Novated Leases and Salary Sacrificing a Car in Australia: Complete Guide

A novated lease is a three-way arrangement between you, your employer and a finance company. It allows you to pay for a car - and its running costs - from pre-tax salary, reducing your taxable income.

• The three parties: (1) you (the employee) lease the car from a finance company, (2) your employer takes on the lease obligations via a novation agreement, and (3) the employer deducts lease payments and running costs from your pre-tax salary and remits them to the leasing company
• Because payments come from pre-tax salary, you reduce your taxable income - at a 37% marginal rate, every $10,000 of novated lease payments costs only $6,300 out of pocket; the ATO effectively subsidises $3,700 of the car costs
• The lease is for a set period (2–5 years) covering the vehicle and typically all running costs (fuel or charging, registration, insurance, tyres, maintenance) - the novated lease company bundles these into a single recurring deduction
• At the end of the lease term, you can: (a) pay out the residual value and own the car, (b) refinance with a new novated lease on the same car, or (c) trade the car in and start a new novated lease on a different vehicle
• The novation agreement means if you leave your employer, the lease responsibility reverts to you personally - you either transfer the novation to a new employer or take over the payments yourself; the car does not stay with the employer
• Novated leases work best when your employer offers them as a genuine salary packaging benefit - some employers pass on all the tax savings to you; others charge administration fees that erode the benefit; get a full quote including all fees before committing
• The car must be used at least partly for work purposes - personal use triggers Fringe Benefits Tax (FBT), which the employer pays; the FBT cost is typically passed on to you via a post-tax contribution to reduce the FBT liability

---

From 1 July 2022, eligible battery electric vehicles and hydrogen fuel cell vehicles are FBT-exempt under a novated lease - eliminating the biggest cost associated with the traditional novated lease structure.

• Eligible zero-emission vehicles (battery electric and hydrogen fuel cell only) are FBT-exempt when provided under a novated lease from 1 July 2022 - the entire value of the benefit (car, fuel/charging, registration, insurance, maintenance) is exempt from FBT
• Plug-in hybrid electric vehicles (PHEVs) were FBT-exempt until 31 March 2025 - the exemption for PHEVs ended on 1 April 2025; any PHEV novated lease entered or renewed after this date is subject to standard FBT rules
• PHEVs already on an eligible novated lease arrangement before 1 April 2025 may continue under a grandfathering provision until the earlier of the lease expiry or 1 April 2025 - check the specific terms with your leasing company
• The vehicle price cap for FBT exemption on EVs: the car's value (including GST) must be below the luxury car tax threshold - $89,332 for fuel-efficient vehicles in 2024–25; EVs above this threshold do not qualify for the FBT exemption
• Popular FBT-exempt models within the threshold: Tesla Model 3 (base and Standard Range), BYD Seal, BYD Atto 3, MG4, Hyundai Ioniq 6, Kia EV6 (some variants), Polestar 2 - prices change regularly; confirm current ORC price against the threshold before ordering
• The FBT exemption for EVs means the employee pays zero post-tax contribution to reduce FBT (unlike ICE vehicles) - the full vehicle and running cost package is paid from pre-tax salary with no FBT cost passed through
• Home charging: the ATO has clarified that electricity costs for charging an EV at home under a novated lease can be included in the lease package - the employee pays a set amount per kWh or a bundled monthly charge, deducted pre-tax

---

For non-exempt vehicles (ICE cars, PHEVs from April 2025), FBT applies. The method used to calculate FBT determines how much post-tax contribution you need to make - and this significantly affects the novated lease's financial attractiveness.

• Statutory Formula Method (ECM or 'flat rate' method): FBT taxable value = 20% of the car's base value × days available ÷ 365; this is the simpler method requiring no logbook - the FBT liability is the same regardless of actual business use
• Operating Cost Method (logbook method): FBT taxable value = total operating costs × private use percentage; requires a 12-week logbook documenting business vs private kilometres; if your business use is high (60%+), this method produces a lower FBT liability
• For most employees who drive predominantly for personal use, the statutory formula at 20% produces a lower taxable value than the operating cost method - which is why it is the default for most novated leases without a logbook
• The employee contribution method (ECM): you make a post-tax contribution equal to the FBT taxable value - this reduces the FBT liability to nil; the post-tax contribution comes from your take-home pay, not pre-tax salary
• Example for a $50,000 ICE car: FBT taxable value = $50,000 × 20% = $10,000; FBT at 47% gross-up = $10,000 × 2.0802 × 47% = $9,777; to eliminate this via post-tax ECM the employee pays $10,000 from after-tax salary per year
• For EVs (FBT-exempt): no post-tax contribution required; no logbook needed; the entire package runs pre-tax; this is why EVs under the threshold are dramatically more financially attractive than equivalent ICE vehicles under a novated lease
• Reportable Fringe Benefits Amount (RFBA): even where FBT is fully eliminated via employee contributions, the grossed-up value of the car benefit may still appear as an RFBA on your payment summary - RFBA is included in income for Medicare Levy Surcharge, HECS repayment, private health insurance rebate and some Centrelink assessment purposes; it does NOT increase your income tax

---

Understanding exactly what costs can flow through the pre-tax lease package - and what cannot - prevents surprises and ensures you maximise the tax benefit.

