A novated lease is a popular and tax-effective way for Australian employees to finance a new or used car. It's a three-way agreement between you (the employee), your employer, and a financier. Your employer takes on the responsibility for making your car lease payments and running costs directly from your salary, often resulting in significant tax savings.
How a Novated Lease Works
With a novated lease, your employer pays for your car's finance and running costs (like fuel, maintenance, insurance, and registration) using a combination of your pre-tax and post-tax salary. This arrangement can reduce your taxable income, leading to less income tax and potentially a lower Medicare Levy.
Pre-Tax Deductions: A portion of your car expenses is paid from your gross salary before income tax is calculated. This reduces your taxable income.
Post-Tax Deductions: Another portion is paid from your net (after-tax) salary. This component is typically used to offset Fringe Benefits Tax (FBT), making the lease FBT-exempt for most employees.
Running Costs: Fuel, servicing, tyres, insurance, and registration can all be bundled into your lease payments and paid from your pre-tax salary, further enhancing tax benefits.
GST Savings: Your employer can claim back the GST on the vehicle's purchase price and running costs, and these savings are usually passed on to you, reducing the overall cost of the car.
Benefits of a Novated Lease
Tax Savings: Reduce your taxable income by paying for car expenses with pre-tax dollars.
GST Savings: Save on GST for the vehicle purchase and running costs.
Budgeting: All car expenses are bundled into one regular payment, making budgeting easier.
Choice of Car: You typically have the freedom to choose almost any new or used car.
Convenience: Your employer handles the payments, reducing your administrative burden.
ATO Residual Value Guidelines
The Australian Tax Office (ATO) sets minimum residual values for novated leases. This is the amount you'll owe at the end of your lease term if you choose to buy the car outright. The percentage depends on the lease term:
Lease Term (Years)
Minimum Residual Value Percentage
1
65.63%
2
56.25%
3
46.88%
4
37.50%
5
28.13%
Ensure you use the correct residual value percentage for your chosen lease term in the calculator below.
Novated Lease Calculator
Use this calculator to estimate the potential tax savings and effective costs of a novated lease in Australia. This calculator assumes your lease is structured to eliminate Fringe Benefits Tax (FBT) through employee contributions, which is a common practice.
Refer to the ATO table above for minimum percentages based on lease term.
function calculateNovatedLease() {
// 1. Get Inputs
var vehiclePrice = parseFloat(document.getElementById("vehiclePrice").value);
var leaseTerm = parseFloat(document.getElementById("leaseTerm").value);
var annualKm = parseFloat(document.getElementById("annualKm").value); // Not directly used in this simplified FBT model, but kept for realism
var annualSalary = parseFloat(document.getElementById("annualSalary").value);
var annualFuel = parseFloat(document.getElementById("annualFuel").value);
var annualMaintenance = parseFloat(document.getElementById("annualMaintenance").value);
var annualInsurance = parseFloat(document.getElementById("annualInsurance").value);
var annualRegistration = parseFloat(document.getElementById("annualRegistration").value);
var leaseRate = parseFloat(document.getElementById("leaseRate").value);
var residualPercentage = parseFloat(document.getElementById("residualPercentage").value);
// Input validation
if (isNaN(vehiclePrice) || isNaN(leaseTerm) || isNaN(annualSalary) || isNaN(annualFuel) || isNaN(annualMaintenance) || isNaN(annualInsurance) || isNaN(annualRegistration) || isNaN(leaseRate) || isNaN(residualPercentage) || vehiclePrice <= 0 || leaseTerm <= 0 || annualSalary <= 0 || leaseRate < 0 || residualPercentage 100) {
document.getElementById("result").innerHTML = "Please enter valid positive numbers for all fields. Residual percentage must be between 0 and 100.";
return;
}
// 2. Intermediate Calculations
var residualValue = vehiclePrice * (residualPercentage / 100);
var totalAnnualRunningCosts = annualFuel + annualMaintenance + annualInsurance + annualRegistration;
var netAnnualRunningCosts = totalAnnualRunningCosts / 1.1; // Remove GST component (assuming 10% GST) for pre-tax calculation
// Calculate Monthly Lease Payment (using PMT formula with residual)
var monthlyRate = (leaseRate / 100) / 12;
var totalMonths = leaseTerm * 12;
var leasePayment;
if (monthlyRate === 0) { // Handle 0% lease rate
leasePayment = (vehiclePrice – residualValue) / totalMonths;
} else {
// PMT formula for a loan with a balloon payment (residual)
// P = (PV – RV / (1 + r)^n) * r / (1 – (1 + r)^-n)
// Where PV = vehiclePrice, RV = residualValue, r = monthlyRate, n = totalMonths
var numerator = (vehiclePrice – residualValue / Math.pow(1 + monthlyRate, totalMonths)) * monthlyRate;
var denominator = (1 – Math.pow(1 + monthlyRate, -totalMonths));
leasePayment = numerator / denominator;
}
var annualLeasePayment = leasePayment * 12;
// 3. FBT Elimination & Deduction Split (Employee Contribution Method)
// To eliminate FBT, the employee makes post-tax contributions equal to the FBT taxable value.
