Novated Car Lease with Salary Sacrificing – Tax Benefits for Employers and Employees
Novated Lease with Salary Sacrificing is a business finance facility that allows employers to provide cars for employees with the employees covering the costs through sacrificing part of their salary. It may sound complex, but our easy explainer sets out the details and the tax benefits for both parties. Those considering this option can work up rough repayment estimates using our business finance comparison rate calculator.
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Easy Tip: Novated Leasing is a more complex finance facility than other business vehicle finance products and consumer finance. As such, it can be beneficial to all parties to engage a specialist broker to handle setting up the arrangement. As us for a contact that is experienced in this type of finance.
As with many financial products, the terminology of Novated Leasing sounds more complicated than it is. Novation is replacing one obligation with another. Moving the obligation from one entity to another. Novated Vehicle Leasing involves three parties – the employer, the employee and the lender. The employee novates the obligation from themselves to their employer. The financial agreement with employee-lender is replaced by an employer-lender obligation.
The salary sacrificing element involves the employee giving up the amount of their salary that equates to the lease payments and other costs which the employer is making for their vehicle.
This finance product and the opportunities offered to employees and employers is best explained by stepping through the process involved in setting up the arrangement.
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Novated Vehicle Lease with Salary Sacrificing: Features and Benefits
- Arrangement can be instigated by employee or employer but must be agreed by both.
- Employee chooses the vehicle.
- Leasing quotes and offers sourced.
- Leasing arrangement set up in the name of the employer business.
- Employer meets the monthly lease payments and vehicle expenses and realises the relevant tax benefits including claiming GST.
- Employer deducts the amount of those expenses from employee’s pre-tax salary to cover the costs.
- By sacrificing pre-tax income, employee has potential to move to a lower tax bracket – pay less relative tax, receive greater percentage take-home pay and have a fully maintained car.
- Lease payments are arranged at a fixed interest rate and fixed for the fixed term of the lease.
- Leasing terms up to 7 years/84 months achievable.
- Residual option available in line with ATO criteria.
- When monthly lease payments are all finalised, payment of the residual is arranged which finalises the finance arrangement.
- When the lease is completely paid out, the vehicle ownership is signed over to the employee. The salary sacrificing term is over and wages payments and tax payable revert to normal arrangements.
- Where the employee leaves the employ of the business prior to the end of the lease term, negotiations with employer and lender will be required to arrange transfer of the lease payments to the employee. Alternatively, the employee may forfeit ownership.
Employers may suggest a Novated Car Lease to an employee as a way of providing the employee with a tax break and a fully maintained vehicle. In some circumstances, this may be considered as a way to retain staff where a salary increase is not feasible or as a performance bonus.
Employees may suggest this option to their employer as an option for them to obtain a new vehicle without having to take on their own finance obligation.
Interested in Novated Car Lease? Both employees and employers are welcome to contact Easy Car Finance for a no obligation quote for consideration.