How Does a Novated Lease Work in Australia?
A novated lease is a three-way arrangement between you, your employer, and a finance company. Your employer leases a car on your behalf and makes the repayments from your pre-tax salary — reducing your taxable income and, in turn, your income tax. The running costs (fuel, insurance, registration, servicing) are also bundled and paid pre-tax.
The result is a lower after-tax cost of running a car compared to buying with a car loan or using your own cash. The exact saving depends on your marginal tax rate — the higher your income, the greater the benefit.
What is FBT and how does it affect my lease?
Fringe Benefits Tax (FBT) is a tax your employer pays on non-cash benefits — including car leases — provided to employees. It's calculated at 47% on the taxable value of the benefit. Under the statutory formula method, 20% of the car's base value is treated as a taxable fringe benefit each year, regardless of kilometres driven.
In practice, your employer passes the FBT cost back to you as a post-tax deduction, which reduces the headline saving. Our calculator includes this automatically.
Are electric vehicles FBT exempt?
As of 2024–25, battery electric vehicles, plug-in hybrid electric vehicles, and hydrogen fuel cell cars priced below the luxury car tax threshold (~$89,332) are exempt from FBT when provided through a novated lease. This makes novated leasing exceptionally attractive for EV buyers — the FBT component that previously reduced the saving is eliminated entirely.
What happens at the end of the lease?
At lease end you have three options: pay the residual value and own the car outright, refinance the residual into a new lease, or hand the car back (subject to fair wear and tear). The ATO sets minimum residual percentages based on lease term — your novated lease provider will advise on the applicable rate.
Common Questions
What happens if I leave my job mid-lease?
If your new employer offers salary packaging, the novation agreement transfers across and your arrangement continues uninterrupted — this is the most common outcome. If your new employer does not participate, the lease reverts to a standard consumer finance agreement in your own name. You continue making repayments from post-tax dollars until the term ends, losing the FBT and GST benefits for that period. Some providers charge a novation transfer fee of $200–$400. Before signing a multi-year lease, check your employer's intention to maintain salary packaging and understand the break cost clauses in your specific lease document.
Can I novated lease any car?
Most new and used passenger vehicles qualify, including EVs and PHEVs which received full FBT exemption under legislation effective 1 July 2022 for eligible low-emission vehicles. Luxury Car Tax (LCT) applies above the ATO threshold ($89,332 in FY2025 for fuel-efficient vehicles; $76,950 for others), which inflates the car's cost but does not block a novated lease. Commercial vehicles like utes and vans may attract different FBT treatment depending on business use. Motorbikes and some specialty vehicles are typically excluded. Your salary packaging provider can confirm eligibility for a specific vehicle before you purchase.
Does a novated lease affect my home loan borrowing capacity?
Yes, and often more than people expect. Lenders treat the full novated lease payment as a financial commitment in their serviceability assessment, similar to a personal loan repayment. Additionally, because your pre-tax salary is reduced by the packaged amount, some lenders assess your income at the lower packaged salary rather than your gross salary, compounding the borrowing capacity reduction. If you are planning to apply for a mortgage within the next one to two years, speak with a mortgage broker before entering a novated lease — the timing of your lease start relative to your loan application can materially affect the outcome.
How does the Employee Contribution Method (ECM) reduce FBT?
Under the statutory formula method, FBT is calculated as 20% of the car's base value annually. The Employee Contribution Method allows you to make an after-tax contribution from your salary to offset the FBT liability dollar-for-dollar. This means you pay no FBT at all, but part of your lease benefit is funded post-tax. The ECM is most advantageous for employees in lower marginal tax brackets where the post-tax contribution is cheaper than the FBT would be at the employer rate (currently 47%). Your salary packaging provider will model both approaches and recommend the optimal split for your income level.
What happens to the balloon payment (residual) at the end of the lease?
The ATO prescribes minimum residual values based on the original cost and lease term — for a five-year lease the minimum residual is 28.13% of the original value. At lease end you have three choices: pay the residual and own the car outright (using savings or a separate car loan), roll the residual into a new novated lease on a replacement vehicle, or hand the car back to the financier subject to fair wear and tear. Rolling into a new lease is the most common approach and restarts the tax benefits. Note that the residual is a genuine liability — if the car's market value falls below the residual, you are still obligated to pay the full contractual amount.
Which novated lease provider should I use?
Major providers include RemServ, Smart Group (Smartleasing), Maxxia, SG Fleet, and Fleet Network. Your employer may have a preferred or exclusive provider as part of their salary packaging arrangement — check this first, as switching providers may not be permitted mid-lease. When comparing providers, look beyond the headline management fee: ask whether the running cost budget is adjusted at year end (a true-up avoids overspending or underspending), what the novation transfer fee is, and whether they offer a dedicated account manager. Independent comparison platforms can provide quotes from multiple providers simultaneously.