Novated Leasing: A Guide for Finance Brokers

Novated Leasing: A Guide for Finance Brokers
Tax treatments, out-of-pocket costs, contract examples and payroll advice.

Current as at June 2026  *changes are noted for FY27. Tax advice should be confirmed with the ATO or a registered tax agent.
What Is a Novated Lease?
A novated lease is a three-way agreement between an employee, their employer, and a finance provider. The employee selects a vehicle and enters a finance lease; the employer makes repayments and running cost contributions via pre-tax and post-tax salary deductions. This "novation" transfers the payment obligation — not ownership of the asset.
The employee remains the registered owner throughout and at lease conclusion. The employer has no asset ownership, no residual liability, and no credit exposure. If the employee leaves, all lease obligations transfer back to them in full.
For the employee, the arrangement provides two core financial benefits: income tax savings (through pre-tax salary sacrifice reducing taxable income) and GST savings (the employer, as a GST-registered entity, can claim GST credits on vehicle costs, and this saving is passed through to the employee).
Employee
Selects vehicle, holds all obligations. The borrower and registered owner.
Employer
Processes salary deductions and remits payments. Payment conduit only — no ownership, no credit risk.
Financier
Provides vehicle finance to the employee. Holds security interest during the lease term.
Lease Manager
Positive Salary Packaging. Manages payments, budgets, FBT calculations, payroll instructions and lifecycle admin.
Tax Treatment
Income Tax & FBT Explained
Income Tax
A portion of gross salary is sacrificed pre-tax to cover lease repayments and running costs (ex. GST), reducing assessable income and PAYG withholding. Reported via Single Touch Payroll (STP).
Key point: Pre-tax sacrifice reduces gross taxable wages for PAYG purposes but does not change the superannuation guarantee base (SGC is calculated on OTE, which includes salary-sacrificed amounts under most modern awards).
Three FBT Calculation Methods
A vehicle provided under a novated lease is classified as a Car Fringe Benefit under FBT legislation. The employer is technically liable for FBT on this benefit. However, the way the lease is structured determines whether FBT is payable, and by whom the cost is borne.
1
Statutory Formula Method (SFM) + ECM
Default for ICE (Petrol/Diesel/Hybrid) vehicles. FBT taxable value = 20% of base value (the statutory rate). Employee makes a post-tax Employee Contribution (ECM) to reduce employer FBT liability to zero.
Practical effect: The employee’s total novated lease deduction comprises a pre-tax component (salary sacrifice) and a post-tax component (ECM). Both are detailed on the Payroll Advice issued at lease settlement.
2
Operating Cost Method (OCM)
FBT based on actual operating costs and business use %. Requires a 12-week ATO-compliant logbook. Advantageous for employees with business use above 60–70%.
3
EV FBT Exemption (EVE)
Eligible battery electric vehicles (BEVs) are fully exempt from FBT under the Treasury Laws Amendment (Electric Car Discount) Act 2022. No post-tax ECM required — entire cost packaged pre-tax.
EV FBT Exemption
Electric Car Discount
The Federal Government has confirmed a phased adjustment to the Electric Car Discount (ECD). The changes were first announced on 5 May 2026 alongside the findings of the statutory review of the ECD, and have since been confirmed in the Federal Budget. The headline: the discount isn’t going away. It’s being recalibrated over the next three years, with most novated lease customers seeing no change at all in the near term.
There are three phases to be aware of:
Now until 31 March 2027 — no change. The current full FBT exemption continues for all eligible EVs under the luxury car tax threshold for fuel-efficient vehicles (currently $91,387, indexed each year).
1 April 2027 to 31 March 2029 — EVs under $75,000 keep the full exemption. EVs between $75,000 and the luxury car tax threshold move to a 25% discount on payable FBT.
From 1 April 2029 — a permanent 25% FBT discount applies to all eligible EVs under the luxury car tax threshold for fuel-efficient vehicles.
Existing leases are grandfathered. If you’re already in a novated lease on an eligible EV, your current arrangement continues under the rules that applied when you set it up — for the life of that lease.

