Novated Lease Glossary
Every term explained in plain English. Bookmark this page — you'll come back to it.
Administration Fee
A monthly fee charged by the lease provider for managing the lease account, processing payments, and handling running cost claims. Typical range is $25–$75/month. This is deducted from your pre-tax salary alongside other lease costs.
Amortisation
The process of paying down a debt through regular instalments, where each payment covers the interest on the outstanding balance plus a portion of the principal. In a novated lease, the finance instalment amortises the gap between the amount financed and the residual value — not the full vehicle cost. The residual is a separate lump-sum balloon owed at the end of the term.
Amount Financed
The principal amount the financier lends — typically the drive-away price minus any deposit, quoted ex GST. Interest is charged on this amount over the lease term.
Annual Kilometre Adjustment
At the start of a novated lease, you nominate an expected annual kilometre figure that drives your fuel, electricity, and tyre budgets. If you consistently drive more than estimated, your running-cost pool can run short — meaning you cover the shortfall from after-tax income at reconciliation. If you drive less, a surplus builds up that should be refunded at lease end. Some providers allow an annual km review mid-lease; ask whether your estimate is locked in or adjustable, since setting it accurately from day one is the best way to avoid an end-of-term surprise.
ATO Minimum Residual Percentages
The ATO sets minimum residual value percentages for leases to ensure they qualify as genuine leases for FBT purposes — providers cannot go below these. Current minimums applied to the amount financed: 1 year: 65.63% · 2 years: 56.25% · 3 years: 46.88% · 4 years: 37.50% · 5 years: 28.13%. Higher residuals are allowed and reduce monthly payments but increase the end-of-lease balloon. Always confirm the exact base used in your quote.
ATO PCG 2024/2 — EV Home Charging Shortcut
An ATO Practical Compliance Guideline allowing a simplified flat-rate claim for home-charging electricity costs on EVs. Claim work-related kilometres × the shortcut rate without receipts or kWh tracking. The rate updates yearly: 4.20c/km applied through the FBT year ending 31 March 2026; 5.47c/km for the FBT year starting 1 April 2026. Covers home charging only — not public or network charging. Compare to actual costs if you have high electricity tariffs.
Balloon Refinance
The residual value (balloon) is the lump sum owed at the end of a novated lease to own the car outright. If you can't or don't want to pay it in cash, you have three main options: refinance the residual as a personal loan, trade the car and use the sale proceeds to clear it, or re-novate into a new lease. The key risk is negative equity — if the car's market value has fallen below the residual, you still owe the difference regardless of what the car fetches at trade-in. Vehicles with steep depreciation curves are most exposed in the back half of a lease term.
Break Costs (Early Termination Fee)
Charges that apply if you end a novated lease before the agreed term. Break costs typically include an administration fee ($500–$2,000), the difference between the outstanding finance balance and the vehicle's market value (if the car is worth less), and potentially a break fee on the fixed-rate finance component. If you change jobs and cannot re-novate, the lease de-novates back to a personal finance agreement — you continue paying the same instalments but from after-tax income, losing the salary-sacrifice tax benefit. Always ask your provider to document the early-termination formula before signing.
Capital Works Deduction (Vehicle Depreciation)
When a vehicle is purchased outright (rather than leased), the ATO allows the owner to claim depreciation as a tax deduction if the car is used for income-producing purposes. For individuals, the deduction is capped at a 'car limit' set by the ATO ($69,674 for FY2025-26). This is only available if the car is used for work (logbook required). In a novated lease, the financier owns the car — so the employee cannot claim depreciation. Instead, the salary packaging arrangement provides the tax benefit through pre-tax deductions rather than a depreciation claim.
Capitalised Charges
Fees or costs that have been added ('capitalised') into the finance principal rather than billed separately. Common examples include origination fees, broker margins, gap insurance, or accessories that weren't disclosed upfront. Because interest is charged on the full principal, capitalised charges cost more over the lease term than the same amount paid upfront. For example, $1,500 capitalised at 10% over 3 years costs approximately $150 in additional interest — plus the original $1,500 is effectively paid with borrowed money.
