A novated lease lets you pay for your car with pre-tax salary. Your employer deducts the lease payments, running costs, fuel, insurance, and maintenance from your gross pay before calculating income tax. The result: you effectively get a discount equal to your marginal tax rate on every dollar spent on the car.
How the three-way agreement works
- You choose a car and negotiate the price
- A finance company (lessor) buys the car
- Your employer agrees to make payments from your pre-tax salary (the "novation")
- You use the car as your own — it is not a company car, it is YOUR car with salary sacrifice payments
The tax savings math
Meena earns $95,000 and novates a $45,000 car over 4 years.
- Monthly total cost (lease + running): $1,400/month ($16,800/year)
- Without novation: paid from after-tax income at 34.5% marginal rate = costs her $25,649 in gross salary to fund
- With novation: deducted pre-tax = costs her $16,800 in gross salary
- Annual saving: $8,849/year or $35,400 over the 4-year lease
FBT and the Employee Contribution Method (ECM)
The employer pays Fringe Benefits Tax (FBT) on the car benefit. To offset this, you make a post-tax "employee contribution" that reduces the FBT-taxable value. Well-structured novated leases use ECM to minimize FBT while maximizing your pre-tax savings. Most providers handle this automatically.
Electric Vehicle exemption (July 2022+)
EVs and PHEVs below the luxury car tax threshold ($91,387 in 2026-27) are FBT-EXEMPT under a novated lease. This means the full lease cost comes from pre-tax salary with zero FBT: making EVs dramatically cheaper through novation than buying outright. A $60,000 EV effectively costs ~$40,000 after tax savings.
