Novated Lease Explained: A Complete Australian Guide for 2026

What is a novated lease in simple words?

A novated lease is a way to get a car through your job. Three people sign the paperwork: you, your boss (the employer) and a finance company. You pick the car you want. The finance company buys it. Your boss then pays the lease from your pay before tax is taken out. That single change — paying before tax instead of after tax — is why so many Australians save thousands of dollars a year with a novated lease.

Think of it like this. Normally, the government takes tax out of your salary first, and then you spend what is left on your car. With a novated lease, the car cost comes out first, and only the smaller amount that is left gets taxed. Less taxable pay means a smaller tax bill, and a smaller tax bill means more money in your pocket at the end of the year.

It sounds fancy, but it is really just a smarter way to pay for a car you were probably going to buy anyway. If your employer offers salary packaging (most Australian workplaces do), you can use a novated lease to buy a new car, a used car, or even the car you already own.

How salary sacrifice cuts your tax bill

Salary sacrifice means swapping part of your salary for a benefit — in this case, a car. The Australian Taxation Office (ATO) allows this because a novated lease is treated as a workplace benefit, not a personal loan. Your employer runs the payment through the payroll system, which means it lowers your gross income for tax purposes.

Say you earn $100,000 a year and your lease costs $12,000 a year including running costs. Instead of paying tax on the full $100,000, you now pay tax on $88,000. At the 32.5% marginal rate, that alone saves around $3,900 in income tax. On top of that, the finance company can claim the GST back on the car price, which is another $3,000–$6,000 saving on a typical vehicle. These numbers add up quickly.

The exact saving depends on three things: your income, the price of the car, and the running costs you bundle in. A higher tax bracket, a more expensive car and higher yearly kilometres usually mean bigger savings. Our free calculator does the maths in seconds so you can see your own number.

What can you pay for inside the lease?

One of the best parts of novated leasing is that almost every driving cost can go into the same pre-tax bucket. That means fuel or electricity, comprehensive car insurance, registration and CTP, scheduled servicing, new tyres, roadside assistance, and even car washes in some packages. Instead of paying each bill separately with after-tax money, you set a yearly budget and your salary packaging provider pays the invoices from your pre-tax salary.

This is a big deal for family budgeting. Car costs stop being surprise expenses. You know exactly what you spend on your vehicle each fortnight, and every one of those dollars is working harder because it has not been taxed yet. Many drivers say the budgeting benefit alone is worth doing a novated lease, even before the tax savings kick in.

The only real limit is that the costs must relate to the car on the lease. You cannot pay for another household car, a caravan, or fuel for a boat. Anything that would be legitimate to claim as a car expense on your tax return is generally fine to include.

Who is eligible for a novated lease in Australia?

Most full-time and part-time employees in Australia are eligible, provided the employer agrees to run the salary packaging arrangement. You do not need to work for a big corporation. Small businesses, schools, hospitals, charities, government departments and start-ups can all offer novated leases through a salary packaging provider. If your boss says yes, you are in.

Casual workers can sometimes qualify, but the finance company will want to see steady income. If you have been in the same casual role for a year or two, it is worth asking. Contractors on PAYG arrangements may also qualify. True sole traders and freelancers on ABNs usually cannot novate because there is no separate employer to novate the lease to — a chattel mortgage or business car loan is normally a better fit for that group.

There is no minimum salary required by law, but in practice the tax savings work best for people earning above about $45,000, because that is where higher marginal tax rates begin. The more tax you would have paid, the more you save by shifting that spending pre-tax.

What cars can you get?

Almost any passenger car, SUV, ute or light commercial vehicle under 4.5 tonnes can be novated. New, used and even demonstrator vehicles are all eligible. Many providers will also let you novate a car you already own through a process called a sale and leaseback: you sell your car to the finance company, they pay you the market value, and then you lease it back and start salary sacrificing the repayments.

