Guides

How a novated lease works

Checked against the official sources on 20 October 2026.

A novated lease pays for a car from your salary before tax. Your income tax drops, and your employer claims back the GST on the car. Whether it beats a car loan or cash depends mostly on your tax rate and the car.

Who signs a novated lease

A novated lease is a three-way agreement. Novated means a contract handed on to someone else. You lease the car, and your employer takes over the payments.

• You. You pick the car, drive it and agree to take less pay.
• Your employer. Your employer pays the lease out of your pay and claims back the GST.
• The financier. The lender pays for the car and leases it to you.

Taking less pay in return for a benefit is called salary sacrifice. The money goes to the car before your income tax is worked out.

Paid before tax, so your income tax drops

Each lease payment comes out of your salary before tax. Your taxable income falls by the same amount. Each dollar paid this way saves the tax you would have paid on it.

Taxable income = salary − lease payments, fees and running costs paid before tax

Income tax rates for 2026-27 run from 0% to 45%. The Medicare levy adds 2%. The higher your top rate, the more each dollar saves.

Your employer claims back the GST

GST is the goods and services tax of 10% inside most prices. Your employer claims the GST on the car price back. The lease then pays for the car without that GST.

The car limit caps the car price a business can use for tax claims. It is $69,883 for 2026-27. The GST claim stops at one eleventh of it: $6,353.

Running costs go in the lease too

A lease can bundle the running costs into the same pre-tax payment. Each one saves tax, and some save GST too.

• Insurance and servicing. Paid before tax, and your employer claims back the GST.
• Fuel on a fuel card. Paid before tax, with the GST claimed back.
• Rego and CTP. Paid before tax, with no GST to claim.
• Home charging. Paid back to you before tax, with no GST to claim.

In the example below the running costs are $4,165 a year from take-home pay. Through the lease they cost $3,947 a year, paid before tax.

Fringe benefits tax and the post-tax contribution

Fringe benefits tax (FBT) is a tax your employer pays on perks given to staff. A car you can use privately counts as a perk. The FBT rate is 47%.

The ATO values the car perk with a set formula. Each year it is worth 20% of the price with GST. For a $50,000 car that is $10,000 a year.

To avoid the FBT you pay that amount from your pay after tax. This is called the employee contribution method. The FBT then drops to $0.

Your employer pays one eleventh of your contribution as GST. Your pre-tax payment falls by the other ten elevenths. With a petrol car at the same price, the tax saving falls from $5,898 to $2,409 a year.

Electric cars skip the FBT

A battery electric or hydrogen car can be exempt from FBT. It must be first used on or after 1 July 2022. Its price must be under $91,661, the luxury car tax threshold for fuel-efficient cars.

With the exemption you make no post-tax contribution. The car still shows on your income statement as $18,868 a year in the example. That amount isn't taxed, but it counts for tests such as HELP repayments and the Medicare levy surcharge.

Plug-in hybrids first used from 1 April 2025 pay FBT. Changes for leases from 1 April 2027 are announced, not yet law. The electric car FBT guide covers both.

The balloon at the end

The balloon is a lump sum left to pay when the lease ends. Its formal name is the residual. The ATO sets a minimum for each lease term.

The minimum runs from 65.63% of the amount financed for 1 year to 28.13% for 5 years. GST is added when you pay it. You pay the balloon to keep the car.

The balloon guide shows how it changes the monthly payment and your choices at the end.

Fees and interest

The financier charges interest, like a car loan. The rate is on your lease quote. The lease borrows less than a loan, because the GST comes off the price first.

A provider can also charge a yearly fee. Fees come out of your pay before tax too. The calculator starts fees at $0, so enter the ones on your quote.

In the example the lease pays $11,804 in interest and fees at 7.5%. The car loan pays $12,668 in interest at 9%. Both rates are examples.

A worked example

The example uses the calculator's default inputs. They are examples, not a quote.

• You. A salary of $200,000, with your cash in a mortgage offset at 6%.
• The car. An electric car for $50,000 in NSW, first driven on 20 October 2026.
• The lease. 5 years at 7.5% with a 28.13% balloon.
• The loan. 5 years at 9% for the price and stamp duty.
• Running costs. $4,165 a year, charging included.

1. GST and stamp duty. Your employer claims back $4,545 of GST. NSW stamp duty adds $1,600.
2. Amount financed. $50,000 − $4,545 + $1,600 = $47,055.
3. Balloon. 28.13% of that is $13,236. With GST you pay $14,560 at the end.
4. Monthly payment. $760 for 60 months.
5. Tax. With running costs, $13,071 a year comes out before tax. Your tax and Medicare levy drop from $59,870 to $53,972 a year.

The total cost is what the car takes out of your account over the term. It counts the interest your cash would have earned. The table also shows a petrol car with the same inputs.

For the electric car the novated lease costs the least, by $33,181. For the petrol car the novated lease costs the least, by $10,597.

Put in your own salary and lease quote

When a car loan or cash costs less

The lease saves tax. It can still cost more in total. These make a loan or cash cost less:

• A lower tax rate. In the 15% tier each dollar paid before tax saves much less.
• A high rate or fees. A lease rate well above a loan rate can eat the tax saving.
• FBT on a petrol car. The post-tax contribution takes back much of the saving.
• Cash that earns little. Paying cash loses the interest that cash would earn. A low savings rate makes that loss small.

Take the petrol car again on a salary of $40,000. The cash sits in savings at 3%. Over 5 years the lease costs $89,001, the loan $97,249 and cash $87,485.

Here the cash purchase costs the least.

If you change job

The lease runs through your employer, so a new job changes it. Your old employer stops the payments when you leave. Ask the financier what happens then before you sign.

• Move the lease. A new employer agrees to take over the payments.
• Pay it yourself. You pay the financier from take-home pay, with no tax saving.
• Pay it out. You pay off what is left, and fees may apply.

The calculator leaves out early termination fees. Ask for them in writing.

Your next home loan

A bank counts the lease when you apply for a mortgage. The lease lowers the pay on your payslip. Some banks add the salary sacrifice back and take off the whole lease payment instead.

In the example a bank could lend about $74,000 to $135,000 less with the lease. The car loan cuts it by about $133,000. The home loan guide shows how a bank works it out.

Try your own numbers in the calculator