Novated leases have established themselves as a mainstream vehicle-financing option in Australia, particularly among salaried employees seeking tax efficiency, convenience and the ability to drive a new car without a large upfront outlay. As electric vehicles (EVs) become more common and government incentives evolve, it’s timely to revisit how novated leases work, who stands to gain, and what pitfalls to watch for.

What is a novated lease?

A novated lease is a three-party arrangement between an employee, their employer and a finance or leasing provider. In practice, the employer agrees to make lease payments and usually meet agreed running costs (fuel/charging, servicing, insurance, registration and roadside assistance) from the employee’s salary – typically using pre-tax income. The arrangement reduces the employee’s assessable income and can produce tax savings versus buying a vehicle with after-tax dollars.

Most novated leases run for one to five years and include a residual (balloon) payment at the end of the term, which the employee can pay to take ownership, refinance, or settle and return the vehicle (subject to contract terms).

How a novated lease works – step by step

• Choose a vehicle and negotiate terms with a novated lease provider.
• Employer approves the salary packaging arrangement and agrees to make payments on your behalf.
• Lease and running costs are deducted from your pre-tax salary, lowering your taxable income.
• At lease end you can pay the residual to buy the car, refinance the residual, or arrange a new lease.

Key benefits (pros)

• Tax efficiency: Lease repayments and many operating costs can be paid from pre-tax income, potentially reducing taxable income and increasing net take-home pay. The exact benefit depends on your marginal tax rate and the structure of the package.
• Convenience and budgeting: A packaged novated lease can include fuel or charging, servicing, insurance, tyres, registration and roadside assistance – simplifying budgeting and reducing unexpected costs.
• Access to fleet pricing: Leasing providers and fleet purchasers often secure discounted pricing, which can reduce the effective cost of a new vehicle versus retail purchase.
• Flexibility: Lease terms typically range from 1-5 years, allowing you to update vehicles regularly without the hassle of selling a used car.
• EV advantages: From 2022 the Australian Government introduced FBT concessions for eligible electric vehicles, making novated leases an attractive pathway for employees wanting an EV. Novated leasing can also help with managing the upfront cost of EVs and packaging charging costs into salary sacrifice.
• No large upfront payment: A novated lease removes the need to pay the car’s purchase price in full at acquisition.

Potential drawbacks (cons)

• Employment-linked: Because the employer is a contracting party, your novated lease is linked to your employment. Changing jobs can complicate or terminate the arrangement unless your new employer agrees to take on the lease.
• Early exit costs: Terminating the lease early often attracts break costs and administrative fees. These can be substantial, particularly early in the contract.
• No immediate ownership: Legally, you do not own the vehicle while the lease is active. Ownership options depend on the residual payment and leasing terms.
• Fees and administration: Leasing providers charge establishment fees, ongoing administration fees and other costs that can reduce the net benefit of salary packaging.
• Residual value risk: The balloon payment at lease end can be higher than the market value of the car, especially as EV depreciation patterns evolve – exposing you to a potential shortfall if you intend to buy the car.
• Credit approval required: Providers assess applicants’ creditworthiness; a poor credit history may limit options or increase costs.
• Potential FBT exposure for petrol/diesel cars: While EVs may enjoy specific concessions, standard novated packages for petrol or diesel vehicles can still attract fringe benefits tax unless structured carefully or eligible for specific exemptions.
• GST and accounting complexity: While many running costs are effectively GST-free to the employee within the package, the arrangement relies on correct GST treatment by the employer and provider; clarification and accurate record-keeping are essential.

Novated leases and electric vehicles – what’s changed and what to consider

The combination of growing EV model availability, falling battery costs and targeted policy measures has made novated leasing particularly attractive for EV adoption. Since 2022, the federal government introduced concessions to encourage EV uptake, including fringe benefits tax (FBT) relief for specific eligible electric cars – a development that can significantly influence the cost-benefit of novated EV leasing.

Practical factors to weigh for EV novated leases:

• Eligibility: Not all EVs automatically qualify for FBT exemptions. Check vehicle eligibility, purchase price thresholds and any expiry dates attached to concessions with the ATO or your tax adviser.
• Residuals and resale values: EV resale values have been variable as the market matures. Ask your provider for realistic residual estimates and how they are set.
• Charging costs and infrastructure: Packaging home charging installation or workplace charging access into the lease can be part of the negotiation. Consider how charging patterns, electricity tariffs and public charging networks will affect running costs.
• Warranty and battery coverage: Confirm manufacturer warranty and battery guarantees, as these affect long-term ownership costs.
• Software and updates: Some EVs improve significantly with over-the-air updates; ask how these updates may impact performance and resale.

