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What is a Novated Lease?

Written by

Shaun McGowan

A novated lease is best explained as a form of car finance that has a three-way agreement between an employer, employee, and a novated lease provider.

It allows an employee to finance a vehicle as part of their salary — known as salary packaging — and benefits both the employee and employer, even where the vehicle is entirely for personal use.

Your employer makes payments to the novated lease provider from your pre-tax salary, meaning that you can literally save thousands of dollars in income tax.

With a novated lease, you can include all the running costs of the car as well as purchasing a car without having to pay the GST. On a $30,000 car, that’s a GST saving of $2,727.

In the three-way agreement each party has the following roles to play

  • The employer agrees to make regular, automated payroll deductions from the employee’s salary to the leasing company
  • The employee agrees to have those salary deductions in exchange for the use of the vehicle. The vehicle can be used for business purposes, or entirely for personal use.
How a novated lease works, explained by Money Matchmaker

And Novated Leasing Companies;

  • Procure the vehicle, establish the lease and manage the administrative, contractual and compliance aspects of the transaction.
Novated lease explained with Money Matchmaker

The Top 10 Novated Lease Benefits

Novated leases are a ‘win-win’ for both employees and employers. Employees benefit from ex-GST pricing on a car for personal use, and can reduce their income tax liabilities. Employers can offer novated leasing as an incentive, at no cost to the business.

In summary, the best benefits of a novated lease in Australia include:

  • No GST payable on the car
  • No GST payable on running costs
  • GST can be claimed by the employer as a tax credit
  • Reduce payroll tax for employers
  • No obligation on the part of the employer to either the vehicle or the lease A cost-effective way of acquiring a vehicle
  • Employee income tax savings
  • Fully maintained personal vehicle — including fuel, insurance, servicing, repairs, roadside assist and registration
  • 100% personal use of the vehicle
  • Option to de-novate and re-novate if changing employers
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Shopping around for the best novated lease can save you thousands of dollars in interest and fees.

Money Tip

To get the best novated lease deal, make sure you choose a leasing company that passes on their bulk-buying car discounts. This means you will also get a discount off the regular car price and can save more money on your vehicle purchase.

How novated lease works

How to choose a novated car lease

You have the choice of fully maintained and non-maintained. The key difference is that, with a fully maintained novated lease, you package all the running costs of the vehicle into your pre-tax payment, which further saves you money. This is by far the most popular choice.

The fully maintained option includes:

  • Registration
  • Insurance
  • Servicing costs
  • Replacement tyres
  • Petrol costs
  • Vehicle repairs

These costs will be estimated based on the number of kilometres you intend to drive each year. If your circumstances change, these estimates can be updated throughout the term of your lease. Speak to your employer to determine the type of novated lease they offer, and the implications of any Fringe Benefits Tax (FBT) liability.

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Money Tip: You will also pay no GST on running costs for your vehicle under a novated lease.

The Top 5 Accessories Novated Lease Owners Get

Yes, you can add accessories to your novated lease cars. These can be bundled in to the purchase price of the new car.

  • Floor Mats
  • Window Tints
  • Roof Racks
  • Tow Bar
  • Side Steps

Fully maintained versus self-managed Novated Lease

Fully MaintainedSelf-managed (Non-maintained)

Obtained from novated leasing companies

Obtained directly from banks

Includes all maintenance and running cost expenses

Only provides funding for the vehicle itself, and no additional running costs

Additional vehicle add-ons and services can be purchased GST-free when acquiring the vehicle

Only of value to the employee if the employer is paying for running costs on the vehicle

FBT liability balanced using post-tax salary contributions by the employee

Any FBT liability is handled by the employer

Novated Lease vs Car Loan compared

A novated lease and a car both provide immediate full ownership of the vehicle, and there are no restrictions on how the vehicle is used for personal or business purposes.

Novated Lease vs Car Loan Comparison

FeatureNovated LeaseCar Loan


$5,000 - $150,000

$5,000 - $100,000


6 months - 5 years

2 - 7 years




Interest Rates

From 5.00%

From 5.00%


Salary packaging a vehicle

Financing a personal vehicle without salary packaging

The main difference between a novated lease and a car loan is in how the vehicle is financed:

  • A fully maintained novated lease is only available through novated lease providers, and includes both the vehicle finance cost and its related operating expenditure in the total repayments and paid by the employer from the employee’s salary.
  • A car loan is available from banks, dealerships, car loan lenders, and vehicle brokers. The car loan can include on-road costs and insurance, but the running costs are entirely the borrower’s responsibility, and are not included in the loan amount. Payments are made directly to the financier from the borrower.

Want to compare loan amounts and see your estimated repayments? Use our car loan calculator.

Get the best deal on a novated lease


New and Used Cars

Whilst the vast majority of novated leases are for new cars, it's not actually a requirement to do so. You can buy any used car. (To get the GST savings though, you'll need to buy a used car from a dealer.)

Novated Leasing GST Benefits

By using a novated lease, an employee can acquire a vehicle without paying GST (Goods and Services Tax) on it. As the leasing company buys the vehicle to lease, the borrower will not pay GST on the initial purchase price of the vehicle.

