms. Consult a qualified independent financial advisor and obtain formal quotes before making financial decisions. These estimates assume a $50,000 vehicle purchase, $80,000 annual salary, 15,000 km driven annually, a 5-year lease at 8.00% interest, and a $29 monthly lease management fee. For the petrol car, estimated annual running costs include $2,531.25 for fuel, $364.29 for tyres, $450.00 for maintenance, and $1,500.00 for insurance & rego, with a $10,000 post-tax contribution (ECM) to offset FBT. For the electric vehicle, estimated annual running costs include $810.00 for electricity, $375.00 for tyres, $250.00 for maintenance, and $1,800.00 for insurance & rego, with no FBT payable due to its exempt status. Both non-novated lease finances are structured to include an equivalent balloon payment, with finance differences primarily due to upfront GST savings on the vehicle purchase and income tax savings with the novated lease.