Novated lease: how it works, savings and the EV FBT exemption

What Is a Novated Lease?

A novated lease is a salary packaging arrangement that allows Australian employees to pay for a vehicle and its running costs using their pre-tax salary. It is a three-way agreement between you (the employee), your employer, and a finance company. The word “novation” refers to the legal process of transferring the lease obligation from you to your employer for the duration of your employment.

Under this arrangement, your employer deducts the total lease cost, including the vehicle finance repayment and budgeted running costs, directly from your gross salary before tax is calculated. This means you pay for your car with dollars that have not yet been taxed, effectively reducing your taxable income and delivering real savings every pay cycle.

Novated leases have been a popular salary packaging benefit in Australia for decades, and they became far more attractive from July 2022, when a Fringe Benefits Tax (FBT) exemption for eligible electric cars took effect. For a battery-electric car below the threshold, on a typical professional income, our worked comparison puts the saving against a straight car loan at about $4,000 to $8,000 a year.

How Does a Novated Lease Save You Money?

Novated leases deliver savings through three mechanisms, each of which reduces the effective cost of owning and running your vehicle compared to buying a car with after-tax income.

1. Income Tax Savings

Because the lease payments and running costs are deducted from your pre-tax salary, your taxable income is reduced. The higher your marginal tax rate, the more you save. For example, if you earn $120,000 a year and a fully exempt EV package totals $15,000, your taxable income drops to $105,000. At the 30% marginal rate plus the 2% Medicare levy, that is an income tax saving of about $4,800 a year.

2. GST Savings

When you buy a car normally as an individual, you pay the full GST (10%) on the purchase price. With a novated lease, the finance company claims the GST credit on the vehicle purchase and passes the saving to you through lower lease payments. This applies to both the purchase price and all running costs arranged through the lease. On a $50,000 vehicle, the GST saving on the purchase price alone is approximately $4,545 over the life of the lease.

3. The FBT Exemption for Electric Vehicles

Battery-electric and hydrogen fuel cell cars with a value at or below the luxury car tax fuel-efficient threshold ($91,387 for 2025-26 and $91,661 for 2026-27) are exempt from Fringe Benefits Tax when salary packaged. That removes the post-tax employee contributions a petrol or diesel car needs to cover FBT, so the whole package comes out of pre-tax pay. Plug-in hybrids lost the exemption from 1 April 2025 unless the car was already under a financially binding commitment before then.

The exemption now has an end date in draft law. Treasury's exposure draft, released in September 2026 and not yet passed, keeps the full exemption for commitments made before 1 April 2027. From 1 April 2027 to 31 March 2029 it stays in full only for cars with a base value of $75,000 or less, with a 25% discount above that; from 1 April 2029 every eligible EV gets the 25% discount only. Existing leases keep their treatment for their term. Our draft law explainer works through what it means.

Who Can Get a Novated Lease?

Novated leases are available to PAYG employees whose employer agrees to offer salary packaging. You do not need to be a permanent full-time employee, many employers extend novated leasing to part-time and fixed-term contract staff as well. The key requirements are:

• PAYG employment, you must receive a regular salary from an employer (sole traders and contractors paid on invoices are not eligible)
• Employer participation, your employer must agree to set up the salary packaging arrangement and make deductions from your pay
• Credit approval, the finance company will assess your ability to service the lease based on your income, employment history, and credit profile
• Vehicle eligibility, new or used vehicles are eligible, though used cars typically need to be under 5 years old at lease commencement

Novated Lease vs Buying Outright vs Car Loan

Understanding how a novated lease compares to other ways of acquiring a vehicle helps you decide which option suits your circumstances. The novated lease vs car loan guide works through the after-tax comparison in detail.

What Vehicles Can Be Novated Leased?

You can novated lease virtually any passenger vehicle in Australia, there is no restriction on make or model. This includes sedans, SUVs, utes, hatchbacks, and even some light commercial vehicles used for personal transport. Both new and used vehicles are eligible, though used vehicles typically need to meet age requirements set by the finance provider (usually under 5 years old at lease start).

For the FBT exemption, the car must be battery-electric or hydrogen fuel cell and valued at or below the fuel-efficient luxury car tax threshold. Popular battery-electric choices include the Tesla Model 3 and Model Y, BYD Atto 3, Hyundai Ioniq 5, Kia EV6 and MG ZS EV, provided the model and accessories you choose come in under the threshold.

