Key Takeaways
- A novated lease is a three-way agreement between employee, employer, and lease provider.
- You can lease new or used cars with payments taken from pre-tax salary.
- Running costs like fuel, servicing, insurance, and registration are bundled as well, to make the savings larger.
- You agree to the lease for a fixed period (usually 1-5 years).
- At the end of the lease, you'll have a lump sum remaining, and you can pay it to buy out the car, refinance it into a new lease, or sell the car to cover it.
How Novated Leasing Works
A novated lease works by combining your car finance and running costs into your pre-tax salary. This three way arrangement between you, your employer, and a lease provider lets you reduce your taxable income while driving the car you choose.
Basically, your employer makes lease payments and covers running costs from your salary before tax is applied. That reduces your actual salary in the eyes of the ATO, meaning you pay less tax.
The higher your tax bracket, the more you could save.
Step by step process:
1. Pick the Car
To squeeze the most value out of Novated Leasing, the new car should be under the Luxury Car Tax threshold ($91,387 for EV's, $80,567 for Fuel Cars).
2. Agree to the Lease
The lease outlines the term, monthly payments, running costs, and the residual value.
If your employer isn't setup for Novated Leasing, we can help them out, it's a fairly easy process for us to get them ready.
3. Salary Packaging
This includes an amount for running costs such as fuel, insurance, registration, and maintenance.
4. Drive the Car
Fringe Benefits Tax (FBT) may apply depending on your situation, but your employer and provider handle the calculations.
5. At the End of the Lease
At the end of the lease, there will be a lump sum remaining on the car finance, called a 'residual value'. You can:
- Pay out the residual, and own the car outright
- Sell the car to pay the residual, and either upgrade to a new lease, or go another route for your next car
- Refinance the residual amount, entering into a new lease agreement to pay the residual amount
Why Do People Get a Novated Lease?
A novated lease is more than just a way to finance a car - it combines tax savings, convenience, and flexibility into one package.
By paying for your vehicle and its running costs through your pre-tax salary, you can reduce your taxable income and simplify the way you manage car expenses.
Tax Savings
- Lease payments and running costs come out of your pre-tax salary, which can reduce your taxable income.
- For Example:
- If you earn $90,000 and package $15,000 worth of car costs, your taxable income would drop to $75,000, saving $4,500 in income tax each year.
Bundled Running Costs
- Expenses like fuel, servicing, tyres, insurance, and registration are included in your lease budget.
- This makes it easier to budget - you have one fixed payment per pay cycle to cover everything, no more surprise bills.
GST Savings
- You can save up to $6,334 in GST on the price of the vehicle, as you aren't technically 'purchasing' it.
- You also don't pay GST on car running costs, as it's handled within the lease.
Flexibility and Better Choice
- Lease a brand-new car, or choose a used car that meets eligibility requirements.
- Pick a lease term that suits you, usually 1-5 years.
- If opting for a new car, we likely have access to Fleet Discounts that can get your savings even higher.
Convenience
- Everything is managed through your employer and lease provider.
- No seperate bills for rego, insurance, or servicing, it's all packaged into your salary.
End of Lease Options
- You have full choice in how you want to proceed when the lease ends. Upgrade to a newer model, buy the car outright, or refinance the residual value to keep the lease going.
Costs and Financial Considerations
While novated leasing can offer significant tax benefits, it's important to understand the costs involved.
A lease combines car finance with running costs, GST considerations, and residual value obligations. Being clear on these financial factors helps you decide if a novated lease is right for you.
The Car and it's Running Costs
A novated lease bundles most car expenses into one pre-tax package:
Benefit: These costs are deducted before tax, making them more affordable compared to paying them personally.
GST Treatment
- New Cars: You'll save up to $6,344 in GST on the purchase price of the car.
- Used Cars: If you purchased from a dealer, GST is handled the same way as a new car. If purchased privately, no GST applies.
- Running Costs: You don't pay GST on fuel, insurance, or servicing under a novated lease.
Residual Value / Lease-End Obligation
- Every novated lease has a residual value - the estimated value of the car at the end of the lease, set by the ATO.
- For example:
- On a $50,000 car with a 5 year lease, the residual might be $14,065 (28%).
- At lease end, you can:
- Pay the residual and own the car outright
- Refinance the residual into another novated lease
- Sell the car to cover the residual value.
Other Considerations
- Early Termination: If you leave your job or end the lease early, you'll need to settle the remaining balance.
- Insurance Requirements: Comprehensive insurance is usually mandatory.
- Luxury Car Tax (LCT): Applies if your car exceeds the ATO's LCT threshold.
