What is a novated lease?
A novated lease is a salary sacrificing or salary packaging agreement between you, your employer and a novated lease provider. Here’s a quick rundown of how it works:
- Your novated lease provider purchases your car and leases it to your employer, who then gives you exclusive private access to it.
- Your employer covers your lease obligations by deducting them from your pre-tax salary, as well as making any necessary post-tax contributions.
- Your payments are made until the end of your lease term (up to five years), at which point you’ll need to deal with the residual value.
The main reason why most people choose novated leases is what happens in step #2: pre-tax salary deductions. By taking part or all of the payment out of your payslip before it’s sent to you, your taxable income is reduced, which in turn lowers the tax you’re required to pay.
Types of novated lease
There are two types of novated lease:
| Fully maintained | Non-maintained | |
|---|---|---|
| Lease payments deducted from pre-tax salary | Yes | Yes |
| GST removed from purchase price | Yes | Yes |
| Running costs bundled into repayments | Yes | No |
| Included in payment | Leasing costs Interest Comprehensive and CTP insurance Vehicle registration Roadside assistance Petrol or charging costs Servicing and repair costs Tyres |
Leasing costs Interest |
| Running costs paid from pre-tax salary | Yes (partial or full, depending on vehicle) | No |
| Freedom to choose service providers | Subject to lease provider approval | Yes |
| Cost of lease payments | Higher | Lower |
| Surplus running cost budget returned at end of term | Yes | No |
| End of term options | Buy, sell, trade in or refinance | Buy, sell, trade in or refinance |
Novated lease tax benefits
One of the big advantages of novated leases is the tax benefits they offer. Here’s what you can expect from your novated lease:
- Income tax: as mentioned, because lease payments come out of your pre-tax income, you’ll pay less income tax. This is despite the fact you’re earning the same amount.
- GST on purchase: the GST on the purchase of the vehicle can be claimed by your leasing company, which can pass the savings of potentially thousands of dollars on to you. In 2025-26, the maximum credit claimable is $6,334.
- GST on running costs: it isn’t just the car purchase that you can avoid GST on. For fully maintained leases, insurance, registration, maintenance and fuel can all be GST-free, in addition to being able to pay for them out of your pre-tax income.
Why novated leases are often cheaper than car loans
"Not only can you cut back on income tax and GST through a novated lease, but providers often also gain access to fleet discounts on vehicles. That means you can save an extra $1,000 or more on your car’s purchase price before tax even comes into the equation."
How much can you save with a novated lease?
Compared to other methods of financing a car, the cost of doing so with a novated lease could be significantly cheaper. You can see what that looks like in the table below:
| Car loan | Home loan top-up | Cash | Novated lease | |
|---|---|---|---|---|
| Vehicle purchase price | $50,000 | $50,000 | $50,000 | $45,455 |
| Running costs over 5 years | $40,000 | $40,000 | $40,000 | $40,000 |
| Finance cost (inc. interest and fees) | $58,179 | $92,038 | $50,000 | $47,017 |
| Tax saved over 5 years | $0 | $0 | $0 | $11,105 |
| Overall cost comparison | $98,179 | $132,038 | $90,000 | $75,912 |
| Calculations are for illustrative purposes only. Car loan calculations based on a five-year, $50,000 loan at 6.20% p.a. repaid weekly. Home loan calculations based on $50,000 being added to a $500,000, 25-year mortgage at 5.50% p.a. Novated lease calculations based on a buyer with a $90,000 salary driving the car approximately 10,000km per year. Drive away price of $50,000 (GST excluded in novated lease example). Car running costs estimated at $8,000 per year for all examples. | ||||
The biggest difference between these finance types is the potential for income tax and GST savings. These are unique to novated leases when it comes to private, non-commercial vehicles. Additionally, novated leasing companies often have access to fleet discounts on the purchase of the car, helping you potentially save several thousand dollars extra.