The Novated Lease Process: How to Get Started

Getting a novated lease is straightforward. The process typically takes one to two weeks from initial enquiry to driving your new car. Here is an overview of the steps involved:

Want a detailed walkthrough of each step? Read the step-by-step guide to how a novated lease works.

Understanding Fringe Benefits Tax (FBT)

Fringe Benefits Tax is a tax paid by employers on certain benefits provided to employees, including the private use of a salary-packaged vehicle. For conventional petrol and diesel vehicles, FBT is typically managed through the Employee Contribution Method (ECM), where you make post-tax contributions from your salary to offset the FBT liability. This reduces but does not eliminate the overall savings of a novated lease.

For eligible electric vehicles, the FBT exemption means no post-tax contributions are required, and the full lease amount (including all running costs) comes from pre-tax salary. This is why EVs deliver significantly higher savings than conventional vehicles under a novated lease.

Read the FBT guide for novated leasing to understand the different valuation methods and how to minimise your FBT.

Novated Leasing for Electric Vehicles

The FBT exemption for electric vehicles has transformed the economics of novated leasing. For a battery-electric car below the threshold, the whole package comes out of pre-tax pay, and our worked comparison puts the saving against a straight car loan at about $4,000 to $8,000 a year on a typical professional income. As a petrol or diesel car at the same price usually works out cheaper on a car loan, the EV exemption is now what makes most novated leases worth doing.

Explore the EV salary packaging guide for eligible vehicles, savings comparisons, and popular EV choices.

For Employers: Novated Leasing as a Staff Benefit

Offering novated leasing is one of the simplest ways to enhance your employee value proposition at little cost to your business. The salary packaging arrangement is cost-neutral to the employer (the deductions come from the employee’s salary), and administration is minimal once a packaging provider is set up.

Novated leasing helps attract and retain talent, particularly in competitive industries where salary packaging is expected. It is especially valued by employees looking to salary package an electric vehicle under the FBT exemption.

Read the employer guide to novated leasing for setup steps, compliance obligations, and how to choose a packaging provider.

End of Lease Options

When your novated lease term ends, the residual falls due. The ATO's guideline residual for a car leased for five years is 28.13% of its cost, and GST is added when you pay it. You then have several options:

• Pay the residual and own the car, the residual value (also called the balloon payment) is set at the start of the lease based on ATO guidelines. Pay this amount and the car is yours outright.
• Refinance the residual, if you do not want to pay the residual in a lump sum, you can refinance it into a new loan or lease.
• Start a new novated lease, trade in or sell your current vehicle and start a fresh novated lease on a new car, continuing the tax savings.
• Return the vehicle, in some arrangements, you may be able to return the vehicle to the finance company, though this is less common with novated leases than operating leases.

For an EV, refinancing or starting a new lease is a new commitment under the draft law, so the rules in force on that date apply.

Common Misconceptions About Novated Leases

There are several myths and misunderstandings about novated leasing that can prevent people from taking advantage of this salary packaging benefit. Here are the facts:

• “I do not own the car”, While the finance company holds title during the lease, you have full use of the vehicle and own it outright once you pay the residual at the end of the lease term. It functions similarly to a car loan in this regard.
• “It is only for expensive cars”, Novated leases work for vehicles at any price point, and the EV exemption only applies below the threshold.
• “I am locked in if I change jobs”, You can transfer the lease to a new employer, take over payments personally, or pay out the lease early. You are not trapped.
• “The employer pays for my car”, The employer does not pay anything. The payments come entirely from your salary. The employer simply facilitates the salary packaging arrangement.
• “It is always cheaper than a car loan”, Not for a petrol or diesel car, where FBT usually tips the after-tax comparison towards the loan. Compare the full-term after-tax cost of both.

Why Use a Specialist for Your Novated Lease?

You can arrange a novated lease directly through your employer's salary packaging provider. Using a specialist can help with:

• More than one quote, comparing providers' rates, fees and inclusions rather than taking the first offer
• The tax picture, how the FBT treatment, the ECM and the reportable fringe benefit apply to your situation
• Employer coordination, working with your employer's payroll team and packaging provider
• The car price, checking the price in the lease against what you could buy the car for yourself
• A car loan comparison, so you can see whether the lease actually beats a loan after tax