Spring 2026 has produced a genuine deadline in the car market. Since late 2022, the fringe benefits tax exemption for eligible electric vehicles has made novated leasing the standout way for many employees to get into an EV, and on 5 May 2026 the federal government announced that generosity will be wound back in stages from 1 April 2027. Suddenly the perennial question, novated lease vs car loan, has a clock attached to it.
We arrange car and asset finance for clients across Geelong, the Bellarine, the Surf Coast, Melbourne and Australia-wide, and this question lands in our inbox most weeks: from the Armstrong Creek tradie upgrading a ute, to the Lara project manager eyeing an EV for the daily run up the Princes Freeway, to practice owners in Ocean Grove weighing a vehicle through the business. This guide compares the options (including the third option most comparison sites skip) and lays out the EV tax timeline that should now be part of the decision.
A novated lease is a three-way agreement between you, your employer and a finance company. Your employer deducts the lease payments (and usually a budget for running costs like fuel or charging, insurance, registration, servicing and tyres) from your salary, with much of it typically taken from pre-tax pay. Because part of your income goes to the car before tax is calculated, your taxable income falls. The trade-off is fringe benefits tax: packaging a car is a fringe benefit, and FBT (levied at the top marginal tax rate) can claw back much of the saving on a petrol or diesel car. Employees commonly make some payments from post-tax salary to offset this.
This is exactly why the EV exemption made such a difference. For eligible electric vehicles under the fuel-efficient luxury car tax threshold, no FBT applies, so the pre-tax salary deductions do their work without the usual tax clawback. It’s also why the announced wind-back matters so much to anyone currently weighing up an EV.
Novated leases also come with structural features to understand before you sign: a residual (balloon) amount is owed at the end of the term, the lease is tied to your employment (changing jobs means re-novating with a new employer or taking over payments yourself), and packaged running-cost budgets are estimates that get reconciled against reality.
A car loan is the simple alternative: you borrow, you own the car (with the lender holding security until it’s repaid), and you pay from after-tax money. No FBT, no employer involvement, no residual unless you choose a balloon payment. And for business owners and the self-employed there’s a third path most novated-lease-versus-car-loan articles never mention: a chattel mortgage, where the business owns the vehicle and may claim GST credits, interest and depreciation to the extent of business use.
| Feature | Novated lease | Car loan | Chattel mortgage |
|---|---|---|---|
| Best suited to | Employees whose employer offers salary packaging, especially for eligible EVs while the exemption lasts | Anyone wanting simple ownership and full control, regardless of employer | Business owners, sole traders and companies using the vehicle substantially for business |
| Who owns the car | The financier during the lease; you can typically own it after paying the residual | You, with the lender holding security until repaid | The business from day one, with the lender holding security |
| Tax treatment | Pre-tax salary deductions lower taxable income; FBT applies unless the vehicle qualifies for the EV exemption | Paid from after-tax income; generally no deductions for private use | GST credits, interest and depreciation may be claimable for the business-use portion. See our equipment finance tax deductions guide |
| Running costs | Usually bundled and largely paid pre-tax | Paid separately, out of pocket | Paid by the business; deductibility depends on business use |
| Key watch-outs | Residual owing at the end; tied to your job; packaging fees; FBT on non-exempt cars | No tax benefits for private buyers; optional balloons increase total interest | Needs genuine business use; get accountant advice on structure before signing |
The table describes typical arrangements as reported at publication. Products differ between financiers, and the right structure depends on your circumstances. Tradies and sole traders comparing the chattel mortgage route should start with our guide to equipment finance for tradies and sole traders; businesses running multiple vehicles can go deeper in our truck and transport finance guide.
Since 1 July 2022, eligible battery electric vehicles priced under the fuel-efficient luxury car tax threshold have been exempt from FBT when provided through arrangements like novated leases (plug-in hybrids reportedly only qualify for arrangements entered into before 1 April 2025). On 5 May 2026 the government announced a phased wind-back. Based on the announcement as reported at the time of writing:
| Period | Announced treatment of eligible EVs |
|---|---|
| Until 31 March 2027 | Full FBT exemption reportedly continues unchanged for eligible EVs under the fuel-efficient LCT threshold |
| 1 April 2027 to 31 March 2029 | Full exemption reportedly limited to EVs valued at $75,000 or less; eligible EVs above that but under the LCT threshold receive a 25% discount on the FBT otherwise payable |
| From 1 April 2029 | A permanent 25% FBT discount reportedly applies to eligible EVs under the LCT threshold |
The luxury car tax threshold for fuel-efficient vehicles for 2026-27 as published by industry sources. It is the price ceiling for the EV FBT exemption. The threshold is indexed each financial year, so confirm the current figure with the ATO before relying on it. The announced $75,000 tier that takes effect from 1 April 2027 is a separate, lower ceiling for the full exemption.
Three careful notes. First, at the time of writing these changes had been announced but not yet passed into law. Details could shift, so check the current status with the ATO or your adviser before making decisions. Second, the government has indicated existing leases are not expected to be affected by the changes, though the fine print on grandfathering (including what happens if you vary an existing arrangement) reportedly awaits the legislation. Third, none of this changes the maths on petrol and diesel vehicles, which have never enjoyed the exemption.
