The three-party structure
A novated lease is an arrangement involving three parties: you (the employee), your employer, and a finance company. Here is how they connect:
- The finance company purchases the car and leases it to your employer
- Your employer leases the car to you under a novated lease agreement
- Your employer deducts the lease repayments from your pre-tax salary and pays the finance company
The word "novated" refers to the act of novation — transferring the financial obligations of the lease from you to your employer. Your employer becomes the party legally responsible for the lease payments. This is what allows the payments to be made from pre-tax salary. If you leave your job, the lease is typically transferred back to you personally, or novated across to your new employer if they also offer salary packaging.
Unlike a hire purchase or chattel mortgage, the vehicle does not appear as an asset on your personal balance sheet during the lease. You have full personal use of the car — it is not restricted to business use — but the legal ownership sits with the finance company during the lease term.
How salary sacrifice reduces your income tax
The financial benefit of a novated lease comes entirely from salary sacrifice. When your employer deducts your lease payments before calculating your income tax, your taxable income drops. Because Australian income tax is progressive — higher income is taxed at higher rates — every dollar of salary sacrifice saves you the marginal tax rate that applies at the point of sacrifice.
Here is a concrete example. Suppose you earn $95,000 per year and salary sacrifice $20,000 toward a novated lease (covering finance repayments and all running costs). Your taxable income drops from $95,000 to $75,000. At ATO 2025–26 rates, income between $45,001 and $135,000 is taxed at 32.5% plus the 2% Medicare Levy — a total marginal rate of 34.5%. That $20,000 sacrifice saves you $6,900 in income tax per year, effectively meaning the government contributes 34.5 cents toward every dollar you put into the lease.
In addition, your employer claims the GST credit on the vehicle purchase — since they are the legal buyer. That GST (1/11th of the car's price) is effectively returned to you through the overall lease cost. On a $62,000 car, that is a $5,636 one-off benefit in year one, on top of the ongoing income tax saving.
Fringe Benefits Tax — the complication for petrol cars
If salary sacrifice reduced your tax with no offset, employers could use it to avoid tax on any kind of benefit. The Australian Tax Office prevents this with Fringe Benefits Tax (FBT). When your employer provides you with a car as part of a salary packaging arrangement, the car is classified as a fringe benefit, and your employer is technically liable to pay FBT on it.
For cars, the ATO uses the statutory formula method: the FBT taxable value is 20% of the car's base price per year. On a $62,000 car, that is $12,400 in FBT value. This is then grossed up and taxed at 47% (the top marginal rate), creating a real FBT cost to your employer — which gets passed back to you through the lease structure.
In practice, employees eliminate this FBT cost using the Employee Contribution Method (ECM): you make post-tax contributions to offset the FBT taxable value. Every dollar of post-tax ECM contribution reduces the FBT value by the same amount, bringing FBT to zero. But those ECM contributions come from your after-tax income, directly reducing your net benefit. The result: petrol car novated leases save substantially less than the headline salary sacrifice figure suggests.
Why EVs are the best novated lease choice in 2025–26
In 2022, the Australian Government passed the Treasury Laws Amendment (Electric Car Discount) Act, which exempts eligible battery electric vehicles (BEVs) and hydrogen fuel cell vehicles from FBT entirely. This removes the ECM problem described above. For eligible EVs, the entire salary sacrifice — finance repayments plus all running costs — comes from pre-tax income with no post-tax contribution required.
To qualify for the FBT exemption, the vehicle must meet three conditions:
- It must be a battery electric vehicle (BEV) or hydrogen fuel cell vehicle — not a plug-in hybrid
- The vehicle's value must be at or below the luxury car tax threshold for fuel-efficient vehicles ($91,387 for 2025–26)
- It must be first held and used on or after 1 July 2022
Plug-in hybrid vehicles (PHEVs) were briefly included in the exemption but lost it from 1 April 2025. From that date, PHEVs are treated the same as petrol vehicles for FBT purposes. The calculator on this site applies the exemption automatically based on vehicle type.
The practical effect is substantial. A $62,000 EV on a novated lease at a $95,000 salary delivers roughly $12,000–$13,000 in year-one savings (income tax + GST). A $62,000 petrol car in the same situation delivers roughly $5,000–$7,000 once ECM contributions are netted out. The EV advantage is real, not marginal.
What running costs can you bundle in?
One of the key benefits of a novated lease over a simple car loan is that you can include running costs in the salary sacrifice, not just the finance payments. The following costs can be included in your pre-tax budget:
- Comprehensive insurance
- Registration and CTP insurance
- Fuel or home/public charging costs (electricity)
- Scheduled and unscheduled servicing
- Tyres (replacement, rotation, repair)
- Roadside assistance membership
What you cannot include: personal accessories not fitted to the vehicle, modifications after purchase (with some exceptions), parking fines, tolls, and the cost of a home EV charger unit itself (though electricity used for charging can be included). Provider admin fees are typically charged separately and are not included in the pre-tax package.
