Quick answer. A novated lease is a three-way arrangement between you, your employer and a financier. Your employer takes the lease payments straight out of your pay — part before tax, part after — and the car is yours to use as if you owned it. For some employees, a novated lease can reduce the after-tax cost of running a car compared with paying all vehicle costs from post-tax income. The result depends on salary, vehicle price, lease structure, running costs, residual and employer arrangements. It also ties the arrangement to your job, and it always finishes with a residual amount owing.
What a novated lease actually is
Three parties, one agreement. You choose the car and use it. Your employer takes the payments from your salary and passes them to the financier. The financier owns the vehicle for the term of the lease.
The word novated refers to the transfer — your lease obligation is novated to your employer for as long as you work there. That transfer is central to the structure. Because the employer takes on the lease obligations and administers the arrangement through payroll, eligible vehicle and running costs can be salary packaged, subject to the applicable tax and FBT rules.
Because the payments come out of your salary rather than your bank account, the comparison that matters isn’t “what’s the interest rate” — it’s what happens to your take-home pay.
→ How a novated lease works covers the three-way agreement and the payroll mechanics in detail.
Who it tends to suit — and who it doesn’t
It tends to work when you’re a PAYG employee whose employer already offers salary packaging, you’re on a reasonable marginal tax rate, you’ll keep the car for the full term, and you’re comfortable that the arrangement is tied to your employment.
It tends not to work when your employer doesn’t offer it, you’re self-employed or a contractor, your income is variable, you expect to change jobs soon, or the car is used almost entirely for business — in which case a chattel mortgage is usually the better structure.
→ Novated lease pros and cons goes through the trade-offs properly.
How it compares to the alternatives
| Novated lease | Car loan | Chattel mortgage | |
|---|---|---|---|
| Who owns it during the term | Financier | You | You |
| Paid from | Salary, pre- and post-tax | Post-tax income | Business funds |
| Best suited to | PAYG employees | Anyone | Businesses and ABN holders |
| Running costs bundled | Usually | No | No |
| Tied to your job | Yes | No | No |
| End of term | Residual owing | Balloon, if you chose one | Residual, if you chose one |
The right comparison depends on which alternative you’re actually weighing up:
→ Novated lease vs car loan · novated lease vs salary sacrifice · chattel mortgage vs novated lease
FBT, and the electric vehicle exemption
Providing you a car through salary packaging is a fringe benefit, so FBT applies. In practice most arrangements use the employee contribution method — you pay part of the cost from post-tax salary, which reduces the taxable value of the benefit, often to nil. That’s why a novated lease quote splits your payment into a pre-tax and a post-tax component.
Eligible electric vehicles are exempt from FBT, which is why EV novated leases became popular. One thing that is widely misunderstood and worth stating plainly: FBT-exempt does not mean invisible. The benefit is still reportable — your employer works out a notional taxable value, and a reportable fringe benefits amount is included in income tests, which can affect HELP repayments and other income-tested obligations. It doesn’t make an EV lease a bad idea. It does mean the headline “no FBT” isn’t the whole picture.
→ FBT on a novated lease · electric car novated leases
Working out what it costs
The number that matters is the change to your take-home pay, and it depends on the vehicle price, the term, your salary and marginal rate, the running costs bundled into the package, and the residual at the end. A lower fortnightly figure isn’t automatically a better deal — it usually means a larger residual waiting for you.
→ How novated lease costs are worked out walks through the components.
What happens at the end
Every novated lease finishes with a residual value still owing. The residual is generally benchmarked against the ATO’s minimum residual guidance for the lease term. Taxation Determination TD 93/142 also allows a lower residual where a well-considered and fair estimate of the vehicle’s likely market value at lease end supports it.
At the end you can generally arrange to buy the vehicle, re-lease it, trade or sell it, or return it where the arrangement allows. Buying it is usually a separate transaction rather than an automatic right under the lease.
→ Novated lease residual value covers the table, the options and the shortfall risk.
How Alpha390 can help
Alpha390 Finance facilitates novated leases through a partner — we don’t provide the lease ourselves. What we do is work out whether a novated lease is genuinely the right structure for you, or whether ordinary car finance or a chattel mortgage would leave you better off, and then connect you with the right option.
We’re not paid to tell you a novated lease is the answer. Often it isn’t.
Talk to us about your options →
Australian Credit Licence 506065 (Five Tees Pty Ltd)
Frequently asked questions
What is a novated lease, in plain terms?
A three-way agreement between you, your employer and a financier. Your employer deducts the lease payments from your salary — partly pre-tax, partly post-tax — and you use the car as if it were yours. The financier owns it during the term.
Do I need my employer’s agreement?
Yes. The lease is novated to your employer, so they have to be willing to administer it through payroll. Many employers offer it as a standard benefit; some don’t offer it at all.
What happens if I change jobs?
The novation ends with your employment. Depending on the arrangement you may be able to novate the lease to a new employer, or you become responsible for the payments directly. Check this before you sign, not after.
Is a novated lease cheaper than a car loan?
Sometimes. For some employees it can reduce the after-tax cost of running a car compared with paying all vehicle costs from post-tax income. The result depends on salary, vehicle price, lease structure, running costs, residual and employer arrangements — so it’s worth comparing both properly rather than assuming.
Is an electric vehicle novated lease exempt from FBT?
Eligible electric vehicles are exempt from FBT. The benefit remains reportable, though, and a reportable fringe benefits amount is included in income tests — which can affect HELP repayments and similar obligations.
What do I owe at the end?
A residual amount, generally benchmarked against the ATO’s minimum residual guidance for your lease term. You can usually buy the car, re-lease it, sell it or return it, depending on the arrangement.
This page is general information only and does not constitute credit, financial or tax advice. Alpha390 Finance facilitates novated leases through a partner and does not provide the lease directly. Tax outcomes, including FBT and GST, depend on your circumstances and your employer’s arrangements — speak to a registered tax agent. Alpha390 Finance operates under Australian Credit Licence 506065 (Five Tees Pty Ltd). Lending is subject to approval, lending criteria, terms, conditions and fees. Consider whether this is appropriate for your circumstances.