Novated leasing explained: how it works and what to check

What is a novated lease?

It's a three-way agreement between you, your employer and a financier. The financier funds the car, and your employer agrees to make the lease payments on your behalf, deducting them from your pay as part of a salary packaging arrangement.

The key point: you can only have a novated lease if your employer offers one. It's an employee benefit, not something you can set up on your own, so the first step is always to check with your employer or their salary packaging provider.

Finance-only or fully maintained

Novated leases generally come in two styles:

• Finance-only (non-maintained): the payments cover the car and the finance. You pay fuel, servicing, tyres, rego and insurance yourself.
• Fully maintained: expected running costs are estimated and bundled into your regular deductions, then drawn on as bills come in. Budgeting is simpler, but check how the estimates are set and what happens to any surplus or shortfall.

Where the potential savings come from

Part of the appeal is that some or all of the payments can come out of your pay before income tax, which may reduce your taxable income. How much difference that makes depends on your income, the car, your employer's arrangements and fringe benefits tax (FBT), so the real outcome varies a lot from person to person.

Electric cars are worth a specific mention. Under ATO rules, eligible zero or low emissions cars provided to employees, including through salary packaging, can be exempt from FBT, as long as conditions are met, such as the car being first held and used on or after 1 July 2022 and luxury car tax never having been payable on it. Plug-in hybrids generally stopped qualifying from 1 April 2025, apart from some existing binding arrangements. The exempt benefit is still reportable. Check the current rules on the ATO website and with your employer before relying on this.

The trade-offs to understand

A novated lease isn't automatically the cheaper option. Things to weigh up:

• A residual (balloon) is payable at the end of the lease if you want to keep the car, or you can refinance it or start a new lease
• Administration or management fees can be built into the payments
• If you leave your job, the lease usually reverts to you, unless a new employer agrees to take it on
• The payments come out of your salary every pay, so they need to fit your budget long term
• The lease has its own rules, so read the contract carefully before you sign

Novated lease or car loan?

For some people, a straightforward car loan is simpler and more flexible, particularly if you might change jobs, want to own the car outright from the start, or your employer doesn't offer salary packaging. For others, a novated lease stacks up well. The only way to know is to compare the total cost of each option on the same car, over the same period, based on your own circumstances.

General information only

This article is general information only. It does not take your personal circumstances into account and is not personal credit, legal, tax or financial advice. Novated lease outcomes depend on your income, your employer's salary packaging arrangements and current tax and FBT rules. Speak with your employer, their salary packaging provider and your accountant before deciding. All finance is subject to lender assessment and approval.

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