Novated lease cons
The novated lease payments on the vehicle are deducted by your employer from your salary. But that’s where the connection to your employer ends. You can use the vehicle entirely for personal use, with no need to keep a record of how you use it.
Of course, a novated lease can also be an effective way of paying for a car that you use for a combination of work and personal use (business use record keeping may be required if applicable).
If you choose an eligible electric vehicle (EV) or plug-in hybrid electric vehicle (PHEV) for your novated lease, it will be exempt from fringe benefits tax (FBT).
This makes a novated lease a particularly cost-effective way of paying for a car and can even work out cheaper than buying it outright with cash – see the cost comparison towards the end of this page.
The FBT exemption to EVs and PHEVs with a purchase price below the luxury car tax threshold ($89,332 for the 2023/24 financial year).
If you acquire your car through a novated lease, you will save on GST on the purchase price of the vehicle, plus any extras and accessories included in the up-front cost (tow bars, roof racks, window tinting etc.).
The total potential GST discount on a car purchase (including extras) is capped at $6,191 for the 2023/24 financial year. With private sales there is generally no GST saving as it’s usually not added to the sale price by the seller.
When it comes time to make the payments for your vehicle, this will be done by your employer using your pre-tax salary. For eligible electric car novated leases, 100% of the cost can be covered with pre-tax salary. For other vehicles it’s generally a combination of pre- and post-tax salary.
Salary sacrificing your car in this way reduces the amount of income you need to pay tax on and can mean savings in the thousands of dollars, depending on the lease repayment amount and your salary.
You can boost your tax savings further by bundling your car running costs into your lease payments. This includes fuel/charging, servicing, insurance, registration/CTP and tyres. This saves you more money and is convenient as it means you won’t need to separately budget for your car running costs. We will help you work out your running costs when calculating your novated lease.
Any car running costs that are included in your lease will also come with a GST discount, bringing yet more tax savings. Say, for example, you spend $100 per week on fuel. With the GST discount, you would save more than $470 per year on your fuel costs, or around $2,300 over a 5-year novated lease term.
You have the flexibility to get a new vehicle or you can get a novated lease for a used car, provided it’s not more than 12 years old at the end of the lease. For a used car, it can be one you buy through a dealer or private sale. You can even novate a car you already own through what’s called a ‘sale and lease back’.
In many cases, the company providing the novated lease (e.g. Novated Lease Australia) can access discounts on the vehicle purchase price from car dealers. This is because we purchase large numbers of vehicles for our clients and can often get a bulk discount. We may also be able to help you with a discount on vehicle running costs, like fuel expenses which can be covered through your novated lease.
Just because your lease was set up through your current employer, it doesn’t mean it needs to stay there. If you move jobs, you can either transfer it to your new employer or de-novate it and continue to make the payments yourself using after-tax money like a regular car loan.
When the novated lease term comes to an end, you have the option to:
Some employers who offer novated leasing have an agreement with a particular leasing company. If that’s the case, you won’t have the option of shopping around for a better deal or a provider offering a higher level of customer service.
A novated lease is only an option for employees. If you’re self-employed (i.e. not an employee of a company) you won’t be able to pay for a car with a novated lease.
Novated leasing is becoming increasingly common as a benefit for employees – both in the private sector (SMEs and corporates) and for government employees – but it’s not available from all employers. If your employer doesn’t offer it, you’ll need to either convince them to change their policy, or look at other finance options for your car.
Unlike a car loan or buying the car outright with cash savings, with a novated lease you won’t actually own the car until you pay the residual amount (which includes GST) at the end of the lease. You’ll still be able to use the vehicle without restriction, but you generally won’t be able to make any major modifications.
For this reason some of the EV incentives offered by state governments in Australia are not available through a novated lease, as they only apply to the vehicle owner.
Your repayments and lease term are fixed meaning you won’t have the option to make extra repayments to pay off the car faster and save on interest. If you do decide you want to end the lease prematurely, there are also generally break costs.
Unless you buy an eligible EV or PHEV, your novated lease will be subject to fringe benefits tax (FBT). However, there is generally not any FBT to actually pay, either by you or your employer. That’s because with a novated lease, we can reduce the FBT payable by including post-tax contributions towards your lease payments (called the employee contribution method).
Only passenger vehicles designed to carry a load of less than 1,000kg can be financed with a novated lease. Generally vehicles like motorcycles, caravans and boats are not eligible for the tax advantages available through a novated lease.
If you change jobs you’ll either need to arrange for your new employer to take on the lease (assuming they offer novated leasing) or start making the lease payments yourself from your own funds (without the generous tax savings). Similar to a standard car loan, there’s a risk of losing the car if your job is unexpectedly terminated and you can’t afford the repayments.
All novated leases come with a residual amount. This is a larger one-off payment you’ll need to make at the end of the lease term to own the car outright. It will be outlined in your lease agreement. GST is payable on the residual amount and you will need to pay it using after-tax funds. Most drivers don’t pay for the residual using their own cash. Instead, they cover it using the trade-in price of the vehicle, and then start a new lease with a different car.
Overall, the trade off for the tax advantages of a novated lease is that it’s not as straightforward as some of the other ways you can finance a car. That said, your provider will do most of the work for you and explain the process of how a novated lease works in detail.
Yes, for a lot of people a novated lease is very much worth it. In fact, the potential tax savings mean a novated lease can work out to be considerably cheaper than the other options available.
If you choose to novate an eligible EV or PHEV the tax savings are most substantial. That’s because these vehicles are eligible for a fringe benefits tax exemption.
Below is an example cost comparison, based on a Tesla Model 3 RWD that’s eligible for the FBT exemption.
Vehicle price (Tesla Model 3 RWD)
GST saving on vehicle
Upfront payment required
$221 (car and running costs)
$76 (running costs only)
$390 (car and running cost)
Tax saving over 5 years (GST & income tax)
Total cost of paying for car & running costs over 5 years
$76,504 (including residual payment)
Of course, the benefits and savings available through a novated lease will vary based on each individual’s circumstances. Here are some factors to consider…