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 guide, you will learn:

How car loans work

Novated Lease explained


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 (i.e. balloon) payment due at the end of the lease. In the lease agreement, the leasing company will include the cost to finance the vehicle and an estimated running cost for the vehicle. 


Novated leasing is explained by understanding that 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 salary. 
  • The employee agrees to have those salary deductions in exchange for the use of the vehicle. The vehicle can be used for business purposes, though unlike a chattel mortgage, it can also be solely for personal use. 
  • 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 leasing company by automatic payroll deduction. As a substantial portion of the salary deduction is pre-tax, this reduces the employee’s gross taxable income, which saves them income tax. The cost of the vehicle (minus the balloon payment) plus the associated running costs will be spread over fixed payments across the agreed lease term.


Money Logo 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.


Novated-lease-repayments

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 offsets the Fringe Benefit Tax (FBT). This is known as the Employee Contribution Method (ECM) and ensures no tax liability for the employee and employer at the end of the year.

Additionally, the employee will see sizeable ongoing GST savings. As much of the GST is claimed by the employer as a tax credit, this is then passed on as savings to the employee. 


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

  • Any fees charged by the leasing company 
  • Vehicle finance payments 
  • An estimate of your running costs for the vehicle  

As with other types of lease, the finance payment will be fixed for the agreed length of the novated lease term. The budgeted running costs in your lease can be easily adjusted if required, however any unused - i.e. surplus - funds are returned to the employee via payroll at the end of the lease. 

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 - and see a substantial income-tax saving throughout the lease term.

Money Logo Money Tip

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

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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 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, you can then ask if they have a preferred financier to supply the vehicle.

While it is possible to apply 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.  

Money Logo Money Tip

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


How-to-apply

How to qualify

You can qualify 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 lease 
  • Over 21 years of age. On rare occasions, lenders may approve applicants between 18 - 21 years old

You may not qualify if you:

  • Are self-employed 
  • Have poor credit history 
  • Cannot demonstrate your ability to make repayments for the full term  
Money Logo Money Tip

The budgeted running costs in your lease can be easily adjusted if required during the lease term and all unused lease funds are reconciled fairly at the end of the lease term.


Types of car loan in Australia

Novated Lease Benefits

Employer Benefits

Employers wishing to reward and incentivise their employees by salary packaging a vehicle offer their employees a significant saving on a car, at no cost to the business. Novated leasing benefits employers in various other ways, including:

  • 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 leases are easily automated. Administration and compliance are managed by the 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 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 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 procures the vehicle, 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 are then passed on as savings to the employee leasing the vehicle.

This can save a considerable amount of money, and is one of the only ways an employee can acquire a new vehicle without being obliged to pay the GST.  


For example:

  • An employee wishes to purchase a vehicle valued at $55,000 
  • GST is calculated at 10% of the ex-GST purchase price (1/11th of the GST-inclusive price) 
  • The vehicle can be acquired for $50,000 
  • The employee saves $5,000 when purchasing the new vehicle
Money Logo Money Tip

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.  

The leasing company will estimate running costs for the vehicle, which are included in regular lease repayments. Running costs include everything you might pay for in relation to the vehicle’s use throughout the term, such as:

  • Registration
  • Insurance
  • Servicing costs
  • Replacement tyres
  • Petrol costs
  • Vehicle repairs 
Money Logo Money Tip

You pay no GST on running costs for your vehicle under a novated lease. These are estimated by the leasing company and bundled into the total lease amount.




Fringe-Benefit-Tax

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

Fringe Benefit Tax (FBT) is applied to any fringe benefit received by an employee or their associates - i.e. family members - from their employer. Novated leasing a vehicle is a fringe benefit, as 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 vehicle (excluding state charges such as stamp duty, registration and CBT) 
  • Operating cost - generally only applied to vehicles with a high percentage of business use where a log book will be be maintained  

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


  • The cost of the car is $55,000 
  • Using the statutory formula, FBT is calculated at 20 per cent 
  • The taxable value amount is $11,000 
  • This amount is taxed at 47%
Money Logo Money Tip

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, which means the employee is paying the amount using their marginal tax rate, instead of the FBT rate of 47%.


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


  • The cost of the car is $55,000 
  • Using the statutory formula, FBT is calculated at 20 per cent 
  • The taxable value amount is $11,000 
  • This amount is included in the employee's lease payments and deducted from their after-tax salary throughout each year of the lease. 
  • The FBT amount is reduced to $0  

Note: This is a basic example of how the FBT base may be calculated on a lease. You will need to speak to your leasing company to determine your exact post-tax deductions.


Fully maintained versus self-managed Novated Lease 
FULLY MAINTAINEDSELF-MANAGED (NON-MAINTAINED)
Obtained from novated leasing companiesObtained directly from banks
Includes all maintenance and running cost expensesOnly 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 vehicleOnly 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 employeeAny FBT liability is handled by the employer


End-of-a-Novated-Lease

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 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 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 company about this.

