Novated Lease

How it works

A novated lease involves three parties: you (the employee), your employer, and a finance company. The employer takes on the lease obligation on your behalf and deducts the repayments - plus agreed running costs - from your pre-tax salary. The car is for your private use; the employer’s involvement is purely administrative and financial.

When you leave the employer, the lease either transfers with you to the new employer or reverts to a standard consumer lease. The obligation moves (it’s “novated”) rather than disappearing.

What gets paid pre-tax

The running costs that can be bundled into the pre-tax package vary by arrangement, but commonly include:

• Lease repayments
• Registration
• Comprehensive insurance
• Servicing and tyres
• Roadside assistance
• Sometimes fuel or electricity

For an EV, including charging costs in the bundle is standard. This makes the pre-tax cost comparison against a petrol car even more favourable.

The tax maths

The advantage comes from paying with dollars that haven’t been taxed yet. If you’re on a 37% marginal rate plus 2% Medicare Levy, every dollar you spend pre-tax effectively costs you 61 cents in take-home pay. A $2,000/month lease payment that comes from pre-tax salary costs you about $1,220 in foregone take-home pay instead of $2,000.

This is why novated leasing is most financially attractive for employees on higher marginal tax rates - the saving is proportionally larger.

The FBT issue - and the EV solution

Normally, FBT applies to car fringe benefits. Before the 2022 EV exemption, FBT significantly ate into the tax benefit of novated leasing. The FBT payable was calculated on the car’s value and could be substantial - enough to make a novated lease barely worth it compared to a car loan.

For eligible EVs under the LCT threshold, no FBT is payable. This transforms the value proposition: you get the full pre-tax salary deduction with no FBT offset.

Residual value risk

At the end of the lease term, you have a “residual value” to pay - a balloon payment based on the agreed remaining value of the car. You can pay it and keep the car, refinance it, or sell the car (hopefully for more than the residual) and walk away. The risk sits with you, not the employer.

EVs have introduced genuine residual value uncertainty that wasn’t an issue for predictable petrol car depreciation. Models that depreciate faster than expected - due to new competitor arrivals or battery technology updates - can leave you with a residual higher than the car’s market value. This is worth factoring into the term length decision. Shorter lease terms (2–3 years) reduce this risk.

Who offers it

Novated lease providers include Maxxia, SG Fleet, Smartleasing, Nlc, and others. Your employer must be willing to participate - not all are. Government employees and staff at larger corporates typically have access; casual workers and sole traders generally do not.