A novated lease is a three-way arrangement between you, your employer and a finance company that allows you to lease a car and bundle its running costs using your pre-tax salary. Because repayments are deducted from your income before tax is calculated, it can be one of the most tax-effective ways for an Australian employee to finance a vehicle.
Like any financial product, though, it comes with trade-offs. Here's a detailed look at the pros and cons of a novated lease to help you decide whether it’s the right option for you.
Novated lease pros and cons
Pros
Novated lease benefits
Income tax and GST reductions
Perhaps the most important benefit of taking out a novated lease is the fact that it reduces your taxable income through payments from your pre-tax salary. Your take-home pay is lowered, known as salary sacrificing or packaging, meaning the income tax you’re required to pay will also be lower.
You can see the tax impact of taking out a novated lease compared to paying cash or buying with a car loan in the table below:
| Car loan | Novated lease | ||
|---|---|---|---|
| Vehicle purchase price (inc. GST) | $46,793 | $44,416 | |
| Running costs over five years | $28,726 | $26,115 | |
| Finance cost (inc. interest) | $54,920 | $52,039 | |
| Tax saved over five years | $0 | $11,180 | |
| Overall cost comparison | $83,646 | $78,154 | |
| Overall cost with tax saving | $83,646 | $66,974 | |
| 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 $1.85/L. Compared to a five-year secured loan of 6.49% p.a. | |||
On top of the income tax reduction, GST on the car purchase is claimable by your novated lease provider. The GST credit limit is 9.09% of your car’s value, up to $6,334 (as of the 2025-26 financial year). For reference, a $50,000 car would become a $45,455 car once GST is claimed.
Even greater savings on offer for EVs
Electric vehicles are exempt from fringe benefits tax (FBT) up to the luxury car tax (LCT) threshold, which means you won’t have to make any payments out of your post-tax income on a car up to $91,387. You can see what that means for the cost of your lease in the following table:
| Car loan | Novated lease | Novated lease (EV) | |
|---|---|---|---|
| Vehicle purchase price (inc. GST) | $46,793 | $44,416 | $44,416 |
| Running costs over five years | $28,726 | $26,115 | $17,380 |
| Finance cost (inc. interest) | $54,920 | $52,039 | $51,514 |
| Tax saved over five years | $0 | $11,180 | $24,440 |
| Overall cost comparison | $83,646 | $78,154 | $68,894 |
| Overall cost with tax saving | $83,646 | $66,974 | $44,454 |
| 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 $1.85 (or $0.35/kWh). Compared to a five-year secured loan of 6.49% p.a. | |||
The Australian Government has committed to increasing the LCT threshold to $120,000, so if it raises the FBT exemption threshold as well, your savings could be supercharged.
Grants access to fleet discounts on vehicles
Novated lease providers are often able to access discounts on the vehicles they buy through their dealership and fleet partners. Through these connections, they can push the cost of the car down further than what you’d be able to manage on your own.
No usage restrictions
Unlike commercial car lease agreements, you aren’t required to use your vehicle for business purposes at all. Novated leases are designed for employees to use them however they like.
Have your on-road costs sorted for you
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. Some of the costs that can be included are:
- Rego and CTP/Green Slip
- Comprehensive car insurance
- Servicing, maintenance and tyres
- Fuel/charging costs
- Roadside assistance
These can also be deducted from your pre-tax income and GST is claimable, reducing their cost and your income tax even further. If you decide not to do this, though, you can opt for a non-maintained lease instead.
Offers flexibility in what you can do at lease’s end
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 for dealing with this, which are:
- Paying the residual in full to own the vehicle outright
- 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 lease
Novated lease disadvantages
Only available through employers that offer them
If your place of work doesn’t provide any salary sacrificing arrangements when it comes to cars, novated leasing simply won’t be 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.
Because your novated lease is tied to your employment, changing jobs to one where it isn’t offered could mean your lease is de-novated. You’d have to continue paying your lease, but you’d lose the various tax benefits of your previous arrangement. Switching between employers who offer novated leasing shouldn’t be an issue, though.
Requires you to deal with the residual
Although there are plenty of options for how to pay off your residual, having to deal with it at all isn’t always easy. 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 April 2026). This means the minimum residual required for a $50,000 car would be $14,065.
Post-tax contributions may still be necessary
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 under the threshold, but it does to any other car obtained through a novated lease.
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 to $0.
No deposits or extra payments available
Unlike a standard car loan, where you can pay a deposit (and therefore reduce your loan size and interest bill) and may be able to make additional payments, neither option is available on a novated lease. There’s no doubt that the savings on offer can be far greater in many cases, but exiting your lease early will attract potentially steep fees.
A more complex product than other forms of car finance
There’s also the simple fact that novated leases come with more moving parts than a car loan or simply paying cash. Neither of these other options is tied to your employment and can be taken out 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.
The benefits of a novated lease for the employer
It isn’t just employees that benefit from novated leases, though. Here are some of the ways that offering novated leasing can be a boon for employers:
- A cost-free, risk-free employee benefit: offering novated leasing costs the employer nothing to administer in most cases, as the lease provider handles the paperwork and payroll deduction setup on their behalf, as well as taking on virtually all of the risk
- Attracts and retains staff: access to a novated lease is a tangible, financially meaningful perk that can help employers differentiate themselves when recruiting and reduce staff turnover
- Reduces payroll tax liability: because novated lease repayments are deducted from an employee's pre-tax salary, the employer's payroll tax obligation may be reduced alongside the employee's taxable income
- Simple to administer: most novated lease providers manage the entire process on behalf of the employer, from setting up the salary deduction to handling lease renewals, meaning the administrative burden on HR and payroll teams is minimal
Is a novated lease right for me?
Whether a novated lease is right for you will ultimately depend on your individual situation. Here are some cases where it may or may not be the best option for your circumstances:
When a novated lease may be right for you
- You’re a salaried employee who wants to reduce your income tax
- You’d be dropped into a lower tax bracket with a novated lease
- You’re in the market for an EV, as this is the most cost-effective way to finance one
- You want your running costs consolidated into a single, predictable payment rather than managing fuel, insurance and servicing separately
- You’re earning enough to comfortably manage your repayments and reduced take-home pay
When a novated lease may not be right for you (or unavailable)
- Your employer doesn't offer novated leasing as part of their salary packaging options
- You're self-employed or a sole trader and don’t pay yourself a salary, which would render you ineligible for a novated lease
- You’re a casual employee working inconsistent hours, as it’s harder to take out a lease in this situation
- You're on a lower income, as the tax savings may be modest
- Your employment situation is unstable, as losing or changing jobs during the lease term can complicate the arrangement and may leave you responsible for the full lease cost