How Does a Novated Lease Work?
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 EVs under the $91,387 threshold are fully FBT exempt when salary packaged, which can save you $5,000 to $10,000+ per year compared to an equivalent petrol vehicle. Combined with lower running costs (cheaper fuel and maintenance), an EV novated lease delivers the maximum possible savings.

See our complete guide to EV salary packaging for eligible vehicles and detailed savings comparisons.

Vehicle Sourcing

You can source the vehicle yourself from any dealer, or we can assist with vehicle sourcing and price negotiation. We have relationships with dealers across Australia and can often secure competitive pricing on your behalf. Whether you have already found the exact car you want or need help narrowing down your options, we are here to assist.

Step 2: Get a Novated Lease Quote — In Detail

Once you have identified the vehicle you want (or a shortlist of options), the next step is to get a novated lease quote. This is where the financial benefits become clear, and you can see exactly how much you will save through salary packaging.

What We Need From You

To prepare an accurate quote, we need the following information:

• 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 helps us budget running costs accurately
• Employer details — your employer’s name and whether they currently offer salary packaging
• Preferred lease term — typically 3 to 5 years (we can model different terms for comparison)

What You Receive in the Quote

Our novated lease quote includes a comprehensive 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)
• Total annual savings compared to buying the vehicle with after-tax income
• Residual (balloon) value at the end of the lease

We compare quotes from multiple novated lease providers to ensure you get the best rates and most comprehensive package. You can also use our online calculator for an instant estimate before requesting a formal quote.

Step 3: Employer Sets Up Salary Packaging — In Detail

For the novated lease to work, your employer needs to agree to the salary packaging arrangement and set up the payroll deductions. This 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 — we coordinate with the existing provider or payroll team to add your novated lease deductions. The employer simply needs to approve the arrangement and process the payroll changes.

If Your Employer Does Not Yet Offer Salary Packaging

If your employer does not currently have a salary packaging policy, we can help them set one up. We provide a template salary packaging policy, guidance on payroll system configuration, and information about the employer’s obligations and compliance requirements. Most employers are willing to establish salary packaging once they understand that it costs them nothing and is a valued employee benefit.

Read our employer guide for full details on setting up novated leasing from the employer’s perspective.

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. We prepare and manage the deed of novation on your behalf.

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

Once the finance is approved, the vehicle is purchased, and the deed of novation is signed, 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. 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 in a dedicated 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 and Enjoy Tax Savings — In Detail

With everything set up, you simply drive and enjoy the benefits of your novated lease. The tax savings happen automatically through your payroll — there is no extra paperwork or action required from you on an ongoing basis.

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. Many employees find that seeing the tax savings reflected in their payslip each period reinforces the value of the arrangement.

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 to continue enjoying the tax savings on a newer car. We guide you through the end-of-lease process well in advance so you have time to make the best decision.

Common Scenarios and Questions

What If My Employer Says No?

While most employers are open to novated leasing once they understand the arrangement, some may be hesitant. Common concerns include administrative burden, compliance risk, and unfamiliarity with salary packaging. We can speak directly with your employer or HR team to explain the process, address concerns, and demonstrate that the arrangement is cost-neutral and low-risk for the business. Our employer guide is also a useful resource to share with your HR department.

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 request a budget adjustment. This ensures your deductions remain aligned with your actual costs.

Ready to Start?

Now that you understand how a novated lease works, the next step is to get a personalised quote. Use our novated lease calculator for an instant estimate, or request a free quote with exact figures for your situation. Our team will guide you through every step of the process.