Your lease provider manages a running cost budget on your behalf. They pay bills as they fall due — insurance renewals, registration, servicing invoices — from your pre-tax pool. If you underspend the budget in a year, the surplus rolls forward. If you overspend, you top up from your own pocket. Setting an accurate budget upfront is important; use realistic estimates for servicing and tyres in particular.
Who is eligible for a novated lease?
Novated leasing is available to any Australian employee who is paid on a PAYG (Pay As You Go) basis and whose employer participates in salary packaging. This covers most employees of private companies, government departments, universities, public hospitals, and not-for-profit organisations.
Self-employed individuals, sole traders, and company directors who pay themselves via dividends cannot access novated leasing in the same way — the tax benefit depends on reducing PAYG taxable income, which requires being an employee. If you operate through a company structure and take a salary, that salary qualifies; it is the dividends that do not.
Employees of charities classified as Public Benevolent Institutions (PBIs) receive an enhanced benefit: an annual FBT exemption cap of $15,900 applies to salary packaging, meaning a larger portion of their package is FBT-free before the novated lease benefit even begins. Hospital and health employees at eligible employers have a separate cap of $9,010. These employees often receive the largest overall savings from novated leasing.
If your employer does not currently offer salary packaging, the setup cost to them is typically zero — most payroll providers can implement it at no charge, and many employers are happy to do so when asked. It is worth raising with your HR team before assuming it is unavailable.
How much can you realistically save?
Savings vary by salary, car price, and vehicle type. As a rough guide at ATO 2025–26 rates, using a 3-year lease on a $62,000 EV:
Year one is always the best year because the one-off GST saving on the vehicle purchase (1/11th of price) is added to the income tax saving. In years two and three, only the income tax saving continues. See our full salary bracket breakdown for exact figures across every income level.
How to set up a novated lease — step by step
- Confirm your employer participates — ask your HR or payroll team whether salary packaging (specifically novated leasing) is offered. If not, ask whether they would consider adding it.
- Choose your car — use our calculator to estimate savings for specific vehicles. If possible, choose an eligible EV under the $91,387 LCT threshold.
- Get quotes from 2–3 providers — compare interest rates and admin fees. Both vary significantly. A provider charging $800/year more in admin fees offsets a meaningful portion of the tax saving.
- Request a formal cost disclosure — ask each provider for a full breakdown: interest rate, admin fees, GST treatment, running cost budget, and total fortnightly cost.
- Sign the agreements — your provider coordinates the novation agreement with your employer's payroll team. This typically takes 1–2 weeks.
- Order the car — your provider purchases the vehicle and registers it. For EVs, you typically order directly with the manufacturer (e.g., Tesla) and provide the order details to your provider.
- Salary sacrifice begins — once the car is delivered, the fortnightly deduction starts appearing in your payslip under "salary packaging."
Key questions to ask any novated lease provider
Provider quality varies enormously. Before signing, get written answers to these questions:
- What is the interest rate, and is it fixed or variable?
- What annual administration fee do you charge?
- Are there any establishment or exit fees?
- Do you use your own insurance policy, or can I arrange my own?
- Which service centres are in your approved network?
- What happens to my lease if I change employers?
- Can I adjust my running cost budget mid-lease if costs change?
- How do you handle end-of-lease balloon payments?
Common mistakes to avoid
Ignoring administration fees
Many employees focus on the interest rate and overlook annual admin fees. On a 3-year lease, a provider charging $1,000/year in fees costs $3,000 more than one charging $200 — potentially wiping out months of tax savings. Always compare the total cost, not just the rate.
Underestimating running costs
If you set a running cost budget that is too low, your provider will ask you to top up from your own pocket when bills arrive. EVs in particular have higher tyre wear (heavier vehicles) and occasional unexpected costs like 12V battery replacement. Budget conservatively — unused funds roll forward, but shortfalls require a personal out-of-pocket payment.
Misunderstanding the residual payment
At the end of a novated lease, you owe the ATO minimum residual — 46.88% of the original car price for a 3-year lease. On a $65,000 car, that is $30,472 due at lease end. You must either pay this (to own the car outright), refinance it into a new lease term, or trade the car in and apply any equity toward a new vehicle. Many first-time lessees underestimate this balloon payment. It is not a surprise cost, but it is a substantial one.
Choosing too long a lease on an EV
EV technology is improving rapidly. A 5-year lease on today's EV may leave you locked into an older vehicle as superior models become available. The lower monthly payment of a longer lease comes at the cost of flexibility. For most EV lessees, a 3-year term balances cost and the ability to upgrade when the market improves.
Not getting multiple quotes
Many employees accept the first provider their employer suggests. Employers often have a preferred provider relationship, which may not reflect the best deal for you. You are generally free to use any accredited provider, not just the one HR recommends. Getting 2–3 quotes takes one afternoon and can save thousands over the lease term.