In this article, we break down the basics of novated leasing and explore why it might be the right fit for your next vehicle purchase.
A novated lease is a three-way agreement between an employee, their employer, and a finance provider. Under this arrangement, the employer agrees to take on the responsibility of lease payments using the employee’s pre-tax salary, a process known as salary packaging.
This makes novated leasing a tax-effective way to drive the car you want, often with reduced running costs.
Here’s how a novated lease typically works in practice:
You select the new or used vehicle you want — from any dealership and of any make or model (within the finance provider’s guidelines).
A lease agreement is established between you and a financier. This includes the lease term (typically 1–5 years), monthly repayments, and residual value (the car’s value at the end of the lease).
Your employer signs a novation agreement, taking over the lease payment obligations while deducting the lease costs from your gross (pre-tax) salary.
You get to drive the car while benefiting from reduced taxable income. The lease also covers running costs such as:
Tax savings: Lease payments and vehicle running costs are deducted from your pre-tax income, reducing your taxable income.
Bundled expenses: Consolidate your car-related costs into one regular payment.
GST savings: You typically don’t pay GST on the purchase price or running costs, which the employer claims on your behalf.
Flexibility: Choose any eligible car and drive it for both work and personal use.
Fringe Benefits Tax (FBT) exemptions: For eligible electric vehicles (EVs) under the luxury car tax threshold.
When your lease term ends, you typically have three options:
Pay the residual value and own the vehicle outright.
Re-finance the residual and continue the lease.
Start a new lease with a different vehicle.
Novated leasing is ideal for salaried employees who:
Want to finance a car in a tax-effective way.
Prefer predictable car costs and budgeting.
Are eligible for salary packaging through their employer.
However, it may not be the best fit for those with irregular income, limited employer support, or who plan to change jobs frequently.
Novated leasing can be a smart financial move when structured correctly. It offers a flexible and cost-effective way to drive the car you want — with potential tax and GST benefits that standard car financing can’t match.
Whether you’re looking to maximise tax savings, simplify your car expenses, or switch to an EV, Prosperity Smart Drive can help you find the right novated lease solution.
