Novated Lease 101: How novated leasing works in Australia

A novated lease is a car finance arrangement between you, your employer, and a lease provider. Your employer makes the agreed lease payments from your salary through salary packaging, and those payments can often include running costs such as fuel, servicing, and insurance. While the payments are handled through payroll, the lease remains your responsibility, so it’s worth understanding how the arrangement works before you sign up. 


If you’re researching novated leasing for the first time, the main thing to know is that it can be a practical way to manage both car finance and ongoing vehicle costs in one place. For some people, that makes budgeting simpler. For others, the appeal is the potential tax treatment. The right fit depends on your income, your employer’s policy, the type of car you choose, and how comfortable you are with the structure. 

What is a novated lease?

A novated lease is a way to finance and run a car using your salary. You may also hear people call it salary packaging a car or salary sacrificing a car. Those terms are often used interchangeably, although salary packaging is the method and the novated lease is the actual legal arrangement.

In practice, you choose a vehicle and agree to a lease. Your employer then enters into a novation agreement so the lease payments can be made through payroll. You usually have full use of the car for personal use, and the arrangement can also cover selected running costs. At the end of the lease, ownership does not automatically transfer to you. If you want to keep the car, you will usually need to pay the residual amount.

 

Hyundai Palisade

How salary packaging works (pre-tax vs post-tax)

Salary packaging means some approved costs are paid from your salary before it reaches your bank account. In a novated lease, that can include part or all of the lease and certain running costs. In a novated lease, some costs may be deducted from your pre-tax salary, which can reduce your taxable income. Many arrangements also include post-tax contributions to manage fringe benefits tax (FBT), depending on how the lease is structured.


The easiest way to think about the day-to-day impact is this:

  • Your payslip changes
  • Your take-home pay is reduced
  • Your overall cost of running a car may change depending on tax treatment and usage

How a novated lease works (step-by-step)

The process generally follows a clear sequence. You choose a vehicle and request a quote that includes both lease repayments and estimated running costs. If you proceed, your employer agrees to the novation arrangement, allowing payroll to deduct the agreed amounts. Once finance is approved, the deductions begin through your salary. A budget is then set for the packaged running costs, and those funds are used as expenses arise. Over time, those estimates may be adjusted to better reflect your actual usage. To get started, you’ll usually need identification, recent payslips, a valid driver’s licence, and an estimate of how many kilometres you expect to drive each year.

Novate used car

What costs can be bundled

One of the main appeals of a novated lease is that it can combine the finance component and many of the ongoing car costs into one arrangement. Common inclusions are registration, insurance, servicing, maintenance, tyres, and fuel or EV charging. These costs are estimated upfront and built into your salary deductions, which can make them easier to plan for over the course of the lease. Because actual costs rarely match the estimate perfectly, many arrangements include periodic reconciliations. If you spend more than expected, your deductions may need to increase. If you spend less, you may have a surplus. The exact process varies between providers, so it is worth checking how adjustments are handled before you proceed.

Tax basics to know (GST + FBT)

GST

GST savings can form part of the appeal of a novated lease, particularly because eligible running costs such as servicing, tyres, insurance, and fuel or charging are often included in the arrangement. In simple terms, those costs may be paid in a more tax-effective way through salary packaging, which is one reason novated leasing can compare differently to paying for the same expenses out of pocket. There are limits on vehicle purchase-related GST benefits though, and the amount will depend on the car, the costs included, and how the arrangement is structured.

FBT

A novated lease is generally treated as a car fringe benefit, which means FBT rules apply. Many arrangements are structured to manage or offset this through a mix of pre-tax and post-tax contributions. The outcome depends on your salary, vehicle choice, and how the lease is configured. It’s not a uniform result across all situations. 

Electric vehicles and the FBT exemption

If you’re wondering about the potential benefits of an EV, it’s worth noting that eligible electric vehicles may receive concessional FBT treatment under current rules. At a high level, eligibility requires the vehicle to be first held and used after 1 July 2022, along with other ATO conditions. There has been a recent change affecting plug-in hybrids. From 1 April 2025, PHEVs are no longer treated as zero or low emissions vehicles for FBT purposes. This means they are generally not eligible for the same concessions as battery electric vehicles. Where price thresholds are relevant, these are tied to the ATO luxury car tax thresholds and should be checked for the applicable financial year. 

Novated lease pros and cons

Like any finance structure, a novated lease has trade-offs. The right question is whether it suits your circumstances.


Pros

A novated lease can make car costs easier to manage by bundling major expenses into one arrangement. For people who like predictability, that can be a genuine benefit. Instead of paying for registration, servicing, fuel, and insurance separately, those costs may be built into your regular deductions. There may also be tax advantages depending on your income and the way the lease is structured. In some cases, you may also gain access to fleet pricing or procurement channels.