The one big rule is that the car must be for personal use. It can be used for work trips too — that is fine and even encouraged — but it cannot be a specialty commercial vehicle like a large truck or a tow tractor. Motorbikes are usually excluded because the ATO treats them differently for FBT.

Electric vehicles (EVs) and plug-in hybrids that fall under the luxury car tax threshold for fuel-efficient vehicles get an extra bonus: they are currently exempt from Fringe Benefits Tax. That makes an EV novated lease one of the most powerful tax-saving tools available to Australian employees today.

How the numbers actually flow through your pay

Once your lease starts, your payroll team splits your fortnightly pay into three pieces. First, they take out the lease payment (which covers finance plus running costs). Second, they calculate income tax on the smaller amount that is left. Third, they pay the rest into your bank account. That is your take-home pay.

There is one extra step for petrol and diesel cars: a portion of the lease is paid post-tax to offset something called Fringe Benefits Tax. This is called the Employee Contribution Method (ECM), and it is designed to reduce your FBT liability to zero. Your packaging provider handles the split automatically — you do not need to work it out yourself.

For EVs under the FBT exemption, the whole lease payment can be sacrificed pre-tax, and there is no post-tax contribution. This is one of the main reasons EV novated leases produce the biggest savings right now.

The end-of-lease decision: understanding the residual

Every novated lease ends with a lump sum called the residual value, or balloon payment. The ATO sets minimum residual values based on the lease term. For example, a five-year lease typically has a residual of about 28.13% of the car's original price, while a one-year lease is around 65.63%. This is how the ATO makes sure the leased asset still has real value at the end of the term.

You have three sensible options when the lease ends. You can pay the residual and keep the car outright. You can trade it in — if the market value is higher than the residual, you keep the difference in cash. Or you can refinance the residual into a new lease and keep driving with lower monthly payments.

Most Australians choose to trade in or refinance. Very few people write a large cheque at the end. When you use our calculator, we show you the estimated residual up front so there are no surprises down the track.

Common myths about novated leasing

Myth one: only rich people benefit. Not true. The tax rules apply to every income bracket above $45,000, and middle-income earners often see the highest percentage savings relative to their pay.

Myth two: you never own the car. False. At the end of the lease you can pay the residual and take ownership, or trade in for equity, just like any other car finance.

Myth three: if you leave your job, you lose everything. Also false. If you change employer, you simply take the lease with you. Your new employer signs a fresh novation agreement, or if they do not offer packaging, you continue paying the lease privately (post-tax) until you refinance or sell.

Myth four: novated leases are only for new cars. Wrong again. Used cars up to about 12 years old at the end of the lease are usually fine, and sale-and-leaseback on your existing car is one of the most underused tricks in the salary packaging world.

Is a novated lease right for you?

A novated lease works best if you plan to keep a car for three to five years, drive a moderate to high number of kilometres each year, and pay tax at the middle or top marginal rate. The higher your tax bracket and yearly distance, the bigger the yearly saving.

It may not be the best fit if you plan to keep the same car for ten years or more, have very unstable employment, or already own a fully paid-off car you love and drive very little. In those cases, keeping your current car with a simple insurance policy might beat the lease maths.

The best way to know is to compare. Use our free Australian novated lease calculator, put in your real salary, the exact car you want and your yearly kilometres, and see what your fortnightly take-home pay looks like both ways. Numbers, not marketing, should make the decision for you.

Next steps

Start by writing down your yearly salary, the car you want, an estimate of yearly kilometres, and your suburb (for insurance quotes). With those four pieces of information, our calculator can show you the tax saving, the fortnightly cost and the estimated residual in less than a minute.

Then talk to your HR or payroll team. Ask if the workplace already has a preferred salary packaging provider, or whether you can bring your own. Most employers are happy to set this up because it costs them nothing and rewards their staff.

Finally, get a written quote from a novated leasing company. Compare at least two, look closely at the interest rate, the fees and the running cost estimates, and only sign when the numbers match what our calculator predicted. That is how you make a confident, informed choice.

Frequently asked questions