- A novated lease is a three-way agreement between an employee, their employer, and a finance provider.
- Lease repayments come from pre-tax salary, thereby reducing taxable income.
- Novated leases and car loans vary differently when it comes to tax, ownership, and flexibility.
- A fully maintained novated lease allows you to package all operating costs of your vehicle, whicle a non-maintaned novated lease only covers the cost of the lease (and sometimes FBT).
As investments go, buying a new car isn't great. It will set you back upwards of $40,000, and for the most part, can be relied upon to lose a good chunk of its value each year.
For many Australians though, leasing has become an attractive alternative to get their hands on the car they want without taking on a full loan for a rapidly depreciating asset.
Read also: Car depreciation rates and calculation
There are three main types of car leases in Australia: a novated lease, finance lease, and an operating lease. Finance and operating leases are primarily used by businesses, so for personal vehicles, a novated lease is the most common choice.
This guide breaks down what novated leases are, how they work, and whether they’re right for you.
What is a novated lease?
A novated lease is a three-way agreement between you, your employer, and a finance provider.
Here’s how it works:
- You choose a car and enter into a lease agreement with a finance provider.
- You then “novate” (transfer) this lease to your employer.
- Your employer makes the lease repayments directly to the financier from your pre-tax salary as part of a salary-packaging arrangement.
This structure makes a novated lease a type of fringe benefit, and as a result, incur fringe benefits tax (we'll get to that later) unless the vehicle qualifies for an exemption (e.g. certain EVs under current rules).
What's the key appeal of novated lease?
Since your employer makes the car payments from your pre tax salary, your taxable income will be significantly less, hence lowering your tax bill.
Work out your taxable income using Savings.com.au’s Income Tax Calculator.
Novated lease vs car loan
A novated lease and a traditional car loan both help you get behind the wheel without forking over a lump sum. However, they work differently when it comes to tax, ownership, flexibility, and long-term cost.
See the table below for a quick comparison.
Feature | Novated Lease | Car Loan |
Ownership | You don’t own it until you pay the residual | You own the car from day one |
Payments | Pre-tax | After-tax |
Tax benefits | Yes | None |
Running costs | Can be bundled | Paid separately |
FBT | Yes (with EV exemptions possible) | No |
Flexibility and restrictions | May come with kilometre caps and modifications may not authorised | No restrictions on use or modifications |
Job dependency | Must be employed with supportive player | Independent of employment |
Ownership
Novated lease
- You don’t own the car during lease, instead the finance company owns the vehicle.
- You can only own it by paying the residual (balloon payment) value at the end.
Car loan
- You own the car from day one, but the bank holds it as a security.
- Once the loan is repaid, it’s fully yours.
How it’s paid
Novated lease
- Payments come from your pre-tax salary (though sometimes there may be a small after-tax component), and therefore reduces your taxable income and lowers your income tax.
Car loan
- All payments are made from your after-tax income.
Tax benefits
Novated lease
- You may save thousands of dollars due to salary packaging.
- You may benefit from GST input tax credits via your employer.
Car loan
- No tax benefits for private buyers.
- GST is built into the purchase price and running costs.
Running costs
Novated lease
- You can bundle vehicle ownership costs like fuel, rego, insurance, tyres, servicing, and repairs and maintenance.
Car loan
- Running costs aren’t bundled, you budget and pay for them separately.
Fringe Benefits Tax (FBT)
Novated lease
- Considered a fringe benefit, and your employer is formally liable, but arrangements (i.e. after-tax contributions) may eliminate or reduce FBT.
Car loan
- No FBT involved as car loans are typically a straightforward personal finance arrangement.
Flexibility and restrictions
Novated lease
- May come with restrictions such as kilometre caps.
- If you change jobs, you either have to transfer the lease to your new employer or take over the payments personally (and therefore lose tax benefits).
Car loan
- Typically no restrictions on use, kilometres, or modifications.
- Not job dependent so changing jobs does not affect your repayments.
Early termination
Novated lease
- Ending a lease can be expensive; you typically have to pay the remaining lease payments + residual + potential fees.
- If you lose your job, the lease becomes a consumer lease paid from after-tax income.
Car loan
- You can usually pay the loan out early, though you may incur break fees.
In the market for a new car? If you’ve considered all factors and believe a car loan suits you, the table below features car loans with some of the lowest interest rates on the market.
| Lender | Car Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Interest Type | Vehicle Type | Maximum Vehicle Age | Ongoing Fee | Upfront Fee | Total Repayment | Early Repayment | Instant Approval | Online Application | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.94% p.a. | 7.07% p.a. | $579 | Variable | New | $8 | $400 | $34,749 |
| Promoted | Disclosure | |||||||||
5.67% p.a. | 6.10% p.a. | $575 | Fixed | New | $0 | $350 | $34,524 |
| Promoted | Disclosure | |||||||||
5.95% p.a. | 5.95% p.a. | $579 | Fixed | New | $0 | $0 | $34,757 |
| Promoted | Disclosure |
Savings.com.au’s two cents
Novated leases are a pretty complex subject and it’s important not to rush into one simply because they can deliver genuine tax savings.