The practical upshot: if an EV novated lease was already on your list, the window between now and 31 March 2027 is when the current, most generous settings reportedly still apply, and if the EV you want sits above $75,000, the announced tiering makes the timing question sharper still. Home owners charging an EV from their own roof might also weigh up whether a green home loan for solar and a battery belongs in the same conversation.
1. Your employment. A novated lease needs an employer willing to offer salary packaging. Most larger employers and many Geelong and Melbourne SMEs do, but not all. Contractors and the self-employed generally can’t novate their own salary, which is where a car loan or chattel mortgage steps in.
2. The car. For an eligible EV under the thresholds, the FBT exemption can make novated leasing very hard to beat while it lasts. For petrol and diesel cars the comparison is much closer, and the packaging fees, interest rate inside the lease and residual all deserve scrutiny against a standard loan.
3. Your marginal tax rate. Salary packaging saves more for higher earners because the pre-tax deductions offset income taxed at higher rates. On modest incomes the benefit shrinks, sometimes below the cost of the lease’s fees and pricing.
4. Your property plans. Every car commitment (lease deductions or loan repayments) reduces what a lender will let you borrow for a home. We regularly meet buyers in Geelong and Melbourne whose car finance quietly clipped tens of thousands off their borrowing power. If a home purchase or refinance is on the horizon, sequence the decisions deliberately.
Picture a project manager in Lara commuting to Melbourne’s west, choosing between a mid-priced electric SUV and a similarly priced diesel wagon. Through her employer’s salary packaging, the EV can be novated with pre-tax deductions and, under current settings, no FBT, while the diesel would attract FBT that erodes most of the packaging benefit, making a standard car loan the cleaner comparison for it. Her partner runs a landscaping business from home in Curlewis, so his ute belongs in a different bucket again: likely a chattel mortgage through the business, claimed to the extent of genuine business use. Same household, three different right answers, and because they plan to refinance next year, both car decisions were sized against the home loan first. The numbers differ for every household; the sequencing lesson doesn’t.
Residuals and balloons. Novated leases end with a residual amount set within ATO guideline ranges; balloon-style car loans end with a lump sum too. Either way, have a plan for that final figure before you start: refinance it, pay it out, or roll into the next vehicle with your eyes open.
The rate inside the product. Novated lease quotes bundle finance, fees and running costs, which can make the underlying interest rate hard to see. Ask for it explicitly, and compare it against what a competitive car loan would cost you. A broker can pull both apart line by line.
Job changes and early exits. Leave your employer mid-lease and the novation unwinds. You’ll need to re-novate with a new employer, cover payments personally, or exit early, which can be costly. If your industry is project-based, weigh this carefully.
Business structure questions. If the vehicle is substantially for business, the comparison widens beyond this article. Our guides to equipment finance in Australia and the instant asset write-off cover the levers, and your accountant should be in the room for the structure call.
Get any novated lease quote independently sanity-checked before you sign. Packaging providers are convenient, but convenience isn’t the same as competitive, and the quote’s assumptions about running costs, fees, the residual and the interest rate all move the total. A finance broker can compare the lease against a car loan and, for business owners, a chattel mortgage on like-for-like terms, then check the winner against your home-loan plans. With the RBA’s next cash rate decision due 29 September 2026, it’s also worth stress-testing any repayment at more than today’s rate.
Often, yes. The announced changes reportedly don’t start until 1 April 2027, full exemption is expected to remain for eligible EVs at $75,000 or less until 2029, and a permanent 25% FBT discount is proposed after that. The government has also indicated existing leases are not expected to be affected. But the changes weren’t yet legislated at the time of writing, so confirm the current rules with the ATO or your adviser, and have the numbers run for your income and vehicle rather than relying on a generic calculator.
Generally not in the traditional sense. Novation requires an employer to run salary packaging, and sole traders can’t package their own drawings. Self-employed buyers usually compare a car loan against business asset finance such as a chattel mortgage, which brings its own possible GST credits and deductions for the business-use portion. If you operate through a company that employs you, other arrangements may be possible. That’s a conversation for your accountant and broker together.
Yes, both. Lenders treat novated lease deductions as a commitment that reduces your assessable income, and car loan repayments count among your liabilities. Either can trim your maximum home loan by a meaningful amount, and the effect lasts for the life of the commitment. If you’re planning to buy or refinance within the next couple of years, it’s worth sizing the car decision against the property goal first. A broker can model both together before you commit to either.
You’ll face the residual, a lump sum set when the lease begins, within ATO guideline ranges. Your options typically include paying it out and keeping the car, refinancing the residual, selling the car (keeping any surplus above the residual, or covering any shortfall), or trading into a new lease. The right exit depends on the car’s market value against the residual at the time, so it pays to think about that figure at the start of the lease, not the end.
Whether you’re comparing a novated lease quote, a car loan, or business asset finance (in Geelong, on the Bellarine, in Melbourne or anywhere in Australia), a no-obligation review will show you the true cost of each option and what it means for your home loan plans.
With years of experience in mortgage broking and finance, Melanie helps first home buyers, refinancers, investors and business owners across Geelong, the Bellarine, the Surf Coast, Melbourne and regional Victoria make their money work harder. Contact our team on 03 9020 2699.
