If you’ve heard the term novated lease but aren’t quite sure what happens behind the scenes, you’re not alone. It’s one of the most tax-effective car finance options available to Australian employees — and it’s simpler than it sounds. Here’s a breakdown of how it actually works, from signing up to driving away.
It Starts With a Three-Way Agreement
A novated lease involves three parties: you (the employee), your employer, and a leasing company. Your employer agrees to take on the lease on your behalf, making payments directly to the leasing company using a portion of your pre-tax salary. This is what makes it tax-effective — those payments come out before the ATO takes its cut.
You Choose the Car
Unlike a company car, you pick the vehicle. New or used, any make or model. The car is yours to drive personally, and if you change jobs, you take it with you.
Your Pay Is Split
Once the lease is set up, your salary is split into two portions. One covers the lease repayments and running costs (paid pre-tax), and the rest is your normal take-home pay. The result is a lower taxable income and less income tax paid overall.
Running Costs Are Bundled In
A well-structured novated lease includes more than just the finance repayment. Fuel, registration, insurance, servicing, tyres and roadside assistance can all be folded into the one package — paid pre-tax, managed centrally, no bill shock.
What About FBT?
Because your employer is paying for a personal benefit, the ATO applies Fringe Benefits Tax (FBT). For most standard vehicles, this is offset using the Employee Contribution Method — where you make a small post-tax contribution to cancel out the FBT liability. For electric vehicles, FBT doesn’t apply at all under the current EV exemption, which is why EVs are particularly good value under a novated structure.
At the End of the Lease
When your lease term ends (usually 1–5 years), you have three options: pay the residual value and own the car outright, trade it in, or roll straight into a new novated lease. The residual is set at the start, so you always know what’s coming.
Ready to See What You Could Save?
eCarz specialises in novated lease car finance and can help you find the right solution for your situation. Connect with the eCarz team today for an obligation-free quote.