Novated Lease

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What is a novated lease?


A novated lease is a form of vehicle finance and a three-way agreement between an employer, employee, and a financier. 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.

Even on a modest income, an employee can use a novated lease to not only acquire a vehicle at ex-GST pricing, but salary package the car and its related operating expenditure.

In this novated lease guide, you will learn:

  • How a novated lease works 
  • What you need to qualify and how to apply 
  • How novated lease GST and Fringe Benefits Tax work 
  • How a novated lease benefits an employee and employer 
  • How to choose between a fully-maintained and self-managed lease 
  • Available options at the end of your term 
  • How to manage your novated lease if you change employers 
  • Rates, fees, and terms for a novated lease 

How a Novated Lease works


A novated lease works in a similar way to a finance lease. There are typically a number of payments over a fixed term, with a residual (or balloon) payment due at the end of the lease. Each party to the agreement - employer, employee, and financier - will play a specific role:

  • The employer agrees to make regular, automated payroll deductions from the employee’s pre-tax salary. 
  • The employee agrees to have those pre-tax salary deductions taken out, in exchange for the use of the vehicle. The vehicle can be used for business purposes, but can also be solely for personal use. Unlike a chattel mortgage, there are no minimum-use restrictions to qualify. 
  • The financier procures the vehicle, establishes the lease and manages the administrative, contractual and compliance aspects of the transaction.

Payments are made directly to the financier by automatic payroll deduction. They are paid before the PAYG income tax is deducted from the employee’s salary. The cost of the vehicle and the cost of finance - minus the balloon payment - will be spread over fixed payments throughout the term.

MONEY TIP

Many lease companies pass their bulk buying discounts on, meaning you will also get a discount off the regular car price and can save more money on your vehicle purchase.

How Novated Lease repayments work


Novated lease repayments are made from the employee’s pre-tax (gross) and post-tax (net) salary. The post-tax portion is where Fringe Tax Benefits (FBT) and the Employee Contribution Method (ECM) allow employees to further reduce their end-of-year tax payments. 

When you salary package a vehicle through a novated leasing company, the total cost of your lease will include:

  • Establishment fees 
  • The purchase price of the vehicle 
  • Ongoing maintenance fees 
  • An estimate of your running costs for the vehicle 

As with other types of lease, payments will be fixed for the agreed length of the novated lease term. The immediate benefit of making vehicle repayments this way is enabling employees to use a portion of their income tax to make finance repayments, rather than relying entirely on their post-tax income.

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With a novated lease, there are typically a number of payments over a fixed term, with a residual (or balloon) payment due at the end of the lease.

Where to get a Novated Lease


You can acquire a novated lease from specific novated lease finance companies. However, as an employee, your employer will first need to agree to a salary package a vehicle. The easiest way to begin this process is to speak to the human resources team at your workplace and ask if they permit novated leasing. 

As novated leasing benefits both an employee and employer, many workplaces allow salary packaging - if your workplace agrees to a novated lease, you can then ask if they have a preferred financier to supply the vehicle

While it is possible to apply for a novated lease through some banks, doing so will only provide finance for the purchase price of the vehicle. A novated lease acquired through a bank is always self-managed (non-maintained) and will not include the running costs of the vehicle as part of the finance package.

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In Australia, there are upwards of 40 to 50 novated lease companies to choose from.

What you need to get a Novated Lease


You can qualify for a novated lease if you are:

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

You may not qualify for a novated lease if you:

  • Are self-employed 
  • Have poor credit history 
  • Cannot demonstrate your ability to make repayments for the full term 
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A wide range of working visas are eligible for novated leasing. You can even apply for a novated lease on an expiring foreign work visa.

Novated Lease GST Benefits


By using a novated lease, an employee can acquire a vehicle without paying GST (Goods and Services Tax) on it. This can save a considerable amount of money, and is one of only a few ways an employee can acquire a new vehicle without being obliged to pay the GST. 

For example:

  • An employee wishes to purchase a car valued at $50,000 
  • GST is calculated at 10% of the purchase price 
  • Using a novated lease, the car can be acquired for $45,000 
  • The employee saves $5,000 when purchasing the new vehicle  
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It is possible to purchase a vehicle through private sale with a novated lease. However, as there is no GST attached to a private sale, it does not offer the benefits afforded by purchasing a vehicle through a registered seller.

