What is Novated Leasing and is it Right for Me? (A Detailed Guide)
Key takeaways
If you’re in the market for a new car – whether upgrading your existing model or making the switch to an electric vehicle – you may be asking yourself: what is a novated lease?
What is a novated lease?
A novated lease is a three-way agreement involving employee, employer and a financer. It’s a unique form of financing that lets many Australian drivers pay for a new, used or existing car and its eligible running costs using their salary.
How does a novated lease work?
Here’s a quick breakdown of who does what:
- You choose and use the car
- Your employer agrees to make lease payments on your behalf with a combination of before- and after-tax dollars (or fully before-tax for eligible EVs)
- The financier owns the car and leases it to you.
With budget convenience and potentially significant tax savings, it's a valuable employee benefit and retention tool for organisations.
Considerations for taking out a novated lease include the residual (or “balloon”) payment due at lease end, and novated leasing potentially being listed as a Reportable Fringe Benefit Amount on your tax return, which could impact income tests for HECS, child support, and family benefits.
Is novated leasing the right choice for you? Here’s our detailed guide to help you make an informed decision.
Does novated leasing mean the same thing as salary sacrificing a car?
Yes, a novated lease is a form of salary packaging; an employee benefit arrangement involving you, your employer and a financier that can last between one and five years.
With a novated lease, you're not limited to any particular car type, model or make, unless stipulated by your employer. In most cases, you’re free to choose the car you wish to lease, whether it’s petrol or electric, or a new, used, or even your existing car.
Best of all, because your repayments are partly sourced from your before-tax income ((or fully sourced for eligible EVs), you could end up paying less tax.
Some of the cost is taken from your ‘before-tax’ income
A novated lease allows for your employer to take money directly from your pay to make payments for your vehicle and its running costs. Some or all of this money is taken before you are taxed on it, meaning you do not have to pay tax on that portion of your income throughout the year. This can reduce your taxable income.
Some of the cost is taken from your ‘after-tax’ income
Fringe Benefits Tax (FBT) is a tax that is applied to benefits you receive from your employer that aren’t in the form of cash salary or wages. Since a novated lease is a benefit outside your cash salary or wages, it is subject to FBT. (Eligible electric vehicles up to the Luxury Car Tax threshold of $91,387, however, are FBT-free.)
To help offset any FBT you may be liable to pay on your novated lease, your deductions can be set up to include a portion of your post-tax salary. This is known as the Employee Contribution Method (ECM).
By paying ECM, you reduce the taxable value of the car, which in most cases reduces the FBT payable to nil.
Electric vehicle novated leases
Because of the FBT exemption tied up with the Australian Government’s Electric Car Discount, novated leases on eligible EVs differ from that of fuel-powered cars, because there is no post-tax component to deductions.
With 100% pre-tax payments permitted on eligible electric cars – up to the Luxury Car Tax (LCT) threshold of $91,387* – this could mean making similar payments on EVs to an equivalent petrol car retailing for considerably less.
What’s included in a novated lease?
Say goodbye to bill-shock. One of the most popular aspects of novated leasing is the budget convenience of having all your car’s eligible running costs spread out over the course of a year. If you’re paid fortnightly, this means 26 payroll deductions covering your car payments and your eligible running costs.
- Registration – Skip car rego stress. We manage payments for you, regardless of state requirements.
- Servicing and Maintenance – Our dedicated maintenance team keeps your vehicle well maintained at service time.
- Insurance – Comprehensive insurance is required to be covered in your lease budget
- Fuel or electricity (for EVs) – cover your EV charging or fuel as part of your lease.
- Tyres – Get your tyres replaced as needed and avoid the one-off outlay.
- Car washes – Regular washes in your novated lease package keep your car cared for.
Note: If you’re paid weekly, the costs will be spread over 52 pay runs; or if you’re paid monthly, 12 pay runs. Before your lease starts you simply estimate your annual running costs for your vehicle, and this amount is deducted evenly from your pay over the life of your lease. You can adjust your budget at any time – if, for example, you’re driving more or less than you originally estimated.
