A novated lease is a unique arrangement where you lease your car through your employer. Having your payments deducted from your pre-tax income brings with it a range of tax benefits and other advantages, but they aren’t for everyone. Weighing up the pros and cons is essential before you apply.
The pros of novated leases
Reduces your payable income tax
One of the most important benefits of novated leasing is that it reduces the income tax you have to pay. Because your payments are deducted from your pre-tax salary, your taxable income is lowered, which in turn lowers your income tax. In this way, novated leasing is a form of salary sacrifice or salary packaging agreement.
You can see the tax impact of taking out a novated lease compared to paying cash or buying with a loan in the table below:
| Car finance type | Car purchase price | GST savings | Running costs | Finance cost | Tax saved | Total spent |
|---|---|---|---|---|---|---|
| Cash purchase | $46,793 | $0 | $28,726 | $52,795 | $0 | $81,521 |
| Car loan | $46,793 | $0 | $28,726 | $46,793 | $0 | $75,519 |
| Novated lease | $46,793 | $5,810 | $26,115 | $44,919 | $9,765 | $71,034 |
| Figures are for illustrative purposes only, based on annual gross salary of $80,000 and travelling 15,000km/year over a five-year term. Vehicle price of $46,793 drive away, fuel price of $1.65 (or $0.35/kWh). Compared to a five-year secured loan of 6.49% p.a. | ||||||
Buy your car without GST
Not only is your income tax reduced, but the cost of the vehicle is too. That’s because GST is claimable on the purchase of your car by your novated lease provider. The limit for a claimable GST credit is 9.09% of your car’s value, up to a maximum of $6,334 (as of the 2025-26 financial year). This means the maximum value car where the full GST credit can be claimed is $69,674.
For example, let’s say you purchased a $50,000 car. Under a regular finance agreement, that’s what you’d be paying. However, with a novated lease, your provider could claim the $4,545 GST credit, meaning you’d only be paying $45,454.
Even more savings for EVs
When it comes to EVs, that’s where the true savings can be enjoyed. EVs are exempt from fringe benefits tax (FBT), meaning you won’t be liable to pay this out of your post-tax income. Here’s an example of how FBT works on a petrol and electric vehicle at the same price:
| Car type | Purchase price | FBT payable | Post-tax contribution |
|---|---|---|---|
| Petrol | $50,000 | $9,776 | $181/fortnight |
| Electric | $50,000 | $0 | $0 |
Bundle your car’s running costs into your payments
Novated lease providers can bundle all the main costs of running a vehicle into your fixed monthly payments, which are known as fully maintained novated leases. A range of costs can be included here, including servicing, registration, petrol or charging and car and CTP insurance, saving you the worry of organising and paying for these yourself. Additionally, these come out of your pre-tax income, further reducing your taxable salary.
However, you also have the option to instead take out a non-maintained novated lease, which allows you to organise all of this yourself. These costs will come out of your post-tax income, reducing the potential tax benefit.
Fleet discounts available
Another handy advantage of going through a novated lease provider is that you can gain access to fleet discounts on vehicles that you wouldn’t have otherwise received buying one on your own. Novated lease companies have strong connections with dealerships and are in a stronger position to negotiate the price of the vehicle than you might be.
No usage restrictions
Unlike commercial car lease agreements, you aren’t required to use your vehicle for business purposes at least 51% of the time. Novated leases are designed for employees to use them however they like.
Range of options available at the end of your lease
When it comes to the end of your novated lease term, you’ll be left with a residual or balloon payment that you’re required to cover. There are several options you can take when dealing with this, including:
- Paying the residual in full and taking ownership of the vehicle
- Refinancing the residual to extend your existing novated lease with the same car
- Selling or trading in your car to cover the residual and taking out a new novated lease with a new car
- Selling or trading in your car to cover the residual and ending your novated leasing arrangement
The cons of novated leases
Only available through employers that offer them
Of course, whether you can obtain a novated lease is subject to whether your employer offers them. If your place of work doesn’t provide any salary sacrificing arrangements when it comes to cars, the option simply isn’t available to you.
Even if your employer does offer them, though, your options will be limited to the company (or companies) they work with, meaning you may not be able to get the best novated leasing rates on the market. Finally, if your employer offers them, these arrangements are only open to salaried employees and certain casual workers (who meet the required criteria).
If you change jobs, your lease could be de-novated
Because your novated lease is tied to your employment, changing jobs could result in your lease becoming de-novated. This happens if your new employer doesn’t offer novated leasing as an option: you’d be required to continue paying your lease, but you’d lose the various tax benefits of your previous arrangement.
If your new workplace does offer novated leasing, though, you should be able to re-novate it with your lease provider and employer.
Having to cover your lease’s residual value
Although there are plenty of options for how to pay off your residual, having to deal with it at all isn’t always easy. The residual value is determined by your leasing company and is intended to represent your car’s proposed value at the conclusion of your lease.
Depending on the value of your car, your lump sum vehicle residual payment could be difficult to cover if you intend to keep the vehicle. For instance, a five-year lease will come with a residual of at least 28.13% of your car’s purchase price (following the ATO’s guidelines as of June 2025), meaning the minimum payment required for a $50,000 car would be $14,065 in this example.
Post-tax contributions may still be required
Because of the presence of FBT, you may be required to pay extra out of your post-tax income. As mentioned above, FBT doesn’t apply to electric vehicles, but it can apply to any other car obtained through a novated lease. It’s a tax that applies to fringe benefits provided to an employee by an employer. Novated leasing is a common example of this, but other benefits such as private health insurance and accommodation allowances can also be included.
Although FBT is charged to employers, rather than employees, the cost is generally passed on to you. However, by using the Employee Contribution Method (ECM), you can make post-tax contributions to the running costs of your vehicle, which in turn reduces your FBT liability down to $0.
More complicated car purchase method
There’s also the simple fact that novated leases come with more moving parts than a car loan or simply paying cash. For example, neither of these methods is tied to your employment and can be completed at any time. They also don’t come with any tax implications, so you can focus solely on buying the car and paying it off at your speed.
How do I know if a novated lease is right for me?
Weighing up the pros and cons of novated leasing will give you a clearer idea of whether it’s the best move for your situation. However, whether it’s right for you depends on a range of factors, such as how much you’re earning (and tax you’re paying), the type of car you’re leasing and its cost and how often you’ll be using your car.
Generally, novated leases are more beneficial for those who stand to gain larger income tax and GST reductions, which are especially the case with EVs. They also present value to those who drive a lot. If you’re unsure about whether to take out a novated lease and what the benefits will be for you specifically, you can get a free quote today and speak with an experienced member of our novated leasing team to find out more about whether they’re right for you.
