How Does a Novated Lease Work?


People often get confused when it comes to novated leasing, asking the question: “What is it and what do I need to know?” Due to this, novated lease is an often overlooked finance option for both individuals and businesses. So today we are going to look at the advantages of novated leasing, providing you with the information that you need before making a final decision to lease.

The novated lease option is not widely understood in Australia. Whilst it is one of the most available in the country, many do not understand the details of the leasing system, so may avoid it. However, there are clear signs that the option of a novated lease is becoming more frequently discussed between individuals.

The Australian Financial Review shows that only 40% of employers in Australia offered novated leasing as an employee incentive. Because it is not largely available, this could be part of the reason why many do not understand how the novated lease works. If you need to borrow to buy a car, do little or no business-related kilometres, or cannot otherwise qualify for GST or PAYG tax concessions, a novated lease may be an alternative option to own the car you aspire to owning.

How Does a Novated Lease Work?

To put it simply, a novated lease is a method of financing a vehicle. It involves three parties; the employer, employee and car finance company. Consequently, the employer pays for the lease and all vehicle running costs such as fuel, insurance and maintenance whereby GST is claimed back and can be passed on to the employee. They will then deduct a monthly amount from the employee’s salary before tax to cover the sum of money involved. In a nutshell, the employer is financing the vehicle (claiming back the GST) and the employee leasing it from them excluding GST.

The period of the lease can vary between one to five years. After the term of the lease ends, the employee has three choices:

1. They can extend the lease for a further period

2. They can make a final lump sum balloon payment and then own the car

3. They can trade in the vehicle and get a newer model under a new novated lease

If the employee leaves the company during the term of the novated lease, the novated lease can be transferred over to their new employer so that they can continue with the lease.

Employees that like to have their car lease and running costs rolled up into one payment, deducted from their salary monthly, tend to like the novated lease option. It provides them with a simple and affordable way of financing a vehicle. Novated Leasing is also a great tool for employers to attract and retain valuable staff.

Benefits of a Novated Car Lease

A novated car lease offers many benefits. One of the key things to remember is that it offers advantages not only for the employee but also to the employer:

Employer benefits

  • It is great in attracting new employees or retaining existing ones.When offered as a part of their employment, it can help to attract potential employees who are then inclined to stay with the company for the long-term.

  • The employer may then be able to lower their payroll tax and also not have company vehicles on their balance sheet.

  • Should the employee leave the employer’s employment, the lease can be transferred to their new employer. This way the novated lease can continue without any detriment to the contract.Furthermore, the employer does not need to worry about potential residual risk as this lies with the employee.

Employee benefits

This is all well and good, but what about the benefits of a novated lease for the employee? Benefits include:

  • Expenses relating to the maintenance of the lease during the term may be tax deductible.

  • Where GST is included in the lease, GST credits are claimable (GST is credited back).

  • Should the employee leave the employer’s employment, the lease can be transferred to their new employer, this way the novated lease can continue.Furthermore, the employer does not need to worry about potential residual risk as this lies with the employee.

  • Whilst the novated lease is operational, the employee can use the vehicle for their own personal use.

  • The deduction for the vehicle is made before tax, reducing PAYG payable.

  • Forget about GST being added to the purchase price as this is dealt with by the employer and therefore the financed amount is excluding GST.

  • The vehicle may come in at a much lower price due to the employer making use of corporate discounts and the financer fleet discounts.

  • The employee is not tied into buying a new car; they can choose any car up to 10 years old at the end of any novated lease.

So is a Novated Lease worth considering?

As can be seen, there are many advantages to novated leasing. For employers, they are able to offer a great incentive to attract and retain the best employees. In comparison, other methods of financing a vehicle purchase do not compare as favourably for employees. Novated Leasing enables them to enjoy the many benefits of a car of their choice for their personal use, knowing that their employer and the finance company are taking care of the payments.

Antony Sabato, Head of Novated Lease & Salary Packaging, Toyota Fleet Management Australia reminds the employee of one essential element when getting involved in a novated lease:

The one thing that an employee needs to remember is that once they take on a novated lease, they need to stay employed, otherwise it will essentially become an unmanaged consumer finance product without the tax benefits and complete management that a novated lease offers.*


Toyota Fleet Management Services provide novated leases as well as an assortment of other finance options, should you be looking to purchase a new or used car. If you are seeking a novated lease in Australia, either as an employer or employee, do get in touch with Toyota Fleet Management Services today.

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The information provided by Toyota Fleet Management (TFM), a division of Toyota Finance Australia Limited ABN 48 002 435 181, AFSL and Australian Credit Licence 392536, on this article is of a general nature and for your information only. Nothing on this article constitutes or should be considered to constitute legal, taxation or financial advice. Before making a decision about any product or service featured on this article, TFM recommends that you seek independent professional advice about that product or service, such as from your accountant, taxation or financial adviser or lawyer, who can advise you about your personal circumstances and what would be suitable for you.


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