A novated lease is a three‑way agreement between you, your employer and a financier. You choose the car and lease term, the financier owns the vehicle during the term, and your employer makes the lease payments on your behalf using salary packaging. The key appeal is tax efficiency: payments are typically taken from pre‑tax income, which can lift your take‑home pay compared to funding the same car personally. However, the details—FBT, residuals and employer policy—determine whether it’s actually advantageous for your situation.
Core mechanics
- Three‑way agreement: you, your employer, and the financier.
- Salary packaging: payments and running costs deducted from pre‑tax pay via a salary packaging provider.
- FBT: Fringe Benefits Tax may apply, usually calculated via the statutory method for cars.
- Residual: a lump sum owed at the end; ATO publishes guideline percentages by term.
- Running costs: rego, insurance, tyres, servicing can be packaged and smoothed across the year.
FBT statutory method
Under the statutory method, the taxable value is 20% of the car’s base value (generally the purchase price including GST, excluding rego and CTP), pro‑rated by days available in the FBT year. That value is then grossed up (Type 1 if GST‑creditable, Type 2 otherwise) and multiplied by the FBT rate. Employee Contribution Method (ECM) reduces taxable value dollar‑for‑dollar by after‑tax contributions.
Gross‑up types
- Type 1: benefits where the employer can claim GST credits (higher gross‑up factor ~2.0802).
- Type 2: non‑creditable benefits (lower gross‑up factor ~1.8868).
Residuals
Residuals are the final lump sum to pay or refinance at term end. The ATO guideline matrix scales with term length (e.g., around 28% at 60 months). A higher residual lowers monthly payments but increases the amount you must settle later. If resale values fall or you change cars early, residuals can become painful. Plan conservatively.
ATO residual value guideline (illustrative)
Typical guideline percentages used by many providers for fully maintained novated/finance leases. Confirm with your employer and financier.
| Lease term (months) | Guideline residual (% of cost) |
|---|---|
| 12 | 65.00% |
| 24 | 56.25% |
| 36 | 46.88% |
| 48 | 37.50% |
| 60 | 28.13% |
Notes: Actual residuals can vary by policy (e.g., operating vs finance lease, fully maintained vs non‑maintained). The above is a common reference set; always verify current requirements.
Running costs and cash flow
Packaging running costs smooths expenses and may improve tax efficiency, but ensure the budget is realistic. Over‑budgeting ties up cash in the salary packaging account until reconciliation; under‑budgeting leads to top‑up deductions later. Review usage annually.
When novated makes sense
- Stable employment with an employer that supports salary packaging
- Predictable annual kilometres and running costs
- Vehicle that holds value reasonably well
- Marginal tax rate high enough to benefit from pre‑tax deductions
Potential drawbacks
- Employer dependency: leaving your job requires novation to a new employer or taking over payments
- FBT exposure if not exempt and ECM isn’t used effectively
- Residual risk at end of term and possible refinancing costs
- Packaging fees and administration overhead
Novated Lease Deep Dives
Novated Lease Tax Benefits: A Complete Guide for Australian Employees
- Pre‑tax deductions: Lease payments and running costs are generally deducted from pre‑tax income, lifting take‑home pay.
- GST treatment: Employers may claim GST credits on eligible costs (Type 1 benefits), lowering the effective cost passed on to you.
- EV exemptions: Certain eligible EVs/PHEVs can be FBT‑exempt — a substantial benefit; check current thresholds and criteria.
- ECM (post‑tax) interplay: Using ECM reduces taxable value for FBT calculation dollar‑for‑dollar.
Novated Lease vs Car Loan: Which Saves You More Money?
- Cash flow vs total cost: Novated can improve after‑tax cash flow, but compare total cost (including residual) to a loan.
- Income‑dependent: Higher marginal tax rates often increase the advantage of a novated lease.
- Running costs packaging: Budgeting benefits are real, but avoid over‑budgeting which ties up cash until reconciliation.
- Objective compare: Use the calculator’s novated mode vs loan mode at the same term to compare net benefit and total interest.
Understanding FBT (Fringe Benefits Tax) and Your Novated Lease
- Statutory method: Taxable value is generally 20% of base value (pro‑rated by days held), then grossed up and multiplied by FBT rate.
- Gross‑up types: Type 1 (GST‑creditable) has a higher factor than Type 2; your employer’s GST eligibility matters.
- ECM reduction: After‑tax contributions reduce the taxable value; model ECM carefully to avoid over/under use.
- Record‑keeping: Keep evidence of running costs, days held, and any EV exemption eligibility.
End‑of‑Lease Options: What Happens When Your Novated Lease Expires?
- Pay the residual: Settle the balloon in cash if savings allow; ownership transfers to you.
- Refinance the residual: Extend financing of the lump sum; compare the new rate/fees to alternatives.
- Upgrade/transition: Trade in and start a new lease; ensure trade‑in value covers the residual to avoid negative equity.
- Plan early: Six months out, get indicative settlement figures and resale estimates; avoid rushed decisions.
Using the calculator
Switch the arrangement to “Novated lease,” set term, rate, days held and gross‑up type. Add estimated running costs and any ECM. If the EV exemption applies to your vehicle, toggle the EV option to see the FBT impact. Review the monthly lease payment estimate, the FBT estimate, and the net benefit figure to gauge suitability.
Bottom line
A novated lease can be a tax‑efficient way to run a car, but it’s not universally superior. The advantage depends on your tax bracket, employer policy, vehicle choice and how you manage residuals and running costs. Model different terms and scenarios, and seek tax advice before committing.