NOVATED LEASING

Novated leasing, explained plainly

A novated lease is a three-way arrangement between an employee, their employer and a financier, paid from salary. Fringe benefits tax applies. Here is how the mechanics work, described rather than sold.

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Parties
Employee, employer, financier
Paid via
Salary deductions
Tax
FBT applies
Advice on FBT
Your accountant

Is this you?

If any of these are true, we can help.

Talk it through

An employee whose workplace offers salary packaging and who wants it explained by someone not selling the lease
Someone comparing a novated lease against simply taking a car loan in their own name
An employee approaching the end of a lease and facing a residual they had not planned for
Someone changing jobs mid-lease and unsure what happens to the arrangement
A business owner asking whether offering novated leasing to staff is worth the administration

How it works

Three moves, in plain words.

The employer confirms it offers novated leasing
Most arrangements run through a salary packaging provider engaged by the employer. Some employers do not offer it at all.
The car and the lease are settled
The employee selects the vehicle. A lease is arranged with a financier over an agreed term, with a residual value at the end.
The deed of novation is signed
Employee, employer and financier sign. This is the document that shifts the payment obligation to the employer while the employment lasts.

If you have a novated lease quote in front of you, send it through with the vehicle details.

Send us the numbers 1300 015 267

The three parties, and what each one does

Novation simply means transferring obligations from one party to another. In a novated lease, an employee enters a lease over a car, and the obligation to make the payments is novated to the employer for as long as that employment continues. Three parties, one car, one agreement binding them together.

The employee chooses the car, holds the lease, and drives it. The car goes with them if they leave.
The employer agrees to the arrangement and makes the payments from the employee’s salary under a deed of novation.
The financier owns the vehicle for the term of the lease and is paid under the lease agreement.

The employer’s agreement is not a formality. No employer, no novated lease. This is the first thing to confirm, before looking at cars, because a workplace that does not offer salary packaging ends the conversation there.

The detail

How the money actually moves

01
The employer confirms it offers novated leasing
Most arrangements run through a salary packaging provider engaged by the employer. Some employers do not offer it at all.
02
The car and the lease are settled
The employee selects the vehicle. A lease is arranged with a financier over an agreed term, with a residual value at the end.
03
The deed of novation is signed
Employee, employer and financier sign. This is the document that shifts the payment obligation to the employer while the employment lasts.
04
Deductions begin from salary
The lease payment, and often a budgeted amount for running costs such as registration, insurance, fuel and servicing, is deducted from pay.
05
Running costs are managed through the package
Where running costs are packaged, they are budgeted and reconciled by the provider. Overspend and underspend are trued up.
06
The term ends
The residual falls due. The employee pays it out and keeps the car, refinances it, or returns or sells the vehicle under the lease terms.

Employee: Chooses and drives
Employer: Deducts from salary
Financier: Owns for the term
Packaging provider: Budgets running costs

Fringe benefits tax, in outline

A car provided to an employee through a novated lease is a fringe benefit, and fringe benefits tax is a tax on the employer. In practice, arrangements are usually built so that the FBT position is managed, commonly by the employee making contributions from after-tax income, which is why a novated lease package normally has both a pre-tax and an after-tax component.

There have also been specific FBT concessions for eligible low and zero emissions vehicles, with conditions that have changed over time. Whether a particular car qualifies today, and what it would mean for you, is a question for your accountant or the ATO.

Fringe benefit: A benefit provided to an employee in place of, or in addition to, salary. A car under a novated lease is one of them.
FBT: Fringe benefits tax. It is a tax on the employer, not on the employee, although packaging arrangements are usually built so the cost lands with the employee.
Deed of novation: The document signed by employee, employer and financier that moves the payment obligation to the employer while the employment lasts.
Salary packaging provider: The administrator the employer engages to run the deductions, budget the running costs and reconcile them.
Employee contribution: An amount paid from after-tax income as part of managing the FBT position. It is why a package usually has both a pre-tax and an after-tax component.
Residual: The amount still owing when the lease term ends. Minimum percentages are set under ATO guidelines according to the length of the term.

Residual value at the end of the term

Every novated lease has a residual, an amount that is still owing when the term ends. Minimum residual percentages are set under ATO guidelines and step down as the term lengthens. The residual is not optional and it is not a surprise, so the only real question is what you plan to do about it.

The one date in a novated lease worth diarising

Day one
The residual and the date it falls due are written into the lease. Both are known before you have driven the car.
Through the term
Salary deductions cover the lease payment and, in most packages, a budgeted amount for running costs.
Twelve months out
Read the lease again. Choose one of the four exits and start setting the money aside for it.
The final month
The residual falls due in full. It does not reduce and it cannot be deferred by ignoring it.
After the term
Pay it and own the car, refinance it as a fresh application on a vehicle several years older, or sell or return it under the lease terms.

Nothing on this line is a surprise. The residual is set on the first day and falls due on a date you already know, which is why the only real mistake is meeting it in the last month instead of the last year.

General sequence only. Your own lease and deed of novation set the actual amounts, dates and options.

View as a table

When	What happens
Day one	The residual and the date it falls due are written into the lease. Both are known before you have driven the car.
Through the term	Salary deductions cover the lease payment and, in most packages, a budgeted amount for running costs.
Twelve months out	Read the lease again. Choose one of the four exits and start setting the money aside for it.
The final month	The residual falls due in full. It does not reduce and it cannot be deferred by ignoring it.
After the term	Pay it and own the car, refinance it as a fresh application on a vehicle several years older, or sell or return it under the lease terms.

