Purchasing a new vehicle as an employee? Novated lease explained…
Could a novated lease be a good option for your next vehicle purchase?
A novated lease is a leasing agreement that allows employees to finance a vehicle using their pre-tax income. It is a three-way agreement between an employer, employee, and leasing company.
As an employee, you purchase the vehicle from a leasing company and then enter into an agreement with your employer and financier to salary sacrifice part of your salary to make the lease payments.
Novated leases are common throughout Australia and there are some significant benefits to be gained.
But is a novated lease right for you? It’s all explained below…
Benefits of a novated lease explained
The terms of a novated lease can be anywhere from one to five years.
Each payroll deduction reduces the balance of the lease using pre-tax salary. This provides significant tax benefits compared to simply financing the vehicle on your own.
Another big advantage of a novated lease is that all running costs including fuel, insurance, maintenance, and tyres are included in the same payroll deductions (depending on the lease type you choose).
Additional benefits include:
- Significant income tax savings
- GST savings on the purchase price and running costs
- More flexibility in choosing your vehicle
- Unrestricted vehicle usage for work and for private use
- Complete car management
- Flexible terms that fit your financial situation
Note that novated leases include a residual value amount that must be paid to the financier at the end of the lease term.
The minimal residual value percentages are set in a scale by the Australian Taxation Office.
Vehicle options and restrictions
With a novated lease, you have a great deal of flexibility in your choice of vehicle.
However, there are some restrictions for the types of vehicles that can be leased, most notably:
- No vehicles in excess of one tonne
- No vehicles older than 12 years at the end of the lease period
- No vehicle seating more than eight passengers
- No vehicles without the proper compliance plates
- No motorcycles
A novated lease is available for used vehicles as well as new vehicles. However, certain restrictions apply on the minimum value to be financed and the vehicle’s age at the end of the lease.
Novated lease explained: Overview of residual values
All finance lease agreements depend on the lease terms.
- Selling the vehicle:If you decide to sell/trade your car, you are responsible for any difference between the selling price of the car and its residual value. However, any profits made from the sale are yours to keep completely tax-free.
- Refinancing the car:If you would still like to continue with a novated lease, you can easily do so by refinancing the car and taking on a new lease.
- Paying off the residual amount: Paying off the residual value gives you full ownership of the vehicle. All prepayments end and you become responsible for all running costs.
Which option you choose depends on your financial situation. It is therefore in your best interests to seek professional advice before proceeding.
Getting started with a novated lease
Obtaining a novated lease for your new vehicle purchase is much easier than you think. It involves the following steps:
- Confirm that your employer offers a salary sacrificing option
- Choose your preferred vehicle
- Estimate the number of kilometres you expect to drive per year
- Engage Paul Johnson from Fleet Network (details below) to negotiate the best price and provide a detailed quote
- Complete your finance application
- Have your employer sign the Deed of Novation and Salary Package Quotation
- Allow Fleet Network to coordinate between the financier and the dealer
- Take delivery of your vehicle
- Have regular deductions made from your salary
If you would like a novated lease explained further or to discuss your circumstances with Ascent Accountants, please contact us on 08 6336 6200.
Alternatively, through our association with Fleet Network, you can contact them directly via the below details:
Paul Johnson on 0411 241 835 or paulj@fleetnetwork.com.au
Ryan Murphy on 0401 522 626 or ryanm@fleetnetwork.com.au
Need help with your accounting?
If your business provides a car to an employee (or you’re the business owner/employee using it), there’s a good chance the Fringe Benefits Tax (FBT) rules apply. A car fringe benefit arises when a car owned or leased by an employer is made available for the private use of the business owner, an employee or their associate (such as a family member). “Private use” doesn’t just mean weekend road trips — it can include everyday commuting and even cases where the car is parked at an employee’s home, making it available for personal trips. Understanding how FBT is calculated and what records to keep is essential for compliance — and for avoiding paying more tax than necessary. What counts as a “car” for FBT purposes? The FBT law defines a car as a motor vehicle (except a motorcycle or similar) designed to carry less than one tonne and fewer than nine passengers. From 1 July 2022, some zero or low-emission vehicles are exempt from FBT, provided they meet certain criteria — for example, they must be first held and used after 1 July 2022 and must not have attracted Luxury Car Tax. Electric vehicle running costs, such as charging, are also exempt when the vehicle itself qualifies. Two main methods for calculating FBT on cars There are two ways to calculate the taxable value of a car fringe benefit. 1. Statutory formula method This method applies a flat 20% statutory rate to the base value of the car, adjusted for the number of days in the FBT year the car was available for private use. The formula is: (A × B × C ÷ D) − E A = Base value of the car (cost price plus GST and certain accessories, less registration, stamp duty and eligible reductions) B = Statutory fraction (generally 20%) C = Days available for private use D = Total days in FBT year (365) E = Employee contributions If the car has been owned for at least four full FBT years, the base value can be reduced by one-third. 2. Operating cost method This method calculates the taxable value by applying the private use percentage to the total operating costs of the car (actual and deemed costs). The formula is: Taxable value = [Operating costs × (100% − Business use %)] − Employee contributions Operating costs include: Fuel, oil, repairs, maintenance, registration and insurance Lease costs (for leased cars) Deemed depreciation (25% diminishing value) and deemed interest for owned cars Certain costs, such as tolls, car parking and insurance-funded repairs, are excluded. The business use percentage is determined by odometer readings, logbook records, and a reasonable estimate based on usage patterns. The three-month logbook requirement (operating cost method only). If you use the operating cost method, you must keep a logbook for at least 12 continuous weeks (roughly three months) to record: The date of each trip Odometer readings at the start and end Total kilometres travelled Whether the trip was for business or private purposes The purpose of each business trip This logbook is generally valid for five years, but you must start a new one if usage patterns change significantly (e.g., a role change, relocation or different duties). You also need to record odometer readings at the start and end of each FBT year. Why record-keeping matters. Keeping accurate records can support a higher business use percentage (and therefore a lower FBT bill). They also ensure you claim only legitimate business kilometres and help you provide evidence if the ATO reviews your FBT calculation. Finally, your records help you decide which calculation method (statutory or operating cost) is more tax-effective. Key takeaways for businesses and employees. If a car is available for private use, FBT may apply — even if the car isn’t driven often for personal trips. Electric cars may be FBT-exempt if they meet eligibility criteria, but you may still need to calculate their taxable value for reporting purposes. The operating cost method often works better if business use is high — but only if you have a compliant logbook. Keep odometer readings, expense records and a valid logbook to support your claims. Need help with your FBT obligations? Get it at Ascent Accountants. We guide business owners through every step of FBT compliance — from choosing the right valuation method to maintaining the right records for ATO peace of mind. If you provide cars to employees or use a company vehicle yourself, now is the time to review your FBT position before the next FBT year rolls over. Let’s talk .
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