A novated lease pays for your car before the tax, not after it.
It's a three-way arrangement between you, your employer and a financier. Your car — finance plus running costs — comes out of your salary as one deduction, and part of it is taken before income tax is worked out. Fringe Benefits Tax applies to the arrangement, and eligible electric cars can be FBT-exempt. Here's how the mechanics actually work, in plain terms.
Where the car cost comes out: before tax vs after tax.
The whole point of salary packaging is when the money leaves your pay. Buy a car the normal way and you pay income tax on your full salary first, then buy and run the car from what's left. Under a novated lease, the packaged portion is deducted before income tax is calculated — so tax is worked out on a smaller taxable income.
Illustrative mechanic only — not a quote, a promise of savings, or personal advice. Figures use a hypothetical $100,000 gross salary and a hypothetical $12,000/yr packaged amount purely to show how pre-tax deduction works; they do not compute your income tax and they are not the amount you would keep. Your actual outcome depends on your salary, your employer's policy, the way the package is structured and the FBT method used. This is general information, not tax or financial advice — confirm with your accountant, a registered tax agent and your employer. FBT applies at 47% on the grossed-up taxable value of a car fringe benefit; under the statutory formula the taxable value is 20% of the car's base value.
Three parties, one agreement — that's the "novation".
A novated lease exists because responsibility for the lease is transferred ("novated") from you to your employer while you work there. Three parties, each with a role:
You
You choose the car and use it. You agree to a lease and take the benefit of packaging its cost through your pay while you're employed.
Your employer
Your employer agrees to make the lease and running-cost payments from your salary — part before tax, part after — and handles the FBT. If you leave, the novation ends and the lease obligations revert to you.
The financier
A lender or leasing company owns the vehicle and provides the lease. At the end of the term you can pay the residual and keep the car, refinance it, or trade it in.
What happens if you change jobs
Because the arrangement depends on your employer, leaving or changing jobs matters. The novation lifts off your employer, and the lease responsibility comes back to you. You can usually keep the car and either novate the lease to a new employer who offers packaging, or continue the payments yourself until you do.
Employer policies, residual values and the pre-tax/post-tax split all vary. General information only — confirm the specifics with your employer, payroll and a registered tax agent.
Finance and running costs, bundled into a single pay deduction.
A big part of the appeal is budgeting: instead of juggling separate bills across the year, a fully maintained novated lease rolls the finance repayment together with the car's estimated running costs into one regular amount from your pay. Under the Employee Contribution Method, some of that (typically the running-cost portion) is taken from your post-tax pay to offset FBT.
What's included, and the pre-tax/post-tax split, depends on your provider and employer. Running-cost amounts are estimates set at the start and reconciled over the lease. General information only — not tax or financial advice.
The FBT exemption that made EV novated leases popular.
Normally FBT is the catch that eats into a novated lease's benefit. For eligible electric cars, the government removed it: there's no FBT on the private use of an eligible EV provided through your employer, which changes the maths considerably. To be eligible, broadly:
- The car is a zero or low emissions vehicle (battery electric or hydrogen fuel-cell).
- It was first held and used on or after 1 July 2022.
- Its value is at or below the fuel-efficient luxury car tax (LCT) threshold — $91,387 for 2025-26 (the threshold changes each year).
Two important limits: from 1 April 2025 plug-in hybrids are no longer treated as eligible EVs for this exemption, and the government has announced the current full exemption is set to continue only until 31 March 2027, with phased changes proposed after that. Exempt EVs still count toward reportable fringe benefits, which can affect other income-tested calculations.
General information, not tax or financial advice. Eligibility, thresholds and the future of the exemption are subject to law and change, and depend on your circumstances and your employer — confirm current rules with the ATO and a registered tax agent before you commit. Reportable fringe benefits can affect things like the Medicare levy surcharge, family assistance and other income tests.
A novated lease isn't for everyone — here's the honest read.
