How does a novated lease work?
A step-by-step guide

Step 1: Choose Your Vehicle, In Detail

The first step in the novated lease process is deciding which vehicle you want to salary package. Unlike some vehicle finance arrangements, a novated lease does not restrict your choice, you can select any passenger vehicle, new or used, from any manufacturer or dealer in Australia.

New vs Used Vehicles

Both new and used vehicles are eligible for novated leasing. New vehicles offer the full range of manufacturer warranties and the latest features, while used vehicles can provide better value with lower purchase prices. For used vehicles, most finance providers require the car to be under 5 years old at the start of the lease and under 10 years old at the end of the lease term. The GST saving on a used vehicle only applies if the seller is GST-registered (typically a dealer, not a private seller).

Electric vs Conventional Vehicles

If you are considering a novated lease, an electric vehicle deserves serious consideration. Since 1 July 2022, eligible battery-electric cars under the fuel-efficient threshold ($91,661 for 2026-27) are FBT exempt when salary packaged, which our worked comparison puts at about $4,000 to $8,000 a year against a car loan on a typical professional income. Combined with lower running costs (cheaper fuel and maintenance), an EV is usually where a novated lease saves the most.

See our complete guide to EV salary packaging for eligible vehicles and how the exemption works.

Vehicle Sourcing

You can choose the car at any dealer. If the provider offers to source the car for you, compare its price with a drive-away quote you get yourself: a marked-up car price or high fees can eat the tax saving.

Step 2: Get a Novated Lease Quote, In Detail

Once you have chosen the car (or a shortlist), the next step is a quote from a novated lease provider. If your employer has a provider or a panel of providers, start there. A novated lease specialist can also gather quotes for you.

What the Provider Needs From You

To prepare an accurate quote, the provider needs:

• Vehicle details, make, model, variant, and the quoted drive-away price (or the vehicle you are considering)
• Your annual salary, gross salary before tax and any other salary sacrifice arrangements
• Pay frequency, weekly, fortnightly, or monthly (this determines your per-pay deduction)
• Estimated annual kilometres, this sets the running-cost budget
• Employer details, your employer’s name and whether they currently offer salary packaging
• Preferred lease term, typically 3 to 5 years (ask for more than one term to compare)

What a Quote Should Show

A novated lease quote should give a full breakdown of:

• Pre-tax salary deduction per pay cycle
• Post-tax contribution (if applicable for non-EV vehicles)
• Running cost budget breakdown (fuel, insurance, rego, servicing, tyres, roadside assist)
• GST saving on vehicle purchase and running costs
• Income tax saving per year
• FBT impact (or confirmation of FBT exemption for EVs)
• The provider’s fees, and the interest rate on the finance
• Total annual savings compared to buying the vehicle with after-tax income
• Residual (balloon) value at the end of the lease

Compare more than one quote, and compare the lease with a car loan: for a petrol or diesel car, the after-tax comparison usually favours the car loan. You can use the online calculator for an estimate before you ask for a quote. If you would like quotes gathered from more than one provider and set against a car loan, get connected with a novated lease specialist.

Step 3: Employer Agreement and Finance Approval, In Detail

For the novated lease to work, your employer needs to agree to the salary packaging arrangement and set up the payroll deductions, and the financier needs to approve your application. The employer step is often simpler than employees expect, especially if the employer already offers salary packaging for other benefits.

If Your Employer Already Offers Salary Packaging

Many medium and large employers in Australia already have salary packaging policies and relationships with salary packaging providers. In this case, the setup is straightforward: the provider works with your employer’s payroll team or its salary packager to add your novated lease deductions. The employer approves the arrangement and makes the payroll changes.

If Your Employer Does Not Yet Offer Salary Packaging

Your employer will need to agree to salary sacrifice and set up the deductions, usually by appointing a novated lease provider or salary packager. The arrangement does not cost the business the car, because the payments come from your salary, but the employer does take on the paperwork, the payroll deductions and FBT reporting.

Share the employer guide with your HR or payroll team: it explains what the employer signs, what payroll does and how FBT is reported.

Finance Approval

The financier assesses your application on your income, employment history and credit profile. If it approves, it pays for the car and owns it during the lease, and your lease payments go to it.

