Novated leasing, explained without the sales pitch.

A novated lease is a three-way arrangement between an employee, their employer and a financier, where the employer deducts the vehicle payments from the employee's salary. It is only available to employees whose employer offers salary packaging, not to a business buying its own vehicle. The tax treatment involves fringe benefits tax rules, and concessional treatment applies to some eligible electric vehicles. Your payroll department and accountant should confirm the position before you sign.

A novated lease is a three-way agreement between you, your employer and a finance company. You choose the car, the finance company leases it to you, and your employer takes over the lease payments and running costs, deducting them from your salary, partly before tax. You use the car as your own, and if you leave the job the lease goes with you. It is available to employees whose employer offers salary packaging, which includes most government, health, education and many private employers.

Lease payments and running costs come out of your salary before income tax, which lowers your taxable income. Because a car provided this way is a fringe benefit, fringe benefits tax applies, and most arrangements use the employee contribution method, where part of the cost is paid from after-tax salary to offset the FBT. The result is usually a saving compared with paying for the same car from after-tax income, and the saving is larger at higher incomes and for eligible electric vehicles. We show the comparison against a car loan for your salary and vehicle.

Eligible electric vehicles under the luxury car tax threshold for fuel-efficient vehicles are exempt from fringe benefits tax when provided through a novated lease. That means the whole lease payment and running costs can come out of pre-tax salary with no FBT to offset, which for many employees makes an EV cheaper to run than a similar petrol car bought with a loan. Plug-in hybrids lost the exemption for new arrangements from April 2025, so check the current rules for the vehicle you have in mind.

Most novated leases bundle fuel or charging, servicing, tyres, registration, insurance and roadside assistance into one salary deduction, budgeted from your expected kilometres and reconciled during the year. Some drivers prefer a finance-only novated lease and pay running costs themselves. Bundling is convenient, but the budget should match your real usage so you are not over- or under-deducted.

A residual value, set by ATO minimum percentages according to the lease term, remains at the end. You can pay it and keep the car, refinance it into a new lease, or sell the car and use the proceeds to pay the residual, keeping any surplus. Many people trade up to a new car on a fresh novated lease at that point. Your broker explains the residual on each quote and what the options are when it falls due.

The lease is yours, not your employer’s. If you leave, the novation with that employer ends and you either novate the lease to your new employer, if they offer salary packaging, or take over the payments personally until you do. Your tax saving pauses while the lease is not novated. It is worth checking that a prospective employer supports novated leasing before you move.

It depends on your salary, the vehicle and how much you drive. Novated leases tend to win for higher earners, for eligible electric vehicles because of the FBT exemption, and for people who value one bundled payment for all running costs. A car loan can be better for lower earners, for very low kilometres, or where the employer’s packaging provider adds high fees. Lyft Money compares the two honestly for your situation rather than assuming one answer.

A chattel mortgage suits a car owned by the business and used mostly for business: the business owns it, claims GST and depreciation, and the repayments come from business cash. A novated lease suits an employee, including a company director on salary, who wants the car packaged from pre-tax pay with running costs bundled. The right answer depends on who drives the car, how much private use there is and the entity structure, which your accountant and broker work through together.

The finance structures are the same — chattel mortgage, lease or novated lease — but a few things change. Some lenders offer specific EV or low-emissions products, residual and balloon settings can be more conservative because resale values are still stabilising, and charging infrastructure can sometimes be financed alongside the vehicle. For employees, eligible electric vehicles under the luxury car tax threshold may attract an FBT exemption on a novated lease. Confirm current rules with your accountant.