Novated Leasing

Drive the latest models without buying and reap the tax rewards when taking out a novated lease through Savvy.

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, updated on March 28th, 2024       

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Novated Leasing

What is novated leasing?

Novated leasing is a three-way agreement between your employer, a financier, and you as an employee to purchase a car through a lease agreement. It is arranged as part of a salary package. The employee sacrifices part of their pre-taxable income to go toward the cost of the lease. The car’s GST purchase price and depreciation are claimed by the employer which reduces the amount an employee must sacrifice. Running costs are also claimed which reduces the amount of fringe benefits tax.

Novated leasing tax advantages

Novated leasing is an ATO-approved way of reducing tax for both employers and employees. An employee can reduce their pre-tax income with a novated lease which reduced their overall tax payable. The car becomes a fringe benefit but is paid for by the employee using their pre-tax dollars or salary. The employee can also claim running costs such as fuel, insurance, and servicing as part of the agreement, most of these costs will be used with pre-tax dollars further reducing costs further.

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The features and benefits of a novated lease

Highly competitive interest rates

You can find and compare leasing deals from a range of Australian providers with competitive rates  and enjoy affordable fees throughout your term.

Salary sacrificing payments

Don’t worry about going out of your way to make repayments: your employer uses salary packaging to pay for the car lease, reducing the tax you’ll need to pay overall.

Claimable expenses

You’re able to claim many key running costs on tax, such as petrol, insurance premiums, repairs and roadside assistance under a novated lease.

Use it however you like

Unlike other commercial car finance products, you’re able to make use of the car for private purposes, such as shopping and taking your kids to school.

No GST payable

Because your employer is buying the car, they’ll claim for GST as well as depreciation, meaning you won’t have to pay for these at all.

You choose the maintenance

You can decide whether to have your lease fully maintained with all costs taken care of by your provider or arrange them yourself with a self-managed lease.

Select your leasing term length

As part of your leasing agreement, you’re able to choose the term over which you continue to use the car between one and five years.

Lease new or used

Whether you want to drive the newest models or select a car up to ten years old (or 15 at the end of the lease), we can help you arrange financing.

Novated leasing with savvy made easy

How to arrange a novated lease?

Learn more about tax, residuals and novated leasing

What is novated leasing and how does it work?

In Australia, novated leasing is a popular way for employees to finance a car. It involves a three-way agreement between you, your employer and a leasing company which runs for a set period of between one and five years.

In terms of how the process works, you select the car you want to lease and enter into a novated lease agreement with a finance company and your employer. The company purchases the vehicle and leases it to you through your employer. The ongoing lease payments are made by your employer to the company out of your pre-tax income, which is also known as salary sacrificing.

How big is a residual value payment?

A balloon payment, also known as a residual value or payment, is a lump sum attached to the end of your novated lease. This is set by your leasing company and is intended to represent the estimated value of your vehicle by the conclusion of your term.

In terms of what happens at the end of your lease, customers are required to pay the residual once it ends but have several options for doing so. These include:

  • Paying the residual in full out of pocket or through other financing and buying the vehicle
  • Refinancing the residual to extend your existing lease with the same car
  • Selling or trading in your car to cover the residual and taking out a new lease with a new car
  • Selling or trading in your car to cover the residual and ending your novated leasing agreement

The residual is determined by factors such as the purchase price of your vehicle and the length of your term. However, the Australian Taxation Office (ATO) has set minimum required residual values for each lease term length, which are as follows:

Lease term Minimum residual value %
12 months
24 months
36 months
48 months
60 months

What are the benefits of novated leasing?

There’s a range of benefits which apply to novated leases. These include the following:

  • Reduced income tax: by deducting your payments from your pre-tax income, the income tax you’re liable to pay will decrease, despite the fact the money you’re earning hasn’t changed.
  • GST-free vehicle: additionally, the GST on the purchase price of your car can be claimed by your leasing company, with this saving able to be passed on to you.
  • No usage restrictions: you can use your novated vehicle 100% for personal purposes, without any requirement for business usage.
  • Flexible residual options: when it comes to deciding what to do at the end of your novated lease term, you have several options to choose from, as outlined above.
  • Convenient car finance option: with your payments being made for you by your employer, novated leases can be more easily manageable than other car finance types.