Comparison Rate
A comparison rate is a standardised interest rate that folds most fees and charges into a single number, making loan products easier to compare. Novated lease providers are not legally required to disclose a comparison rate, and most don't. The closest equivalent is the implied interest rate, which LeaseAudit reverse-engineers from your finance instalment, amount financed, residual, and term. Using the implied rate to compare quotes from different providers gives you a consistent, objective basis that a quoted nominal rate alone won't provide.
Comprehensive Insurance (Novated)
Under a novated lease, comprehensive car insurance is typically arranged and held by the employee — not the lease provider. Some providers require you to use a preferred insurer or meet a minimum agreed-value sum insured. Check whether the policy is agreed value (a fixed payout if the car is written off) or market value (which may fall below the residual as the car ages). If the insurance payout is less than the residual still owed, you're personally liable for the shortfall — this is the gap that GAP insurance is designed to cover.
Deferred Payments
A deferred payment arrangement delays the first lease instalment by one or more months after delivery. During the deferral period, interest still accrues on the full outstanding balance — it's capitalised into the principal rather than paid immediately, which increases the total interest paid over the lease term. Deferrals are sometimes offered as a sales incentive and are a negotiable term. They can be useful if you're timing the lease start to a salary increase or a new job, but they are not a saving — they are a cash flow tool with a real cost.
Division 293 Super Tax
An additional 15% tax on concessional (pre-tax) superannuation contributions for high-income earners, taking the effective contributions tax from 15% to 30%. It applies when your 'income for surcharge purposes' — which includes RFBA — exceeds $250,000. If your salary is $235,000 and your FBT-exempt EV adds $27,000 in RFBA, your income for surcharge purposes reaches $262,000, triggering Division 293 on your super contributions. The ATO issues a Division 293 assessment after tax time and you can choose to pay it from your take-home pay or have it debited from your super fund.
Drive-Away Price
The total cost to get the car on the road — includes the vehicle price, stamp duty, registration, CTP insurance, dealer delivery, and any options. This is the starting amount your lease is based on.
Electricity Claim Method (ATO Shortcut vs Actual Cost)
EV and PHEV drivers who use their vehicle for work or income-producing purposes can claim electricity costs one of two ways. The ATO shortcut (PCG 2024/2) lets you claim a flat 5.47c/km for FY2026-27 without receipts — simple but capped at the shortcut rate. The actual cost method tracks real electricity consumption: (kWh/100km ÷ 100) × annual km × your tariff. Actual cost can be higher or lower than the shortcut depending on your tariff, consumption, and whether you charge overnight on off-peak rates. For an FBT-exempt EV under a novated lease, the claim method affects how much electricity is included in the lease budget and benchmarked by the audit — a mismatch between the budgeted amount and your intended claim method can leave you out of pocket at year-end.
Employee Contribution Method (ECM)
A method of reducing FBT liability where the employee makes after-tax contributions toward the lease. Common for non-exempt vehicles. The post-tax contribution reduces the taxable value of the fringe benefit.
Employer Contribution
Some employers contribute a fixed amount toward employee novated lease costs as part of their salary packaging benefit — for example, subsidising the administration fee or covering the first few months of running costs. This is not standard and not required by law. It's worth asking your HR or payroll team before signing a lease, as an employer contribution can meaningfully reduce your out-of-pocket costs over the term. Employers in competitive hiring markets and the not-for-profit sector are more likely to offer this.
End of Lease Options
At the end of a novated lease you have three options: (1) trade or sell the car and keep any surplus above the residual tax-free, (2) refinance the residual into a new lease on the same or different car, or (3) pay the residual (plus GST) from after-tax funds and own the car outright.
