A novated lease lets you pay for a car through your salary, with the lease and most running costs rolled into one regular deduction. For the right person it's a smart way to run a car. For the wrong person it's an expensive commitment. Here's how it works, what happens at the end, and where the electric car tax rules stand as at October 2026.
What is a novated lease?
The ATO describes a novated lease as a three way agreement between an employer, an employee and a novated lease provider. The employer takes on the obligation to make the lease repayments and makes a matching deduction from the employee's salary.
In plain terms: you choose the car, a lender buys it and leases it to you, and your employer makes the payments out of your pay while you work there. The car is yours to drive like any other, weekends included.
Who does what
At Lend It we arrange the lease finance only. Your employer's salary packager looks after the novation agreement and the running costs.
How the money comes out of your pay
Salary sacrificing means you agree to receive less income before tax, and your employer pays for certain benefits of a similar value in return. With a novated lease, that benefit is the car.
Running costs such as fuel or charging, servicing, tyres, registration and insurance can usually be bundled in. Your packager estimates the year's costs and spreads them across your pay cycles.
Before tax and after tax deductions
A car you can use privately is a fringe benefit, so fringe benefits tax (FBT) comes into play. That's why most novated leases on petrol, diesel and hybrid cars use a mix of before tax and after tax deductions.
Under the ATO's statutory formula, the taxable value of a car benefit is based on 20% of the car's base value for the days it was available for private use, less any contribution you make. Paying part of the cost from your after tax pay counts as that contribution, which is how many packages bring the FBT bill down to nil. Your packager runs these numbers.
The residual at the end of the lease
A novated lease doesn't run down to zero. At the end there's a residual: a lump sum you pay if you want to keep the car. The ATO sets minimum residual values by lease term, based on the car's cost before any trade in.
When the lease ends, you'll usually have three choices:
- Pay the residual and own the car outright.
- Refinance the residual, often with a standard car loan.
- Sell or trade in the car to cover the residual, and start a new lease.
Plan for the residual from day one. If the car is worth less than the residual when the lease ends, you'll need to cover the gap.
Electric cars and FBT: where things stand
Under current law, there's no FBT on the private use of an eligible electric car. To qualify, the car must:
- be a battery electric or hydrogen fuel cell vehicle
- have been first held and used on or after 1 July 2022
- cost less than the luxury car tax threshold for fuel efficient vehicles, which is $91,661 for 2026/27.
Plug in hybrids stopped qualifying from 1 April 2025, apart from limited transitional arrangements. Salary packaged cars are included in the exemption, but the benefit is still reportable. A reportable fringe benefit appears on your income statement and can affect things like the Medicare levy surcharge, study loan repayments, child support and some government payments.
What's proposed from 1 April 2027 (not yet law)
In the 2026/27 Budget, the Government announced it will wind the exemption back in stages:
Draft legislation was released for consultation from 10 to 28 September 2026. At the time of writing these changes are not law, and the details could still change. If you're weighing up an electric car, talk to your packager and accountant about timing. Our solar and EV loans page covers other ways to finance one.
Novated lease pros and cons
Is a novated lease worth it?
Moneysmart notes that salary packaging is usually more effective for people on middle to high incomes. A novated lease also tends to stack up when your employer offers packaging, you drive plenty and you're considering an eligible electric car.
It may not suit you if your job feels uncertain, you drive very little, or you'd rather own the car with no lump sum at the end. A standard car loan can be simpler, and we're happy to compare both.
What happens if you change jobs?
When your employment ends, the novation agreement ends too. Your employer's liability stops and you become responsible for the remaining lease payments. You can ask your new employer to take the lease on, or keep paying it from your take home pay.
How Lend It helps
We compare lenders that write novated leases and explain the numbers in plain English. Getting a quote doesn't affect your credit score. We may run a soft check, and a full credit enquiry only happens when you apply. Once you're approved, your employer's salary packager signs the novation and starts your deductions. We're based on the Gold Coast, help clients Australia wide and we're open 7 days, 8:30am to 6pm.
FAQs
Does my employer have to offer salary packaging?
Yes. Your employer needs to agree to the novation and run the deductions through payroll, usually via their salary packager.
Can I get a novated lease on a used car?
Often, yes. Lenders and packagers set their own limits on the car's age, so check before you commit.
Is the electric car FBT exemption ending?
Not under current law. Changes are proposed from 1 April 2027 and draft legislation has been released, but it hasn't passed.
Ready to see your numbers?
Get a novated lease quote or call 1300 082 012. We'll line up the finance and work alongside your employer's salary packager.
General information only. This article is not financial, tax or legal advice and doesn't take your personal circumstances into account. Talk to your accountant or a licensed adviser before you make a decision. Tax rules are current as at October 2026. Lend It Finance Group is a credit representative (535206) of COG Compliance Services Pty Ltd, Australian Credit Licence 384428.