A novated lease sounds almost too good to be true: pay for your car and its running costs out of your pre-tax salary, and keep more of your pay. It is fair to wonder where the catch is. There are some, and they matter. For the right person, though, a novated lease can be one of the most cost-effective ways to drive a new car in Australia.
You do not need to become a tax expert to work out whether it suits you. It comes down to a handful of questions about your job, your income and the car you want. Here is how it works, where the saving comes from, and how to tell a good quote from a weak one.
What a novated lease is
A novated lease is a three-way agreement between you, your employer and a finance company. You choose the car and drive it as your own. Your employer makes the lease payments and the car's running costs out of your salary, and passes them on to the financier.
Leases usually run for one to five years. At the end you owe a set amount, called the residual. You can pay it and keep the car, refinance it, or trade the car in and start a new lease.
Where the saving comes from
Three things stack on top of each other:
- Income tax. Payments come out of your salary before tax is worked out, so you are taxed on a smaller income. The higher your tax bracket, the more that is worth.
- GST on the car. The GST on the purchase price is claimed back, so you do not pay it. For leases starting in 2026-27, the most that can be claimed is $6,353, which is one eleventh of the ATO's $69,883 car limit.
- Running costs. Fuel or charging, servicing, tyres, registration and insurance can be budgeted into the lease and paid the same way, with the GST on them claimed back too.
On a petrol, diesel or hybrid car, part of each payment comes out of your after-tax pay. That part is sized to cancel the fringe benefits tax (FBT) the arrangement would otherwise attract, and it is called the employee contribution method. It means the tax saving is real, but smaller than the headline "all pre-tax" pitch suggests.
Where electric cars fit in
Battery electric cars, and the rare hydrogen fuel cell car, can be exempt from FBT on a novated lease. On those cars there is no FBT to cancel, so far more of the cost comes out of pre-tax pay and the saving grows.
Plug-in hybrids no longer qualify for new leases. They lost the exemption from 1 April 2025. The car also has to sit under the fuel-efficient luxury car tax threshold, which is $91,661 for 2026-27.
The rules are changing, too. The government has announced a phase-down of the exemption from 1 April 2027, subject to legislation. If you are weighing up an electric car, our guide to a novated lease on an electric car covers the threshold, the announced changes and what they mean if you sign now.
Novated lease or car loan
| Car loan | Novated lease | |
|---|---|---|
| Repayments come from | After-tax pay | Mostly pre-tax pay |
| GST on the car | You pay it | Claimed back, up to the limit |
| Running costs | Paid separately, after tax | Budgeted in, mostly pre-tax |
| At the end | You own the car | You owe the residual |
| If you change jobs | Nothing changes | The lease moves with you |
The saving on any one lease depends on your salary, the car, the term and the provider's fees. A generic "save $X" figure tells you very little. A real quote on your numbers tells you a lot.
The catches to know about
- Your employer has to offer it. A novated lease runs through payroll, so it only works if your employer agrees to it.
- Changing jobs. The lease belongs to you, not the job. If your new employer offers novated leasing, it can move across. If not, you make the payments yourself from after-tax pay and most of the saving goes.
- The residual is real money. The ATO sets minimum residual values by lease term. On a five year lease the minimum is 28.13 per cent of the car's cost, so plan for that amount from the start.
- It can show up in income tests. Some leases create a reportable fringe benefits amount on your income statement. It is not taxed as income, but it is counted in income tests for some government benefits and obligations. An electric car's exempt benefit is still reportable.
- Fees and the rate vary. Management fees and the interest rate inside the lease differ between providers. Two quotes on the same car can be a long way apart.
- The car's price carries through. Every payment is worked out from what the car cost. A car bought at full retail costs more every pay cycle for the whole term.
Who a novated lease suits
It tends to work well if you are in steady employment with an employer who offers it, you earn enough for the tax saving to count, and you plan to keep the car for the lease term. It works best of all on an eligible electric car.
It suits you less if your income is on the lower side, your job is short term or uncertain, you drive very little, or you would rather own the car outright with no residual at the end. In those cases a car loan or paying cash can come out ahead.
How to compare quotes properly
Look past the weekly figure. Ask every provider for the same breakdown on the same car:
- The interest rate, and every fee: establishment, monthly management and end of lease.
- Which running costs are budgeted in, and the kilometres the budget assumes.
- The residual in dollars, and the date it falls due.
- Whether unused running cost money comes back to you at the end.
- Whether the saving shown is compared with paying cash or with a car loan. A car loan is usually the fairer comparison.
- What the car itself is priced at, drive-away.
That last point is the one most often skipped. The lease is only as good as the price of the car inside it, so it pays to get the car priced competitively first and then compare the finance on the same number.
How Rodar helps you weigh up a novated lease
If you are trying to work out whether a novated lease is right for you, you are asking the right question. It is a real saving for some people and the wrong fit for others, and the only way to know is to see your own numbers side by side.
That is the part we can take off your hands. You tell us the make, model, grade and colour you want. We put it to our network of over 1,000 trusted automotive dealers and manufacturers and bring the drive-away offers back to you. Then we compare a novated lease, a car loan across a panel of over 30 lenders, and paying outright on that same price, so you can see the real cost of each before you commit.
This is general information, not financial or tax advice. Your own outcome depends on your circumstances, so speak with a licensed adviser or tax agent about your situation before you sign.
Whenever you are ready, get your competitive offers, or read our FAQs if you would like to see how it works first. There is no pressure either way.
Rates and repayments are indicative only and subject to lender approval. Rodar Pty Ltd is an Authorised Credit Representative (555548) of Fintelligence Pty Ltd (ACL 511803).
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