Novated Leases Explained: Is Salary Packaging a Car Worth It?

A novated lease lets you pay for a car using your pre-tax salary. Your employer deducts the lease payments before calculating your income tax, which means you pay less tax overall. But is it actually cheaper than just buying a car yourself? The answer depends on your salary, the car price, and whether you're going electric.

How It Works

You choose a car. A finance company buys it. Your employer deducts the lease payments and running costs (fuel, insurance, registration, servicing) from your gross salary before tax. Because your taxable income drops, you pay less income tax. You also save the GST on the car and running costs — that's an immediate 10% saving on everything.

At the end of the lease (typically 3-5 years), you pay a residual value to own the car outright, or refinance, or start a new lease on a different car.

The Tax Benefit

The higher your marginal tax rate, the bigger the saving. Someone on $120,000 (37% marginal rate) saves 37 cents in tax for every dollar paid through the lease. Someone on $60,000 (16-30% rate) saves less. The GST saving applies equally regardless of income — it's a flat 10% off everything.

There's a catch though: Fringe Benefits Tax (FBT). Because you're getting a personal benefit (a car) through your employer, FBT applies. The statutory method taxes 20% of the car's value at your marginal rate. This eats into the savings significantly for petrol and diesel vehicles.

The Electric Car Game-Changer

Here's where it gets interesting. Electric vehicles and plug-in hybrids under $91,387 are completely exempt from FBT under the Electric Car Discount. This means the entire FBT cost disappears, making novated leasing an EV dramatically cheaper than for a petrol car — and dramatically cheaper than buying the EV outright with post-tax dollars.

For a $50,000 EV on a $100,000 salary, the FBT exemption can save you $3,000-$5,000 per year compared to a petrol car of the same price on a novated lease. It's one of the strongest tax incentives available to individual Australians right now.

When It's NOT Worth It

If your salary is under $60,000, the tax saving is modest because your marginal rate is low. If you drive very few kilometres, the running cost savings are smaller. If you already own a reliable car outright with no payments, starting a lease means taking on a new financial commitment you don't currently have.

Also, if you leave your job, the lease needs to be novated to your new employer or you take on the payments personally — which can be expensive.

The Bottom Line

For someone earning $80,000+ who needs a car anyway, a novated lease on an electric vehicle is almost always the cheapest way to drive. For petrol cars, it depends on the numbers — the FBT cost can eliminate most of the tax benefit. Run your specific scenario through the calculator to see the real comparison.