Fringe Benefits Tax (FBT) and Employee Contribution Method (ECM)


Fringe Benefits Tax (FBT) is applied to any fringe benefits received by an employee or their associates - i.e. family members - from their employer. Fringe benefits are any non-wage compensation or benefits you may receive, such as:

  • Company vehicles for personal use 
  • Medical insurance 
  • Accommodation allowance 
  • Entertainment allowance 
  • Discounted loans 

FBT is charged at 47% (the highest tax bracket rate of 45%, plus Medicare levy of 2%) and the taxable value amount is calculated on motor vehicles under a novated lease one of two ways:


  • Statutory formula - a flat 20 per cent rate on the cost of the car 
  • Operating cost - generally only applied to vehicles with a high percentage of business use

While the employer is liable for the FBT amount, the employee will agree to reduce this liability to a nil balance through post-tax contributions to the vehicle’s running costs. Let’s look at an example of how FBT might be calculated:


  • The cost of the car is $50,000 
  • Using the statutory formula, FBT is calculated at 20 per cent 
  • The taxable value amount is $10,000 
  • FBT is 47% of $10,000 
  • The required FBT amount to pay is $4,700
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The income tax savings using a novated lease are greater than the FBT payable on the car.

How the Employee Contribution Method (ECM) works


The main method to reduce FBT on a novated lease is through the Employee Contribution Method (ECM), and will be agreed upon between the employer and the employee when creating the salary packaging agreement. 

Using the ECM, contributions made from your after-tax salary will reduce FBT obligations when used to pay for running costs on the car. Running costs can include:

  • Registration 
  • Insurance 
  • Servicing 
  • Fuel 
  • New Tyres 

In many cases, you can eliminate FBT liability completely. This is possible because every dollar paid from your after-tax salary reduces the FBT liability by the same amount

Let’s look at the same example from earlier, this time incorporating the ECM:


  • The cost of the car is $50,000 
  • Using the statutory formula, FBT is calculated at 20 per cent 
  • The taxable value amount is $10,000 
  • FBT is 47% of $10,000 
  • The required FBT amount to pay is $4,700 
  • The employee pays $4,700 to run the vehicle, through buying petrol and servicing the vehicle 
  • The FBT amount is reduced to $0

Fully maintained versus self-managed Novated Lease

Fully Maintained Self-Managed (Non-Maintained)
  • Obtained from novated leasing companies 
  • Includes all maintenance and running cost expenses 
  • Additional vehicle add-ons and services can be purchased GST-free when acquiring the vehicle 
  • FBT liability balanced using post-tax salary contributions by the employee 
  • Obtained directly from banks 
  • Only provides funding for the vehicle itself, and no additional running costs 
  • Only of value to the employee if the employer is paying for running costs on the vehicle 
  • Any FBT liability is handled by the employer 

What happens at the end of a Novated Lease?


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

  • Pay any balloon residual amount and gain full ownership of the vehicle 
  • Sell the vehicle and any claim any profit from the vehicle (above the residual) tax-free 
  • Refinance the vehicle into another term 
  • In some cases, you may be able to return the vehicle to the novated leasing company without paying any residual amount 

The residual amount on your novated lease will vary, and shorter terms will have higher residuals attached.

Novated Lease TermEstimated Balloon Amount
3 years45%
4 years35%
5 years25%
MONEY TIP

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

Leaving your current job during a Novated Lease


If you leave your job during the term of your novated lease, or are fired from your position by the employer, you will still be responsible for making payments on the vehicle. The lease will be de-novated, where the running costs are removed from the agreement and repayments work much the same way as a standard car loan. 

If you are terminated from your position, the employer is required to notify the leasing company with details of the end-date of your employment. A reconciliation statement of the account will be provided to you by the employer, which will document all incoming and outgoing payments throughout the lease to that point:

  • If there is a deficit in payment and money owing on the account to the lender, the employer will advise final deductions from the employee’s pay to cover the amount. 
  • If there is a surplus, where funds haven’t been used for running costs, these are returned to the employer and passed on to the employee. 

If you are employed again and the existing lease is incorporated as part of a salary packaging agreement with your new employer, the lease will be re-novated, and revert back to its initial state including running costs.


Novated Lease if you work for your own company


A novated lease can be suitable for a business owner who is also an employee of their own company. This can be particularly useful if the business owner is planning to change the structure of their business, as the novated lease can be re-novated under the new company. 

However, this is only an applicable option if the business owner is receiving a salary from the company they own.

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If you are planning to leave your current employment to start your own business, you can transfer your novated lease provided you are paying yourself a salary.

What type of car can you finance with a Novated Lease?


If your employer agrees to a novated leasing programme, you can choose the kind of vehicle that suits you and your lifestyle - from SUVs to 4WDs and sports cars. You are not restricted in vehicle choice in the manner of the limitations applied to a typical company car or fleet policy. 

There are two restrictions to choosing a car for a novated lease:

  • The car needs to be a passenger vehicle 
  • The car’s maximum payload cannot exceed 1,000 kg 

While accessories you stipulate for the vehicle - such as heavier wheels, towbars, or trays for utility vehicles - can be included in the novated lease agreement, these must not increase the payload of the vehicle beyond the maximum payload amount at the time of delivery. 