Salaried employees with a stable job
You need an employer that offers salary packaging and reasonably steady employment, since the arrangement rides on staying employed there. PAYG employees are the typical candidates.
Buying an eligible electric car
The FBT exemption for eligible EVs is where the numbers can look most attractive — which is exactly why you should model it properly rather than assume.
Uncertain employment or self-employed
If you're likely to change jobs, contract, or run your own business, the novation can be awkward — the lease reverts to you between employers, and sole traders can't novate to themselves. Other finance (like a chattel mortgage) may suit better.
Lower incomes or very cheap cars
The pre-tax benefit scales with your marginal tax rate, and provider/packaging fees are fixed costs. On a low income or a very inexpensive car, a plain secured car loan can work out simpler and cheaper — worth comparing both.
How we help
We're a finance broker, not a tax adviser. What we do is compare the finance across our panel and help you see the novated lease next to a straight secured car loan, so you and your accountant can decide with the real numbers in front of you. We look at the comparison rate, term and fees — not just a headline rate.
Any rates mentioned are indicative only, not a quote or an offer of credit, and rates move with the cash rate and lender pricing; a comparison rate may differ from an advertised rate. We compare products from our panel of 50 lenders and don't compare every product or lender in the market.
Novated leasing, answered straight.
What is a novated lease and how does it work?
A novated lease is a three-way arrangement between you, your employer and a financier. The financier leases you a car, and your employer agrees to make the lease and running-cost payments from your salary — part before income tax and part after — while you work there. At the end of the term you can pay the residual and keep the car, refinance it, or trade it in.
How does a novated lease affect my tax?
Part of the cost is deducted from your pay before income tax is calculated, so income tax is worked out on a smaller taxable income. Fringe Benefits Tax then applies to the car benefit, and is commonly offset by paying part of the running costs from your post-tax pay (the Employee Contribution Method). Whether you're better off overall depends on your salary, your employer, the package structure and the car. This is general information, not tax advice — confirm your position with a registered tax agent.
What is FBT and the Employee Contribution Method?
Fringe Benefits Tax (FBT) is a tax on benefits an employer provides, including a packaged car. Under the statutory formula the taxable value is 20% of the car's base value, and FBT is charged at 47% on the grossed-up value. The Employee Contribution Method (ECM) means you contribute toward the car's running costs from your post-tax pay; each post-tax dollar reduces the FBT taxable value dollar-for-dollar, and can bring the FBT payable down to nil. General information only — not tax advice.
Are electric cars FBT-exempt on a novated lease?
An eligible electric car can be exempt from FBT: it must be a zero or low emissions vehicle, first held and used on or after 1 July 2022, and valued at or below the fuel-efficient luxury car tax threshold ($91,387 for 2025-26). Plug-in hybrids stopped being eligible from 1 April 2025, and the government has announced the full exemption is set to continue only to 31 March 2027 with phased changes proposed after. Exempt EVs still count as reportable fringe benefits. Confirm current rules with the ATO and your accountant.
What happens to my novated lease if I change jobs?
The arrangement depends on your employer, so if you leave, the novation ends and the lease responsibility comes back to you. You can usually keep the car and either novate the lease to a new employer who offers salary packaging, or keep making the payments yourself in the meantime.
What running costs can be bundled into a novated lease?
A fully maintained novated lease can bundle the finance repayment together with estimated running costs — fuel or EV charging, servicing and tyres, registration and comprehensive insurance — into one regular deduction from your pay. What's included, and the pre-tax/post-tax split, depends on your provider and employer.
Who does a novated lease suit?
It generally suits salaried employees with an employer that offers salary packaging and reasonably stable employment, and it's most talked-about for eligible electric cars. It's usually a poorer fit if you're self-employed, likely to change jobs often, or on a lower income buying an inexpensive car, where a plain secured car loan can be simpler. It's worth comparing both — with your accountant.
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