Quick answer: A novated lease is a three-way agreement between you, your employer and a lease/finance provider. Your employer pays the car’s lease and running costs out of your salary — part from your pre-tax pay — which can reduce your taxable income. You get the use of the car; the provider owns/finances it; your employer administers the deductions. At the end of the term you usually pay a residual (balloon) to keep the car, or trade/refinance it. Alpha390 arranges novated lease enquiries and refers them to our lease partner.
Ask us about a novated lease → · Call 1300 390 390
The three parts of a novated lease
“Novation” just means a contract is transferred. In a novated lease, the finance obligation is shared across three parties:
- You — choose the car and get to drive it.
- Your employer — agrees to deduct the lease and running costs from your salary and pay the provider while you work there.
- The lease/finance provider — supplies the finance and the packaging of running costs.
Because your employer pays some of the cost from your pre-tax salary, a novated lease is a form of salary packaging (see novated lease vs salary sacrifice).
How the salary packaging works
Your pay is split so that part of the car’s cost comes out before tax and part after tax. Reducing your pre-tax (taxable) income can lower the income tax you pay; the after-tax portion is used to offset FBT. The net effect for many people is that a novated lease can be more tax-effective than buying the same car with an after-tax car loan — but the actual outcome depends on your salary, the car and your employer’s policy, so it is worth modelling your own numbers (our novated lease calculator is a starting point).
What is usually included
A key appeal of a novated lease is that it can bundle the running costs into one regular salary deduction, typically:
- Finance repayments on the car
- Fuel or charging
- Servicing and tyres
- Registration and CTP
- Comprehensive insurance
That turns most of the cost of running the car into a single, largely pre-tax figure.
FBT and the EV exemption
Because you get a private benefit (the car) through your employer, a novated lease attracts Fringe Benefits Tax (FBT). In practice this is commonly handled by the Employee Contribution Method — the after-tax part of your payments offsets the FBT. Importantly, eligible electric and low-emission vehicles can qualify for an FBT exemption, which is why EVs are especially popular on novated leases (see EV novated lease). FBT rules are general information here, not tax advice — confirm your position with your accountant.
What happens at the end of the lease
At the end of the term you typically have a residual (balloon) value to deal with. You can usually:
- Pay the residual and own the car outright, or
- Re-lease or upgrade to a new car, or
- Sell or trade the car (any difference to the residual is yours to settle or keep).
If you change jobs, the lease “un-novates” — the obligation reverts to you until a new employer picks it up, so it is worth understanding that before you start.
Is a novated lease right for you?
Novated leases tend to suit salaried employees whose employer offers packaging, especially for a newer or electric car driven for a mix of work and private use. If you are self-employed or your employer doesn’t offer it, a car loan or business car finance may be the better route. See novated lease vs car loan and novated lease pros and cons to compare.
Ask us about a novated lease → · Call 1300 390 390
Frequently asked questions
How does a novated lease work?
It is a three-way agreement between you, your employer and a lease provider. Your employer pays the car’s lease and running costs from your salary, partly pre-tax, which can reduce your taxable income. You drive the car; at lease end you pay a residual to keep it or upgrade.
Is a novated lease worth it?
It can be tax-effective for salaried employees whose employer offers packaging, especially for electric cars that qualify for the FBT exemption. The outcome depends on your salary, the car and your employer’s policy, so model your own numbers.
What is included in a novated lease?
Usually the finance repayments plus running costs – fuel or charging, servicing, tyres, registration, CTP and insurance – bundled into one regular salary deduction.
What happens at the end of a novated lease?
You typically pay the residual to own the car, re-lease or upgrade, or sell/trade it. If you change jobs, the lease reverts to you until a new employer takes it on.
Do electric cars get a tax break on a novated lease?
Eligible electric and low-emission vehicles can qualify for an FBT exemption, which often makes EVs particularly cost-effective on a novated lease. Confirm eligibility and your position with your accountant.
Written and reviewed by the Finance Director at Alpha390 Finance.
Novated leasing is facilitated through our lease partner; Alpha390 arranges and refers the enquiry. This article is general information only and does not constitute credit, financial or tax advice. Alpha390 Finance operates under Australian Credit Licence 506065 (Five Tees Pty Ltd). FBT and tax outcomes depend on your circumstances – confirm with your accountant. Lending and leasing are subject to approval, criteria, terms, conditions and fees.
