Novated Lease Calculator

The three-way deal behind a novated lease

A novated lease is a three-way arrangement between you, your employer and a finance company. You pick the car, the finance company buys it and leases it to your employer, and your employer makes the payments on your behalf, deducted from your salary before tax lands in your account. The legal bit that makes it work is called novation, your employer takes over your obligation under the lease while you're employed there. Leave the job, and that obligation typically reverts back to you.

It's not a car loan. The finance company owns the car during the lease, not you, and what you're really buying is the use of the car plus the tax efficiency of running it through payroll. Lease payments and running costs both get bundled into a single deduction each pay cycle, which is the whole point of novated lease salary packaging.

Read our full guide to novated leases for a deeper walkthrough of the three-way agreement, the EV exemption, and who actually benefits most.

How the tax saving actually works

The saving comes down to one thing: money spent before tax is worth more than money spent after tax. When your employer deducts lease payments and running costs from your gross salary, your taxable income drops, so you pay less income tax overall. It works the same way salary sacrificing into super does, redirect income before tax touches it, and you keep more of it.

The complication is that providing you with a car is a fringe benefit, and fringe benefits are normally subject to Fringe Benefits Tax (FBT), paid by your employer at a flat 47% rate on a taxable value. Under the statutory formula method almost every novated lease uses, that taxable value is a flat 20% of the car's price, regardless of how far you actually drive it. To stop your employer copping an FBT bill, most providers structure the lease so you make an after-tax contribution, called the Employee Contribution Method (ECM), sized to exactly offset that taxable value. Done right, the employer's FBT liability drops to nil, which is why a typical novated lease splits into a pre-tax portion and a smaller after-tax portion rather than being entirely pre-tax.

The EV FBT exemption, and what's actually changing

This is where things get genuinely good if you're considering an electric car. Under current law, eligible battery electric vehicles (BEVs) and hydrogen fuel cell vehicles (FCEVs) are fully FBT-exempt, no 47% FBT, no ECM contribution needed to offset it, meaning the entire lease can come off your pre-tax pay. To qualify, the car needs to have been first held and used on or after 1 July 2022, sit below the fuel-efficient vehicle luxury car tax threshold ($91,661 for 2026-27), and never have attracted luxury car tax on its way to you.

Plug-in hybrids (PHEVs) lost this exemption from 1 April 2025. If you had a financially binding commitment to a PHEV lease in place before that date and the car was already in use, you keep the exemption for the rest of that specific arrangement, grandfathered, but optional lease extensions don't count, and the ATO has no discretion to bend the deadline for a late delivery. If you're shopping for a PHEV today expecting the exemption, you won't get it.

Important, this bit is not yet law: the government has proposed a tiered cap from 1 April 2027, cars at $75,000 or under would keep the full exemption, cars priced between $75,000 and the LCT threshold would drop to a 25% FBT discount only, and from 1 April 2029 that 25% discount would apply across the board. It's a proposal, not legislation, existing leases are expected to be protected from the change either way, and a government review of the whole exemption is due by mid-2027. Don't let anyone sell you a car today on the basis that these rules are already in effect, they aren't.

What running costs actually get bundled in

Beyond the lease payments themselves, novated lease providers typically bundle in fuel or home charging, comprehensive car insurance, registration, servicing, tyres and roadside assistance, all rolled into one fortnightly or monthly deduction. For non-EVs these come from pre-tax salary too (subject to the same ECM treatment), and for qualifying EVs they're fully FBT-exempt right alongside the lease payments. No juggling receipts, no scrambling at tax time, the lease provider pays the bills out of your packaged budget.

Novated lease vs car loan vs buying outright

Here's a realistic scenario: a $120,000 salary, a Toyota RAV4 Hybrid at $55,000 drive-away, a 3-year lease at 15,000 km a year, roughly $5,000 a year in bundled running costs, and a 32% marginal tax rate (30% plus the Medicare levy). Using the ECM to bring FBT to nil, the novated lease pulls roughly $17,000 a year from pre-tax pay.

The novated lease looks most compelling against the car loan, the tax saving closes most of the gap. Against buying outright with cash, it's closer, the residual payment brings the 3-year total near the car loan figure, though you've also still got a car (or the cash from selling it) at the end. Its real edge is cash flow and convenience, especially if you don't have $55,000 sitting in savings and would be taking out a loan anyway. Plug your own salary, car price and lease term into the calculator above for a version that actually matches your numbers.

Who a novated lease suits (and who it doesn't)

It tends to work well for PAYG employees on higher marginal tax rates who plan to keep the car for the full term, drive 10,000km+ a year, want running costs bundled into one payment, and especially anyone eyeing an eligible EV, the exemption makes it one of the most tax-efficient car purchases available to Australian employees right now.

It suits you far less if you're self-employed (you need an employer to novate the lease, there's no workaround), close to leaving your job or in unstable employment, earning under roughly $45,000 where the tax saving barely covers the fees, or someone who likes changing cars often, early termination costs bite hard if you don't see the lease through.

Common misconceptions

"I own the car at the end of the lease." You don't, automatically. There's a residual (balloon) payment set by ATO guidelines, 46.88% of the car's cost on a 3-year lease, 28.13% on a 5-year lease. You can pay it out, refinance it, or hand the car back.

"It always saves money." Not for everyone. Low income earners see a small tax saving that fees can eat into, and leaving your employer mid-lease can wipe out the benefit through exit costs.

"The reportable fringe benefit doesn't affect anything else." It does. Even though your reportable fringe benefits amount isn't taxed as income, it's added back for HECS-HELP repayment income, the Medicare levy surcharge, and income tests for some family payments. This calculator doesn't model that flow-on effect, factor it in separately if any of these apply to you.