However, it’s also worth looking into some of the potential disadvantages of novated leasing, which include:

  • Must be offered by your employer: you can only take out a novated lease with an employer that offers them. If your place of work doesn’t, you’ll have to look elsewhere.
  • Potentially limited selection: even if they are available, you may be restricted in your choice, as you’ll have to go with the company your employer offers.
  • Salaried employees only: if you don’t earn a salary at your place of work, you won’t be eligible to take out a novated lease.
  • Lump sum residual: in some cases, the residual value may be difficult to pay off, especially if your car is expensive or your lease term is short.

By closely analysing the pros and cons of novated leases, you can determine whether a novated lease is worth it for you.

What are the different types of novated lease?

The two main types of novated lease are fully maintained and non-maintained leases. It’s important to understand the differences between these two arrangements, which are as follows:

Fully maintained novated leases

Fully maintained novated leases incorporate a range of on-road and ongoing maintenance costs into your payments. These can include:

  • Comprehensive car insurance
  • CTP insurance
  • Servicing costs
  • Repairs
  • Petrol or charging costs
  • Vehicle registration

The cost of each of these will be determined in part by an estimate of the kilometres driven per year.

The main benefit of fully maintained leases is that the cost of all the included extras comes out of your pre-tax salary, rather than post-tax. This means they can save you more money, as well as have GST claimable on these costs. However, with all of these included, you may not have as much choice when it comes to insurers or mechanics.

Non-maintained novated leases

In contrast, non-maintained novated lease payments only include the cost of your vehicle and the fees and interest associated with your lease. This means you’re responsible for arranging all the servicing, insurance and everything else which would’ve otherwise been included in your agreement.

This type of lease grants more control to the lessee, as you can pick and choose providers to help you minimise costs or maximise quality. However, you’ll have to pay for these out of your post-tax income, meaning you won’t enjoy the same tax benefits as you would under a fully maintained lease. Additionally, drawing up budgets for on-road costs and negotiating the terms of your agreement yourself can take up more time.

How do novated leases compare to car loans?

There’s a wide range of differences between novated leases and car loans. The main similarities and differences to think about include the following:

Feature Novated lease Car loan
Parties involved
Employer, employee and lease provider
Borrower and lender
Financing responsibility
Lease provider on employee’s behalf
Borrower directly to lender
Payment responsibility
Employer to lease provider through employee’s pre-tax income
Borrower directly to lender
Salary sacrificing
Running costs
Can be included (fully maintained) or separate (non-maintained)
Certain on-road costs (such as rego and insurance) may be included in your loan amount
Car ownership
Typically transferred after lease end
Ownership from the beginning of the loan
Tax benefits
Income tax and GST reduction
None for non-commercial loans
Anyone who meets eligibility criteria and whose employer offers it
Anyone who meets eligibility criteria
On all novated leases, minimum set by ATO
Not required on car loans, flexible amounts available
Interest rates and fees
Ability to compare
Limited by employer’s choice of lease provider
Can be done online through various other lenders but may be limited to a broker’s partnered panel if chosen
Up to 100% personal
Up to 100% personal
Trading in your old car
Cannot be put towards your next novated lease
Can be put towards your next car loan to reduce the financed amount

It’s important to think about what your priorities are as a car buyer before deciding between a novated lease and a car loan.

How do novated leases compare to business car leases?

Novated leases and business car leases are similar in principle, but there are several key differences. These include:

  • Salary sacrificing: business leases don’t take advantage of salary sacrificing, as the car is leased to the business for business use
  • Usage: cars leased by a business must be used for business purposes at least 50% of the time
  • Tax benefits: as a business operating cost, you may be able to claim the full payment as a tax deduction if it’s used 100% for business purposes. Additionally, you may be able to claim a GST credit for any payments which include GST (though it’s important to speak with a tax professional if you’re unsure)
  • Residual: business finance leases often come with a residual value, which works in the same way as they do on novated leases, but operating leases don’t
  • Running costs: business operating leases allow you to include your car’s on-road costs in your payments, but this isn’t the case for finance leases
  • Option to hand back your car: under a business operating lease, you can use the car for your specified term and hand it back afterwards, with obsolescence risk remaining with your lease provider

What is fringe benefits tax? How does it work?

