Should you salary package a car through a novated lease, or buy it outright with your own money? The honest answer is that it depends almost entirely on the car you choose. On an electric car, a novated lease can save you more than $17,000 over five years. On a petrol car, the saving shrinks to around $3,400 — and once fees are counted, it can disappear altogether.
A novated lease is a three-way agreement between you, your employer and a finance company: your employer pays the car’s lease and running costs out of your salary before tax is calculated, which lowers your taxable income. Buying outright means paying with money you have already been taxed on. This guide compares the two side by side, with published five-year costings, so you can see which wins for your situation.
Assumptions used in this article: Costings are published comparisons for 2025–26 and 2026–27, not quotes. Your outcome depends on your marginal tax rate, the car, your employer’s packaging policy, interest rates and fees. Figures assume the car is used for personal use and the lease runs for five years.
How a novated lease actually works
With a novated lease, you choose the car and the finance company buys it. Your employer then deducts the lease payments and the car’s running costs — fuel or charging, insurance, registration, servicing and tyres — from your salary before tax, and pays them to the finance company and the service providers. At the end of the lease term, a residual amount falls due: the ATO’s minimum residual on a five-year lease is 28.13% of the vehicle’s cost, plus GST. You pay it to keep the car, refinance it, or trade the car in.
Buying outright is simpler. You pay for the car with cash or a car loan, you own it from day one, and every running cost comes out of your after-tax pay. There is no residual, no packaging fee, no finance company — and no tax saving either.
The five-year cost comparison
Money.com.au modelled the same cars both ways over five years. The results show just how much the car itself matters:
| Car (5 years) | Novated lease | Car loan / outright | Saving |
|---|---|---|---|
| BYD Sealion 7 Premium (electric) | $67,373 | $84,720 | $17,347 (25.7%) |
| 2025 Mitsubishi Outlander (petrol) | $75,584 | $78,960 | $3,377 (4.5%) |
The gap is tax, not finance. On the electric car, the lease produced $37,042 of tax savings over five years; on the petrol car, $17,777. Another published comparison tells the same story: a 2026 Tesla Model Y RWD financed over five years on a novated lease cost $72,661 all-in, against $85,854 for buying the same car outright with cash and paying running costs separately — a saving of $13,193, including a $5,518 GST saving on the vehicle price.
Where the saving actually comes from
There are three separate savings in a novated lease, and they are frequently confused with each other:
- Income tax: the pre-tax portion of the package reduces your taxable income, so you save at your marginal rate. On a 32% marginal rate (30% tax plus 2% Medicare levy) that is roughly a third of every packaged dollar; on a 47% marginal rate it is nearly half. The higher your income, the bigger this saving.
- GST on the purchase price: the finance company buys the car and claims the GST credit, so the amount financed is generally the price excluding GST — an immediate reduction of about one-eleventh of the vehicle cost. The saving is capped by the ATO’s car limit, at around $6,300 — the 2026–27 cap is $6,353. GST is charged again on the residual when you pay it, so the net GST saving over the life of the lease is smaller than the GST in the car’s price.
- GST on running costs: fuel or charging, servicing, tyres, insurance and registration inside the package are generally handled GST-exclusive too, which saves another 10% on every running-cost dollar you package.
On a petrol or diesel car, part of the package is paid after tax to cover fringe benefits tax, which shrinks the income tax saving. On a battery-electric car that qualifies for the FBT exemption, nearly the whole payment can come out pre-tax — which is why the EV saving is five times the petrol saving in the comparison above.
The EV fringe benefits tax exemption
The single biggest factor in the comparison is the FBT exemption for electric cars. Battery-electric cars valued below the fuel-efficient luxury car tax threshold — $91,661 for 2026–27 — are exempt from fringe benefits tax when provided through a novated lease. With the exemption, every dollar you spend on the car through the lease comes from your pre-tax salary.
Plug-in hybrid cars lost the exemption from 1 April 2025, so only fully battery-electric vehicles qualify now. And the exemption may not last in its current form: draft law released in September 2026 would narrow it for commitments made from 1 April 2027. It is not law yet, but anyone signing a lease in late 2026 should know the rules could change before the term ends. On a $120,000 salary, a $55,000 FBT-exempt EV saves about $5,038 a year against paying the same costs from after-tax pay; the same car with a petrol engine saves about $1,984 a year — before provider fees, which can eat a large part of it.
What a novated lease costs you
A novated lease adds costs that buying outright does not have, and all of them come out of the tax saving before you ever see it:
- Finance interest: novated lease interest typically starts from around 7.00% a year, while car loan rates run from about 5.50% to 20% depending on your credit profile. The effective rate built into lease finance is often higher again — frequently 8% to 12% once the structure is unpicked.
- Establishment fee: a one-off fee, typically around $475 including GST on the amount financed.
- Annual management fee: typically around $200 including GST a year, varying by employer.
