Payroll & super
A novated lease is a three-way salary packaging arrangement between an employee, their employer and a finance company. The employer takes over the employee's car lease payments and deducts them from pre-tax salary, reducing taxable income. If the employee leaves, the lease reverts (novates) back to the employee.
The employee chooses a car and signs a lease with a finance company, then all three parties sign a deed of novation transferring the payment obligation to the employer for as long as the employment lasts. The employer pays the lease from the employee's package, typically as a pre-tax salary deduction, sometimes with a post-tax component (more on why below). Because the deductions come out before income tax is calculated, the employee's taxable income falls.
Most arrangements are fully maintained: the lease payment bundles fuel or charging, registration, insurance, servicing and tyres into one deduction, managed by a leasing company. At the end of the term (commonly one to five years) the employee pays a residual (balloon) amount set by ATO guidelines, refinances it, or trades the car in and starts again. If the employee resigns or is made redundant, the novation ends and the lease obligations revert to them personally, which is worth understanding before signing. The employer's role is administrative: run the deductions through payroll, remit payments, and account for fringe benefits tax.
A car provided under a novated lease is a car fringe benefit, so fringe benefits tax enters the picture. Under the statutory formula method, the taxable value is 20 per cent of the car's base value each year (apportioned for days available), and FBT is charged at 47 per cent on the grossed-up value. Left unmanaged, that tax would swallow much of the income tax saving.
The standard fix is the employee contribution method (ECM). The employee makes part of the payments from post-tax salary, and every post-tax dollar contributed reduces the FBT taxable value by a dollar. Packaging providers usually calculate the split so post-tax contributions equal 20 per cent of the base value, driving the FBT liability to nil while the balance of the costs still comes from pre-tax salary. The FBT year runs 1 April to 31 March, not the standard financial year, and employers providing car benefits generally need to register for and lodge an FBT return. The mechanics are covered in the ATO's guidance on car leasing fringe benefits, and you can estimate a liability with the OneBookPlus FBT calculator.
Since 1 July 2022, battery electric and hydrogen fuel cell vehicles are exempt from FBT when provided to an employee, provided the car was first held and used on or after that date and its value is below the luxury car tax threshold for fuel-efficient vehicles ($91,387 for 2025-26). This is what makes EV novated leases so heavily marketed: with no FBT to offset, the entire lease can run from pre-tax salary, no post-tax employee contribution needed, and the income tax saving is undiluted.
Two important caveats. Plug-in hybrids lost the exemption from 1 April 2025; a PHEV only remains exempt if there was a binding commitment to provide it before that date and the arrangement continues unchanged. And exempt does not mean invisible: the benefit's value is still a reportable fringe benefit amount on the employee's income statement, which feeds into tests such as the Medicare levy surcharge, Division 293 super tax, child support and HELP repayment income. Check the current thresholds on the ATO's fringe benefits tax pages on ato.gov.au before quoting savings to staff.
Offering novated leasing costs a small employer little beyond administration, and it can be a genuine recruitment and retention lever: the employee funds the car, the leasing provider handles the running costs, and the tax benefit accrues to the employee. Your obligations are narrower but real. Payroll must be set up to handle the pre-tax and post-tax deduction split correctly, and the pre-tax portion reduces taxable wages but not the employee's superannuation guarantee base if the arrangement is structured as effective salary sacrifice agreed in advance.
Register for FBT if you provide car benefits that are not fully offset by employee contributions, lodge the annual FBT return for the year ending 31 March, and keep the deed of novation with your employment records. Think about exit risk too: if the employee leaves mid-lease, the obligations revert to them, but you need a clean payroll cut-off and a final reconciliation with the leasing company. Many small employers simply nominate a packaging provider and let them run the calculations, which keeps the workload to approving deductions and paying one consolidated invoice.
The definitions above only get you so far; the free OneBookPlus FBT calculator turns them into your own figures in seconds, no sign-up needed.
Usually only administration. The lease payments come out of the employee's own salary package, and the employee contribution method typically reduces FBT to nil. The employer's tasks are payroll setup, remitting payments, FBT compliance and keeping the novation paperwork.
Battery electric and hydrogen fuel cell cars under the fuel-efficient luxury car tax threshold ($91,387 for 2025-26) are FBT-exempt if first held and used on or after 1 July 2022. Plug-in hybrids lost the exemption from 1 April 2025 unless a binding pre-existing commitment applies. The benefit is still reportable on the employee's income statement.
The novation ends and the lease reverts to the employee personally. They can continue the payments themselves, ask a new employer to enter a fresh novation, or pay the lease out. The old employer's involvement stops at the final payroll deduction.
Last reviewed and updated: by Bishal Shrestha