For many Australians, the dream of driving a brand-new car is often dampened by the reality of household budgets. Traditional car ownership is expensive. Between the loan interest, insurance premiums, registration, fuel, and unexpected maintenance costs, a vehicle is often the second largest expense after a mortgage or rent.
But what if there was a way to pay for that car using money that would normally go to the Australian Taxation Office (ATO)?
Enter novated leasing. Often misunderstood as a complex perk reserved for corporate executives, novated leasing is a government-legislated salary packaging arrangement available to all Australian employees. It is widely considered one of the most effective ways for a salaried earner to maximise their take-home pay while driving the car they want.
This guide will break down the mechanics of a novated lease, demystify the tax advantages, and explain why it is frequently a superior financial choice compared to traditional car loans.
What is a Novated Lease? The Mechanics
At its core, a novated lease is a three-way agreement between you (the employee), your employer, and a finance provider (the leasing company).
In a standard car loan, you borrow money from a bank, buy a car, and make monthly repayments using your net salary—the money left over after income tax has been deducted.
A novated lease changes the order of operations via a “deed of novation.” This deed transfers the obligation of making lease payments from you to your employer. Your employer then deducts these payments directly from your salary before passing the remaining amount to you.
Crucially, the employer is not paying for your car out of their pocket; they are simply facilitating the payment using your salary. Because this deduction happens partly before income tax is calculated, it lowers your taxable income.
Furthermore, a novated lease isn’t just about the car finance payment. It is a “fully maintained” lease. This means you bundle virtually all the vehicle’s running costs—fuel (or electricity), registration, insurance, servicing, tyres, and roadside assistance—into that single payroll deduction.
The Magic of Salary Packaging: Understanding the Tax Advantages
The primary reason Australians choose novated leasing is the significant tax savings. This is achieved through “salary packaging.”
When you pay for a car with a traditional loan, you are using “post-tax dollars.” If you are in the 37% tax bracket (earning between $135,001 and $190,000 for the 2024-25 year), you effectively must earn roughly $1.59 to end up with $1.00 in your pocket to spend on your car.
With a novated lease, you pay for a significant portion of the car’s finance and running costs using “pre-tax dollars.”
By paying for these expenses before your income tax is calculated, your taxable salary decreases. A lower taxable salary means you pay less income tax to the ATO.
Addressing the “Fringe Benefit”
Because your employer is providing you with a car (a non-cash benefit), the ATO views this as a “fringe benefit,” which attracts Fringe Benefits Tax (FBT).
However, novated leasing companies have a standard method to neutralise this potential tax hit, known as the “Employee Contribution Method” (ECM).
To offset the FBT, the ATO requires that a portion of the lease costs be paid using post-tax salary(ECM). Therefore, your total novated lease deduction is split between pre-tax, and post-tax. This split is calculated specifically to reduce the taxable value of the car benefit to zero, meaning you generally won’t face an FBT liability for a standard combustion engine car, while still maximising your pre-tax savings.
The Game Changer: Electric Vehicles and the FBT Exemption
If the savings on a standard petrol or diesel car are good, the savings on an Electric Vehicle (EV) are life-changing.
Under legislation introduced by the federal government in 2022 to encourage EV uptake, eligible zero and low-emission vehicles below the luxury car tax threshold for fuel-efficient vehicles ($91,387 for the 2024-25 financial year) are entirely exempt from FBT.
This means you do not need to make post-tax contributions to offset FBT. You can pay for the finance and all the running costs of an eligible EV using 100% pre-tax salary. The potential tax savings in this scenario are substantial, making an EV obtained through a novated lease vastly cheaper than buying one outright and much cheaper than with a traditional loan.
Novated Leasing vs. Traditional Car Finance
To understand the benefits, we must compare a novated lease to the traditional method of buying a car with a consumer loan.
- The Source of Funds:
- Traditional Finance: You pay income tax on your entire salary first. You then use the remaining, heavily taxed money to pay the bank loan, pump fuel, and pay insurance premiums.
- Novated Lease: You use a mixture of pre-tax and post-tax income (or 100% pre-tax for eligible EVs). You pay less tax because your taxable income is lower.
- GST Savings:
- Traditional Finance: You pay full GST on the purchase price of the car and full GST on all running costs (fuel, servicing, tyres).
- Novated Lease: Because the finance company buys the car (and they are GST registered), you generally don’t finance the GST amount on the purchase price, lowering your monthly payments. Furthermore, you save the GST on all the running costs included in the lease package.
- Budgeting Convenience:
- Traditional Finance: You have multiple bills arriving at different times: loan repayment monthly, insurance annually or monthly, registration annually, and servicing whenever it’s due. It can be tedious to manage and leads to “bill shock” when four tyres need replacing at once.
- Novated Lease: One single, consistent deduction comes out of your pay packet each cycle. Your fuel card, insurance, and maintenance budgets are all managed within that single payment. It is “set and forget” budgeting, with the bonus of saving thousands in tax.
Conclusion: Benefits for All Employees
A common myth is that novated leasing only benefits high-income earners. While it is true that those on higher marginal tax rates stand to save more in absolute dollar terms, the fundamental mechanics of paying with pre-tax income and saving on GST benefit almost every employee paying income tax.
Whether you are an administrative assistant looking for a reliable hatchback, a tradesperson needing a dual-cab ute, or a manager eyeing a Tesla Model Y, a novated lease allows you to make your salary work harder for you. It turns a depreciating asset and its unavoidable running costs into a tax-effective financial strategy.
If your employer offers salary packaging, obtaining a quote for a novated lease is a necessary step before committing to any new car purchase. It’s not just about driving a new car; it’s about keeping more of the money you earn.
Next Steps for You
If you are ready to explore this, try our Novated Lease Calculator by clicking HERE.
Or book an online session with one of our specialists who will answer all your questions and provide you with detailed quotes on any vehicles of interest.
Click HERE to book a time that suits you.
