Quick answer
A novated lease is a three-way agreement between an employee, an employer and a financier, where the employer pays the vehicle lease and running costs from the employee's salary. If the employee leaves, the lease can move with them. Ownright can talk through whether it, or another car finance option, fits.
Key points
- A three-way arrangement between employee, employer and financier
- Payments come out of salary, often with running costs bundled
- Tax benefits depend on the vehicle, your pay and the arrangement
- If you leave your job, the lease usually stays with you
- Suits
- Employees whose employer offers novated leasing
- Security
- The vehicle, owned by the financier during the lease
- Ownership
- Financier owns; residual payable at the end
- Australia-wide
- Yes
What is a novated lease?
A novated lease is a vehicle finance arrangement involving three parties: you, your employer and a financier. You lease a car, then the lease is “novated” so your employer takes over the payment obligation while you work for them. The employer pays the lease, and often the running costs such as fuel or charging, registration, insurance and servicing, from your salary under an agreed package.
It is not something Ownright arranges as a standard product, because it depends on your employer and a specialist novated-lease provider. What we can do is help you work out whether it fits and, if not, look at what is available for your car.
Who uses novated leases?
- Employees at organisations that offer salary packaging
- Staff in sectors such as health, education and government with packaging schemes
- People who want running costs bundled into one regular amount
- Buyers considering an eligible electric vehicle and its tax settings
It generally does not suit the self-employed, who have no employer to novate to. For that group, our self-employed car loans and car loans are more relevant.
How does a novated lease work in practice?
- You choose the car and a novated lease provider your employer works with.
- The financier provides the lease and you sign a novation agreement with your employer.
- Your employer deducts lease and running costs from your pay.
- Your employer pays the financier and the cost suppliers.
- At the end, you pay the residual, refinance it or sell the car to clear it.
How does tax come into it?
Part of the deduction typically comes from pre-tax salary and part from post-tax salary, depending on the arrangement and the vehicle. Fringe benefits tax rules sit behind this, and eligible electric cars have been treated differently from petrol and diesel cars in recent years. The settings change, so the ATO’s current guidance and your accountant matter more than any summary here. We do not give tax advice or promise a saving.
Novated lease or a normal car loan?
| Question | Novated lease | Car loan |
|---|---|---|
| Who needs to be involved | You, employer, provider | You and the lender |
| Running costs | Often bundled in | Paid separately |
| If you change jobs | Needs sorting out | Unaffected |
| Ownership | Financier until paid out | You own the car, lender holds security |
| Suits | Stable employees | Wide range of borrowers |
What can go wrong?
- Losing or changing jobs mid-lease, which can leave you paying directly
- A residual that is higher than the car’s worth at the end
- Bundled running costs that cost more than paying separately
- Tax savings that turn out smaller than expected
- Assuming your employer will agree to novate, when many will not
What do financiers look at?
Providers and financiers look at your employment, income, credit history, existing debts and the vehicle. Stability counts: a permanent role with an employer that supports novating is typically stronger than a short contract. The guide on loan serviceability explains how repayments are tested against income.
How Ownright can help
Trevor Scott’s team has long experience matching people to the right car finance, and part of that is being straight about when a product is not the best fit. If you are weighing a novated lease, we can compare it with a car loan, a car loan refinance or an operating lease. If you are eyeing an electric car, our EV car loans page covers that side. For those with credit challenges, bad credit car loans outlines the options.
We work Australia-wide from our Knoxfield, Victoria head office.
An illustration
Illustrative scenario only. A nurse at a large hospital is thinking about a novated lease for a new car, but her employer does not offer packaging for vehicles. A broker could explain this early, then look at a standard car loan, with a balloon if suitable, so she gets the vehicle without waiting on an arrangement that will not happen.
Mistakes to avoid
- Assuming a novated lease is cheaper without comparing the total costs
- Not asking what happens if you leave the job
- Overlooking the residual at the end
- Skipping the accountant when tax is part of the appeal
- Letting a provider or dealer rush the paperwork
Documents to have ready
- Recent payslips and employment details
- Photo ID
- Details of existing debts
- The vehicle quote or listing
The documents guide and the loan-ready checklist help you prepare.
Does a novated lease suit contractors or casuals?
Usually not. The arrangement depends on an employer agreeing to take on the payment obligation, and employers tend to be cautious about casual or fixed-term staff. Contractors and the self-employed generally need a different structure altogether. If that sounds like you, our pages on contractor income loans and casual income loans explain how lenders view those incomes.
What should I ask before signing?
- What exactly is bundled into the payment, and what is not
- What the residual is, and how it was set
- What happens if I resign, am made redundant or change employer
- Whether early payout is possible, and what it would involve
- Who handles the paperwork and who to call when something goes wrong
Good answers in writing matter more than a quick sign-up. If the numbers look attractive only because of a tax assumption, ask your accountant to test that assumption.
How long do novated leases run?
Terms are commonly set in whole years, and the length affects the residual that tax rules require at the end. A longer term lowers the regular amount but leaves more time for your job, the car’s value and your needs to change. Choose a term you are likely to see out, and ask what a payout would look like in year two or three, not only at the finish line. Brokers can model a few terms alongside a standard loan so the comparison is on the same footing.
Not sure a novated lease is right for you?
Sounds like you want the right finance for your next car, whether that is a novated lease or something simpler. We’re the lending experts in vehicle finance, so click the button below and see if you qualify.
How it works, step by step
- 1
Step 1
Tell us the vehicle you have in mind and whether your employer offers novating.
- 2
Step 2
We compare a novated lease with other ways to fund the car.
- 3
Step 3
We look at what is available and explain the likely costs and risks.
- 4
Step 4
You choose the route and we help organise the finance.
Frequently asked questions
How does a novated lease work?
The employee leases a vehicle, then the lease is novated, meaning the employer takes on the repayment obligation during employment. The employer deducts lease and running costs from salary, often partly before tax and partly after. The arrangement requires employer agreement and usually involves a specialist provider handling the paperwork.
What happens to a novated lease if I leave my job?
The lease generally stays with you, as the obligation to the financier is yours. You may need to pay the lease from your own funds, transfer the novation to a new employer who agrees to it, or pay out the lease. Talk this through before you sign, especially if your job is not secure.
What is a residual payment on a novated lease?
The residual is the lump sum owing at the end of the lease, set as a proportion of the car's original value. Minimum residual percentages are set by tax rules and vary with the lease length. At the end you can pay it, refinance it or sell the car to clear it.
Do electric cars have special tax treatment under a novated lease?
Eligible electric cars have been exempt from fringe benefits tax under rules in place since mid-2022, which has made novated leases attractive for some employees. The rules are specific and have been changing, particularly for plug-in hybrids, so check the ATO's current guidance and speak to your accountant.
Is a novated lease better than a car loan?
It depends. A novated lease may suit an employee with a stable job who values bundled running costs and tax outcomes. A car loan may suit someone wanting ownership from day one or a self-employed borrower, who cannot use a novated lease. We compare the real alternatives for your circumstances.
Can I get a novated lease with bad credit?
Novated lease providers assess credit, and a poor file can limit options. In that case, a different structure, such as a car loan through a lender open to weaker credit, may be more realistic. We can look at what is available and what you could do to strengthen your position first.