What is a novated lease?
A three way deal where your employer pays for your car out of your pay before tax.
It can cut the tax on your pay, and an eligible electric car is free of fringe benefits tax for now, though that may change.
The rule
- The ATO describes a novated lease as a three way agreement between an employer, an employee and a novated lease provider. The employer takes on the repayments under the lease, and a matching deduction is made from the employee's pay. The car is privately owned by the employee but is treated as if it were a company car.
- Under a full novation the employer makes the lease payments and guarantees the residual value of the car at the end of the lease. Under a split full novation the employer makes the payments but the employee keeps the residual value duty.
- The deed of novation usually hands the lease back to the employee if the employee leaves the job, so a new novated lease can be started with a new employer.
- A car provided by a novated lease is a fringe benefit, which gives the employer a fringe benefits tax (FBT) bill. The ATO says that bill can be reduced if the employee makes after-tax payments.
- You cannot claim running costs for a car you use under a novated lease or salary sacrifice, because you do not own or lease it.
- Salary packaging uses part of your pay before tax. Moneysmart's example is a $100,000 salary packaged as $85,000 income and $15,000 car expenses.
- An eligible electric car is exempt from FBT, including under salary packaging, but the benefit is still reportable. It must be zero or low emissions and first held and used on or after 1 July 2022. Plug-in hybrids have not counted since 1 April 2025. The Government will review the exemption by mid-2027.
- The Budget announces that the exemption will change to a permanent 25% FBT discount for eligible electric cars over $75,000 from 1 April 2027, and for all eligible electric cars from 1 April 2029. Cars costing up to $75,000 would keep the full exemption if the arrangement starts before 1 April 2029.
What people ask
What is a novated lease?
A three way agreement between you, your employer and a lease provider. Your employer takes on the lease payments and takes them out of your pay. You still own the car privately, but the tax system treats it like a company car.
Is a novated lease worth it?
That depends on the price, the rate, the fees, the lump sum at the end and your pay, so there is no one answer. The model above shows the tax effect and the lump sum. It leaves out fees and the FBT on a car that is not an exempt electric car.
What happens to a novated lease if I leave my job?
The ATO says the deed usually passes the lease back to you when you stop working for that employer. You can then set up a new novated lease with a new employer.
What is a residual or balloon payment?
It is the value the car is set to have at the end of the lease. The monthly payments do not pay it off, so a lump sum is still owing at the end. Under a full novation the employer guarantees it. Under a split full novation you do.
Are electric cars exempt from fringe benefits tax?
The rule today is yes for an eligible electric car, but the benefit still has to be reported. The Budget proposes a 25% discount instead for cars over $75,000 from 1 April 2027. That is not law yet.