Fringe Benefits Tax or FBT is a tax on non-salary benefits you obtain from your employer. This extends to company cars, private health insurance, accommodation allowances, and meals & entertainment. Fringe benefits are taxed at the maximum rate of 45% + 2% Medicare levy.

A vehicle’s taxable portion is either calculated by the Statutory Formula, a flat 20% rate minus state charges; or by operating costs if the vehicle is used for business more often than private use by a substantial margin.

If an employer must pay the FBT, the employee can reduce the FBT to zero by making post-tax contributions (i.e., paying for out of pocket) to running costs. This can include fuel, registration, insurance, servicing, and tyres. This is called the Employee Contribution Method (ECM.) Each dollar paid from an employee’s after-tax salary reduces the FBT by the same amount.

This is given as an example. Ask your accountant or company financial controller for a more detailed breakdown of FBT obligations and offsets.

Cost of Car $50,000
Statutory Formula
Taxable Portion
FBT Applied
ECM over a Year
Effective EBT

Frequently asked questions about novated leases

Can any business provide novated leasing to their employees?

No – not all businesses will be able to offer a novated leasing arrangement to you. Before beginning your enquiry with Savvy, you should always check with your employer as to whether they’re willing and able to enter into such an agreement.

What types of cars am I able to use with a novated lease?

When it comes to novated leasing, you’re limited to passenger vehicles in terms of the types of cars that you can drive. However, models such as utes and dual cabs are still available for lease provided that their maximum payloads don’t exceed 1,000kg.

What happens if I leave my company during the lease term?

If you leave your company, either voluntarily or otherwise, you can switch your lease to your new company provided it offers salary packaging. However, if they don’t, your lease will revert to a standard consumer car loan and you’ll be required to complete the remainder of its payments out of pocket. This means that you’ll no longer gain any of the tax benefits present on standard novated leases, as well as your maintenance package if you opted for one.

What is Fringe Benefits Tax and why is it important for novated leases?

Fringe Benefits Tax (FBT) is a tax that applies to fringe benefits provided to employees by their business outside of their traditional salary. Novated leases are a common example of a fringe benefit, but this can also include health insurance and travel or accommodation allowances.

While this tax is charged to employers, this is often passed on to the employee. However, by making post-tax contributions to your car’s running costs through the Employee Contribution Method (ECM), you can reduce the FBT down to as little as $0. Also, electric cars and PHEVs are exempt from the FBT.

What is a split novated lease?

Yes – your car will need to be a passenger vehicle (not a ute or a van) and its maximum payload must not exceed 1,000 kg. You may also not select a vehicle that will be older than 15 years by the end of the term. For example, you cannot lease an 11 year old car over five years, but a 9 year old car would be acceptable.

Can I get a novated lease to finance a used car?

Yes – novated leases can be used to finance used cars. Vehicles financed through such an agreement will be required to meet certain criteria set by your leasing company, such as its age (typically no older than 12 to 15 years by the end of your term).

Can I use a novated lease to finance a car from a private seller?

Yes – novated vehicles can come from dealerships or private sellers. However, if you purchase through a private seller, you won’t be able to claim GST on the purchase of your car.

Will I be able to use a novated lease to finance any type of car?

No – as mentioned, leasing companies will set eligibility requirements for cars financed through them. In addition to age, you’ll typically be required to choose a passenger vehicle (commercial vehicles such as trucks and buses may not be allowed). Also, while utes can be leased, those with a payload above 1,000kg may not be accepted by your company.

How do novated lease interest rates work?

The interest rates charged on novated leases are very similar to those on car loans in terms of how they’re determined. Your credit score will play a role in this, as your leasing company will conduct a credit check to determine whether you’re a suitable candidate for finance.

However, because the payments are deducted from your salary by your employer and your lease provider owns the car until the end of the term, these arrangements are generally considered lower risk than others like car loans.

What happens to my novated lease if I change jobs?

Because your novated lease is tied to your employment, changing jobs is an important consideration. If you move to a new job where novated leasing is offered, you should be able to transfer your lease across and continue it.

However, if you remain unemployed or start a job where salary sacrificing isn’t offered, your lease will become de-novated and you’ll be responsible for paying it yourself, losing tax benefits in the process.

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