Novated Lease Explained Australia | Salary Packaging a Car
Short answer
A novated lease lets you salary package a car through your employer using a mix of pre-tax and post-tax pay. You effectively reduce your taxable income while covering the lease payments, running costs, fuel, insurance, and maintenance in one bundled amount. The real saving depends on your marginal tax rate, how much you drive, and whether your employer uses the Employee Contribution Method (ECM) to minimise Fringe Benefits Tax.
How it works
Your employer deducts lease payments from your gross salary (pre-tax) and running costs from your net salary (post-tax). The three-way agreement between you, your employer, and the finance company is the "novation" — your employer pays the lease company directly.
FBT and the ECM
A car under a novated lease triggers Fringe Benefits Tax. The Employee Contribution Method (ECM) uses your post-tax contributions to reduce FBT to zero, which is why most novated leases split payments between pre-tax and post-tax. The statutory method uses a flat 20% of the car's base value regardless of kilometres driven.
Who benefits most
Higher marginal tax rate earners save the most because more income is redirected pre-tax. If you earn under the tax-free threshold or are on a low marginal rate, the savings may not outweigh the structuring costs and residual obligation at lease end.
Common mistakes
- Assuming the advertised "tax saving" is your actual saving — always compare the total cost of the novated lease against buying the car outright or with a standard car loan.
- Forgetting the residual (balloon) payment at lease end — this can be 25% to 40% of the vehicle's original price depending on lease term.
- Not checking whether your employer uses ECM — without it, the FBT liability can wipe out the pre-tax benefit entirely.
- Overestimating kilometres driven when using the operating cost method, which can trigger FBT adjustments at year end.
Car loan repayment calculator
Compare standard car loan repayments against novated lease costs.
New vs used car comparison
See how depreciation and financing differ for new and used vehicles.
Run the numbers first
Salary packaging sounds great on paper — check the total cost.
Model your car loan repayments and compare against the true cost of a novated lease before committing.
Open car loan calculatorRelated guides
Frequently Asked Questions
- Who is eligible for a novated lease in Australia?
- Any employee whose employer agrees to salary packaging can access a novated lease. There is no income threshold, but your employer must be willing to make pre-tax and post-tax deductions from your pay on your behalf.
- What happens to my novated lease if I change jobs?
- The lease transfers to your new employer if they agree to continue salary packaging. If they do not, you can pay the lease costs yourself, refinance, or pay the residual and take ownership of the vehicle.
- What are my options at the end of a novated lease?
- You can pay the residual (balloon) amount and keep the car, refinance the residual into a new lease, trade the car in and start a new novated lease, or return the vehicle to the finance company.