EVSE (Electric Vehicle Supply Equipment)
The technical term for home EV charging hardware — what most people call a 'home charger' or 'wallbox'. A Level 2 EVSE (7–22 kW) charges significantly faster than a standard wall outlet (2.4 kW). Cost of supply and installation is typically $800–$2,500. EVSE can sometimes be bundled into a novated lease's financed amount, but be aware that adding it to the amount financed increases the LCT value, which can affect FBT exemption eligibility. EVSE supply and installation may also be claimable as a work-related expense if the vehicle is used for business travel.
FBT Exemption (Electric Car Discount)
Under the Electric Car Discount, eligible new and used BEVs and hydrogen fuel cell vehicles (meeting LCT value thresholds at first retail sale) are fully FBT-exempt. PHEVs lost eligibility from 1 April 2025, with limited grandfathering only for vehicles already in an FBT-exempt arrangement before that date under a binding commitment with no material changes afterward. Confirm LCT status before signing — vehicles above the threshold do not qualify.
Finance Instalment
The regular payment that covers the depreciation of the car (drive-away minus residual) plus interest charges. This is separate from running costs. Usually quoted monthly, deducted from your pre-tax salary.
Fringe Benefits Tax (FBT)
A tax employers pay on non-cash benefits provided to employees. For non-exempt vehicles on a novated lease, the employer either absorbs the FBT or passes it to the employee as a post-tax contribution (Employee Contribution Method). For FBT-exempt EVs, this doesn't apply.
GAP Insurance
GAP (Guaranteed Asset Protection) insurance covers the difference between your comprehensive insurance payout and the residual value still owed if the car is written off or stolen. Because insurance pays out the car's current market value — which typically depreciates faster than the residual in the early years of a lease — there can be a significant shortfall. GAP insurance is most valuable in the first half of a lease on vehicles with steep depreciation. It's frequently offered as an add-on by lease providers, sometimes capitalised into the financed amount without being clearly itemised — always confirm whether it's optional.
GST Gross-Up Factor (Type 1 and Type 2)
When calculating the reportable value of a fringe benefit, the ATO requires grossing up the benefit to its pre-income-tax equivalent. Type 1 (factor: 2.0802) applies when the employer can claim GST input tax credits — which is typical for novated lease payments. Type 2 (factor: 1.8868) applies when no GST credit is available. For most employees on a novated lease, Type 1 applies. The RFBA shown on your income statement is: taxable value × 2.0802. Even for FBT-exempt vehicles, the grossed-up benefit is reported as RFBA — it doesn't attract FBT but it does raise your income for MLS, HECS-HELP, and other downstream thresholds.
GST on Novated Leases
GST (10%) applies to the vehicle purchase and most running costs. In a novated lease, the financier claims the GST input credit, so the amount financed is usually ex GST. However, if you buy out the car at end of lease, GST is added to the residual (residual × 1.1).
HECS-HELP Compulsory Repayment Threshold
From 1 July 2025, the ATO uses a marginal HELP repayment system. Once your 'repayment income' (taxable income + RFBA + other reportable amounts) exceeds $67,000, compulsory repayments begin on a marginal basis: 15c per $1 over $67,000 up to $125,000; then $8,700 plus 17c per $1 over $125,000 up to $179,285; then 10% of total repayment income above that. RFBA from a novated lease adds directly to repayment income, even though the salary sacrifice reduces your taxable income. If you're close to the $67,000 threshold, a lease that generates significant RFBA can trigger or increase compulsory repayments — potentially hundreds of dollars per year in accelerated debt repayment. Source: ATO study and training support loans thresholds (verified May 2026).
Implied Interest Rate
The effective annual interest rate embedded in the lease, calculated from the finance instalment, amount financed, residual, and term. Many providers don't disclose this directly. LeaseAudit reverse-engineers it from your quote figures using Newton-Raphson iteration. Current competitive benchmarks are shown on each audit — they move with the RBA cash rate and are updated when rate decisions are made. Rates above the competitive ceiling are worth querying; rates significantly above market warrant firm clarification from your provider.
