One of the biggest themes we’ve been discussing with clients this year? Buying a new car.

Interestingly, many of our clients hadn’t upgraded their car in years — but this year feels like the year for a refresh. Whether it’s rising repair costs, lifestyle changes, or the growing appeal of electric vehicles (EVs), car upgrades are firmly back on the agenda.

And because a car is a significant purchase, the big question isn’t just what to buy — it’s how to fund it.

We’ve had this conversation dozens of times lately, and the advice hasn’t been identical for everyone. That’s because the right funding option depends on:

• The price of the car

• Your available cash

• Your income level

• Your marginal tax rate

• Whether you’re a business owner or employee

• How much you use the car for work

• Your broader financial priorities

One strategy that keeps coming up is novated leasing. Let’s break down how it works — and when it makes sense.

What Is a Novated Lease?

At a high level, a novated lease changes when tax is collected relative to when you spend your income.

If you’re an employee in Australia, you’re typically paid under the PAYG (Pay-As-You-Go) system. Each pay cycle looks like this:

1. You earn gross (pre-tax) income

2. Your employer withholds income tax

3. You receive the remainder as post-tax income

4. You spend that post-tax money on things like a car or loan repayments

In simple terms:

Pre-tax income → Tax withheld → Post-tax income → Spend on car

How a Novated Lease Changes the Flow

A novated lease is a three-party agreement between:

1. You (the employee)

2. Your employer

3. A lease provider / financier

Instead of paying for your car from post-tax income, a portion of your salary is redirected before tax to cover lease payments and running costs.

So the flow becomes:

Pre-tax income → Some spent on car → Tax withheld on the remainder → Post-tax income

Because you’re effectively spending some of your income before it’s taxed, you receive a benefit equal to your marginal tax rate plus the Medicare levy.

For someone on a high marginal tax rate, that can be significant.

So What’s the Catch?

The catch is something called Fringe Benefits Tax (FBT).

FBT is a tax paid by employers when they provide non-cash benefits to employees. Allowing you to use pre-tax income for personal car expenses is considered a fringe benefit.

In most traditional novated lease arrangements:

• The employer incurs an FBT liability

• To avoid this, employees are asked to make post-tax contributions

• This is known as the Employee Contribution Method (ECM)

ECM reduces or eliminates the employer’s FBT liability — but it also reduces much of the tax advantage for the employee.

So while the marketing might scream “huge tax savings,” the real-world benefit was often more modest.

The Game-Changer: EV FBT Exemption

Everything shifted in 2022 when the Australian Government introduced an FBT exemption for eligible low-emission vehicles (primarily electric vehicles under the luxury car tax threshold).

For eligible EVs:

• The car benefit is exempt from FBT

• There’s no need for ECM

• A much larger portion of the lease can be paid pre-tax

This dramatically improved the attractiveness of novated leasing for EVs in particular.

For high-income earners purchasing an eligible EV, the numbers can be compelling.

Why Novated Lease Comparisons Can Be Misleading

This is where we spend most of our time with clients — unpacking the fine print.

Most novated lease calculators highlight:

• “Tax saved” figures

But they often underemphasise:

• Interest costs you wouldn’t otherwise incur

• Lease administration fees

• Mandatory bundled running cost budgets

• Residual (balloon) value at the end

• Opportunity cost of funds

• Early termination risks if you change jobs

• Legislative risk if policies change

A novated lease isn’t “free money.” It’s a financing structure with tax advantages — but also embedded costs.

You have to compare it properly against:

• Paying cash

• Using an offset redraw

• A traditional car loan

• Keeping your existing car

Who Is a Novated Lease Most Suitable For?

In our experience, novated leasing tends to work best when most of the following apply:

• You have stable employment
• You’re a high-income earner on a high marginal tax rate
• You’re buying an eligible EV
• You’d prefer to preserve cash reserves
• You have competing priorities (investing, mortgage offset, business opportunities
• You’re comfortable with structured repayments and residual values

It’s generally less compelling for:

• Lower-income earners

• People planning to change jobs soon

• Buyers of non-exempt petrol/diesel vehicles

• Those who could comfortably pay cash without impacting broader strategy

The Real Question: What’s the Opportunity Cost?

The biggest mistake we see isn’t choosing the “wrong” structure.

It’s making the decision in isolation.

A car purchase should fit into your broader financial strategy:

• Are you building wealth?

• Are you trying to reduce non-deductible debt?

• Are you protecting liquidity?

• Are you trying to optimise tax?

Sometimes the “best” answer isn’t the most tax-effective one — it’s the one that aligns with your bigger goals.

Novated leasing — particularly for EVs — has become significantly more attractive in recent years.

But it isn’t automatically the right choice.

Like most financial strategies, it depends.

If you’re considering a new car this year (and many people are), the key is not just asking:

“How do I get the biggest tax saving?”

Instead, ask:

“How does this decision fit into my overall financial plan?”

That’s where the real value is found.