The Deed of Novation

The core legal document in a novated lease is the deed of novation, a three-way agreement between you, your employer, and the finance company. This deed formally transfers (or “novates”) the lease obligation from you to your employer for the duration of your employment. The deed specifies the salary deduction amounts, what happens if you leave the employer, and the rights and obligations of each party. The provider prepares the deed; you, your employer and the financier sign it.

Step 4: Lease Payments Deducted from Pre-Tax Salary, In Detail

Once the finance is approved and the deed of novation is signed, the financier pays for the car and the salary packaging begins. Here is how the ongoing deductions work:

Pre-Tax Deductions

Each pay cycle (weekly, fortnightly, or monthly), your employer deducts the agreed novated lease amount from your gross salary before calculating income tax, and passes it to the provider. This deduction covers the vehicle finance payment plus the budgeted running costs, all excluding GST (the GST saving is passed to you through lower lease payments). Because the deduction reduces your taxable income, you pay less income tax.

Post-Tax Deductions (Non-EV Vehicles)

For conventional petrol and diesel vehicles, FBT applies to the private use of the salary-packaged vehicle. This is typically managed through the Employee Contribution Method (ECM), where a post-tax deduction is also made from your salary to offset the FBT liability. The post-tax contribution is calculated to equal the FBT taxable value, effectively reducing the employer’s FBT to nil. This post-tax component reduces the overall savings of the novated lease (compared to EVs where no post-tax contribution is required).

Running Cost Account

The running cost portion of your deduction is held by the provider in a running cost account. When you incur actual expenses, filling up with fuel, paying an insurance renewal, having the car serviced, the costs are paid from this account. At the end of each FBT year (31 March), the running cost budget is reconciled. If there is a surplus (you spent less than budgeted), the balance may be refunded or rolled over. If there is a shortfall, an adjustment may be required.

Step 5: Drive the Car, In Detail

With everything set up, you drive the car and the tax saving comes through your payroll each pay. Beyond claiming running costs from the provider, there is little ongoing paperwork for you.

What Changes in Your Day-to-Day?

Very little. You drive the car as your own personal vehicle with no restrictions on usage. The key differences compared to owning a car outright are:

• Your payslip shows the pre-tax and (if applicable) post-tax novated lease deductions
• Your take-home pay is lower, but your total cost of motoring is significantly reduced due to the tax savings
• Running costs (fuel, insurance, rego, servicing) are paid from your running cost account rather than out of pocket
• You submit running cost receipts or claims to the novated lease provider for reimbursement from your running cost account

Monitoring Your Savings

You can track your savings and running cost account balance through the novated lease provider’s online portal or app. This gives you visibility over your deductions, account balance, and upcoming expenses.

End of Lease Options

When the lease term ends, you have several options: pay the residual to own the car outright, refinance the residual into a new loan, start a fresh novated lease on a new vehicle, or (in some arrangements) return the vehicle. Most people either pay out the residual or start a new lease on a newer car. Ask the provider for the residual amount and your options a few months before the end of the term, so you have time to decide.

Common Scenarios and Questions

What If My Employer Says No?

Some employers are hesitant at first, usually about the administration, compliance or unfamiliarity with salary packaging. Share our employer guide with your HR or payroll team: it explains what the employer signs, what payroll does, how FBT is reported and how to choose a provider. If your employer still says no, a car loan is the alternative, and for a petrol or diesel car it is usually the cheaper one after tax.

What If I Am on a Fixed-Term Contract?

Fixed-term contract employees can access novated leasing, though the lease term is typically aligned with the remaining contract period. If your contract is extended or you move to a permanent role, the novated lease can continue. If the contract ends, the lease obligation reverts to you personally, and you can transfer it to a new employer or manage it independently.

What If I Want to Change My Running Cost Budget?

Running cost budgets are typically reviewed annually. If your driving habits or circumstances change significantly during the year (for example, a change in commute distance or a move to a different state affecting registration costs), you can ask the provider to adjust the budget. This keeps your deductions in line with your actual costs.

Ready to Start?

Use the novated lease calculator for an estimate, then get a written quote from a novated lease provider and compare it with a car loan before you sign. If you would like help gathering and comparing quotes, get connected with a novated lease specialist.