You could save on the cost of the car
GST savings may apply to the purchase price of a vehicle financed through a novated lease up to the annual car limit (currently $6,334 for FY2025-6), unless the vehicle is GST-exempt. This may save you thousands in upfront costs you would otherwise have to pay.
As one of the country’s leading novated leasing providers Maxxia has a nationwide preferred dealer network to tap into to help you get a great deal on a great car.
Types of novated leases
While there several different types of novated leases, the two main ones are fully maintained, and self-managed.
Fully-maintained novated lease
As your novated lease provider, Maxxia will assist you in all steps of the process – from sourcing the vehicle, to negotiating on price, arranging finance and establishing a budget for your running costs. Maxxia will set up your pay deductions and arrange these deductions with your employer.
You may also be provided with a fuel card, so you don’t have to worry about seeking reimbursement for fuel. You also have the peace of mind of having Maxxia’s expert maintenance team deal with your mechanic directly when it’s time for a service, to ensure costs and work undertaken are fair and reasonable.
Self-managed novated lease
While Maxxia sets up your novated lease account and makes agreed payments to the financier, you take full control of the day-to-day management of your lease – from sourcing your own vehicle and conducting any negotiations with dealers to arranging your own finance and insurance. You also need to draw up your own budget for all the running costs for your vehicle. You will also need to do all the required paperwork, set up a pay deduction and make arrangements with your employer.
What happens at the end of the lease?
One of the requirements of a novated lease is that there must be a ‘residual’ or 'balloon payment' amount at the end of the lease. This means that you don’t make lease payments for the whole financed amount over the term of a novated lease. The amount that you don’t pay during the lease is the residual, this is owed at the end of the novated lease.
The Australian Tax Office stipulates the percentage of the residual based on the term of the lease. For example, if you have a novated lease for four years, with a car finance amount of $30,000, the minimum residual is 37.5% or $11,250.
With Maxxia, there are several options available for you as the end of your lease approaches. These include:
- Trading in your car and using the money from your trade-in to pay the residual amount, then enter into a new lease for a new car.
- “Re-leasing” your current car – that is, enter into a new novated lease and finance arrangement for the residual amount. You keep your current car and we set a new budget together.
- Pay the residual amount from your savings and keep your car.
- Sell your car and use the money from the sale to pay the residual amount.
Can anyone get a novated lease?
Eligibility depends on your employer and their salary packaging policy. Many employers offer novated leasing as part of their employee benefits to reward staff beyond their regular wage. Full-time and part-time employees are usually eligible, while casual employees often are not due to fluctuating income.
This is always subject to employer approval, so if you are unsure, it is best to speak with your human resources contact.
Can you modify a car on a novated lease?
Upgrades or extras – such as tow or bull bars, and window tinting – must be included in the initial vehicle quote and bundled into the financed amount of your lease. The car cannot be modified once the lease is active so it pays to plan ahead.
How to go about getting a novated lease?
There’s a few steps to take before you can get behind the wheel of your dream car via a novated lease. Luckily, Maxxia brings more than 35 years’ experience as one of Australia’s leading novated lease providers, and we’re experts in simplifying the process. Maxxia provides the following six-step process:
- Ask your employer if they offer novated leasing
- Crunch the numbers and get a quote
- Choose the car you want
- Get finance approval
- Sign the lease documentation
- Settle the lease and have your car delivered
This article provides a detailed step-by-step guide to getting a novated lease – from initial research and quote-getting to taking your new car for a spin.
A novated lease with Maxxia
Novated leasing can seem complex, but if you work with a company like Maxxia, we can handle much of the complexity for you.
Want to know more about novated leasing? You can read our novated leasing FAQs here. Or, if you’re ready to get started with a novated lease, get in touch with us today.
This general information doesn't take your personal circumstances into account. Please consider whether this information is right for you before making a decision and seek professional independent tax or financial advice.
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