// FBT Taxable Value (Statutory Formula, flat 20% for cars)
var fbtTaxableValueAnnual = vehiclePrice * 0.20;
// Total annual cost of the car (pre-GST for running costs)
var totalAnnualCarCostPreGST = annualLeasePayment + netAnnualRunningCosts;
var totalAnnualPreTaxDeduction;
var totalAnnualPostTaxDeduction;
// The post-tax deduction is designed to offset the FBT taxable value.
// The remaining total annual car cost is then the pre-tax deduction.
if (totalAnnualCarCostPreGST >= fbtTaxableValueAnnual) {
totalAnnualPostTaxDeduction = fbtTaxableValueAnnual;
totalAnnualPreTaxDeduction = totalAnnualCarCostPreGST – fbtTaxableValueAnnual;
} else {
// If total car cost is less than FBT taxable value, it means all costs are effectively post-tax
// and there's no pre-tax benefit from this structure. This scenario is less common for novated leases.
totalAnnualPostTaxDeduction = totalAnnualCarCostPreGST;
totalAnnualPreTaxDeduction = 0;
}
// 4. Tax Savings Calculation
var marginalTaxRate = getMarginalTaxRate(annualSalary);
var medicareLevy = 0.02; // Standard Medicare Levy in Australia
var totalTaxRate = marginalTaxRate + medicareLevy;
var estimatedAnnualTaxSavings = totalAnnualPreTaxDeduction * totalTaxRate;
// 5. Total Cost of Lease over Term
var totalDeductionsOverTerm = (totalAnnualPreTaxDeduction + totalAnnualPostTaxDeduction) * leaseTerm;
var totalLeaseCostOverTerm = totalDeductionsOverTerm + residualValue; // Includes residual if employee buys it out
// 6. Effective Weekly Cost
var effectiveAnnualCostAfterSavings = (totalAnnualPreTaxDeduction + totalAnnualPostTaxDeduction) – estimatedAnnualTaxSavings;
var effectiveWeeklyCost = effectiveAnnualCostAfterSavings / 52;
// 7. Display Results
var resultHTML = "
Novated Lease Summary
";
resultHTML += "Total Annual Pre-Tax Deduction: AUD " + totalAnnualPreTaxDeduction.toFixed(2) + "";
resultHTML += "Total Annual Post-Tax Deduction: AUD " + totalAnnualPostTaxDeduction.toFixed(2) + "";
resultHTML += "Estimated Annual Tax Savings: AUD " + estimatedAnnualTaxSavings.toFixed(2) + "";
resultHTML += "Total Cost of Lease (Over Term, incl. Residual): AUD " + totalLeaseCostOverTerm.toFixed(2) + "";
resultHTML += "Effective Weekly Cost (After Tax Savings): AUD " + effectiveWeeklyCost.toFixed(2) + "";
resultHTML += "Note: This calculation assumes the novated lease is structured to eliminate Fringe Benefits Tax (FBT) through employee contributions. Tax rates are based on current Australian income tax brackets (2023-2024) and Medicare Levy. Consult a financial advisor for personalized advice.";
document.getElementById("result").innerHTML = resultHTML;
}
// Helper function for Australian marginal tax rate (2023-2024 financial year)
function getMarginalTaxRate(salary) {
if (salary <= 18200) return 0;
if (salary <= 45000) return 0.19;
if (salary <= 120000) return 0.325;
if (salary <= 180000) return 0.37;
return 0.45;
}