Not all novated leases are made equal, though. There’s a range of variables that can impact the cost of your agreement.
What factors impact the cost of my novated lease?
- Interest: much like a car loan, interest is applied to your novated lease payments. It accounts for factors such as the amount borrowed, administrative expenses and the risk associated with leasing to the borrower.
- Finance and admin fees: these are charges associated with setting up and managing the lease.
- Choice of vehicle: the make, model and specifications of the car you choose will impact the overall cost. More expensive models will lead to costlier payments.
- Post-tax contributions: most cars are subject to fringe benefits tax, which is required to be offset through post-tax contributions. We’ll explain more about this in the next section.
- Driving distance: your annual mileage affects running costs, which can influence lease price or tax savings and the overall effectiveness of the lease.
- Car insurance: comprehensive car insurance is mandatory for novated leases. The cost of your policy can vary based on factors like your driving history, where you live and what car you drive.
Novated leases and FBT
One potential cost to consider when leasing your car is fringe benefits tax (FBT). It’s 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 they can also include health insurance and travel or accommodation allowances.
As of the 2024-25 FBT year, this is charged at a rate of 47% on the taxable portion of the benefit (equivalent to 45% plus the 2% Medicare Levy). However, by making post-tax contributions to your car’s running costs, your FBT liability can be reduced to $0. This is typically handled for you by your employer, who will make the necessary post-tax deductions from your payslip to cover your liability.
The taxable portion of your vehicle is calculated using one of two methods:
- Statutory formula method: under this method, you multiply the base value of your vehicle by 20%. This is then multiplied by the number of days it was available for use and divided by the number of days in the FBT year. Finally, subtract your post-tax contribution from this overall figure. If a car were available all year, this formula would be: ($X × 0.2 × 365 ÷ 365) − $Y.
- Operating cost method: in cases where cars are used largely for business purposes, any private use is calculated as an overall percentage and applied to pre-tax expenses (inclusive of GST). A logbook is required to track business and private use.
Each of the costs listed under the fully maintained lease section (as well as new tyres) can be paid for out of your post-tax income to cut down on your FBT liability. This will be calculated by your novated lease provider.
Why are EVs so cheap to finance with a novated lease?
When it comes to novated leasing, the tax savings available on electric vehicles (EVs) are typically much higher than on petrol, diesel or hybrid models. The reason for this is simple: EVs are exempt from FBT up to the luxury car tax (LCT) threshold of $91,387, as of the 2025-26 financial year.
This means that no post-tax contributions will be necessary for the portion of your car’s value below that sum. If your car is priced below the threshold, 100% of your lease payment can be deducted from your pre-tax salary, driving down your post-tax salary and therefore your payable income tax.
Once you throw an EV into the mix, you can see just how much you could save compared to other finance methods:
| Car loan | Home loan top-up | Cash | Novated lease (non-EV) | Novated lease (EV) | |
|---|---|---|---|---|---|
| Vehicle purchase price | $50,000 | $50,000 | $50,000 | $45,455 | $45,455 |
| Running costs over 5 years | $40,000 | $40,000 | $40,000 | $40,000 | $40,000 |
| Finance cost (inc. interest and fees) | $58,179 | $92,038 | $50,000 | $47,017 | $47,017 |
| Tax saved over 5 years | $0 | $0 | $0 | $11,105 | $26,105 |
| Overall cost comparison | $98,179 | $132,038 | $90,000 | $75,912 | $60,912 |
| Calculations are for illustrative purposes only. Car loan calculations based on a five-year, $50,000 loan at 6.20% p.a. repaid weekly. Home loan calculations based on $50,000 being added to a $500,000, 25-year mortgage at 5.50% p.a. Novated lease calculations based on a buyer with a $90,000 salary driving the car approximately 10,000km per year. Drive away price of $50,000 (GST excluded in novated lease examples). Car running costs estimated at $8,000 per year for all examples. | |||||
In a climate where fuel prices are surging and EVs are being sold at increasingly competitive prices, it’s easy to see why Aussies are going green with their car choices and using novated leases to maximise their savings. The first quarter of 2026 alone saw sales for EVs at record highs.