Eligibility Requirements
Not everyone can access a novated lease - there are some basic requirements for employees, employers, and vehicles. Here's what you need to know before applying.
Employee Eligibility
- Must be employed in Australia (full-time, part-time, or in some cases, contractors).
- Income is processed via PAYG payroll so deductions can be made.
- Generally available across most industries and job types.
- Contractors and self-employed may not be eligible unless they have a specific arrangement with an employer.
Employer Eligibility
- Must agree to enter a novated lease agreement with a provider.
- Needs to be GST-registered (to claim GST credits on the lease).
- Employer processes the pre-tax and post-tax deductions through payroll.
- Most medium to large businesses already offer novated leasing, but smaller employers may need education or setup support (we will get them setup).
Vehicle Eligibility
- New Cars: Almost all new cars are eligible, provided they're roadworthy and registed.
- Used Cars: Are Typically allowed if
- Under a certain age (commonly less than 10 years at lease end)
- Roadworthy and insured
- Luxury Vehicles: Eligible but may attract Luxury Car Tax (LCT)
- Exclusions: Some very old, unroadworthy, or specialty vehicles may not qualify.
Other Considerations
- Early Termination: If you leave your job or end the lease early, you'll need to settle the remaining balance.
- Insurance Requirements: Comprehensive insurance is usually mandatory.
- Luxury Car Tax (LCT): Applies if your car exceeds the ATO's LCT threshold.
Example Scenario:
Sarah works in finance and earns $95,000 annually. Her employer is GST-registered and already supports novated leasing. She wants a 3-year-old Mazda CX-5 purchased from a dealer. Since it's roadworthy, under age limits, and her employer participates, she's fully eligible.
Quick Checklist:
- You're employed and paid via payroll
- Your employer is GST registered
- You've chosen a new or eligible used car
- You can cover lease payments and residual at lease end
Lease Types and Variations
A novated lease can be structured in different ways depending on your needs, budget, and driving habits. Understanding the main lease types and variations will help you choose the right arrangement for your situation.
Fully Maintained Novated Lease
- The most common option.
- Bundles running costs such as fuel, servicing, tyres, registration, and insurance into the lease.
- Convenient because all expenses are managed in one package.
- Ideal for people who want predictable costs and no surprise bills.
Non-Maintained Novated Lease
- Covers the finance portion of the lease only.
- Running costs (fuel, servicing, insurance, rego, etc) are managed seperately by you.
- Less common as it removes many of the tax benefits of packaging running costs.
New Car vs Used Car Novated Lease
- New Cars: Come with manufacturer warranty, attract full GST savings, and usually lower maintenance costs.
- Used Cars: Can still be leased if they meet age/condition requirements. Often cheaper upfront, but may have higher servicing costs.
- GST treatment differs depending on whether the used car is purchased from a dealer or privately.
Short-Term vs Long-Term Lease
- Short-Term (1-2 years):
- Higher repayments
- Higher residual percentage
- Good if you plan to upgrade cars often
- Long-Term (3-5 years):
- Lower repayments
- Lower residual percentage
- Better for affordability and tax savings over time.
Luxury and Specialty Vehicles
- Luxury cars are eligible but may attract Luxury Car Tax (LCT) if over the threshold.
- Specialty vehicles (utes, vans, EVs) may have specific rules or tax treatments.
- EVs and plug-in hybrids often enjoy additional tax concessions under ATO rules.
End of Lease Options
When your novated lease term ends, you're not stuck - you have flexible options for what to do next. The ATO requires every lease to have a residual value (the car's estimated worth at the end of the leasE), and this gives you a clear set of choices.
Option 1: Buy the Car
- Pay out the residual value and keep the vehicle
- You may need to pay GST on the residual at this point
- Popular choice if you've looked after the car and want to keep it long-term
- Example: On a $40,000 car with a 3-year lease, residual might be $20,800. You pay this to own the car outright, and this closes off the lease.
Option 2: Trade-In and Upgrade
- Use your current car as a trade-in towards a new lease
- Residual is paid out of the trade-in value
- Ideal for drivers who like upgrading every 3-5 years
Option 3: Sell the Car to Cover the Residual
- Sell the car to pay the residual, and either upgrade to a new lease, or go another route for your next car
If you leave your job before Lease-End
- The lease doesn't disappear - you'll need to continue paying or refinance.
- Options include:
- Transferring the lease to your new employer
- Refinancing into a personal loan
- Paying out the lease balance and residual
Comparison & Alternatives
A novated lease isn't the only way to finance a car. To decide if it's the right fit, it helps to compare it with other options like a personal car loan or a company car. Each has pros and cons depending on your income, lifestyle, and goals.
