Novated Lease Explained: Your Complete Guide to Car Salary Packaging

Novated leases are a popular option for Aussies looking to finance their next set of wheels while enjoying significant tax benefits with the help of car salary packaging. 

Whether you’re a first-time buyer or a seasoned professional looking for more clarity on how novated leases work, getting a grip on the fundamentals of a novated lease is a must for any informed purchase. 

In this article, we’ll break down exactly what a novated lease is, how the process works and cover everything you need to know about car salary packaging and the potential benefits for your back pocket. 

What is a Novated Lease? 

To keep things as simple as possible, a novated lease is a three-way agreement between an employee, the business employing them and the finance or leasing company. 

The term comes from the fact that the loan is ‘novated’ to your employer, who is responsible for making loan repayments. These loan repayments are made on the employee’s behalf through a salary sacrifice plan, otherwise known as salary packaging. 

Notably, these salary sacrifice arrangements are made from an employee’s pre-tax salary, which helps to reduce their overall taxable income at the end of the financial year and can net some significant savings. 

Ongoing vehicle costs like scheduled maintenance, insurance, registration and CTP insurance can also be bundled up and deducted from your pre-tax salary.

Many Aussies working full-time are eligible to apply for a novated lease, with the provision that their contract allows for salary packaging. However the total amount you stand to benefit by depends on your industry.

How Does Novated Leasing Work?

Putting a novated lease into practice involves a few steps.

1. The first step involves checking your employment contract for any mentions of salary packaging or contacting your employer to see if they’re willing to participate in a novated lease agreement and how you stand to benefit. 

2. Next comes the fun part - finding your preferred vehicle; both new and used vehicles can be financed under a novated lease agreement. 

3. From here, it’s time to sign the dotted line with your employer and chosen finance provider, thereby entering a salary sacrifice agreement that may include running costs. 

Once the contract is signed, your employer will begin making payments invoiced to them via the finance provider, which are paid via salary sacrificing your pre-taxable income. If employment status changes, your novated lease can be transferred to a new employer if they agree.  

What are the Benefits of a Novated Lease?

GST Savings 

One of the biggest benefits of a car financed with the help of a novated lease is the massive GST discount. There is no GST payable for a vehicle purchased via a novated lease valued up to $69,674 for the 2024/25 financial year, while GST is payable to the amount above $69,674 for any vehicles priced above that threshold. That’s a potential 10% saving right there.

Reduce Taxable Income

The fact that your repayments are taken from your pre-taxable income means that you stand to benefit from a lower taxable income, potentially lowering the amount of tax you’ll pay. 

Many salary packaging arrangements allow for expenses like vehicle registration, insurance, fuel, maintenance and tyres as part of your repayment structure. You can use the vehicle for entirely personal use if your employer and finance provider agree. 

Novated Leasing Benefits by Industry

Not-for-profit: NFP employees are able to make uncapped contributions for novated leasing repayments as well as voluntary superannuation top-ups, work-related and travel expenses and professional memberships, training and self-education. Mortgage, rent, utility and a wide range of personal expenses can also be packaged, up to a cap of $15,900.

Education: teachers benefit from a range of salary packaging opportunities to reduce their taxable income, namely the uncapped superannuation contributions, $15,900 cap for personal and work expenses and capped novated lease repayments to help lower their taxable income.

Corporate: employees stand to benefit from added salary sacrificing for superannuation contributions, electronic devices and substantial savings on the purchase of a new car, especially electric vehicles. However, caps tend to be lower than in the public and NFP sectors.

Healthcare: workers in the healthcare sector can pocket some serious savings at tax time with a novated lease, alongside salary packaging up to $9,010 for mortgage, rent and everyday expenses and a separate $2,650 cap for eating and entertainment.

Government: public sector employees can make extra contributions to their super, package their salary for personal electronics and net some savings when opting for a novated lease.

Mining: employees of Australia’s mining sector pick up the same potential tax savings on a novated lease, as well as the ability to package mortgage interest or rent payments under the ‘remote area benefits’ scheme.

What is Car Salary Packaging?

Car salary packaging, also known as salary sacrifice, is a financial arrangement where an employee agrees to have their salary reduced in exchange for receiving a non-cash benefit—in this case, a new or used car. 

The employer makes the lease payments directly to the leasing company on the employee’s behalf. In the context of a novated lease, salary packaging allows employees to pay for the car - and associated running costs -  with pre-tax income, which can lower their taxable income and reduce their overall tax bill.

What Happens at the End of a Novated Lease? 

At the end of a novated lease, the employee has several options:

• Purchase the Vehicle: If there is a residual value (the balloon payment), the employee can choose to pay this amount and purchase the car outright.

• Return the Car: The employee can return the car to the leasing company and walk away, potentially entering into a new novated lease for a different vehicle.

• Refinance the Lease: In some cases, employees may have the option to refinance the remaining amount of the lease and continue using the vehicle.

• Extend the Lease: If the vehicle is still in good condition and the employee is satisfied with it, they may opt to extend the lease for another term.

Can I Choose Any Car for a Novated Lease?

In most cases, employees have the flexibility to choose the car they want for a novated lease, within reason. While the choice of vehicle will depend largely on your budget and the finance provider’s policies, employees can typically select a vehicle from a wide range of makes and models, including new or used cars.

It’s worth noting that the GST exemption cap stands at $6,334, meaning the purchase of a vehicle up to $69,674 is exempt from GST. 

Is a Novated Lease Right For Me?

If you have stable, full-time work and your employer allows for car salary packaging, a novated lease can be a great way to leverage existing tax structures in your favour and pocket some savings. 

The combination of lowering your taxable income, escaping the sting of GST on a new vehicle’s purchase price and being able to forecast your expenses makes a novated lease a particularly appealing option. 

That said, the question of whether or not a novated lease is right for you is highly dependent on your financial standing, ability to stick to a payment schedule and awareness of the overall structure. 

You’ll probably need to contend with the residual payment, otherwise known as the balloon payment, as well as the fact the loan is highly dependent on you staying with your current employer. 

As always with these big financial decisions, you should consult your accountant for some honest and tailored advice about the potential pros and cons of a novated lease.

Read more: Car Loan Basics

Alexi Falson

Alexi is InfoChoice Group's resident automotive expert and has been with the group since 2021, primarily writing for OnlineAuto.com.au and Performance Drive. He appreciates the complexity of modern vehicle engineering and loves to keep his hands greasy working on motorbikes and cars.