Novated lease employer guide: offering salary packaging to your team

Why Offer Novated Leasing to Your Employees?

Novated leasing lets your employees pay for a car and its running costs from pre-tax salary, which lowers their taxable income. Salary packaging has long been standard practice in the public sector, health and education, and private employers can offer it too.

The EV FBT exemption has made it worth more to employees. For a battery-electric car under the threshold ($91,661 for 2026-27), our worked comparison puts an employee’s saving against a car loan at about $4,000 to $8,000 a year on a typical professional income. Draft law released in September 2026 would narrow the exemption for commitments from 1 April 2027.

The business does not pay for the car: the payments come out of the employee’s salary. What the employer takes on is administration (signing each deed of novation, running the deductions and FBT reporting) and, under the deed, the lease payments while the employee works for you, funded from their salary. The deed should say that this ends when their employment ends.

How to Set Up Novated Leasing for Your Organisation

Here are the steps for HR managers, payroll teams and business owners, and who does each one:

What the Employer Signs: the Deed of Novation

Each novated lease has a deed of novation, a three-way agreement between the employee, the employer and the financier. It transfers the employee’s lease obligations to you while they work for you, sets out the deduction amounts, and says what happens if their employment ends. The provider prepares the deed; you, the employee and the financier sign it.

Before you sign, check that the deed:

• Limits your obligation to passing on the agreed deductions while the person works for you
• Ends the novation, and hands the lease back to the employee, when their employment ends
• Says how and when you must tell the provider that an employee is leaving

What Payroll Does

Pre-Tax Deductions

Each pay, payroll deducts the agreed amount from the employee’s gross salary before working out tax. It covers the finance payment and the running-cost budget, excluding GST, and goes to the provider on the schedule the provider sends you. Payroll does not work out the amounts; the provider does.

Post-Tax Deductions and the Employee Contribution Method

For a car that is not exempt from FBT, part of the package is usually paid from the employee’s after-tax pay as an employee contribution. Under the statutory formula, the car’s taxable value is 20% of its base value for a full year, less any employee contribution, so a contribution of that amount reduces the taxable value, and the FBT, to nil. This is the employee contribution method (ECM). Payroll takes the contribution from net pay and passes it to the provider with the pre-tax amount.

An eligible battery-electric car is exempt from FBT, so it needs no employee contribution: the whole package comes out of pre-tax pay.

Payroll Tax

In most Australian states and territories, novated lease deductions are subject to payroll tax as they form part of the employee’s total remuneration. However, the treatment varies by jurisdiction, and some states provide exemptions or concessions for salary-packaged vehicles. Confirm the payroll tax treatment with your accountant or your state revenue office.

Superannuation

Check how your employment agreements treat super on salary-packaged amounts. Some work out super on the salary before salary packaging, so the employee’s super is not reduced; others work it out on the salary after it. Make sure your agreements are clear and that you meet the Superannuation Guarantee either way.

FBT Reporting, and Who Calculates It

FBT is the employer’s tax. When you provide a car for an employee’s private use under a novated lease, you are liable for any FBT on that benefit, not the provider or the employee.

Your provider or salary packager will normally work out the figures: the car’s taxable value, the employee contribution needed and, for an exempt electric car, the notional taxable value. In the ATO’s own salary sacrifice example, it is the salary packaging provider that does this calculation. Ask what the provider will send you each year and check it before you rely on it, because the FBT return and the reporting are yours.

The FBT year runs from 1 April to 31 March. If you have FBT to pay, the return is due by 21 May, or later if a tax agent lodges it.

Reportable Fringe Benefits

Even when there is no FBT to pay, the benefit may have to be reported. If an employee’s reportable fringe benefits for the FBT year are more than $2,000, you report a grossed-up amount through Single Touch Payroll for the income year ending on the following 30 June. That includes an FBT-exempt electric car: you work out its notional taxable value and report it. Where employee contributions reduce a petrol or diesel car’s taxable value to nil, there is nothing to report for that car.

The reportable amount is not part of the employee’s assessable income, but it counts in income tests for some government benefits and obligations, so let employees know to expect it.

When an Employee Leaves

Under a typical deed of novation, the novation ends with the employment and the lease goes back to the employee. Check the termination clause in each deed. When someone with a novated lease leaves, you:

• Tell the provider the employee’s last day
• Stop the deductions from the final pay, and process any final deductions or adjustments the provider gives you
• Include the car benefit up to the last day in your FBT figures
• Report their reportable fringe benefits as usual; if they leave between 1 April and 30 June, you report them in the next income year, even if there are no wages to report

The provider deals with the employee about their options: moving the lease to a new employer that offers salary packaging, taking over the payments from after-tax income, refinancing, or paying the lease out. Once the final deductions are processed, the employer has no further part in the lease.

How to Choose a Novated Lease Provider

You can appoint one novated lease provider or salary packager, or a panel of several so employees can compare quotes. Whichever you choose, compare providers on:

• Panel or single provider, a single provider is simpler to run; a panel gives employees a choice and lets them compare prices
• Fees, what each employee pays (establishment fees, ongoing management fees and any margin on the car, insurance or finance) and whether the employer pays anything
• Reporting, per-employee FBT figures each year, the notional taxable value for exempt electric cars, and deduction schedules in a format your payroll system takes
• Support, who answers employees’ questions, how departures are handled, and how complaints are dealt with
• Finance, which financiers the provider uses, and whether employees can see the interest rate and compare it with a quote from elsewhere

Questions to Ask a Provider

• What exactly does the employer sign, and what does the deed say happens when an employee leaves?
• What fees are in each employee’s package, and do you charge the employer anything?
• Do you receive commissions from financiers, insurers or car dealers, and do you show them in the employee’s quote?
• Which financiers do you use, and will the quote show the interest rate?
• How do you work out the employee contribution for a car that is not FBT exempt?
• What will you send us for the FBT return and for Single Touch Payroll reporting, and when?
• How are running-cost budgets reconciled each year, and what happens to a surplus or a shortfall?
• Who answers employees’ questions, and how quickly?

Novated Leasing for Small Businesses

Small businesses often assume that novated leasing is only for large organisations, but this is not the case. Businesses of any size can offer novated leasing, and it lets a small business offer a benefit larger employers offer without paying for the cars itself.

For small businesses, the key considerations are:

• Payroll system capability, make sure your payroll system can process pre-tax and post-tax salary sacrifice deductions
• Salary packaging policy, you need a written policy; ask your provider or adviser for a template and have it reviewed
• Employee eligibility, the employee must be a PAYG employee with enough income to meet the financier’s lending criteria
• No minimum number of employees, the tax rules set no minimum, so you can offer it to one employee or your whole team; ask providers whether they set one

How to Promote Novated Leasing to Your Team

Once novated leasing is set up, tell your employees clearly what it is and what it is not. Some ways to do it:

• Company-wide announcement, introduce the benefit and how to contact the provider, and keep any comment on savings general, because they depend on the car, the employee’s income and the FBT treatment
• Information sessions, ask your provider whether it runs sessions for staff
• Onboarding materials, include novated leasing information in your new employee onboarding pack so new hires are aware of the benefit from day one
• Calculator access, share a link to the novated lease calculator so employees can estimate their own savings
• A fair comparison, point employees to the novated lease vs car loan comparison: for a petrol or diesel car, a car loan is usually cheaper after tax