- The residual: the lump sum owed at the end of the term before the car is yours — 28.13% of the vehicle’s cost on a five-year lease, plus GST. On a $55,000 car that is about $15,472. If you cannot pay it, you refinance or trade in — and the car is not yours until it is settled.
Most lease quotes also compare the lease against funding the identical car with a high-interest car loan paid from post-tax income, rather than against a cash purchase or a sharply priced car loan.
Novated lease vs buying outright: side by side
| Novated lease | Buying outright | |
|---|---|---|
| Who owns the car? | The financier, until the residual is paid | You, from day one |
| How is it paid for? | Mostly pre-tax salary via your employer | Cash or a loan, from after-tax income |
| GST on purchase price | Generally not paid by you (capped) | Paid in full |
| GST on running costs | Generally claimed back in the package | Paid in full |
| Running costs | Bundled into the package | You pay separately |
| FBT | Exempt for eligible EVs; payable (or offset) for petrol/diesel | Not applicable |
| Fees | Establishment + annual management fees | None |
| End of term | Residual of 28.13% (5-year lease) falls due | Car is yours; no further payments |
| Leaving your employer | Novation ends; you take over the payments | No effect |
| Car choice | New or used cars under 12 years old at lease end | Any car |
When buying outright wins
A novated lease is not always the cheaper option. Buying outright usually wins when:
- You have the cash: paying cash avoids finance interest entirely, and the lease’s interest and fees can outweigh its tax saving on a petrol car.
- Your marginal tax rate is low: on a $55,000 salary your marginal rate is 32%, so the pre-tax saving is worth a third of each packaged dollar. On a $200,000 salary it is worth 47%. The lower your rate, the weaker the case for a lease.
- You are buying a petrol or diesel car: without the EV FBT exemption, a large part of the package is paid after tax to cover FBT, and the saving can fall to a few thousand dollars over five years — easily consumed by fees and higher interest.
- You plan to keep the car long term: a lease term is usually one to five years, and the residual means you pay again at the end. If you keep a car for ten years, buying outright and running it cheaply usually wins.
- You might change jobs: leaving your employer ends the novation and leaves you paying the lease from after-tax income, which removes the tax advantage overnight.
When a novated lease wins
The lease is hard to beat when the stars align: a high marginal tax rate, an eligible electric car under the luxury car tax threshold, high running costs, and a stable job with an employer who offers salary packaging. In that combination, the published comparisons show savings of $13,000 to $17,000 over five years — real money, driven almost entirely by the FBT exemption and the pre-tax treatment of running costs. Before you sign, get the quote in writing and ask for three numbers: the total cost over the full term including the residual, the fees, and the interest rate. Then compare that total — not the fortnightly payment — against buying the same car with cash or a car loan and paying the running costs yourself. Our novated lease calculator can model the comparison for your salary and car, and our salary sacrifice calculator shows how the package changes your take-home pay.
Frequently asked questions
Is a novated lease cheaper than buying a car outright?
It depends on the car. Over five years, an electric car on a novated lease saved $17,347 against a car loan in a published comparison, while a petrol car saved only $3,377. Against a cash purchase the saving is smaller, because a cash buyer pays no interest.
What is the residual on a novated lease?
The residual is the lump sum owed at the end of the lease before the car is yours. The ATO’s minimum residual on a five-year lease is 28.13% of the vehicle’s cost, plus GST — about $15,472 on a $55,000 car. You pay it, refinance it, or trade the car in.
Do you pay FBT on a novated lease?
Battery-electric cars under the fuel-efficient luxury car tax threshold ($91,661 for 2026–27) are exempt from FBT. Petrol and diesel cars attract FBT, usually brought to nil by after-tax employee contributions, which reduces the tax saving. Plug-in hybrids lost the exemption from 1 April 2025.
What happens to a novated lease if I change jobs?
The novation ends and the lease reverts to you. You keep paying it from after-tax income until the term ends or you settle it, which removes the tax advantage. Some people refinance or sell the car at that point.
Can I get a novated lease on a used car?
Yes. A novated lease can be used for any new or used passenger vehicle with a maximum payload of 1,000kg. Used cars must be less than 12 years old at the end of the lease.
How much GST do you save on a novated lease?
You generally avoid paying GST on the vehicle purchase price, a saving of up to around $6,300, capped by the ATO’s car limit — the 2026–27 cap is $6,353. You also save GST on packaged running costs, but GST is charged again on the residual, so the net saving is smaller.
Conclusion
A novated lease beats buying outright when the car is electric, your tax rate is high and you will stay with your employer for the full term — the published five-year savings of $13,000 to $17,000 are real. On a petrol car, the saving shrinks to a few thousand dollars and can be wiped out by interest, fees and the residual.
Run your own numbers before you sign anything. Our novated lease calculator compares the lease against buying outright for your salary and car choice, and our salary sacrifice calculator shows the effect on your take-home pay.
