What are the pros and cons of novated leasing?

What is a novated lease?

A novated lease is where the employee sacrifices part of their salary to lease a vehicle. The employer arranges an agreement with a leasing provider to provide the vehicle. The repayments for the lease come out of the employee's pre-tax salary. This not only takes away the repayment management from the employee, it saves them on tax too.

The pros of novated leasing

The pros of novated leasing are different for employers and employees.

For employees

• Cost and tax benefits. Employees will use their pre-tax salary, which means they receive tax benefits.
• Easy loan management. Because repayments come from employees' pre-tax salary, they don't have to worry about budgeting for their repayments.
• Vehicle options. Employees can choose from a wide variety of vehicles.
• After-lease sale benefits. If you decide to sell your vehicle after the lease, any profit from the sale will be tax-free.
• No usage restrictions. There are no limitations on the way employees use the vehicle, whether they use it for personal or business use.

For employers

• Offering incentives. Employers can use salary sacrificing as an employee benefit.
• No risk. Because the employee carries the risk of the repayments, there's no risk to the employer.
• No company fleet necessary. Employees can individually manage their own leases, rather than you taking on a company fleet.

The cons of novated leasing

Most of the cons are considerations rather than disadvantages. They're also mostly for the employee to consider.

For employees

• Lower salary. Because you're making repayments from your pre-tax income, you'll receive less. But if you were going to make repayments towards a car on finance anyway, this is probably a better way to do it.
• The lease responsibility is on you. You need to make sure you can afford the repayments even if you lose your job when the responsibility of the lease will transfer with you.
• No modifications. You typically can't make any modifications to the vehicle you're leasing.
• Additional costs. The cost of Fringe Benefits Tax will usually be passed on to you as well so you should take that into consideration.
• Must earn a salary. Novated leasing is only available to employees on a salary, not casual staff.
• Balloon repayment. If you want to own the car when the lease ends, you'll need to make a balloon repayment which can be quite a large lump payment.
• Limited options. You might have to use the novated lease provider your employer already has which limits your choice of vehicle more than it's already limited.

For employers

• Payroll management. There's some work to set up the novated lease arrangement with the company's payroll.

Novated lease tax benefits

GST

There's no GST to pay on the vehicle. The financier which buys the vehicle on the employee's behalf pays the tax, which they can then pass on to the tax office.

Income tax

With your lease repayments coming out of your pre-tax income, it reduces the amount of tax you're liable to pay.

Benefits of EVs on novated leases

A lot of Australians opt for an electric vehicle on their novated lease. Aside from the fact it's an environmentally friendly option, there are financial benefits too.

No Fringe Benefits Tax

As an employee benefit, novated leases will typically be charged a fringe benefits tax (FBT). FBT is the employer's liability, but it's usually passed on to the employee through the lease. If an employee leases an eligible electric vehicle, however, no FBT applies. To be eligible, the car must be a battery electric or hydrogen fuel cell vehicle first held and used on or after 1 July 2022, and no luxury car tax can have been payable on it when it was sold or imported, so its value needs to be within the fuel-efficient luxury car tax threshold below. Plug-in hybrids no longer qualify, except under some arrangements already in place before 1 April 2025. This exemption is an incentive to encourage more people to use electric vehicles.

Higher luxury car tax threshold

Another EV incentive is the higher luxury car tax threshold. Luxury car tax (LCT) applies to cars sold or imported in Australia with a value above a certain threshold, and the thresholds are updated each financial year. For 2026-27 this threshold is $80,809. However, fuel-efficient vehicles, including electric vehicles, have a higher threshold of $91,661. This means you can buy a more expensive electric vehicle without paying LCT.

Is novated leasing worth it?

Novated leasing is often considered the most cost-effective way to buy a car. Because the repayments come out of your pre-tax salary, it provides more of a tax benefit than if you were going to take out a car loan.

But whether it's the right solution depends on the employee.

A novated lease might be worth it if:

• You were going to buy a car using a car loan anyway.
• You know you can afford the reduced salary for repayments.
• You'd be happy to renew the lease for a new car at the end of the plan to reap even more tax benefits.

More questions about the pros and cons of novated leasing

• What happens if I change jobs?

  As an employee with a novated lease, if you change your job or stop working, the responsibility of the novated lease remains with you. You will either need to make sure your new employer is happy to continue a salary sacrifice arrangement with your lease provider or make sure you can continue the repayments out of your own pocket.

  Even if you wanted to end the novated lease agreement you'd still need to pay off the cost. This means paying the remaining balance in full.

• Can I novate‑lease a used car?

  It is possible to take out a novated lease for a used car, but you'll need to check with individual leasing providers. There may also be restrictions on the cars that can be leased, such as age limits of the vehicle.

• How does the residual value work?

  The residual value is a large lump sum payment that comes at the end of the novated lease term. The ATO requires it to be calculated a certain way.

  The ATO says that the total cost of the lease repayments must only cover a certain portion of the estimated value of the car at the end of the lease. The longer the lease, the lower the residual value.

  For example, you have a novated lease for 5 years and your car is expected to be worth $20,000 by that time. For leases of 5 years the ATO says the residual value must be 28.13% of the estimated value. In this case, your residual value would be $5,626.

  ATO residual value percentages:

  Year 1
  65.63%
  Year 2
  56.25%
  Year 3
  46.88%
  Year 4
  37.50%
  Year 5
  28.13%

• Can self‑employed get a novated lease?

  No, self-employed car buyers cannot get a novated lease. Novated leases are salary-sacrificing packages for employees with salaries. Part-time salaried employees would need to speak to their employer about whether the option is available to them.

Written by

Rebecca Pike

Editor, Money

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Rebecca Pike is Finder’s money editor, with over 7 years of experience in mortgages and personal finance. A frequent TV and radio commentator, she frequently appears on Sunrise and 7News, Today and 9News, as well as Sky News, Channel 10 and across radio and print. Rebecca previously served as Editor of Mortgage Professional Australia. She has a Master’s degree in Journalism as well as ASIC-recognised certifications in Tier 1 Generic Knowledge and Tier 2 General Advice Deposit Products, which comply with ASIC guidelines. See full bio

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