How a Novated Lease Runs Through Your Pay

A novated lease quote usually arrives as one number, the amount that will leave each pay. That number is a bundle. Part of it may come out before tax and part after. Tax is claimed back along the way by people you will never deal with. And a final payment sits at the far end, often years away.

This guide takes the bundle apart. Whether a lease suits you turns on your income, the car and the terms, which is the calculator's job. What you get here is the layout: who signs what, where each part of a payment goes, and which parts are fixed by tax rules.

Three signatures, one car

A novated lease begins as an ordinary car lease between you and a finance company. The word novated describes what happens next. Your employer signs a deed of novation with you and the finance company and takes over all or part of your obligations under that lease, above all the repayments. From then on the payments come out of your salary through payroll.

None of this can happen unless your employer agrees. Salary packaging is something an employer offers or does not, and it needs an agreement between the two of you before it starts.

The car is privately yours to drive, yet the tax system treats it much as it would a company car. That is why two separate taxes take an interest: the one on benefits employees receive, and the goods and services tax on what businesses buy.

The two halves of a payment

Salary sacrifice means agreeing to receive less income before tax, in return for your employer paying for something of similar value. The sacrificed money is gone before income tax is worked out, so your taxable income falls.

The other half exists because a car provided for private use is a fringe benefit, and fringe benefits carry their own tax, fringe benefits tax (FBT), which falls on the employer. For a car the taxable value usually comes from the statutory formula. Take the car's base value, multiply by a fixed statutory percentage and by the share of the year the car was available for private use, then subtract whatever the employee contributed.

That last step is the one that matters. Contribute enough from your after-tax pay and the taxable value falls to nil, leaving no FBT to pay. This is the employee contribution method, and it is why a lease is usually split when the car runs on petrol or diesel: part of each payment goes before tax, and the rest goes after tax to cancel the fringe benefit.

FBT is charged on a grossed-up value, sized to the income someone would need to earn at the top marginal rate, Medicare levy included, to buy the same benefit with their own money. That is the charge the after-tax contribution avoids.

The calculator asks for the base value. It is the cost price paid for the car, and for a leased car that means what the finance company paid. Registration and stamp duty stay out. Dealer delivery, fitted non-business accessories, GST and luxury car tax go in, after any trade-in or cash you put towards the car. In FBT years that start after the fourth anniversary of first holding the car, the base value drops to two thirds.

The calculator keeps the full base value for every year of the lease. On a lease that runs past that anniversary, the after-tax slice it shows is larger than the formula strictly needs.

What gets claimed back, and by whom

Here is the part a quote rarely spells out. Goods and services tax (GST) sits inside the price of the car, every lease charge and the running costs, which are the bills of keeping a car on the road: registration, insurance, maintenance and fuel, or the electricity to charge an electric car. A business registered for GST can usually claim that tax back as a credit.

Under a full or split full novation, the kinds described above, the credits land in different hands. The finance company claims the GST it paid when it bought the car, and that credit is capped once the car's value passes the car limit the tax office sets each year. Your employer claims the GST in the lease charges, with no car limit cap, and the GST on running costs it pays for in providing the car. Employers whose own sales are mostly input taxed, such as some financial businesses, may be able to claim less.

You claim nothing, and for you there are no GST consequences. In the tax sense you have neither bought nor leased the car.

What the tax rules do not say is how any of those credits reach you. Whether the finance company's credit lowers the amount it lends, and whether the GST in each lease charge is stripped out before the deduction leaves your pay, is settled by the lease and the payroll arrangements, not by a rule you can look up. So look in the quote. Find out whether the amount financed is shown before or after the vehicle GST credit, and whether the amounts deducted from your pay are quoted with GST or without it.

The calculator takes a simpler route. It shows the vehicle GST credit as a line of its own and adds it once to the net benefit over the lease, while the lease payments are worked out on the full drive-away price. A quote that folds the credit into the amount financed may show much of the same money in another place, and the totals can drift apart through interest and the residual.

Electric cars, where the second half disappears

An eligible electric car is exempt from FBT. Eligible means a battery or hydrogen fuel cell car first held and used on or after 1 July 2022, provided its base value stays at or under the luxury car tax threshold for fuel-efficient vehicles. Plug-in hybrids are out of the exemption from 1 April 2025.

With no FBT to cancel, an after-tax contribution has nothing left to do. The whole payment, lease and running costs together, can come out before tax, which is why an eligible electric car shows a larger benefit in the calculator.

Exempt does not mean invisible. It still counts as a reportable fringe benefit, and although you pay no tax on that amount directly, it is counted when your study loan repayment and the Medicare levy surcharge are worked out. The calculator includes both effects when you tell it you have a study loan or no private hospital cover.

The exemption itself is under review. The government has proposed scaling it back for leases entered into from April 2027. That proposal is not law yet, and a lease signed before then would keep the exemption for its whole term. The calculator applies the rules in force today, which is why it only takes lease start dates before April 2027.

The last payment

Every novated lease ends with a residual, a lump sum still owing when the regular payments stop. The tax office expects a car lease residual to reflect what the car will be worth at the end, and it publishes a table of minimums by lease term. The longer the lease, the lower the minimum, because an older car is worth less.

That table is a floor with some give. A lower residual can be used where a well considered, fair estimate of the car's market value supports it, and when leases are strung together the minimum is measured on the total time leased. The calculator sets the residual at the table minimum for the term you pick, so a real quote may land somewhere else.

At the finish, the tax office describes two routes. You can buy the car for the residual, and at the end of a genuine lease that creates no fringe benefit, because the price and the value the rules expect are the same. Or you can take out a further lease on the same car. What the lease cannot contain is an agreement, made at the start, that you will buy the car when it ends. A lease written that way is not treated as a genuine lease at all.

When the job ends first

Leases often outlast jobs. The deed of novation usually carries a clause for that moment: when you leave, the lease obligations pass back to you, and you can take the lease to a new employer and novate it again if that employer offers packaging. Because this is a contract clause and not a rule of law, the exact terms are in your own deed. Read them before you sign.

Put the pieces back together and a quote has four parts worth finding: what comes out before tax, anything that comes out after tax, the GST other parties claim on the way through, and the residual waiting at the end.

The novated lease calculator lays your own figures over that structure.