Cons

Your take-home pay will usually reduce because part of your salary is being redirected to cover the vehicle and its running costs. This may work if the overall outcome suits you, but it does need to be understood upfront.

The structure can also feel more complex than a standard car loan. Tax treatment, running cost budgets, residual value, and employer participation all play a role. If your employment changes, the arrangement may need to be transferred, restructured, or unwound. Early termination costs and provider-specific processes can also add complexity.

What happens if you change jobs, take leave, or stop working

The lease remains your responsibility regardless of your employment status. If you change jobs and your new employer supports novated leasing, the arrangement may be transferred. If not, the lease is usually de-novated, which means you continue making the repayments directly without the salary packaging benefit.


If you take unpaid leave or stop working, payroll deductions stop but your repayment obligations do not. Some providers offer alternative payment arrangements, but this varies. Speak to your novated lease provider about this scenario to understand potential impacts from the start rather than later.


What happens at the end of the lease (residual value explained)

The residual value, sometimes called a balloon payment, is the amount left owing at the end of the lease if you want to keep the vehicle. It is a standard feature of lease structures and should be planned for well in advance.


At the end of the lease, you will usually have three broad options. You can pay the residual and take ownership of the car, refinance or extend the arrangement, or sell or trade the vehicle and use the proceeds to settle the residual.

Expertise handshake

The ATO provides guideline residual values commonly used in lease structures:


  • 1 year: 65.63%
  • 2 years: 56.25%
  • 3 years: 46.88%
  • 4 years: 37.5%
  • 5 years: 28.13%


The key point is that the regular deduction figure is only part of the story. The end-of-lease position matters too, so it is worth looking at the full lifecycle of the arrangement rather than focusing only on the short-term payment.

Novated lease vs car loan vs paying cash

A novated lease changes how you pay for and manage a car, not just how you finance it. Compared with paying cash, it spreads costs over time and introduces salary packaging and tax considerations. Compared with a car loan, it may change your cash flow through payroll deductions and can bundle running costs into the arrangement as well. 

 
Ownership works differently too. With a loan or a cash purchase, you generally own the car outright either immediately or once the loan is repaid. With a novated lease, ownership only passes once you pay the residual value at lease end. 

 
These options have pros and cons pending individual situations. Paying cash offers simplicity if you have the funds available. A car loan may feel more straightforward and flexible. A novated lease may suit someone who values bundled costs and the potential tax treatment. The better option depends on how you want to manage your money, how stable your employment is, and what kind of car costs you are comfortable carrying over time. 

FAQs

A novated lease is a three-party agreement where your employer deducts car-related payments from your salary and pays a lease provider. The obligation ultimately remains yours.

You select a car, obtain a quote, secure employer agreement, receive finance approval, and begin payroll deductions that cover both lease and running costs.

In practice, yes. Salary sacrificing or salary packaging describes the method, while a novated lease is the specific structure used for a car.

Often yes, though providers typically apply age and condition limits, especially at the end of the lease term.

Sometimes. This may be possible through a sale-and-lease-back arrangement, depending on provider criteria and employer policy.

No. You usually have the right to use it, with ownership transferring only if you pay the residual value at the end.

FBT rules apply, but many leases are structured to manage or offset it through contribution methods.

Your take-home pay generally decreases, as part of your salary is redirected. The overall outcome depends on tax treatment and total costs.

Lease repayments, registration, insurance, servicing, tyres, and fuel or charging are commonly included, depending on the arrangement.

Eligible electric vehicles may receive concessional treatment. Plug-in hybrids are no longer treated as zero or low emissions vehicles from 1 April 2025.

It is the amount remaining at the end of the lease if you want to keep the car. It is typically a significant lump sum.

You may transfer the lease if your new employer supports it. Otherwise, you continue repayments privately.

Repayments still apply even if salary deductions stop, though alternative arrangements may be available depending on the provider.

It can be, but not always. A fair comparison considers total cost, tax treatment, and end-of-lease outcomes.

It typically suits PAYG employees with stable employment who prefer structured budgeting and whose employer offers salary packaging.

The answer depends on several variables rather than a single outcome.


Income level and tax bracket influence how pre-tax deductions affect your position. Driving habits and running costs matter, particularly if you package fuel, maintenance, and other expenses.


Employment stability is a key consideration. If you expect to change jobs, the structure may become less convenient.


Some people value the administrative simplicity and bundled costs, while others prefer flexibility. Vehicle choice also matters, especially when comparing electric vehicles with petrol or diesel alternatives.