Read more here.
EV Eligibility & PHEV Changes
To qualify for the FBT exemption, all of the following must be met:
Vehicle Type
Battery electric vehicle (BEV) or hydrogen fuel cell electric vehicle (FCEV) only.
First Use Date
Vehicle was first held and used on or after 1 July 2022.
LCT Threshold
GST-inclusive value at first retail sale did not exceed $91,387 (FY2025–26 fuel-efficient threshold). LCT was never payable.
PHEV Exclusion: From 1 April 2025, PHEVs are no longer eligible. PHEVs under binding pre-existing arrangements entered before 1 April 2025 may continue under transitional provisions for the original lease term only. Any refinancing, extension, or material change terminates the exemption.
GST & LCT
GST Treatment & Luxury Car Tax
GST Savings
Where the employer is GST-registered, they claim GST credits on lease payments and running costs. This saving is passed through to the employee, reducing total vehicle ownership cost by approximately 9.09% (1/11th) of eligible costs. GST savings on the initial purchase price of the vehicle are capped at a maximum of $6,334. If the employer is not GST-registered, no credits are available — verify this upfront.
LCT Thresholds — FY2025–26
LCT of 33% applies to the excess above the relevant threshold, typically built into the drive-away price.
Definition Change from 1 July 2025
The "fuel-efficient" definition tightened from 7 L/100km to 3.5 L/100km. Only electric or partially electric vehicles now qualify for the higher $91,387 threshold. Mild hybrids above 3.5 L/100km now fall under the $80,567 threshold.
Luxury Car Charge (LCC)
Separate to LCT, the ATO's car depreciation limit ($69,674 for FY2025–26) caps the employer's income tax deduction for interest and depreciation. Where the financed amount exceeds this limit, the employer may pass through a Luxury Car Charge to the employee to maintain a net-zero tax position, spread evenly across the lease term.
Cost Comparisons
Out-of-Pocket Cost Examples
The following illustrates the financial impact of novated leasing vs. standard after-tax purchase for an employee on $150,000 gross salary with a weekly pay cycle, 5-year lease term, who drives 14,000km p.a. Both are fully maintained packages including finance, fuel/charging, insurance, registration, servicing, tyres, and roadside assistance. Your client's personalised quote from Positive will show their specific numbers.
ICE Vehicle — SFM + ECM
$40,823 drive-away (price ex. GST $37,331).
Combined tax saving over life of package: $22,831 
PAYG Tax saving over term $18,954 
GST saving over term $3,877
Initial GST saving $3,492
Electric Vehicle — FBT Exempt (EVE)
$71,042 drive-away (price ex. GST $64,914).
Because the EV FBT exemption eliminates the post-tax ECM, the entire package is funded from pre-tax salary, producing significantly greater savings than an equivalent ICE lease.
Combined tax saving over life of package: $57,104
PAYG Tax saving over term $47,143 
GST saving over term $9,961
Initial GST saving $6,128
Contract & Payroll
Contract Structure & Payroll Advice
Novation Agreement (Deed of Novation)
The core three-way agreement. Formalises the employer's commitment to deduct and remit payments. If the employee leaves, all obligations transfer back immediately. The novation may be transferred to a new employer if they agree to participate.
Finance Lease Agreement
Standard consumer finance lease between employee and financier. Key terms: vehicle capital value (GST-exclusive), lease term (1–5 years), interest rate, residual value payment (set at or above ATO minimums), and repayment frequency aligned to pay cycle.
Running Cost Budget
Positive budgets all running costs: finance repayments, fuel/charging, insurance, registration, servicing, tyres, and roadside assistance (optional) — aggregated into a single fortnightly or monthly deduction. Managed via a secure online portal. Funds are the employees at all times and surplus can be returned at any time via employer's payroll (with tax taken).
Payroll Advice Document
Issued by Positive upon settlement to employer. Contains all payroll setup details: salary deduction split (pre-tax sacrifice and post-tax ECM), FBT capital value, Luxury Car Charge (if applicable), GST to remit, and total deduction per pay cycle.
Pay Run Examples
Payroll Setup & Pay Run Impact
Upon settlement of the novated lease, Positive issues a Payroll Advice to the employer. This document contains all the information the employer’s payroll team needs to set up the deductions.
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BAS & STP: The salary sacrifice amount is excluded from W1 (total gross wages) on the BAS. For STP reporting, the salary sacrifice category must be linked to gross wages — the employee's income statement reflects gross wages less the pre-tax sacrifice amount.
Residual Value & FAQs
Residual Values & Common Accountant Questions
ATO Minimum Residual Values
Every novated lease includes a residual value at lease end. The ATO sets minimums to ensure the arrangement is a genuine lease. Calculated as a % of base value (excluding on-road costs). Residual must be paid with after-tax funds — it cannot be salary sacrificed.
End-of-Lease Options
At the end of the lease term, the employee has several options:
Pay out the residual
The employee pays the residual value (inc GST) and takes outright ownership. This payment is made from after-tax funds.
Sell the vehicle
The employee sells the vehicle (privately or to a dealer). If the sale price exceeds the residual, the employee keeps the profit tax-free. If it falls short, the employee covers the shortfall.
Re-lease the residual
The remaining residual value can be financed into a new novated lease term, allowing the employee to continue salary packaging the vehicle at a lower cost per pay period.
Upgrade to a new vehicle
The employee trades in the vehicle (covering the residual with sale proceeds) and enters a new novated lease for a different vehicle.
Frequently Asked Questions
Employee leaves their job?
The novation unwinds; payroll deductions stop. The lease remains in the employee's name — they are personally liable. They can transfer the novation to a new employer or continue paying privately.
Impact on borrowing capacity?
Lenders treat repayments as a committed obligation. Salary sacrifice reduces the gross income figure on the income statement, but experienced brokers will "add back" the sacrificed amount. Clients should inform their mortgage broker.
HECS/HELP repayments + childcare subsidies?
For ICE (SFM/ECM) vehicles, the RFBA is typically $0, so the novated lease should not increase HELP repayment obligations. For EVs, RFBA is added back for ATI purposes, which may have an impact on repayments and subsidies. Verify against the employee's specific circumstances.
Can an employee pay lease out early?
Yes, and there are multiple options for doing so. The main thing to be aware of is that the tax advantages stop when the novation does — so the longer the employee benefits from salary packaging, the better the overall outcome tends to be. Employees should consider selecting a lease term that suits their objectives and scenario.
FY2025–26 Reference
Key Thresholds, Rates & ATO References
FY2025–26 Summary
*Transitional provisions apply for PHEVs under binding arrangements entered before 1 April 2025.
ATO References
Car fringe benefits
Electric cars exemption
GST and novated leases
LCT rate and thresholds
Car depreciation limit
Prepared by Positive Salary Packaging | positivesp.com.au | ABN: 71 643 583 171 | 2026