You can use a novated lease to finance new cars or good-quality used cars (including buying a car privately), provided the vehicle is not older than 15 years at the end of your lease term. For example:

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

While this is a viable option for your initial novated lease, you will be unable to refinance the vehicle beyond three years under a new arrangement.

Top 10 Salary Packaging Vehicles for Employees

Top 10 Novated Lease Cars 2017 Top 10 Novated Lease Cars 2018
  • Mazda3 
  • Ford Ranger 
  • Mazda CX-5 
  • Toyota Hilux 
  • Mazda CX-9 
  • Toyota LandCruiser Prado 
  • Toyota LandCruiser 
  • Hyundai Tucson 
  • Nissan Navara 
  • Volkswagen Golf 
  • Mazda CX-5 
  • Toyota LandCruiser Prado 
  • Toyota Hilux 
  • Ford Ranger 
  • Mazda CX-9 
  • Toyota Corolla 
  • Subaru Outback 
  • Toyota LandCruiser 
  • Volkswagen Golf 
  • Mazda3 
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Novated leases are not only for new cars. It’s possible to get a novated lease on cars up to 7 years old.

What are the interest rates for a Novated Lease?


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

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

How much can you borrow with a Novated Lease?


The amount you can borrow to salary package a vehicle will vary depending on the lender. In general, the minimum novated lease amount is between $5,000 and $10,000, while higher amounts are subject entirely to the repayment capacity of the applicant. Some novated lease agreements exceed $100,000, however they very rarely exceed $150,000.

Novated Lease Minimum and Maximum Amounts

Minimum AmountMaximum Amount
$5,000 - $10,000$150,000

What is the term on a Novated Lease?


The term of the lease agreement is flexible, to suit the employee Generally, terms of one to five years are available under a novated lease, although 7-year terms are also possible. The shorter the term of the salary packaging agreement, the higher the residual - i.e. balloon payment - amount will be.

Novated Lease Minimum and Maximum Terms

Minimum TermMaximum Term
6 months7 years

What fees are included with a Novated Lease?


A novated lease may include management fees for a Fully Maintained lease, generally between $20 and $50 per month, and a one-time establishment fee of between $200 and $500 which is bundled into the total finance amount. When compared to other forms of vehicle finance, the tax savings through salary packaging a vehicle far outweigh any fees included in the agreement.

Novated Lease Establishment and Management Fees

Establishment FeesManagement Fees
$200 - $500$20 - $50 per month

Novated Lease Summary


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 wishing to reward and incentivise their employees by salary packaging a vehicle offer their employees a significant saving on a car, with very little cost to the business. 

In summary, the 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 
  • A cost-effective way of purchasing 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 

Novated Lease Benefits Summary

Employee Benefits Employer Benefits
  • Ex-GST purchasing - The vehicle you purchase will not have GST included in the purchase price. 
  • Convenience - A fully maintained novated lease includes all running costs for your vehicle, with the exception of tolls. 
  • Reduced Taxable Income - Your taxable income is reduced by the repayment amount, and can even lower your tax bracket to provide further benefits. 
  • Portability - You may take your novated lease with you if you leave the business and take up employment elsewhere. 
  • Immediate ownership - You have freedom in the choice of vehicle and will gain exclusive and immediate use of the vehicle upon entering the novated lease agreement. 
  • Possible discounts - Novated leasing companies often receive fleet discounts on vehicles and may provide a personal car at a discounted rate.
  • Motivated staff - A novated lease offers employees a considerable saving on a personal vehicle, and is typically far more time-efficient and cost-effective than administering a traditional company fleet. 
  • Low costs - No direct cost to the business and opportunity to claim the GST included in the lease charges. 
  • Simple operation & administration - Regular payroll deductions for novated leases are easily automated. Administration and compliance are managed by the novated lease provider, not the employer. 
  • Low Obligations - No ongoing obligation on the part of the employer to the vehicle or the lease; In the event an employee leaves the business, the employee’s novated lease also leaves with them. 
  • Payroll tax savings - Payroll tax liability for employers is reduced for each employee taking up a novated lease.

Novated Lease FAQ


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


No, if you are self-employed - i.e. are not paid a salary or paying yourself a salary through your own company - you will need to look at alternative forms of vehicle finance, such as a Chattel Mortgage 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 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 Equipment Finance as an alternative.


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?


Novated leasing approval is dependent on your capacity as a borrower. This means you need to illustrate your ability to meet regular repayments over the term of the lease. For example, as it is entirely dependent on your personal living situation, expenses and dependents, you could gain approval for a $30,000 vehicle on a yearly salary of $45,000.