Novated leasing is one of Australia’s most tax-effective ways to finance a vehicle, yet many employees don’t fully understand how it works or whether it suits their situation. If you receive a salary from an employer who offers salary packaging, a novated lease could save you thousands of dollars every year — and Journey Finance can help you set one up through the right lender.
This complete guide covers everything you need to know about novated leasing in Australia, including how it works, who qualifies, the tax benefits, and what happens at the end of the lease term.
What Is a Novated Lease?
A novated lease is a three-way agreement between you (the employee), your employer, and a finance company. Your employer agrees to make lease payments on your behalf from your pre-tax salary, effectively reducing your taxable income. The arrangement covers the cost of the vehicle itself, as well as running costs such as fuel, insurance, registration, and servicing — depending on how the lease is structured.
The word “novated” refers to the transfer (or novation) of the lease obligation from you to your employer. If you change jobs, the lease typically reverts to you as a standard consumer lease, or your new employer may take over the payments — which is one of the key differences between a novated lease and a standard car loan.
How Does a Novated Lease Save You Money?
The primary financial benefit of a novated lease is the pre-tax salary deduction. Because your lease payments are made from your gross salary, you pay less income tax. Here’s a simplified example:
If you earn $90,000 per year and your novated lease payments are $10,000 per year, you would only be taxed on $80,000 of income rather than the full $90,000. At a tax rate of 34.5% (including Medicare levy), this could represent approximately $3,450 in annual tax savings.
In addition to income tax savings, you can also avoid GST on the purchase price of the vehicle — a saving of up to $5,000 on a $55,000 car — and on eligible running costs throughout the lease term.
The FBT Exemption for Electric Vehicles
Since April 2022, eligible battery electric vehicles and plug-in hybrid vehicles acquired through novated leases are exempt from Fringe Benefits Tax (FBT), provided they fall below the luxury car tax threshold. This is an extraordinary incentive that makes novated leasing an even more financially compelling option for employees considering an EV.
Without the FBT exemption, a novated lease on a petrol vehicle would typically involve an FBT liability calculated on the vehicle’s taxable value. With the exemption, employees can enjoy the full pre-tax salary deduction benefit without any FBT offset — significantly boosting the tax savings compared to a petrol vehicle lease.
Who Can Access a Novated Lease in Australia?
Any permanent full-time or part-time employee can access a novated lease, provided their employer offers salary packaging as part of their remuneration package. Novated leasing is particularly common in sectors such as healthcare, education, not-for-profit organisations, and government — where salary packaging is a standard employment benefit.
Casual employees and self-employed individuals are generally not eligible for novated leasing, as the arrangement requires an employer to make payments on the employee’s behalf. Self-employed people typically use a chattel mortgage or commercial hire purchase instead.
What Is Included in a Novated Lease Package?
A fully maintained novated lease (also called a fully packaged lease) typically includes:
- The vehicle purchase price (or finance repayments)
- Fuel or charging costs
- Registration and CTP insurance
- Comprehensive insurance
- Scheduled servicing and maintenance
- Tyres and wear items
By consolidating all of these costs into a single pre-tax deduction, employees find it much simpler to budget for their vehicle, and many report significant savings compared to managing these costs individually on an after-tax basis.
Novated Lease Terms and Residual Values
Novated leases in Australia typically run for one to five years. At the end of the term, you’ll have a residual value (also called a balloon payment) which is a percentage of the vehicle’s original value, as set by the ATO. The minimum residual percentages increase the longer the lease term.
At the end of the lease, you have three options: pay the residual and own the vehicle outright, re-lease a new vehicle, or sell the vehicle and use the proceeds to pay out the residual. The flexibility of these end-of-lease options is one of the most attractive features of novated leasing.
New vs. Used Vehicles on Novated Leases
While novated leases are most commonly associated with new vehicles, you can also novate a used vehicle — subject to certain age and condition requirements set by the lender. Most lenders prefer vehicles under five years old and with relatively low kilometres. The vehicle must also be registered in Australia and primarily used for personal or commuting purposes.
How Journey Finance Can Help You Set Up a Novated Lease
Setting up a novated lease involves coordinating between you, your employer’s payroll or HR team, and a finance provider. Our brokers at Journey Finance manage this entire process on your behalf, ensuring the paperwork is handled correctly and that you’re getting the most competitive rate available.
We work with a wide range of lenders who specialise in novated leasing and can compare products quickly to find the option best suited to your salary, vehicle preference, and lease duration. We’ll also model the financial outcomes for you so you can see exactly how much you’re likely to save before you commit.
Whether you’re interested in leasing a traditional vehicle or taking advantage of the EV FBT exemption, our team has the expertise to guide you through every step. Get in touch with Journey Finance today and ask about our novated leasing service.