Novated leases: what employers need to know

What is a novated lease?

“Novate” means to transfer obligations under a contract. In a novated lease, an employee takes out a car lease with a financier, then the employer signs a novation agreement to take over the lease payments while that person works for them. The employer deducts the payments, and often the car’s running costs, from the employee’s salary package.

So there are three parties:

1. The employee, who chooses the car and drives it.
2. The employer, who makes the payments from the employee’s pay and handles the paperwork.
3. The financier, who owns the car during the lease.

It’s worth being clear about what a novated lease isn’t: it isn’t business vehicle finance in the usual sense. The car is the employee’s benefit, not an asset of the business. That’s why we explain it here from the employer’s side — owners get asked about it, and it’s easy to confuse with the finance lease a business takes out in its own name.

What does the employer actually have to do?

Agreeing to a novated lease adds a few jobs to the payroll calendar:

• Set up salary deductions for the lease payment and the running-cost budget.
• Work out fringe benefits tax on the car benefit each FBT year, which the ATO says runs from 1 April to 31 March. The FBT rate is 47% for the years ending 31 March 2023 to 31 March 2027.
• Report the benefit on the employee’s income statement where required — including for exempt electric cars, which are still reportable.
• Manage changes when the employee changes hours, goes on leave or resigns.

Many employers hand this to a salary-packaging administrator. That keeps the payroll team out of the detail but adds a provider relationship to manage.

Why do employees ask for them?

Mostly because part of the cost of the car can come from pre-tax salary, and because the running costs are bundled. The ATO’s general salary-sacrifice guidance notes that cars are a common fringe benefit, and that the employer pays FBT on the value of the benefit provided. A common approach is for the employee to contribute some payments from after-tax pay to reduce the FBT, but how that works depends on the provider and the employee’s situation.

For employers, offering novated leases can be a low-cost way to make a role more attractive. For employees, the numbers depend heavily on salary, the car and kilometres driven, so they should get independent advice.

What about electric cars?

This is where most current interest sits. The ATO’s electric cars exemption means an employer doesn’t pay FBT on private use of an eligible car if:

Condition	ATO requirement
Type of car	Zero or low emissions — battery electric or hydrogen fuel cell
Timing	First held and used on or after 1 July 2022
Value	Below the luxury car tax threshold for fuel-efficient vehicles at first retail sale

The ATO also says a plug-in hybrid is not treated as a zero or low emissions vehicle from 1 April 2025. And the benefit is still reportable, so it can affect the employee’s income tests even though no FBT is payable.

The ATO’s new-legislation page also describes a proposal from the 2026–27 Budget to change the electric car discount from 1 April 2027. It is marked as not yet law, so don’t build a decision around it until it passes. Our electric vehicle finance page covers EVs bought by the business itself.

What happens when someone leaves?

Generally the novation ends and the employee becomes personally responsible for the lease again. They can keep paying it themselves, transfer it to a new employer who agrees to take it on, or pay it out. Make sure your employment and salary-packaging paperwork spells this out so there’s no confusion at exit.

Novated lease or a business-owned vehicle?

	Novated lease	Business-owned or business-leased vehicle
Who chooses the car	Employee	Business
Whose asset or liability	Employee’s lease, employer pays via payroll	Business
Best for	Staff perks, salary packaging	Work vehicles, utes, vans, tools of trade
If the person leaves	Lease goes with them	Vehicle stays with the business

If the vehicle is really a work tool — a ute full of gear or a van on a delivery run — a chattel mortgage or lease in the business’s name usually makes more sense than a novated lease.

Questions employers should ask before agreeing

If a staff member asks for a novated lease, you’re entitled to understand what you’re signing up for. Useful questions for the salary-packaging provider or financier:

1. Who administers the payroll deductions and FBT calculations? You, your payroll provider or a packaging administrator?
2. What happens if the employee goes on parental leave or reduces hours? The deductions may no longer fit their pay.
3. What happens on termination? Confirm the novation ends and the lease reverts to the employee, and that the employer isn’t left liable.
4. How are running costs budgeted and reconciled? Fuel, servicing, tyres and registration are often estimated in advance.
5. How does the arrangement interact with super contributions and leave entitlements? Salary sacrifice can affect these.

Is it worth offering novated leases?

For many businesses, yes. The cost to the employer is mainly administrative, and the arrangement can help attract and keep staff, especially where electric cars are eligible for the FBT exemption. For very small businesses without payroll support, the admin can be a burden — a packaging provider can absorb most of it, at a cost.

Novated leases and owner-directors

Directors who are employees of their own company can sometimes package a car the same way. Whether that’s better than the company owning the vehicle depends on how the car is used, FBT and the company’s tax position. Sole traders and partners can’t use a novated lease, because they aren’t employees of their own business; for them, a business-owned vehicle is the norm.

Need finance for vehicles the business will own?

If you’re weighing staff perks against vehicles your business owns and controls, we can help with the business side. Start a 60-second enquiry and tell us what you’re trying to achieve.

There’s no credit check when you first get in touch, and your details stay with the specialist handling your enquiry instead of being sprayed across lenders. A real person calls to talk through the vehicles, the people driving them and the timing. The more accurate the form, the faster we can line up the right fit — send it through here.