Always consider the risks associated with leasing a car and weigh up whether financing through this option or any other way (car loan or saving for the full amount) is better. However, if you think you might be in a position where a novated lease is for you, discuss it with a financial adviser and your employer first.
What is fringe benefits tax (FBT)?
A fringe benefit is something extra, a non-cash perk provided by an employer (think car, gym membership, entertainment expenses, or private health cover). These perks don't always come for free, and employers are generally responsible for paying fringe benefits tax (FBT) on these at a rate of 47% of their taxable value, per the ATO.
However, your employer may be exempt up to a certain amount if they fall under these categories:
- Public hospitals, not-for-profit hospitals, and ambulance services enjoy FBT-exempt benefits up to $17,000 per employee.
- Public benevolent institutions and health promotion charities receive exemptions up to $30,000.
If your employer is subject to FBT, be aware that it might pass this expense on to you by paying you a smaller salary or be less inclined to give you a pay rise in future.
Even when the benefit is FBT-exempt, if the taxable value of certain fringe benefits you received (typically 20% of the base value of the car) in an FBT year* exceeds $2,000, the grossed-up taxable value may still appear as a reportable fringe benefit on your income statement, which may be included as assessable income for the purpose of calculating things like the Medicare levy surcharge (MLS), specific tax offsets, private health insurance rebates, or student loan repayments (e.g. HELP).
Gross up rates for the 2026 FBT include a Type 2 rate of 1.8868.
*FBT is obviously so straightforward the ATO decided to make things just a bit more confusing, by making it have a completely separate financial year to the normal financial year. The FBT year is April 1st to 31st March.
For any further tax information, check out the ATO’s page on fringe benefits tax or speak to a qualified tax professional.
FBT rules on EVs and PHEVs
You may be exempt from FBT, under certain conditions.
Battery electric vehicles (BEVs) and hydrogen fuel cell vehicles remain FBT‑exempt for the 2025-26 FBT year, provided their value is below the fuel‑efficient Luxury Car Tax (LCT) threshold.
- Quick note: Plug-in hybrids (PHEVs) lost FBT exemption for leases commencing 1 April 2025, except where the vehicle was already held/used prior to that date.
Types of novated leases
There are two main types of novated leases: fully maintained and non-maintained. This will normally be at your employers discretion, so could be out of your hands.
Fully maintained novated lease
This agreement allows you to package all the operating costs of your vehicle as part of your salary sacrifice agreement. Operating costs that can be packaged may include:
- Fuel
- Registration
- Services and maintenance
- Tyres
- Insurance
Of course, packaging all or some of these things into the agreement means you’ll have even less take-home pay. But this does take away the stress of having to incorporate any vehicle expenses into your weekly budget while also increasing your tax savings.
Non-maintained novated lease (finance-only)
Only the cost of your lease (and sometimes FBT) are packaged and can be deducted from your salary package. You cover running costs separately.
As an employee, this might not be in your best interests as you’re only getting a tax savings on your lease payments. But it does mean you’ll likely have a higher take-home pay.
What happens at the end of a novated lease?
There are several options available to you when it comes to the end of your lease:
- You can extend the lease on your existing car, which could be costly due to the car’s depreciation and fees associated with setting up another agreement.
- You can pay the residual value (balloon payment) to own the car outright.
- You can trade-in and start a new novated lease.
- You can sell the car after paying the residual.
Novated lease residual value (balloon payment)
At the end of your lease, you’ll face a residual value, which is the ATO‑mandated minimum value of the car. These percentages prevent leases being treated as disguised loans.
Term of lease | Minimum residual value |
Year 1 | 65.63% |
Year 2 | 56.25% |
Year 3 | 46.88% |
Year 4 | 37.5% |
Year 5 | 28.13% |
Source: ATO
Novated lease pros
- Tax savings. Lease payments come from your pre-tax salary which effectively reduces your taxable income.
- Flexible choice of vehicle and lease term. Employers and finance providers will generally be flexible on lease lengths so you could be driving the latest Audi every three years in theory.
- Bundled expenses simplify budgeting. If you’re in a fully maintained novated lease, you can have all of your vehicle expenses coming out of your pre-tax salary, which further lowers your taxable income.
- Transferable. If you change jobs at any point in your lease, you could simply enter into another novation agreement with your new employer (should they offer it).
- Potential GST savings. As you haven’t purchased the vehicle and the finance company is leasing it on your behalf, you avoid paying any GST.
- Stress-free repayments. Bundling all the payments into one sum, which is deducted before you’re even paid, removes the stress of accounting for your vehicle in your budget.
Novated lease cons
- You don’t own the car unless you pay the residual. This also means you can’t claim it as an asset for financial purposes.
- Driving restrictions. Your employer might restrict you to a certain number of kilometres per year (e.g. 20,000 km) as a way of reducing wear and tear.
- Job dependent. If you lose your job your novated lease will become a consumer lease and will have to pay it from your post-tax salary, losing the tax break that made this arrangement attractive. This will also be the case if you take your lease to a new employer and they don’t offer salary sacrifice.
- Interest rates and fees can be costly. The interest rates and fees on novated leases can often be higher than a standard car loan.
- More expensive in the long run. If you lease a car for an extended period of time, it could work out more expensive than just buying the car outright.