What happens at the end of my lease?
All novated leases come with a residual value or payment. This is a lump sum that’s intended to represent the value of your car at the conclusion of the lease. 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 | 65.63% |
| 24 months | 56.25% |
| 36 months | 46.88% |
| 48 months | 37.50% |
| 60 months | 28.13% |
You have several options for dealing with your car’s residual value at the end of your lease. These are:
Option 1: Sell, trade or upgrade
If you're coming up to the end of your novated lease term and want to refresh your wheels, you can sell your car to cover the residual payment and start a new agreement with a new vehicle.
Option 2: Sell the car and end the lease
Alternatively, you can simply sell your car and end the agreement. You'll have to pay any difference between the car's sale price and the residual value but if you sell the car for more you keep the profit.
Option 3: Refinance the residual
You can continue to take advantage of your novated lease's tax benefits by refinancing your residual. This extends your existing lease term by up to five years and allows you to keep your current vehicle.
Option 4: Own the car outright
Finally, you can choose to pay the residual yourself and take full ownership of the car. This ends your novated lease and the tax benefits that come along with it, but there's no longer any interest in your car from third parties.
Option 1: Sell, trade or upgrade
If you're coming up to the end of your novated lease term and want to refresh your wheels, you can sell your car to cover the residual payment and start a new agreement with a new vehicle.
Option 2: Sell the car and end the lease
Alternatively, you can simply sell your car and end the agreement. You'll have to pay any difference between the car's sale price and the residual value but if you sell the car for more you keep the profit.
Option 3: Refinance the residual
You can continue to take advantage of your novated lease's tax benefits by refinancing your residual. This extends your existing lease term by up to five years and allows you to keep your current vehicle.
Option 4: Own the car outright
Finally, you can choose to pay the residual yourself and take full ownership of the car. This ends your novated lease and the tax benefits that come along with it, but there's no longer any interest in your car from third parties.
Why trust Savvy with your novated lease?
How to get a novated lease with Savvy
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Complete our online form
Tell us about you and the car you want to lease so we can work out the best solution for you.
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Find your car
We can help you lock in your vehicle if you haven’t already.
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Review your budget
We'll set a tailored car running cost budget that your employer transfers to us each payroll.
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Have your deductions set up
Your payslip will now show both pre-tax and post-tax deductions.
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Enjoy on-road costs being bundled into your payments
Everyday car expenses, such as fuel, registration and insurance, are paid pre-tax.
If you need any help at all when applying for a novated lease or want to discuss salary packaging options further, reach out to Savvy Benefits.
How we support you
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We help you feel comfortable asking any questions and give the support you need to make informed decisions.
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Highly personalised care starts with your very own, dedicated consultant who you can contact by email, SMS or call.
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Benefit from over 15 years of industry experience to quickly identify fact from fiction.
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We think ahead and help you consider how a novated lease can add value towards your future goals and objectives.
Is a novated lease worth it?
Whether a novated lease is right for you depends on your circumstances. If you’re buying an EV, the tax savings on offer are hard to pass up. You should get a novated lease quote at the very least and do your due diligence to see whether it’s the most cost-effective move for you. As the table above shows, your savings could be in the tens of thousands in some cases.
If you’re a high income earner and want to cut back on your income tax, a novated lease as your car finance option of choice is a no-brainer. It can be especially useful if it drops you into a lower tax bracket.
However, high income and EVs aren’t everything when it comes to novated leasing. Both petrol and diesel vehicles can still deliver valuable tax savings as well.
If you’re a lower income earner and are financing a non-EV, the savings on offer may not be as great, but it’s worthwhile considering whether they’re worth it in your situation. Those without stable employment typically won’t be in a position to take out a novated lease, either.
Driver Handbook
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