What is a novated lease?

You choose the car and the finance company leases it to you. A novation agreement then transfers the obligation to make the lease payments to your employer while you are employed. Your employer deducts the payments from your pay, generally from pre-tax salary, and a portion may be taken after tax to reduce fringe benefits tax.

Because the car is yours to use privately, the arrangement is a fringe benefit. Employers usually calculate the tax under the statutory formula method, and the employee contribution method lets you cancel it out with after-tax payments. Eligible battery electric and hydrogen fuel cell cars can be exempt, although plug-in hybrids stopped qualifying on 1 April 2025 unless a binding commitment was already in place, and an exempt car still counts towards your reportable fringe benefits amount. If you change jobs the novation ends and the lease, and its payments, come back to you.

Every novated lease has a residual value set at the start, in line with the ATO's minimum residual guidelines for the term. At the end you can pay the residual and keep the car, refinance the residual into a new lease, or sell the car and use the proceeds to clear it. If the car sells for less than the residual, you cover the difference.

Many people re-lease into a newer car at this point, which is why novated leases suit drivers who like to change cars every few years.

It suits salaried employees whose employer offers salary packaging and who drive enough for the packaged running costs to matter. The tax saving depends on your marginal rate, the car's price, how the fringe benefit is handled and whether the vehicle qualifies for the electric vehicle exemption, so the numbers need to be run for your situation.

A novated lease is a personal arrangement, not a business one. Sole traders and companies buying vehicles for the business usually look at a chattel mortgage or a finance lease instead.