Novated leasing

Novated lease glossary

24 terms, in the words a person would use. Quotes are not written to a standard vocabulary, so each entry also lists the other names providers print for the same thing. Every figure below is the one this site actually calculates with.

Holding a quote right now? Decode it line by line → — we'll name every figure on it and work out the interest rate it doesn't print.

The arrangement

Who is party to what, and which part of it ends when your job does.

Novated lease: A car lease in three parts: you choose the car, a financier owns and leases it, and your employer agrees to make the payments out of your salary while you work there.Only the middle party is lending you money. The employer's role is payroll, and the tax treatment is the whole reason the arrangement exists.The mechanism in six steps →
Novationalso called Deed of novation, Novation agreement: The document that transfers your obligation to pay the lease over to your employer for as long as you are employed there.It is the part that ends when the job does. The lease itself doesn't — it comes back to you, and from that point it is paid out of money already taxed.What ending early costs →
Salary packagingalso called Salary sacrifice: Agreeing to take part of your pay as something other than cash — here, as a car and everything that runs it.It reduces the income you are taxed on. It also reduces the earnings your employer works your super out on, which nobody mentions.
Employee contribution methodalso called ECM, Post-tax contribution: Paying part of the package from salary that has already been taxed, in an amount that reduces the fringe benefits tax to nil.Those dollars get no tax relief at all. It is the trade almost every non-exempt lease makes, because the tax it cancels is dearer than the relief it gives up.
Residualalso called Balloon, Residual value, Final payment: The lump still owed on the last day of the lease. The ATO sets a minimum for each term — 28.13% of the amount financed over five years — and financiers may set it higher.It is not optional and it is not small. Whether it is a formality or a bill depends on what the car is worth that day, which is a different question.Owing against worth →
Term: How long the lease runs, usually one to five years.A longer term means a smaller payment and a smaller residual, but more interest overall and more time for something to change.

The tax

Four ideas do most of the work. Getting them in the right order is most of understanding a lease.

Fringe benefits taxalso called FBT: Tax an employer pays for providing a benefit instead of salary. A car for private use is one, and it is charged at 47% on the grossed-up value.Left alone it would swallow the saving whole. Every novated lease deals with it one of two ways: the car is exempt, or you make a post-tax contribution.
Statutory formula method: The standard way of valuing a car fringe benefit: a flat 20% of the car's base value each year, whatever the actual private use.It means the FBT does not fall if you drive less. The old alternative — a logbook — is rarely used for novated leases.
Base value: The car's GST-inclusive cost price. Includes dealer delivery, luxury car tax and anything fitted before handover; excludes registration, stamp duty and CTP.Entering a drive-away figure here is the most common and most expensive mistake on a quote — it taxes you on 20% of your own registration, every year.Work the price out properly →
Grossing upalso called Type 1 gross-up, Type 2 gross-up: Scaling a benefit's value up to the pre-tax salary that would have bought it. Type 1 (2.0802) applies where the employer claimed a GST credit; type 2 (1.8868) where it didn't.It is why FBT is so expensive relative to the benefit, and why the employee contribution method almost always wins.
Reportable fringe benefits amountalso called RFBA, Reportable fringe benefit: The grossed-up value of your benefit, shown on your annual income statement.It is not taxable income, but it counts towards income tests — study loan repayments, the Medicare levy surcharge, family assistance, child support. An exempt electric car still generates one.
Electric car FBT exemption: A battery-electric car first held and used from 1 July 2022, priced at or under the fuel-efficient luxury car tax threshold of $91,661, pays no FBT at all.It is being wound back in stages from 1 April 2027, and a lease keeps whatever treatment it commenced under for its whole life.Check a specific car →
Superannuation guaranteealso called SG, Employer super: The 12% an employer must contribute, worked out on your ordinary earnings — which a car salary sacrifice lawfully reduces.No contribution is owed on earnings above $270,830 a year, so a high enough salary loses nothing. Everyone else loses 12% of whatever they sacrifice.

The money

The figures on a quote, and which of them the interest rate falls out of.

Amount financedalso called Vehicle amount financed, Financed amount: What the lease is actually written over: the price the financier pays, less the GST it claims back.Always smaller than the drive-away price. If a quote shows them as the same figure, something has gone wrong.
Drive-away price: What the dealer invoices in total — the car, plus stamp duty, registration, CTP and plates.It bundles together things the tax rules keep firmly apart, which is why it is worth splitting out once rather than guessing later.
On-road costs: Stamp duty, registration, CTP and plates.Normally financed along with the car, so you repay them — but expressly outside the FBT base value, so you should not be taxed on them.
GST creditalso called Input tax credit: The GST the financier recovers on buying the car, because it is a business and you are not.Capped at one eleventh of the $69,674 car limit. A private seller charges no GST, so on a private sale there is nothing to claim and the whole price is financed.
Car limit: $69,674. Caps both the GST credit a financier can claim and the depreciation it can deduct.Above it the financier loses deductions and passes the cost on — usually as a line called a luxury car charge.
Luxury car taxalso called LCT: 33% on the value of a car above the threshold — $91,661 for fuel-efficient vehicles, $80,809 for everything else.It is inside the price you pay, and therefore inside the base value the FBT is worked out on. The fuel-efficient threshold also caps the electric car exemption.
Luxury car adjustmentalso called Luxury car charge: A charge a financier adds when the amount financed is above the car limit, recovering the deductions it cannot claim.Quotes do not always name it. An unexplained gap between the itemised lines and the salary deduction is often this.
Finance rentalalso called Lease rental, Lease payment, Repayments: The part of the deduction that pays for the car itself, separate from running costs and fees.It is the only line the interest rate can be recovered from. With the amount financed, the residual and the term, the rate is fully determined.Recover the rate from a quote →
Implied interest rate: The rate that must be true given the amount financed, the finance payment, the term and the residual.Almost no quote prints a rate. It is not a guess: a loan calculator starts with a rate and works out the payment, and this is the same sum the other way round. It covers anything else built into that payment, not only interest.Work it out from your quote →
Lease management feealso called Admin fee, Lease management: What the provider charges to administer the package, separate from the car.Published pricing runs from about $200 to $470 a year, which is a wide range for the same service.
Running costsalso called Budgets, Operating costs: Fuel or charging, servicing, tyres, registration, insurance and roadside — budgeted into the deduction and paid by the employer.Packaged this way they are bought without GST and out of pre-tax salary. Budgets are estimates and are trued up, so a padded one is your money sitting with the provider.

Now put a number on it

LeaseWiz takes no commission and has no relationship with any lease provider. Knowing what the words mean is the first half; the second is seeing what they do to your pay. General information only, not financial or tax advice.

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