• 7.7 Novated leases

    Full novation

    Under this arrangement, an employee leases a vehicle from a financier using a standard finance lease agreement. The employee, you (the employer) and the financier then enter into a novated lease, which transfers to you for the term of the lease:

    • the employee's obligation to pay the lease payments
    • the right to use the vehicle
    • other obligations under the finance lease.

    As the employer in the novated lease, you are entitled to a deduction for lease expenses where the vehicle is used in the business or provided to an employee as part of a salary packaging arrangement. However, this rule does not apply to leasing a luxury car. In the case of a luxury car, the deduction is based on an accrual amount and depreciation is subject to the luxury car depreciation limit.

    FBT consequence of full novations

    A car fringe benefit arises where you are the lessee of a car that is provided for the private use of an employee or associate of the employee. Cars under a full novated lease are subject to the same car fringe benefit valuation rules as other cars you lease.

    Split full novation

    A variation on the full novation is an arrangement known as a split full novation. Under this arrangement, the lessee's rights and obligations under a finance lease (except the residual payment obligation) are transferred to you.

    FBT consequences of split full novations

    Cars under a split full novated lease are subject to the same car fringe benefit valuation rules as other cars you lease.

    Transfer of lease to new employer

    Upon a terminating event, such as the payment of the last lease payment under the novated lease or termination of employment, a further novation may occur. Under the further novation, your rights and obligations are novated to the employee. The employee becomes the lessee and can take this lease to another employer.

    Where an employee transfers a novated lease to a new employer who is not an associate of yours, the base value of the car is the market value at the time of transfer.


    An employee has a bona fide novated leasing arrangement with their employer. The base value of the leased car at the start of the lease was $35,000. The employee finished employment with the company on 31 March 2008. At that time, the novation agreement between the finance company and the employer was terminated. The employee became responsible for the lease obligations from 1 April 2008.

    The employee started working for a new employer on 1 May 2008. The new employer entered into a new novation agreement on this date. The market value of the car on this date was $25,000.

    The base value of the car to the new employer is $25,000, assuming the new employer is not an associate of yours. However, the base value remains at $35,000 if the new employer is an associate of yours.

    FBT consequences of acquiring the car at the end of a lease

    If the employee acquires the car at the end of a bona fide lease for its residual value, this will be an arm's length transaction on which you would not be subject to FBT.

    This is because the residual value and notional value would be the same, so the benefit provided to the employee will have a nil taxable value.

    We will generally accept the agreement as a bona fide lease if:

    • there is no express or implied agreement under which ownership would pass to the lessee at the end of the lease
    • the residual value under the lease is equal to or exceeds the minimum residual value calculated in accordance with Taxation Ruling IT 28.

    However, if the agreement is not covered by a bona fide lease, a fringe benefit would usually arise.

      Last modified: 08 May 2012QC 17818