What is a Novated Lease?

Don’t get caught up in the jargon of novated leases. Use our guide to learn how they work so you can benefit from them.

If you’re looking for a way to finance a vehicle purchase and want to take advantage of tax benefits, easy loan management and fixed repayments, then you might want to consider a novated lease.

A novated lease lets you use and pay for a vehicle via salary-sacrificing, plus it gives you the option of having all operating and maintenance costs paid for using your pre-tax income.

Before you take out a novated lease it’s important to understand the ins and outs, the advantages and drawbacks. But don’t worry—we’ve put them all together for you in this guide.

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Rates last updated February 21st, 2018
Name Product Interest Rate (p.a.) Comparison Rate (p.a.) Min Loan Amount Loan Term Monthly Service Fee Application Fee Product Description Monthly Repayment
RACV New Car Loans
From 6.49% (fixed)
1 to 7 years
A competitive rate car loan from RACV with no monthly fees and 5-hour loan approval.
Stratton Finance New Car Loan
From 5.49% (fixed)
1 to 10 years
Benefit from a car broker with over 25 years experience
IMB New Car Loan
From 5.99% (fixed)
1 to 7 years
Borrow up to $75,000 for a new car up to two years old. Competitive 5.99% p.a. rate available to all approved applicants.
Latitude Car Loan
From 6.99% (fixed)
1 to 7 years
A secured loan with a competitive rate that can help you finance a range of new or used vehicles.
Beyond Bank Low Rate Car Loan
From 5.69% (fixed)
1 to 7 years
A great rate for cars under 2 years old.
From 5.16% (fixed)
1 to 7 years
AutoCarLoans can match you with a lender from its panel with rates starting from 5.16% p.a. Suitable for vehicles up to 2 years old.
NRMA New Car Loan
From 6.49% (fixed)
1 to 7 years
Purchase a new car with an NRMA Car Loan with a fixed rate term and no monthly fees. Pre-approval available within 5 business hours.
Freedom Finance Car Loan
From 5.1% (fixed)
1 to 5 years
If you meet all the requirements you could get access to a range of lenders to finance a new or used car up to 4 years.
St.George Secured Personal Loan - Fixed Rate
8.49% (fixed)
1 to 5 years
Use your car as security and benefit from a competitive interest rate.
Bank of Melbourne Secured Personal Loan
From 8.49% (fixed)
1 to 5 years
A low rate personal loan from Bank of Melbourne with your choice of a fixed or variable rate.

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What is a novated lease?

A novated lease is a type of financing option that helps you purchase a vehicle. It involves an agreement between you, your employer and a third-party financier whereby you take out a lease and your employer makes the lease repayments and operating costs out of your pre-tax income. While the responsibility of these repayments is still yours, it is your employer who will make these payments. The lease, therefore, becomes a part of your salary packaging.

What types of novated leases are there?

  • Novated operating lease. This type of lease allows you to have use of the vehicle for the duration of the lease, and at the end of the lease you have no further obligations. You also have no further access to the vehicle. The vehicle will be inspected on its return and it must be in good condition, apart from normal wear and tear.
  • Novated finance lease. This type of lease requires you to guarantee upfront the residual value of the vehicle. At the end of the lease term, if the valuation is less than that value, then you will be responsible for the shortfall. Note that it will be you and not your employer who will need to pay this.
  • Fully-maintained operating lease. A fully-maintained lease involves all operating costs of the vehicle being included in the salary package.
  • Non-maintained operating lease. Under this type of lease you will be responsible for the operating costs of the vehicle, including maintenance and running costs. Only the lease repayments will come out of your pre-tax income.
  • Budgeted finance lease. This is an option offered by some financiers that allows you to budget for your maintenance expenses and set limits for the amount you’d like to spend.

leasing vs buying a car

Benefits of a novated lease

For the employee

  • Cost and tax benefits. As you’re paying for your car with pre-tax income you can take advantage of a lower rate of tax on the benefit than if you were to pay with your after-tax income. You can also stand to benefit from corporate fleet discount programs that can reduce the retail price of a vehicle.
  • Easy loan management. As the lease payments and, depending on the option you choose, running costs, come straight out of your salary you don’t have to worry about budgeting and managing them yourself.
  • Vehicle options. A range of vehicles can be financed with a novated lease, including both new and used vehicles.
  • After-lease sale benefits. If you decide to sell your vehicle after the lease is up, any equity built up in the vehicle that you profit from in the sale will be tax-free.
  • No usage restrictions. There are no limitations on the way you use the vehicle, and you can use it for business or personal use as much as you like.

