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Are you in the market for a new car but looking for a smart way to finance it? Novated leasing is a popular option in Australia that allows you to save money, simplify payments, and enjoy significant tax benefits.
Whether you’re considering a brand-new vehicle, a used car, or even an electric vehicle EV, novated leasing could be the solution you’ve been looking for.
Let’s explain novated leasing in Australia, how it works, and the key benefits it offers. By the end, you’ll understand why a novated lease is a great option for saving money on your next car.
What is a Novated Lease?
A novated lease is a three-way financial agreement between you, your employer, and a leasing company. Essentially, your employer makes the car lease payments from your pre-tax salary, which reduces your taxable income and can result in significant tax savings.
Here’s how it works:
- Choose Your Vehicle: Select the car you’d like to lease—whether it’s new or used.
- Enter the Lease Agreement: Your employer agrees to pay the lease on your behalf from your pre-tax salary, bundling all car-related costs (such as insurance, maintenance, and registration) into one monthly payment.
- Enjoy Your Car: Drive the car for the agreed-upon lease term, typically 2-5 years. After the lease period, you can choose to buy the vehicle, extend the lease or sell the car.
How Novated Leasing Works?
The mechanics of novated leasing are quite straightforward, but its benefits are what make it stand out. When you sign a novated lease, the cost of leasing the car, including running expenses like fuel and maintenance, is deducted from your pre-tax income. This process is often referred to as salary packaging or salary sacrificing.
By deducting these payments before tax, your taxable income decreases, allowing you to pay less tax over the year. That’s a major benefit compared to traditional car loans, where you make payments from your post-tax income.
Who Benefits from Novated Leasing?
Novated leasing can benefit a wide range of employees in Australia, especially those looking for a tax-efficient way to drive a car. It’s particularly useful if you:
- Earn a salary: The higher your salary, the greater your potential tax savings through novated leasing.
- Prefer new or newer cars: Novated leasing allows you to easily upgrade to newer models every few years.
- Want to avoid upfront costs: There are no large upfront payments or deposits involved in novated leasing.
- Are considering an electric vehicle: Many EVs qualify for even more tax advantages, making novated leasing an attractive option for eco-conscious drivers.
- Looking to save in the long term: You don’t pay GST on the purchase price and running costs of a novated lease. This can save you more money in the long term when compared to buying outright.
Key Benefits of Novated Leasing
1. Tax Savings
One of the primary reasons people choose novated leasing is the significant tax savings. By salary packaging your car, you reduce your taxable income, which lowers your income tax liability. For example, if your pre-tax salary is $90,000, but your novated lease reduces your taxable income to $80,000, you’ll pay tax on that $80,000.
Additionally, the payments for fuel, insurance, and maintenance are also made with pre-tax income, which offers further savings.
2. Bundled Expenses
Managing multiple bills for car expenses can be time-consuming and stressful. With a novated lease, all running costs are bundled into one payment. This includes fuel, insurance, servicing, and registration. Instead of juggling various bills each month, you can enjoy one simple payment, making it easier to budget.
3. No Upfront Costs
Unlike buying a car outright or with a traditional car loan, novated leasing requires no upfront deposit. You get to drive away with the car of your choice without needing to worry about a large down payment.
4. Flexible Vehicle Options
With novated leasing, you’re not restricted to a single type of car. You can choose a new or used vehicle that fits your needs, whether it’s a compact car, an SUV, or an electric vehicle. When the lease ends, you can decide to buy the car, return it, or lease a new one, giving you flexibility in your vehicle choice over time.
5. Electric Vehicle Leasing
Australia is seeing rapid growth in the electric vehicle (EV) market, and novated leasing is an ideal way to finance an EV. Not only do you benefit from tax savings, but electric vehicles generally have lower running costs, further enhancing your savings. In some cases, EVs may even qualify for additional incentives and exemptions, such as no FBT,
Common Questions About Novated Leasing
Is Salary Sacrificing a Car Worth It?
In many cases, yes. Salary sacrificing a car through novated leasing can offer significant tax benefits, particularly if you’re in a higher income bracket. By reducing your taxable income, you may end up paying much less in taxes while enjoying the use of a new or near-new vehicle.
What Happens at the End of a Novated Lease?
When your lease ends, you have three options:
- Purchase the Car: You can buy the car for its residual value, which is the agreed-upon value at the end of the lease term.
- Extend the Lease: If you’re happy with the car and want to keep driving it, you can extend the lease.
- Sell the Car: You can sell the car on the secondhand market and lease a new vehicle, allowing you to upgrade every few years.
What Running Costs Are Included in a Novated Lease?
A novated lease often includes:
- Fuel or electricity
- Vehicle registration
- Insurance
- Maintenance and repairs
- Tyres
Is Novated Leasing Better Than Buying a Car Outright?
It depends on your financial situation and goals. Buying a car outright means you’ll own the vehicle immediately, but it also requires a significant upfront payment. Novated leasing offers no upfront costs and allows you to drive a new car without taking on long-term ownership responsibilities.
It’s also a tax-effective way to drive a car, particularly for those in higher tax brackets. You also avoid GST on the purchase price and running costs of the vehicle if you novate it. You can’t do this when you buy it outright.
Use a Novated Lease Calculator to Estimate Your Savings
If you’re considering novated leasing, the best way to estimate your potential savings is by using a novated lease calculator. Simply input your salary, the car you’re interested in, and the lease term to get an instant estimate of how much you can save in taxes and what your total lease payments will be.
CarBon offers a great novated lease calculator to help you make an informed decision. Whether you’re looking for a Toyota novated lease calculator, Tesla novated lease calculator, or something else, you can easily explore how much you could save with our tool.
Conclusion: Save Money with Novated Leasing in Australia
Novated leasing is an excellent option for Australians who want to save money on their next car while enjoying the convenience of bundled expenses and the flexibility of regular vehicle upgrades. With significant tax benefits, no upfront costs, and a wide range of vehicle options, it’s a solution that works for many.
Ready to explore your options? Use the CarBon novated lease calculator to see how much you could save on your next car!
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