How a novated lease works
A novated lease is a car lease paid through salary packaging: your employer deducts the lease payments and running costs from your pay and passes them to the lessor. In 2026-27 the saving comes from paying from pre-tax salary, offset by fringe benefits tax (20% statutory formula) unless the car is an eligible electric car. Source: ATO.
Run your own numbers in the novated lease calculator. Every figure on this page is listed with its ATO source on our sources page.
About the structure. How the three parties (you, your employer and the lessor) split obligations is set by the lease and novation agreement you sign. We describe the usual arrangement in general terms only; we have not verified it against an official source. The tax figures are verified ATO figures.
How does a novated lease work, step by step?
- You choose a car and a lessor, and the lessor finances the car. Your employer agrees to make the payments from your salary.
- The payments come out of your pay. Ask the lessor which costs their quote includes (for example finance, charging, registration, insurance, tyres and servicing).
- Your taxable income falls by the pre-tax part, and income tax and Medicare levy are worked out on the lower figure. That is where the saving comes from.
- FBT applies to the car. For a petrol, diesel or hybrid car, the FBT taxable value is 20% of the base value a year. Most packages pay that amount from post-tax pay (the employee contribution method), which reduces the taxable value to nil. See FBT on a novated lease.
- A battery electric car that meets the ATO conditions is exempt from FBT, so the whole package can come from pre-tax pay. It is still a reportable fringe benefit. See EV FBT exemption.
- At the end you pay the residual, a lump sum set at the start based on the ATO minimum residual values. Your agreement sets how you can deal with it, so ask the lessor. See residual values and the end of the lease.
Worked example: electric car vs petrol car
Same salary ($100,000), 3-year lease, 8% p.a. example interest rate, current rules, no GST assumption. The same code as the calculator produces these figures.
| Item | BEV $60,000 | Petrol $40,000 |
|---|---|---|
| Lease payments + running costs | $19,235 | $13,490 |
| FBT taxable value (20% of base value, or exempt) | $0 | $8,000 |
| Paid from pre-tax pay | $19,235 | $5,490 |
| Paid from post-tax pay (ECM) | $0 | $8,000 |
| Income tax + Medicare saved | $6,155 | $1,757 |
| Net cost to you | $13,080 | $11,733 |
| Residual at the end | $28,128 | $18,752 |
The petrol car's $8,000 of post-tax contributions is why its tax saving is much smaller. Over the term, including the residual, our model puts the BEV lease $7,632 below buying it with cash, and the petrol lease $1,952 above cash. That model ignores interest you could earn on the cash, and lessor fees; see novated lease vs buying outright.
What does a novated lease cost you that a loan or cash does not?
- Interest and fees: the lessor's rate and any establishment or admin fees. We do not hold verified market rates, so the calculator's 8% is an example only. The quote checker works out the rate built into a real quote.
- The residual, a large lump sum at the end, paid from post-tax money in our model.
- Post-tax contributions on non-exempt cars. These reduce FBT to nil but get no tax saving.
- A reportable fringe benefit on exempt EVs, which appears on your income statement. We have not verified which income tests it affects.
Who is a novated lease usually better for?
Higher marginal tax rates mean each pre-tax dollar saves more tax: 30% from $45,001, 37% from $135,001 and 45% from $190,001, plus 2% Medicare levy (ATO). At or below $18,200 there is no income tax to save. An eligible EV removes the FBT cost entirely. The detail is on is a novated lease worth it, with side-by-side comparisons on novated lease vs car loan and vs buying outright.
Can you get a novated lease on a used car?
Possibly, depending on the lessor. Lessors set their own age and kilometre limits, and we have not verified them. See novated lease on a used car.
Frequently asked questions
What is a novated lease in simple terms?
A way of paying for a car, and usually its running costs, through deductions from your salary, with your employer making the payments to a lessor. Because part or all of the deduction can come from pre-tax pay, your income tax changes, and fringe benefits tax rules apply to the car.
Do you pay FBT on a novated lease?
The car is a fringe benefit. For most cars the taxable value is 20% of the base value a year, and post-tax contributions under the employee contribution method can reduce it to nil. Eligible electric cars are exempt but still reportable. Source: ATO.
What is the residual on a novated lease?
The amount left to pay at the end of the lease. The ATO minimum residual values for an 8-year effective life car are 1 year 65.63%, 2 year 56.25%, 3 year 46.88%, 4 year 37.5%, 5 year 28.13% of cost.
What happens if I change jobs?
It depends on your lease agreement and your new employer. We have not verified a general rule against an official source; ask your lessor before you sign.
By . Published by Abdisalan Awale, ABN 64 886 470 398 (about us). Last reviewed 17 Oct 2026 against the sources on our sources page. Not yet reviewed by a qualified third party. How we calculate: methodology.