What Is a Novated Lease, and How Does It Actually Work?

A novated lease is a way of paying for a car out of your salary before tax. Around 300,000 Australians have one, most of them public servants, health workers and employees of large companies whose employers offer salary packaging. The word "novated" means the lease has been transferred: you sign a lease with a finance company, then a deed of novation moves the obligation to make the payments to your employer for as long as you work there.

The three parties

• You choose the car, drive it as if it were yours, and carry the residual at the end. The car is available for your private use without restriction; it does not need to be used for work at all.
• Your employer deducts the package from your salary each pay, makes the payments to the lease company, claims the GST, and either pays FBT or arranges for you to cancel it. Most employers outsource this to a salary packaging provider.
• The financier or lease provider owns the car during the lease, sets the interest rate and the residual, and usually bundles fuel, insurance, registration, servicing and tyres into one monthly figure.

Where the money goes each pay

Take an employee on $95,000 choosing a $55,000 car on a three-year lease. Each pay, before tax is calculated, the employer deducts the lease payment plus a budget for running costs. Because that deduction comes off taxable salary, income tax and Medicare levy are calculated on a smaller number. That is the first saving.

The second saving is GST. The employer claims the GST on the car's purchase price (up to the $69,883 car limit, so a maximum credit of $6,353) and on every running cost, and passes those credits through, so you are effectively buying the car and its fuel, tyres and servicing GST-free.

The cost is the fringe benefit. Because your employer is providing you with a car, FBT applies unless the car is exempt. That is the fourth thing, and it decides most outcomes.

The four things that decide whether it pays

1. Your marginal tax rate

Every dollar of the package that comes off your salary saves tax at your marginal rate plus the 2% Medicare levy. In 2026-27 that is 17% between $18,201 and $45,000, 32% up to $135,000, 39% to $190,000 and 47% above. The higher your rate, the bigger the saving; on a salary under $45,000 a novated lease rarely beats a good car loan.

2. Whether the car is FBT exempt

Battery electric cars first held after 1 July 2022 and priced at or below the fuel-efficient luxury car tax threshold ($91,661 in 2026-27) are exempt from FBT. That means the entire package comes out pre-tax with no offsetting contribution, which is why an EV novated lease is the single most effective form of salary packaging available to most employees. Plug-in hybrids lost the exemption on 1 April 2025. Our FBT and EV exemption guide covers the detail.

3. How FBT is handled on a non-exempt car

For petrol, diesel and conventional hybrid cars, FBT is calculated under the statutory formula: 20% of the car's value is the taxable value, regardless of how far you drive. Left alone, that value is grossed up by 2.0802 and taxed at 47%, a cost most employers pass straight back into the package. Almost everyone instead uses the Employee Contribution Method: you pay that 20% from post-tax income and the taxable value falls to zero. The saving on a non-exempt car is therefore the tax on the balance of the package plus the GST, not on the whole cost.

4. The interest rate and the residual

Novated lease rates in 2026 mostly sit between 6.5% and 9.5%, higher than a secured car loan from a bank, and providers add management fees. The residual is set at ATO minimums: 46.88% of the amount financed after three years, 28.13% after five, payable with GST added if you keep the car. A lower monthly payment over a short term means a large residual; the calculator shows both.

What you can package

New and used cars (see used cars for the age rules), from any dealer or a private seller in most cases. The package normally includes finance, comprehensive insurance, registration, fuel or charging, servicing, tyres and roadside assistance, all paid pre-tax and GST-free. It does not include fines, tolls in most packages, or modifications after purchase.

At the end of the lease

• Pay the residual and keep the car. The residual plus GST is due from post-tax money. If the car is worth more than the residual, that gap is yours; providers must set the residual at or above the ATO minimum, and on a five-year lease the car is often worth more than 28% of its financed price.
• Refinance the residual into a new lease on the same car, often for one or two years, and keep packaging the running costs.
• Sell the car, pay the residual from the proceeds and keep any surplus, then start a new lease on a new car. This is the cycle most long-term novated leasers run.

If you change jobs

The deed of novation ends with your employment. The lease is yours: you can novate it to a new employer, keep paying it personally from post-tax income (which removes every benefit), or pay it out, often with an early termination fee. This is the main structural risk, and the reason a shorter term suits anyone unsure of their next two to three years. Employees paid out on redundancy or long leave should check how the package is handled during unpaid periods.

Frequently asked questions