Novated Lease vs Car Loan
- Novated Lease:
- Payments come from pre-tax salary, lowering taxable income.
- Running costs (fuel, insurance, servicing) can be included.
- GST savings on new and dealer-sold used cars.
- Lease ends with residual value to pay or refinance.
- Car Loan:
- Payments come from after-tax income.
- Running costs are separate and fully out of pocket.
- No GST benefits.
- You own the car outright once the loan is paid off.
Novated Lease vs Company Car
- Novated Lease:
- You choose the car you want to drive.
- Payments reduce your taxable income.
- The car is yours to use privately.
- You manage lease terms and end of lease options.
- Company Car:
- Provided and owned by your Employer
- Limited or no choice of vehicle
- Often only available for work use (private use may be restricted).
- You don't build equity or ownership in the vehicle.
A Cost Comparison
Polestar 2
Assumptions:
Term: 5 year loan/lease/running costs
Salary: $120,000. Which means you would normally pay $562 in tax per week.
KM’s Driven/Year: 10,000km’s. Which means the Polestar 2 would cost you ~$93/week for running costs (Registration, Insurance, Charging, Maintenance & Repairs, etc)
Novated Lease Breakdown
Car Loan Breakdown
Buying Outright Breakdown
Mazda CX-5 Sport
Assumptions:
Term: 5 year loan/lease/running costs
Salary: $120,000. Which means you would normally pay $562 in tax per week.
KM’s Driven/Year: 10,000km’s. Which means the Mazda CX-5 Sport would cost you ~$108/week for running costs (Registration, Insurance, Fuel, Maintenance & Repairs, etc)
Novated Lease Breakdown
Car Loan Breakdown
Buying Outright Breakdown
Pros and Cons of Each Options:
| Option | Pros | Cons |
|---|---|---|
| Novated Lease | Tax savings, bundled running costs, flexibility in car choice | Residual value to pay at end, depends on employer support |
| Car Loan | Your car finance is independent of your employer | After-tax payments, no GST or tax benefits |
| Company Car | No personal financial outlay, maintained by your employer. | Limited choice if any, may not allow private use, no ownership |
When a Novated Lease Makes the Most Sense:
- You're a salaried employee with a stable income
- You drive regularly and want running costs bundled
- You'd like to reduce your taxable income
- You prefer upgrading to a new car every 3-5 years
FAQ's
The Luxury Car Charge is a salary deduction used to offset the extra tax your employer pays when you lease a car above the ATO’s luxury car depreciation limit. It helps them recover the shortfall from reduced tax deductions.
Please note, this is completely separate from the Luxury Car Tax (LCT).
FBT is a tax (with a rate at 47%) applied to fringe benefits (incentives beyond salary/wages received from an employer). A non-electric car under a novated lease is a fringe benefit (electric cars are completely FBT exempt in Australia).
The employer is responsible for paying the FBT, but at Clear Lease - we use the employee contribution method (contributing post-tax funds) to offset any FBT to zero.
Our regular novated lease package (fully-maintained) usually includes your car lease repayments, fuel/charging, servicing, maintenance & repairs, registration, insurance, and tyres - all bundled into a single pre-tax deduction.
Yes, but it’s treated as a financial termination. You'll need to pay out the remaining lease value (and any fees), and you may lose some tax benefits. Talk to us to get a payout quote from your financier.
No, when your employer leases the car, they claim the GST credit, meaning you don’t pay GST on the purchase price. The same applies to most running costs. You will, however, pay GST if you buy the car at lease end.
Yes, if you’d like to keep the car, you simply pay the residual value set at the beginning of the lease. You can pay this from your personal funds, or refinance it separately. Once paid, the car is yours. You can also sell or trade it in and start a new lease.
Yes, if your new employer supports novated leasing, you can transfer your lease by signing a new agreement. If they don’t, you’ll need to make private repayments, refinance, or consider ending the lease.
Your lease doesn’t end if you change jobs. You can either transfer it to your new employer, pay privately until the lease ends, or choose to end the lease early.
Cars that are too old, unroadworthy, imported, heavily modified, or intended for commercial use typically don’t qualify for novated leasing. Motorcycles are also excluded under current ATO guidelines.
Luxury Car Tax (LCT) applies to vehicles that exceed the government’s set price thresholds. For the 2025–26 year, it’s $80,567 for standard vehicles and $91,387 for fuel-efficient ones. If your lease includes a car above these values, LCT may be added to your lease costs.
Please note: This is very different to the Luxury Car Charge (LCC).
