Novated Leases Explained

Key takeaways

• Payments come from pre-tax salary, reducing taxable income.
• FBT applies to most vehicles, usually handled by the employee contribution method.
• Eligible electric vehicles under the luxury car tax threshold can be FBT exempt.
• The lease ends with a residual you must pay, refinance or trade.

How the structure works

• You choose the car; the financier owns it.
• Your employer deducts the lease payment and running costs from your salary before tax.
• The obligation is "novated" to the employer while you work there - if you leave, it usually reverts to you.
• At the end you pay a residual set by ATO guidelines, refinance it, or trade the vehicle.

Where the EV exemption changes things

For a petrol car, FBT largely cancels the pre-tax benefit, and most packages use the employee contribution method to manage it. For an eligible electric vehicle below the luxury car tax threshold for fuel-efficient vehicles, the FBT exemption means the whole package - lease, electricity, insurance, registration, servicing - can come from pre-tax salary.

That is why EV novated leases frequently beat every other finance channel for employees, and why the same arrangement on a petrol car often does not.

What to check before signing

• The residual. ATO minimums apply by term; a higher residual lowers payments and raises the end obligation.
• What is bundled and at what price - fuel or charging, tyres, servicing, insurance.
• Leaving your job. The lease generally follows you, and the payments become post-tax.
• Total cost against a plain car loan, including all fees. Convenience packaging is not free.

Frequently asked questions

What happens if I change jobs?

The novation usually ends and the lease reverts to you personally, paid from post-tax income, unless your new employer will take it on. Check this before committing if your role is not secure.

Is a novated lease worth it on a petrol car?

It can be, particularly for higher marginal tax rates, but the benefit is much smaller once FBT is accounted for. Model it against a secured car loan rather than assuming.

Do I own the car at the end?

Only if you pay the residual. Until then the financier owns it - which is why a novated lease is not building equity in an asset you own.

Related reading

• Car Loans: Dealer Finance vs Bank vs Broker
• Personal Loans: Secured vs Unsecured
• SMSF Loans: Limited Recourse Borrowing Explained

Sources

• Fringe benefits tax - electric cars exemption — Australian Taxation Office
• Novated leases and salary packaging — Australian Taxation Office