How a Novated Lease Works
A novated lease lets an employee package car costs through payroll rather than paying for the car entirely from after-tax cash. Three parties are involved:
You
Choose and drive the car. Your pre-tax salary is reduced by the lease payments and running costs.
Your employer
Pays the finance company directly from your pre-tax salary. Becomes liable for FBT on the car benefit.
Finance company
Owns the car during the lease. You pay a residual (balloon) payment at the end to own it outright.
The tax benefit is not that the car becomes cheap by magic. It comes from the way the payments are routed through payroll: some costs are met from pre-tax salary, and in the EV case the FBT exemption can materially change the numbers.
If you want the broader context on how packaging works across super, cars, and other benefits, start with the salary sacrifice guide.
Novated Leases and Fringe Benefits Tax (FBT)
FBT is the tax your employer pays when it provides you a car benefit — and it is the single biggest factor in whether a novated lease saves money. The FBT rate is 47%of the benefit's grossed-up taxable value (matching the top marginal rate plus Medicare levy), and the FBT year runs 1 April to 31 March.
For a novated lease on a petrol or diesel car, your employer typically recovers FBT costs from you via an after-tax "employee contribution". The combination of pre-tax deductions (income tax savings) and after-tax FBT contributions determines the net benefit to you.
ICE vehicles: the FBT offset
The EV FBT Exemption
Eligible zero or low-emission vehicles are exempt from FBT when provided through a salary-packaged novated lease — an exemption in place since 1 July 2022, and the main reason EV novated leases often look much stronger than petrol or diesel leases.
| Vehicle type (2025–2026) | FBT status |
|---|---|
| Battery Electric Vehicle (BEV) | Exempt — no FBT |
| Hydrogen fuel cell vehicle | Exempt — no FBT |
| Plug-in hybrid (PHEV) | Exempt only for contracts entered before 1 April 2025 |
| Petrol / diesel / hybrid (non plug-in) | FBT applies |
Example: Savings on an EV Novated Lease
On an FBT-exempt EV, every packaged dollar avoids tax at your marginal rate plus the Medicare levy. Here is a simplified example for an employee earning $120,000 packaging $18,000 a year of lease and running costs:
| Component | Amount |
|---|---|
| Annual lease + running costs packaged | $18,000 |
| Income tax + Medicare saving (32% marginal) | +$5,411 |
| FBT payable (EV exemption) | $0 |
| GST credit on $12,000 of running costs | +$1,091 |
| Total annual saving vs paying after-tax | ~$6,502/yr |
Who Benefits Most?
Novated leases work best for higher marginal-rate earners, EV buyers, and employees of FBT-exempt employers — and worst for low incomes and short job tenures:
✓ High-income earners
✓ EV buyers
✓ Employees of FBT-exempt employers
✓ Middle-income earners
✗ Low-income earners
✗ People who change jobs frequently
Things to Watch Out For
Five risks come up again and again with novated leases — residual value, locked-in budgets, job changes, the LCT ceiling, and reportable fringe benefits:
Residual value risk
Locked-in running cost estimates
End-of-employment risk
Luxury car tax (LCT) ceiling
Reportable fringe benefits
Frequently Asked Questions
What is a novated lease?
A novated lease is a three-way arrangement between you, your employer, and a finance company. Your employer leases a car on your behalf and makes the repayments from your pre-tax salary. Because the payments reduce your taxable income, you pay less income tax — but the savings may be partially offset by Fringe Benefits Tax (FBT) unless the car qualifies for the EV FBT exemption.
How does a novated lease save tax?
The lease payments and running costs come out of pre-tax salary, so every packaged dollar avoids tax at your marginal rate plus the 2% Medicare levy. For FBT-exempt EVs nothing claws that saving back; for petrol and diesel cars, FBT (or the after-tax employee contribution that offsets it) erodes part of the benefit. Your employer can also pass on GST input-tax credits on the car's running costs.
What cars are exempt from FBT in a novated lease?
Battery electric vehicles (BEV), plug-in hybrid electric vehicles (PHEV, for eligible contracts entered before 1 April 2025), and hydrogen fuel cell vehicles can qualify for the exemption if the car's value is below the fuel-efficient luxury car tax threshold ($91,387 for 2025-26). For many employees, that makes an EV lease easier to justify than a comparable petrol car.
How much tax can I save with a novated lease EV?
Savings depend on your income and the car's cost. As an illustration, packaging $18,000 a year of lease and running costs on a $120,000 salary saves about $5,411 in income tax and Medicare levy, plus GST credits on running costs — with no FBT on an eligible EV. Run your own numbers in the novated lease calculator.
What costs are included in a novated lease?
A fully maintained novated lease often bundles lease repayments, fuel or electricity, registration, insurance, servicing, tyres, and roadside assistance. The exact mix depends on the provider, so it is worth checking what is truly included and what is only budgeted for.
What happens to the lease if I leave my job?
If you resign or are made redundant, the novation (the employer's obligation) ends. You typically have options: take over the lease personally (continue repayments from your own after-tax income), refinance with a new employer, or pay out the residual balance and own the car.
Is a novated lease better than a car loan?
For an EV, the tax treatment often makes a novated lease competitive with or better than a car loan, but it still depends on lease pricing, running-cost assumptions, employer fees, and what happens if you leave your job. For petrol and diesel vehicles, the comparison is usually closer because FBT erodes part of the tax benefit.