How a novated lease works
Seven steps, in the order they actually happen. The first one is the one people skip, and it is the one that decides whether any of the rest is possible.
- 1
Check your employer will allow it
Before anything else, and before you fall in love with a car. Some employers already offer salary packaging and it is a form. Others have never done one and need to decide. Nothing else on this list matters until this is answered.
- 2
Get a quote on a specific car
The quote sets the lease term, the residual, and what running costs are bundled into the payment. Two quotes on the same car can differ on all three, so it is worth understanding what is included rather than comparing weekly figures.
- 3
Confirm the car qualifies, if it is electric
Eligibility for the FBT exemption is decided on the actual build, including options. A car close to the threshold can be pushed over by accessories fitted at the same time, and the exemption is all or nothing.
- 4
The novation deed is signed
A three-way agreement between you, your employer and the provider. It sets out that the employer makes the payments while you are employed, and that the obligation returns to you if that ends.
- 5
Payroll starts the deduction
The agreed amount comes out of each pay before tax, with a post-tax portion as well if the car is not FBT exempt. Your payslip will show the deduction, and your taxable income drops accordingly.
- 6
You drive it, and the budget runs
Running costs bundled into the payment are drawn from a budget the provider manages. Budgets are estimates: underspend usually comes back to you at the end, overspend has to be made up.
- 7
The lease ends and the residual is due
Pay it and keep the car, refinance it into a new term, or sell the car and settle the difference. If the car is worth less than the residual, the shortfall is yours.
Where the money actually goes
Your employer never owns the car and never pays for it out of their own money. They deduct an agreed amount from your salary and pass it to the provider. What changes is the order: the deduction happens before income tax is calculated rather than after, which is where the benefit comes from.
For a car that is not FBT exempt, part of the payment usually comes from after-tax salary instead. That portion reduces the taxable value of the benefit, often to nil, which is how the FBT liability is dealt with. It also means less of the total is pre-tax, so the saving is smaller than on an eligible electric car.
The employer also reports the benefit at the end of each FBT year, which happens even when the car is exempt. That reported amount follows you into several income tests. Why that matters.
The two moments people get caught
Leaving the job mid-lease
The novation ends and the lease returns to you, payable from after-tax income. A new employer can take it on, but they are not obliged to and it is not automatic. Worth thinking about before signing a term longer than you expect to stay.
The residual at the end
It is owed whatever the car is worth. A shorter lease carries a higher residual percentage, because the ATO sets minimums by term. People who plan only as far as the monthly payment tend to meet this figure for the first time in the final year.
End of lease questions
What is a residual value
The amount still owing at the end of the lease. The ATO sets minimum residuals by lease term, so a shorter lease carries a higher residual percentage. At the end you can pay it and keep the car, refinance it, or sell the car and settle the difference. If the car is worth less than the residual, the shortfall is yours.
What happens at the end of a novated lease
You pay the residual and keep the car, refinance the residual into a new term, or sell the car and settle up. Selling can leave you ahead or behind depending on what the car is worth against the residual. Re-leasing a new car is also common, which is how many people end up in a rolling arrangement.
Get a quote
A quote sets the term, the residual and the inclusions, which is where the real differences between arrangements sit.
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Novii is an information and referral service. When you request a quote your details are provided to an Australian novated leasing provider. Novii is not a lease provider, financier or financial adviser.
Information only, not tax, financial or credit advice.