Novated Leasing

Community Salary Packaging – Outsourced Service

You are entitled to salary package private motor vehicles through a Novated Lease arrangement. (Subject to approval by your Employer)

In this situation the finance company technically aquires and has ownership of the motor vehicle. The vehicle is then leased back to you over an agreed lease term, in return for a fixed monthly lease cost and an agreed residual value.

You may opt to salary package all the motor vehicle running costs additionally to the lease payment. This is called a fully maintained novated lease.

Novated Leases can be a particularly tax effective way of structuring your Salary Package, as part (or all) of the lease cost can be made out of your pre-tax income.

How does a Novated Lease work?

A novated lease is a threeway agreement between an employee, an employer and a finance company for the provision of a car to the employee. A finance lease for the car is entered into by the employee which in turn is novated to the employer. Under this novation the employer agrees to make the lease payments to the finance company and these payments are funded via deductions from the employee’s pre-tax (and in some cases post-tax) income.

The motor vehicle fringe benefit is provided by the employer through the salary sacrifice arrangement the employee has entered in to.

NOTE: If the employee ceases their employment the novation agreement is broken and the employer’s lease payment obligations are transferred to the employee.

 The Process

1) The employee and employer enters into a novated lease agreement

2) The finance company invoices the employer for the monthly lease cost

3) The employer pays the monthly lease and deducts these amounts out of the employees pre-tax (and in some cases post-tax) income.



The cost of the  lease payments will depend on a number of variables:

  • cost of the vehicle
  • the agreed residual value at the end of the lease
  • the lease term
  • interest rate

If the vehicle is fully maintained, the lease payments can also include costs such as:

  • Registration
  • CTP
  • Comprehensive Insurance
  • Tyres
  • Service/Maintenance
  • Fuel
  • Roadside assistance

What happens at the end of the lease term?

When the lease expires the employee is responsible for the payment of the residual value as determined at the beginning of the lease.

Typically there are two options that employees choose from at the end of the lease:

  1. The first is that the finance company offers to transfer the ownership of the car to the employee at the end of the lease if the employee pays out the residual value.
  2. The second is that the residual value is ‘renovated’ and a new lease for the same car is commenced.


 Benefits of a Fully maintained Novated Lease Arrangement

As the lease payments are (mostly) made out of an employee’s pre-tax salary, this reduces the employee’s taxable income so that less tax is paid.

Additionally if you work for a  Public Benevolent Institution, Health Promotion Charity or if you are employed by a Public and non-profit hospital or a Public ambulance service you can potentially have a more tax effective outcome.

This is because the fringe benefit amount for the FBT calculation does not consider how much the lease payments and running costs of the vehicle are. Instead the FBT calculation considers the Motor Vehicle Taxable Value (which in many cases is less than the total years motor vehicle cost)

The taxable value of a Vehicle can be calculated using the following methods:

  • Statutory Formula Method
  • Operating Cost Method