What is Novated Leasing

By Alexi Falson
Updated on 15 Nov 2022 First published 11 Nov 2020
image for What is Novated Leasing A novated lease can be a great way to get a new car and pay less tax. We'll explain what they are, how they work, and their benefits and drawbacks.

Novated leases are a very attractive prospect for employees that have a good working relationship with their organisation, but there is a heap of things you should know before signing the dotted line. 

Let’s unpack what a novated lease is, how it works, and toss up the pros and cons of the process to find out if a novated lease is the best option for you. 

What is a Novated Lease? 

A novated lease is an agreement struck between you, the employee of a business, your employer and a financial provider who can back up the loan. 

When signing a novated lease, your employer effectively signs a lease agreement with a finance provider for the vehicle. In turn, you are replacing, or ‘novating,’ the place of your employer who is making the payments on your behalf, who makes payments from your pre-taxable salary, usually in the form of salary packaging or salary sacrificing. 

As a result, novated leases are subject to the Fringe Benefits Tax (FBT), which an employer is required to pay. The employer will typically pass these costs onto the employee in the form of a reduced salary. 

If you’re interested in learning more about novated leasing vs a traditional car loan, we’ve covered the topic in an article that you can read here.

Types of Novated Leases 

Let’s unpack the two main types of novated leases. 

Fully-Maintained Novated Lease 

A fully-maintained novated lease allows you to package all the operating costs of your vehicle into the salary sacrifice agreement that you’ve struck with your employer. 

This includes operating costs like car repayments, fuel, registration, insurance, servicing, maintenance and the replacement of tyres. 

Packaging these costs means you still have to pay for them, although they are taken from your pre-taxable salary, which is one of the main advantages of a fully-maintained novated lease. 

Non-Maintained Novated Lease 

A non-maintained, or finance-only novated lease, on the other hand, covers just the cost of the vehicle paid to the finance provider, excluding operating costs. 

This means that you’re responsible for paying the operating costs, and while you have a higher salary to pay for these costs, you’re not getting as much of the potential tax savings.

What Happens at the End of a Novated Lease? 

When a novated lease ends, there are three options available to you, these include: 

Trade-in your vehicle to lease another

This is one of the most common avenues and allows you to benefit from the tax incentives of a novated lease while upgrading your car. 

Extend the current lease on the vehicle

Extending the lease is a less common option, which can require some added costs of establishing a new agreement, with the costs being compounded when taking depreciation into account.  

Pay the residual value, AKA, the balloon payment to keep the vehicle 

Finally, you can pay the residual payment and keep the vehicle, in line with the ATO’s minimum residual value of a vehicle, which takes depreciation into account. The table below maps out the ATO’s residual value calculations. 

Year 1 - 65.63%

Year 2 - 56.25%

Year 3 - 46.88%

Year 4 - 37.5%

Year 5 - 28.13%

Advantages of a Novated Lease 

Tax Benefits

Payments are taken from your pre-taxable salary, which reduces the amount of tax you’ll pay. 

Flexible Arrangements

A novated lease can help you upgrade cars regularly. 

Bundled Payments

Fully-maintained novated leases cover running costs and expenses, lowering your tax bill even more in the process.  


The fact that you’re leasing, rather than actually purchasing the vehicle means there’s no GST to pay, saves you thousands as opposed to buying outright.  

Disadvantages of a Novated Lease 

No Ownership

Technically, the vehicle is leased, meaning you don’t own it, which means you can’t make any modifications or claim it as an asset for financial purposes. 


Employers will often put kilometre caps on vehicles that their employees are leasing to reduce wear-and-tear on the vehicle.

Job Loss

In the event of losing your job, you can be subject to paying the entirety of the lease from your post-taxable salary, which negates the tax break a novated lease originally provided.  

Early Contract End

If you want to end the lease early, you may be required to pay the remaining payments and the residual value, or balloon payment. 

Interest Rates & Fees

Novated leases are often subject to comparatively higher interest rates and fees than a traditional loan, which is something to take into account before signing the dotted line. 

Need More Help?

Click here to read another detailed breakdown of novated leases, as well as a full comparison of novated leases compared to a traditional car loan here.

If you’re looking to upgrade your current car, click here to get in contact with one of our car-buying experts who can also help find you some of the best possible financing options.


Alexi Falson

Alexi is an automotive journalist and road tester hailing from Byron Bay. He has an affection for both cars and motorbikes, a great admiration for the simplicity of old-school engineering, and a fascination of new technology making its way to modern cars. When he's not road testing, you'll find him surfing, hiking or helping people find their dream cars.

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