What is a Novated Lease?

How it works

"Novated" means the lease obligation has been transferred, novated, from you to your employer. You pick a car, a finance provider owns the lease, and your employer takes over the payments while you're employed there, deducting them from your salary each pay cycle as a mix of pre-tax and post-tax amounts.

Running costs are often bundled in too: fuel or electricity, registration, insurance, servicing and tyres, all drawn from a budget account your provider manages. At the end of the lease term, typically one to five years, you're left with a residual value, sometimes called a balloon payment, and you can pay it out, refinance into a new lease, or hand the car back.

Why people do it

Two things make novated leases attractive. First, the pre-tax portion of your package reduces your taxable income, so you pay less income tax, and the saving grows with your marginal rate. Second, because your employer is the one leasing the car, they can usually claim the GST credit on the purchase and on eligible running costs, a saving that's typically passed through to you as a lower overall lease cost.

The FBT catch

Providing a car for private use is a fringe benefit, which technically makes your employer liable for Fringe Benefits Tax on it. For 2026-27, FBT is a flat 47%, and the taxable value of a car fringe benefit is usually calculated as 20% of the car's base value under the statutory formula method, regardless of how far you actually drive it.

Most novated leases solve this with the Employee Contribution Method (ECM): you make post-tax contributions toward the car's running costs, which reduce the taxable value, ideally to nil, so no FBT is payable. In practice, your provider splits your deductions into a pre-tax slice (the income tax saving) and a post-tax ECM slice (the FBT offset), structured so the employer's FBT bill lands at zero.

Electric vehicles change the maths

Eligible battery electric and hydrogen fuel cell vehicles priced under the luxury car tax threshold for fuel-efficient vehicles are fully exempt from FBT in 2026-27. That means no ECM workaround is needed, and a bigger share of the package can run pre-tax, which is why EV novated leases tend to come out noticeably cheaper than petrol equivalents in provider quotes. Plug-in hybrids lost the exemption for new leases signed from April 2025, and the Budget has flagged further changes to the EV exemption from April 2027 that weren't yet law as of publication, so confirm the current position with your provider before deciding on a car for tax reasons alone.

Is it worth it

Novated leases suit people on higher marginal tax rates who were going to buy a car anyway, and whose employer actively supports salary packaging, common in health, education, government and larger corporates. The savings are smaller for lower income earners, and administration fees can eat into what's left. And remember: the car isn't free, you're still paying for it, just with pre-tax dollars, and the residual value at the end of the lease is a real cost, not a bonus.