Novated leases have become increasingly popular in recent years, particularly with the introduction of Fringe Benefits Tax (FBT) concessions for eligible electric vehicles. While they can offer tax savings for some employees, they’re not the right solution for everyone.
Understanding how novated leases work—and where the potential pitfalls lie—can help you make an informed decision before signing on the dotted line.
What Is a Novated Lease?
A novated lease is a three-way agreement between:
- You (the employee)
- Your employer
- A finance company
The finance company purchases the vehicle, your employer makes the lease payments from your salary, and you agree to reimburse your employer through salary packaging.
Unlike a company car, you generally keep the vehicle if you change jobs, although you’ll usually need to make new arrangements with your new employer or take over the lease payments yourself.
What Are the Tax Benefits?
The biggest attraction of a novated lease is the potential tax savings.
Depending on the arrangement, benefits may include:
- Paying lease repayments from your pre-tax salary
- Salary packaging running costs such as fuel, servicing, registration and insurance
- GST savings on eligible vehicle purchases and many running costs
- Reduced taxable income, which may lower the amount of income tax you pay
For many employees, the convenience of having most vehicle costs bundled into one regular payroll deduction is also appealing.
Electric Vehicles Receive Additional Benefits
One of the biggest drivers behind the growth in novated leasing has been the FBT exemption for eligible electric vehicles.
Where the vehicle qualifies, employers may not pay Fringe Benefits Tax on the benefit provided to the employee. This has made salary packaging an electric vehicle significantly more attractive than packaging a petrol or diesel vehicle.
However, the 2026 Federal Budget proposed changes to these concessions from 2029, so anyone considering a novated lease should keep an eye on future legislative developments.
It’s Not Always Cheaper
While novated leases can provide tax savings, they aren’t automatically the cheapest way to own a car.
Before entering into an agreement, it’s worth considering:
- Interest rates and finance charges
- Lease management fees
- Balloon or residual payments
- Early termination costs
- Restrictions if you change employers
Sometimes the tax savings are outweighed by the total cost of the finance arrangement.
That’s why it’s important to compare the overall cost—not just the tax benefit.
Understanding Fringe Benefits Tax (FBT)
FBT is a tax paid by employers on certain benefits provided to employees, including motor vehicles.
For traditional petrol or diesel vehicles, FBT is often a key factor in determining whether salary packaging is worthwhile.
Eligible electric vehicles currently receive a significant concession, which is why they have become much more popular under novated lease arrangements.
Even where an exemption applies, employers may still have reporting obligations, so it’s important that payroll and bookkeeping records are maintained correctly.
Is a Novated Lease Right for You?
The answer depends on your individual circumstances.
Factors to consider include:
- Your income level
- How many kilometres you drive
- Whether you’re considering an electric or petrol vehicle
- Your employer’s salary packaging arrangements
- How long you expect to keep the vehicle
A novated lease can be a valuable tax planning tool, but it’s still a finance decision first. Understanding the full costs, as well as the tax implications, will help you decide whether it represents good value.
The Bottom Line
Novated leases can offer genuine tax advantages, particularly for eligible electric vehicles, but they’re not a one-size-fits-all solution.
Before entering into a lease, it’s worth looking beyond the advertised tax savings and considering the overall cost, your employment circumstances, and the long-term financial commitment.
If you’re considering a novated lease or salary packaging a vehicle and would like to understand the tax implications, our team can help you assess whether it’s the right option for your situation.