01Pay the residual and take ownership of the car
02Refinance the residual, which is a fresh application on a vehicle that is now several years older
03Sell or return the vehicle under the lease terms and settle the residual from the proceeds
04Enter a new lease on a new vehicle, with the previous lease settled first

The lease documents that set the residual and the date it falls due — The residual is written into the lease on the first day, along with the date. It is one of the few obligations in consumer finance you can diarise years ahead, which is exactly why so few people do.

Worked example · illustrative

The residual arrives on schedule

The situation: An employee three years into a novated lease has been budgeting the salary deduction comfortably and has not looked at the residual since the day of signing.
The move: The lease documents are read again twelve months out. The residual amount and the date it falls due are written down, and one option is chosen: pay it out and keep the car.
Where it lands: The amount is set aside across the final year rather than found in the last month. Had the plan been to refinance instead, that would have meant a fresh application on a car several years older, which is a very different conversation.

A composite example, not a specific client. Any figures are indicative and outcomes depend entirely on individual circumstances and lender assessment.

What happens if you change jobs

This is the question most novated lease explanations skip, and it is the one that causes the most trouble. The lease belongs to the employee. The novation belongs to the employment. When the employment ends, the novation typically ends with it, and the payment obligation reverts to the employee.

General outcomes. Your own lease and deed of novation set out what actually applies.
What happens	Usual effect on the lease	What to check
You move to a new employer that offers packaging	The lease can often be novated again to the new employer	That the new employer and its provider will accept the existing lease
You move to an employer that does not offer packaging	The obligation reverts to you personally, paid from after-tax income	What the repayment looks like without the packaging benefit
You are made redundant or the role ends	Payments become your responsibility until the position is resolved	Whether you can meet the payment while between roles
You want out of the lease entirely	Early termination, on the terms in the lease	The payout figure and any early termination costs

None of that makes a novated lease a bad idea. It makes it an arrangement worth entering with the exit understood, particularly if your industry or your role is one where employment changes often.

Where a novated lease fits, and where it does not

A structural comparison. Which is better for you depends on your income, employer and vehicle.
	Novated lease	Consumer car loan	Chattel mortgage
Who can use it	Employees whose employer agrees	Anyone, for a private vehicle	A business, for a business asset
Who owns the car	The financier	You	The business
How it is paid	Salary deductions	From after-tax income	By the business
Tax layer	FBT applies	None	GST and depreciation, via your accountant
If you change jobs	The novation usually ends	No effect on the loan	No effect, it sits with the business

A novated lease can suit an employee in stable employment who wants running costs bundled and budgeted. A straightforward car loan can suit someone who wants to own the car outright, keep it long term, and not tie a vehicle to a job. Neither is universally better, and anyone telling you otherwise is usually selling one of them.

FAQ

Questions people actually ask

If yours is not here, ask it. We would rather answer the awkward one early than have you find out later.

1300 015 267

Do I own the car on a novated lease?

No. The financier owns the vehicle for the term of the lease. You have the right to use it, and at the end of the term you can pay the residual and take ownership, refinance it, or return or sell the car under the lease terms. Ownership does not pass automatically.

What happens to a novated lease if I leave my job?

The lease is yours; the novation is tied to the employment. When the employment ends, the payment obligation generally reverts to you personally until the lease is novated to a new employer or otherwise resolved. Check your own deed of novation, because the detail sits there.

Is a novated lease cheaper than a car loan?

It depends on your income, your employer’s arrangement, the vehicle, and how the FBT position is handled. A packaging quote and a loan quote are not directly comparable because one bundles running costs and tax effects. Ask your accountant to compare the full annual cost of both rather than the headline deduction.

Can I novate a car I already own?

Some arrangements allow a sale and novated leaseback of a vehicle you already own, subject to the employer, the provider and the financier accepting it. Age and condition of the car matter. Whether it makes sense financially is a question for your accountant.

What is the residual and can I avoid it?

The residual is the amount still owing at the end of the lease. It cannot be avoided, and minimum residual percentages are set under ATO guidelines according to the lease term. What you can do is plan for it: know the amount and the date from the day you sign.

Does a novated lease affect my ability to get a home loan?

Yes, it is a commitment and lenders assess it. How it is treated varies, because some lenders assess the gross salary and the full lease cost while others take a different view of the packaged amount. Tell your broker about it up front rather than letting it appear in the payslips unexplained.

Can a sole trader or contractor get a novated lease?

Generally no, because a novated lease requires an employer to novate the obligation to. A sole trader without an employer would typically look at a chattel mortgage or a consumer car loan instead, depending on how the vehicle is used.

Does WeL’nd arrange novated leases?

Novated leasing usually runs through the salary packaging provider your employer has engaged, so the arrangement is often set by your workplace rather than by a broker. What we can do is explain the structure, compare it honestly against a car loan or chattel mortgage, and tell you which questions to put to your accountant before you commit.

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Compare it against the alternative first

If you have a novated lease quote in front of you, send it through with the vehicle details. We will explain what the structure commits you to and how it compares with simply financing the car in your own name.

Or call us

1300 015 267

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Head Broker

Speak to Dave Pham

Call 1300 015 267 Info@WeLnd.com.au