For the employer

  • A way to offer incentives. A novated lease is a way to incentivise employees with little expense to your business.
  • Limited risk. You won’t be responsible for the vehicle if your employee leaves before the lease is up.
  • Not attached to the business. Novated leases are not considered an asset or liability of the business.
  • No burden of a company fleet. It gives a way for your employees to access discounted vehicle leasing through your company without the burden of your business managing a company fleet.

Novated lease tax benefits: What you need to know

One key benefit of a novated lease is that you don’t have to pay GST. As the vehicle is sold to the financier and then leased to you, they are liable to pay the GST on the vehicle, but they are able to pass this GST on to the tax office.

In terms of the other tax options, this depends on the method you choose. There are two methods you can opt for when taking out a novated lease: the Fringe Benefits Tax method or the Employee Contribution Method.

  • Fringe Benefits Tax

When you choose this method the entire amount of your lease payments are deducted from your pre-tax income, saving that portion of your salary from income tax. Although as your employer is providing you this lease as a benefit, the lease is subject to Fringe Benefits Tax (FBT), which you are responsible for. FBT is calculated using the Statutory Formula method and based on the distance you’re likely to travel during the ‘FBT year’, which runs from April 1st to 31st March.

There is also a ‘days not available’ option which involves your FBT being reduced when your vehicle is unavailable for travel. This may be because your vehicle is in for repairs, you lease your vehicle on company premises or lend the vehicle to an authorised person for a whole business day.

In May 2011 the government introduced transitional rules regarding the calculation of cars using FBT using a standard statutory rate of 20%. Financiers help you track and calculate your ongoing FBT obligations in accordance with ATO guidelines. Most financiers will offer something like a fuel card that can track your fuel usage over the year.

  • The Employee Contribution Method

This method involves both pre-tax and post-tax deductions from your income. There are benefits to this method, particularly if your salary is below $180,000. If you contribute part of your post-tax salary you can reduce the rate of FBT from 46.5% to your own marginal income tax rate, which might be as low as 30%, depending on your income. This can ultimately reduce the cost of salary packaging your vehicle. This option is available to both fully-maintained and non-maintained novated leases.

How to arrange a novated lease


While there are more tax and monetary considerations when it comes to novated leases, when you choose the right financier the process is not complicated. Here is a typical process that you can expect:

  • Step 1: Shop around for a vehicle and get a quote. Ensure that the quote lists all options including projected operating costs, vehicle options and the vehicle cost.
  • Step 2: Estimate how many kilometres you’ll be travelling over the course of a year. You can do this by tracking your usage over a normal week and factoring in holidays and other times when you might use you car more.
  • Step 3: Decide if you want a fully maintained or non-maintained novated lease.
  • Step 4: Contact your company’s financial consultant and discuss your options. Together you can prepare an estimated salary package, which you can sign when you’re happy with it.
  • Step 5: Compare your novated lease options and apply with your chosen provider.
  • Step 6: Provide your car dealer’s details to your financial consultant so that the Novated Lease Agreement can be prepared and signed.
  • Step 7: Compare your comprehensive car insurance options and apply for your chosen provider. Then get your cover approved by your financial consultant.
  • Step 8: Your financial consultant will organise the dealer to be paid, and if you have a fully-maintained novated lease then they will also organise the insurance to be paid as well.
  • Step 9: You can collect your vehicle and receive your fuel card from your financier so you can start using your car.

Frequently asked questions

What types of vehicles can be used for a novated lease?

There are really no restrictions as to the type of vehicle that can be used. In some cases, you may even be able to use a vehicle that you are already paying off. Vehicles can also be new or used.

What happens if my employment is terminated?

If your enrollment is terminated you can take your novated lease with you to your new employer, you can continue making repayments directly to your financier, or you can terminate the lease early and pay it out.

How long do novated leases take to establish?

This depends on the financier you go with, although will generally take approximately two weeks to a month.

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