NOVATED LEASE TERMESTIMATED BALLOON AMOUNT
3 years45%
4 years35%
5 years25%
Money Logo Money Tip

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


Leaving-your-job-with-a-Novated-Lease

Leaving 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, where the running costs are removed from the agreement and repayments work much the same way as a standard car loan. 

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 the employee by the leasing company, which will outline all incoming and outgoing payments throughout the lease to that point:

  • If there is a deficit in the lease account (due to overspend on the budgeted running costs) the employer will advise final deductions from the employee’s pay to cover the amount. 
  • If there is a surplus, these are returned to the employer and passed on to the employee via payroll.

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

Novated-Lease-and-self-employment

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 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. Personal income tax returns will typically need to be supplied to the leasing company, and the company is required to have a minimum operating time of two years.   


Vehicle Types

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 vehicle for a novated lease:

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

Accessories fitted to the vehicle prior to delivery - such as heavier wheels, towbars, or trays for utility vehicles - can be included in the lease agreement, and these will typically reduce the payload of the vehicle beyond the maximum payload amount. This means a ute which may be ineligible for a lease can be made eligible with the inclusion of accessories.


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

In the option above, while the vehicle is a viable option for your initial lease, you will be unable to refinance that vehicle beyond three years under a new arrangement.

Top 10 Salary Packaging Vehicles for Employees

TOP 10 NOVATED LEASE CARS 2018 TOP 10 NOVATED LEASE CARS 2019 
Mazda CX-5 Toyota Hilux 
Toyota Land Cruiser Prado Ford Ranger
Toyota HiluxToyota Corolla
Ford RangerMitsubishi  Triton
Mazda CX-9Toyota RAV4
Toyota CorollaMitsubishi ASX
Subaru Outback Hyundai i30
Toyota Land CruiserIsuzu Ute D-Max 
Volkswagen GolfMazda CX-5 
Mazda3Toyota Land Cruiser

Novated Lease vs Car Loan

A novated lease and a car loan 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
Amount$5,000 - $150,000$5,000 - $100,000
Terms6 months - 5 years2 - 7 years
FeesLowMedium
InterestFrom 5.00%From 5.00%
PurposeSalary packing a vehicleFinancing 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 a novated leasing company, and includes both the vehicle finance cost and its related operating expenditure in the total loan repayments. 

    These repayments are then taken directly from the employee’s pre- and post-tax salary by way of automatic payment to the leasing company. 
  • A car loan is available from banks, dealerships, car loan lenders, and vehicle brokers. The car loan can include on-road costs and insurance, however as the loan is secured only by the vehicle itself, this may incur additional fees.

    Operating 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. 
Money Logo Money Tip

A novated lease also provides borrowers with certain GST and tax benefits which are not available under a standard car loan agreement.


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


Novated Lease vs Car Loan Compared

Novated Lease Car Loan
  • Vehicle finance largely through pre-tax salary 
  • No GST payable on the car 
  • No GST payable on running costs 
  • Fully maintained personal vehicle - including fuel, insurance, servicing, repairs, roadside assist and registration
  • Flexible payments 
  • Options for longer terms than a novated lease 
  • Can purchase a car through private sale 
  • Loan repayments remain fixed for the term and can’t change similar to de-novation.

Rates

What are the interest rates?


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  


How-much-can-you-borrow

How much can you borrow?

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 lease agreements exceed $100,000, however they very rarely exceed $150,000.


Minimum and Maximum Amounts

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

What is the term?


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 6-month terms are also possible. The shorter the term of the salary packaging agreement, the higher the residual payment amount will be.  


Minimum and Maximum Terms

MINIMUM TERM Maximum TERM 
6 months5 years
Fees

What fees are included?

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 Fees

ESTABLISHMENT FEESMANAGEMENT FEES
$200 - $500$20 - $50 per month

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 can offer novated leasing as an incentive, at no 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 
  • 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

Novated Lease Pros and Cons

Pros Cons
  • Ex-GST purchasing - The vehicle you purchase will not have GST included in the purchase price
  • Convenience - A fully maintained 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 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 lease agreement
  • Possible discounts - Novated leasing companies often receive fleet discounts on vehicles and may provide a personal car at a discounted rate  
  • You can only finance a passenger vehicle (including utes)
  • The vehicle’s maximum payload cannot exceed 1,000 kg
  • An employer must agree to salary package the vehicle for an employee 
  • Fully maintained lease only available through a novated leasing company 
  • Often there is no GST benefit to buying privately

Novated Lease FAQ

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 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.

What is FBT and ECM for a novated lease?


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.

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 may be approved for a $30,000 vehicle on a yearly salary of $45,000.

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