Who benefits most from a novated lease?

• Employees on higher marginal tax rates who can obtain meaningful tax savings.
• Drivers who value convenience and predictable running costs, especially those who drive moderate-to-high annual kilometres.
• Individuals keen to adopt an EV but without the capital for an outright purchase and who want to package charging and running costs.
• People who regularly replace vehicles and prefer the simplicity of leasing and fleet discounts.

Who should be cautious?

• Those with unstable employment or planning to change employers soon (unless your new employer can novate the lease).
• Buyers wanting immediate title to the car.
• People with tight cash flow who might struggle with unexpected break costs or residual payments.

Comparing novated leases to other options

• Outright purchase: You own the asset and avoid ongoing administrative fees, but you may miss tax advantages and may need a substantial initial outlay.
• Chattel mortgage: A loan where you progressively own the vehicle and claim depreciation; may suit business owners or those seeking ownership while claiming business deductions.
• Consumer car loan: Provides ownership after repayments with no employer involvement; lacks the salary packaging tax advantage.

Practical steps before signing a novated lease

1. Review the contract: Understand fees, included services, residual value, early termination terms and how running costs are calculated.
2. Confirm employer participation: Not all employers support novated leasing or the specific provider you choose.
3. Run the numbers: Use a novated lease calculator to compare net take-home pay under the package vs. buying or financing independently. Factor in expected kilometres, fuel/charging, and likely resale values.
4. Seek professional advice: Speak with a financial adviser or tax professional to understand personal tax implications and whether the arrangement suits your financial goals.
5. Check EV-specific thresholds and policy settings: Confirm any FBT concessions, luxury car tax exposure and whether the model you want is eligible.

Conclusion

Novated leasing remains a powerful tool in the Australian vehicle-financing toolkit – offering tax efficiency, convenience and access to fleet pricing. The rise of EVs and government incentives has further sharpened its appeal for drivers wanting to transition to electric. However, the arrangement carries obligations – from employment dependence to residual value risk and contractual fees – that mean it isn’t the right solution for everyone. Careful comparison with alternative finance options, clear understanding of contract terms and up-to-date advice on tax and EV policy will ensure you make an informed decision.

Frequently asked questions

What exactly is a novated lease and who are the parties involved?

A novated lease is a three-way agreement between you (the employee), your employer and a leasing/finance provider. Your employer agrees to make lease repayments and, often, running-cost payments on your behalf from your pre-tax salary.

Can I get a novated lease for an electric vehicle?

Yes. Many novated lease providers offer EVs and government incentives introduced since 2022 have made novated EVs more attractive in many cases. Confirm that the particular EV model is eligible for any FBT concessions and check current ATO guidance.

What happens to my novated lease if I change jobs?

Novated leases are tied to your employment. If you change jobs, you will need your new employer to agree to transfer the lease; otherwise, the lease may need to be terminated or novated to you personally, which can incur costs.

Are there tax benefits to a novated lease?

Potentially. Lease payments and included running costs charged to your salary package can reduce your taxable income, but the actual benefit depends on your marginal tax rate, the package structure and the vehicle type. Seek personalised tax advice.

What are the risks with the residual (balloon) payment?

The residual (balloon) payment is the amount due at lease end to take ownership. If the car’s market value is lower than the residual, you may face a shortfall. Residuals for EVs can be less predictable as the second-hand market develops.

How do fees and administration costs affect the deal?

Fees – including establishment, monthly administration and exit fees – can reduce the net savings from salary packaging. Compare providers carefully and request a comprehensive fee breakdown before committing.

About EV Evolution

EV Evolution is the leading online platform dedicated to Australian electric vehicle owners and enthusiasts. We foster a vibrant community, delivering essential EV news and insights, and enhancing user engagement through our innovative, AI-powered chatbot for dynamic discussions. Our mission is to empower Australian electric vehicle owners and enthusiasts by fostering a vibrant, AI-driven online community that connects, informs, and advances the nation’s electric vehicle landscape.