Any GST included in the lease charges can be claimed by the employer, which is then passed on as savings to the employee leasing the vehicle.

As mentioned above, at a new car price of $30,000, that’s a $2,727 upfront saving.

Do I have to drive a minimum number of kilometres?

The short answer is no. There used to be a requirement, but that was over 10 years ago. It doesn't matter whether you drive 10,000 km or 30,000 km or whether you drive for personal or business use.

This is one of the key reasons that makes a novated lease totally worth it.

What happens at the end of a Novated Lease?

You have a few options available at the end of your novated lease term:

  1. Pay any residual/balloon amount and gain full ownership of the vehicle
  2. Sell the vehicle and claim any profit from the vehicle (above the residual) tax-free
  3. Refinance the vehicle
  4. In some cases, you may be able to return the vehicle to the novated leasing company without paying any residual amount

Balloon or ‘residual’ amounts are pre-determined lump-sum repayments, which are paid at the end of the novated lease term. Residual payments reduce regular repayments by including a higher final payment. Learn more here.

The residual amount will vary, and shorter terms will have higher residuals attached. If you are using the car to travel extensively (35,000 km or more per year) you can usually opt for a lower residual. Speak to your leasing provider about this.

At the end of your novated lease, you will need to either pay the residual amount owing, or consider refinancing the vehicle under a new agreement.

What are the interest rates on a Novated Lease?

Interest rates on a novated lease can reach 10%, and are generally applied between 5% and 7.50%. The interest rate will be influenced by:

  • The price of the vehicle
  • The age of the vehicle
  • Purchasing from a private seller or dealership

Novated lease terms and balloon amounts

Novated lease termEstimated balloon amount

3 years


4 years


5 years


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Money Tip: A great benefit of a novated lease is any equity realised by you at the sale time of the vehicle remains tax-free.

How to qualify and choose a novated vehicle

In Australia, there are around 40-50 novated leasing companies that can work with you and your employer to establish your novated lease. You can qualify if you are:

  • Employed on a full-time or permanent part-time basis
  • Working for an employer who supports a novated leasing agreement
  • Capable of meeting repayments for the duration of the lease
  • Over 21 years of age. On rare occasions, lenders may approve applicants between 18 - 21 years old

You can essentially have any new vehicle that best suits you and your lifestyle — from SUVs to 4WDs and sports cars.

Used cars are also possible but cannot be more than 15 years old at the end of the term. For example, you could buy a 10-year-old vehicle and have a 5-year term.

There are only two restrictions to consider:

  1. It needs to be a passenger vehicle (including utes)
  2. The vehicle’s maximum payload cannot exceed 1,000 kg

You can even use a novated lease to finance used cars (including buying a car from a private seller), provided the vehicle is not older than 15 years at the end of your lease term. For example:

  • You choose a used car which is seven years old
  • Your novated lease term is five years
  • Your car will be 12 years old at the end of the term

Novated Lease with Bad Credit

Getting a novated lease is still a finance contract and you will be required to be credit checked. This will show the lender any bad credit history. The positive with novated leasing though is that you still have a high likelihood of being approved because it's your employer making the repayments to the financier.

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Money Tip: When you buy a car from a private seller, there is no GST so you will not get this benefit.

Here are the most popular questions people are asking about a novated lease:

If you are self-employed — i.e. are not paid a salary by an employee or receiving a salary through your own company — you will need to look at alternative forms of vehicle finance, such as a Chattel Mortgage for business vehicles, or Low-Doc Car Loan.

Novated leasing allows for a maximum vehicle payload of 1,000 kg — if you are wishing to finance heavy machinery, a non-passenger vehicle, or vehicles with a heavier payload than the maximum limit, you may wish to consider a Chattel Mortgage or Equipment Finance as alternatives.

In salary packaging a vehicle, Fringe Benefit Tax (FBT) is a tax paid by an employer for certain benefits received by employees. The Employee Contribution Method (ECM) is a way to reduce the FBT liability to a nil balance by having the employee make post-tax contributions to maintaining the vehicle.

The lowest salary you need for a novated lease will depend on the cost of the vehicle being novated. Novated leasing approval is dependent on your capacity as a borrower, and with a minimum vehicle price of $15,000 on a 5-year term with a 25% balloon, even employees on a modest salary can take advantage of novated lease benefits.

If you leave your job during the term of your novated lease, you will still be responsible for finance payments on the vehicle. The lease will be “de-novated”, the running costs are removed from the agreement and repayments will continue much the same way as a standard car loan.

When you are employed again — provided your new employer agrees to salary packaging the vehicle — the lease can be re-novated, and revert back to its initial state including running costs.

If your new employer accepts novated leasing, then you will simply be able to transfer your lease to them. There is a bit of paperwork involved, but largely this is a seamless process.

Get the best deal on a novated lease


About the Author

Shaun McGowan from



Shaun McGowan

Shaun is determined to help people pay as little as possible for financial products, through education and world class technology. Before Money he co-founded Fleet Choice, a novated lease company that Eclipx (ASX:ECX) acquired.