What is a Novated Lease? (Ultimate Guide)

What is a novated lease?

A novated lease is a way of financing a new or used vehicle and paying for car running costs through your pre-tax salary. It means you pay less income tax and can save on GST on the up-front cost of the vehicle and ongoing costs.

A novated lease involves your employer, but the vehicle can be used 100% for personal use. Because the payments come directly from your salary, novated leasing is sometimes referred to as salary packaging or salary sacrificing a car.

How does a novated lease work?

Let’s look step-by-step at how a novated lease works in Australia:

You find the new or used car you want (your novated lease provider can also help you find a vehicle).
The novated lease company arranges for the vehicle to be purchased on your behalf (with a GST discount), and then leased to you.
Your employer makes regular, salary sacrifice car deductions from your pre-tax salary and pays them to the leasing company to cover the car lease payments.
You can also include car running costs in your lease (with a GST discount), based on how many kms you expert to drive each year.
At the end of the novated lease term, you pay off the vehicle's residual amount so you own it outright, or you can renew the lease for a new term.

Interest rates on a novated lease generally start from around 8-12% p.a. but can be higher depending on your situation. Novated lease interest rates are generally influenced by the same factors as car loan interest rates.

Your credit history
Drivers with higher credit scores (reflecting a clean credit history) will generally qualify for lower interest rates on their novated lease finance.
The age of the vehicle
Newer vehicles generally qualify for lower rates as there's a bit less risk for the finance provider.
Whether you are a homeowner
Drivers who own their own home (with or without a mortgage) are generally viewed as being less risky and qualify for lower rates as a result.
Your employment history
If you have a strong history of employment in your industry, you may qualify for lower rates.
Your overall finances
Applicants with a strong income, manageable expenses and low levels of debt relative to their income typically qualify for the best rates available.

How a novated lease can save you money

Income tax savings, as the payments are made from your salary before tax is deducted.

GST savings on the up-front cost of the vehicle and eligible salary sacrificed running costs.

Fleet discounts that novated lease companies can often negotiate for customers an extra on your vehicle due to the volume of cars they order for customers.

Electric car discount which is a further tax incentive for eligible EV novated lease, meaning the entire cost of the vehicle and running costs can be salary sacrificed without fringe benefits tax (FBT)

The example below demonstrates the potential savings on one of Australia's most popular vehicles.

1. Fully maintained novated lease

With a fully maintained novated lease, you package the running costs of the vehicle into your pre-tax payment, which saves you even more money.

This is by far the most popular choice. Not least because you will also pay no GST on the running costs for your vehicle.

The fully maintained option includes:

Registration & CTP insurance

Servicing costs

Comprehensive car insurance

Replacement tyres

Petrol/charging costs

Vehicle repairs

These costs will be estimated based on the number of kilometres you intend to drive each year but can be changed later on.

Depending on the agreement, you may have the option to choose the supplier for these (e.g. your insurer of choice). Or you might be limited to the leasing company’s preferred supplier (e.g. a fuel card that can only be used at certain petrol stations).

2. Non-maintained novated lease

With a non-maintained novated lease, your payments only cover the vehicle repayments and the finance costs, including interest and fees. You’ll need to cover the running costs of the vehicle yourself.

3. Self-managed novated lease

With a self-managed novated lease, you arrange the finance with a lender yourself. A novated leasing company may then assist with setting up the salary sacrifice with your employer or you might have to do this yourself.

How to qualify for a novated lease

You can generally qualify for a novated lease 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 (the lender will assess your application like any other kind of finance and will do a credit score check)

Over 21 years of age. On rare occasions, lenders may approve applicants between 18 - 21 years old

Buying an eligible vehicle

Novated lease FAQs and myths busted

How is a novated lease different to a car loan?

A novated lease and a car loan are both ways of financing a vehicle, with no restrictions on whether the vehicle is used for personal or business purposes.

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

A fully maintained novated lease is only available through novated lease providers, and can include both the vehicle finance cost and related operating costs. The payments are made directly from your salary.

A car loan is available from banks, dealerships, car loan lenders, and vehicle brokers. Car loans generally don’t cover on-road costs and insurance (it may be possible with an unsecured personal loan). You make the repayments directly to the lender without any involvement from your employer.

What kind of car can I finance with a novated lease?

A common misconception among people considering a novated lease is that it’s 'only for new cars.’ Not so.

You can also a novated lease to finance a used car. In fact, you can get a novated lease for more or less any car, provided it:

Won't be more than 15 years old at the end of the novated lease term.

Is a passenger vehicle (this can include utes).

Does not have a maximum payload above 1,000kg.

You can typically also use a novated lease whether you buy through a car dealership or private seller. Just bear in mind there generally is no GST saving with a private sale.

What is novated lease fringe benefits tax (FBT)?

An important point to bear in mind is that your employer may need to pay fringe benefits tax (FBT) on the novated lease benefit provided to you. This is a tax that applies to most non-salary employee benefits. Employers typically pass this cost onto the employee.

But the Australian government announced that low or zero-emission vehicles – electric cars (EVs) – would be exempt from FBT up to the luxury car tax threshold.

This means eligible electric car novated leases are eligible for significant further savings.

What happens at the end of a novated lease?

You have three options available at the end of your novated lease:

Pay any residual/balloon amount and gain full ownership of the vehicle

Sell the vehicle and claim any profit from the vehicle (above the residual) tax-free

Refinance the vehicle to a new lease agreement

The balloon or ‘residual’ amount is a pre-determined lump-sum repayment made at the end of the novated lease term.

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.

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.

Can I use a novated lease if I am self-employed?

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.

Can I use a novated lease to finance heavy vehicles?

Novated leasing allows for a maximum vehicle payload of 1,000 kg — if you want 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.

What is FBT and ECM for a novated lease?

In salary packaging a vehicle, Fringe Benefits 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.

What is the lowest salary I need to get approval for a novated lease?

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 payment, even employees on a modest salary can take advantage of novated lease benefits.

What happens if you lose your job with a novated lease?

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.

What happens if you want to change employers and have a novated lease?

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.