How a novated lease works
Your employer deducts the car's finance and running costs from your salary and pays a leasing company — a three-way ("novated") agreement. Money that would have been taxed at your marginal rate instead buys the car, and the leasing company claims back GST on the purchase price and running costs. The tax system claws some back through fringe benefits tax — and managing that FBT is where the whole game is decided.
Why EVs changed everything
Since 2022, electric vehicles under the luxury car tax threshold pay no FBT at all on a novated lease. Every dollar — finance, charging, insurance, servicing — comes out pre-tax with no clawback. For someone in the 39% marginal bracket, that's roughly a third off the cost of the car. This exemption single-handedly explains why novated EV leasing exploded; note that plug-in hybrids lost the exemption for new leases from April 2025, and the rules have a sunset review — check currency before signing a 5-year term.
For petrol cars, the standard trick is the employee contribution method (ECM): you pay 20% of the car's value each year from post-tax salary, which cancels the FBT liability, and the rest comes out pre-tax. The benefit is real but much thinner — often only worth it for higher incomes and heavier running costs.
The traps the glossy quote glosses over
- The residual balloon. ATO rules require a residual (28% of cost on a 5-year lease) you must pay to own the car. Quotes showing low weekly costs are partly just deferring the car to the end.
- Padded rates and fees. Lease interest rates of 8–12% and management fees of $300–$800/year are common, eroding the tax benefit. Always extract the effective interest rate from the quote.
- Job risk. Leave your employer and the lease follows you — you either re-novate with a new employer or pay it personally from post-tax income.