• Included (can be paid pre-tax): finance repayments (principal and interest), comprehensive car insurance, registration and CTP, tyres and scheduled maintenance, roadside assistance, fuel (petrol or diesel) or home/public charging costs for EVs
• Not included - these must be paid personally: parking fines, road tolls (unless the employer has a specific arrangement), modifications not agreed upfront, costs incurred after a not-at-fault accident excess while claiming on insurance
• Residual value: the amount owing at lease end is the residual - typically 25–35% of original vehicle value for a 3-year lease; if you intend to keep the car, budget for paying this out; if trading, the residual must be covered by the trade-in value
• GST advantage: the leasing company claims GST input tax credits on the vehicle purchase and running costs - these savings are typically passed back to the employee via lower monthly payments; this is a genuine additional saving beyond the income tax benefit
• Fuel/charging budgets: novated lease packages include an estimated fuel or charging budget; if you drive more than estimated, you pay additional costs or top up the account; if you drive less, surplus funds may be refunded or rolled forward - understand the reconciliation process with your leasing company
• Finance rate: novated lease interest rates are typically higher than standard car loan rates (0.5–2.0% above equivalent car loan rates) because the leasing company bundles administration and services; compare the total cost of ownership (all pre and post-tax costs to the end of the lease plus residual) against buying with a car loan
• Early termination: breaking a novated lease before the end of the term incurs significant penalties - generally the remaining finance charges plus any shortfall between the break value and the vehicle market value; novated leases are long-term commitments

---

The right vehicle acquisition strategy depends on your marginal tax rate, the type of vehicle, your employer's novated lease terms and how long you intend to keep the car.

• EV under LCT threshold via novated lease: almost always the best option for employees in the 32.5%–47% marginal rate brackets - the full package (car + running costs) is paid pre-tax, no FBT, no post-tax contribution; the tax saving on a $60,000 EV with $10,000/yr running costs at 37% marginal rate is approximately $25,900 over 3 years
• ICE car via novated lease: the benefit depends heavily on how much private use you have; at predominantly personal use, the post-tax ECM contribution substantially reduces the advantage; the remaining benefit comes from GST savings and pre-tax treatment of running costs
• Buying outright with savings: no interest cost, no residual risk, full ownership - but no tax benefit; suitable if you have the cash and are in a lower tax bracket (19% marginal rate) where the pre-tax benefit is modest
• Car loan (personal finance): interest rates 6–12% p.a.; payments are from after-tax income; no tax deduction unless used for income-producing purposes (e.g. sole trader using the car for business with logbook); straightforward but no tax leverage
• Sole trader or contractor (business use): if you use the car predominantly for business and can document this with a logbook, the operating cost method may make a standard car loan + claiming actual costs on your tax return more attractive than a novated lease - seek specific tax advice for this scenario
• Decision framework: (1) Is the car an EV under $89,332? Use a novated lease. (2) Are you in the 37%+ bracket with an ICE car and high business use? Consider novated lease with logbook. (3) Are you in the 19–32.5% bracket with an ICE car? The benefit narrows - compare total costs carefully. (4) Are you self-employed? A novated lease requires an employer; consider a business chattel mortgage instead
• Get a full comparison quote: reputable novated lease companies (Maxxia, SG Fleet, LeasePlan, RemServ) provide a detailed pre-tax vs post-tax comparison showing total cost of ownership - request this before signing and compare against buying with a car loan at a competitive rate

---

Whether you drive an EV on a novated lease or own outright, Roopon helps reduce what you spend day-to-day. Members access exclusive discounts on fuel, retail, dining, health and lifestyle across Australia - plus FREE included prize-draw entries per your plan and published campaign terms. Extra packages exist for specific campaigns. See /giveaways for live prizes.

Join at roopon.com.au from $19.99/month.

---

Join Roopon today for exclusive member discounts plus FREE included prize-draw entries per your plan and published campaign terms. Extra packages exist for specific campaigns. See /giveaways for live prizes.

Join ROOPON Now