Luxury Car Tax (LCT)
A tax of 33% levied on the GST-inclusive portion of a new car's value above the LCT threshold. For fuel-efficient vehicles (under 7L/100km), the current ATO-published FY2025-26 threshold is $91,387. The tax formula is: LCT = (LCT value − threshold) ÷ 1.1 × 0.33. LCT is typically included in the drive-away price but rarely shown as a line item. For FBT exemption purposes: if LCT has ever been payable on a vehicle (at first retail sale), it permanently loses eligibility for the EV FBT exemption — even second-hand and even if the price has since fallen below the threshold. Adding factory options that push the LCT value above the threshold can trigger this permanently.
Luxury Car Tax (LCT) Threshold
The price ceiling for the FBT exemption on electric vehicles. The current ATO-published threshold for FY2025-26 is $91,387 (GST-inclusive). Critically, the threshold is compared against the vehicle's LCT value, NOT its drive-away price. LCT value includes the GST-inclusive vehicle price, dealer delivery, standard warranties, and any pre-delivery accessories. It EXCLUDES stamp duty, registration, CTP, and extended warranties. Drive-away price includes all of those extras, so drive-away is typically $2,000–$5,000 higher than LCT value. A car with a $94,000 drive-away can easily have an LCT value of $90,000 and still qualify. If a vehicle's LCT value exceeds the threshold at first retail sale, it doesn't qualify for the EV FBT exemption — and once LCT has ever been payable on a vehicle, it's permanently ineligible, even if its value later falls below the threshold. Adding factory options can push a car over the threshold — the 'accessories trap'. Future change: the Australia–EU Free Trade Agreement, once in force, will raise the LCT threshold for zero-emission vehicles to $120,000. As at April 2026 the agreement has not commenced — the $91,387 threshold remains in force. Monitor ATO and Treasury announcements if your EV sits in the $91,387–$120,000 range.
Marginal Tax Rate
The tax rate on your highest dollar of income, including the Medicare levy (2%). This determines how much you save through salary sacrifice. For example, at a 32% marginal rate, every $1 deducted pre-tax only costs you $0.68 in take-home pay.
Medicare Levy Surcharge (MLS)
An additional levy on Australian taxpayers who don't hold adequate private hospital cover and whose income exceeds certain thresholds. Rates for FY2025-26 (singles): Tier 1 ($97,001–$113,000) 1.0%; Tier 2 ($113,001–$151,000) 1.25%; Tier 3 ($151,001+) 1.5%. Family thresholds are roughly double. Critically, your RFBA is added to your income when testing MLS thresholds. An FBT-exempt EV generating $27,000 RFBA can push a $90,000 salary to $117,000 for MLS purposes — into Tier 2, adding roughly $1,463 in surcharge per year. The MLS applies to your full taxable income, not just the excess above the tier threshold.
Mortgage Offset Account
A transaction account linked to your home loan. Money in the offset reduces the balance your mortgage interest is calculated on. Keeping trade-in cash in the offset while leasing (instead of buying the car outright) can create an interest arbitrage — you effectively borrow through the lease at a lower after-tax rate while your cash earns the mortgage rate.
Newton-Raphson Solver (Implied Rate Calculation)
An iterative mathematical technique for finding the root of an equation — in this context, the interest rate that makes the PMT formula produce the quoted lease instalment. Since the PMT formula cannot be algebraically rearranged to solve directly for the rate, LeaseAudit uses Newton-Raphson iteration to converge on the implied rate within a few steps. This is how we calculate an implied interest rate even when the provider hasn't disclosed one.
Novated Lease
A three-way agreement between you, your employer, and a finance company. Your employer deducts lease payments from your pre-tax salary, reducing your taxable income. The 'novation' means the employer takes on the salary deduction obligation, but the lease itself is between you and the financier.
Novation
The legal mechanism that involves your employer in the lease. The employer agrees to make the salary deductions and remit payments to the lease provider. If you change employers, the lease 'de-novates' back to a standard finance agreement, and you can re-novate with your new employer.
Operating Cost Method (FBT on Cars)
An alternative to the statutory formula for calculating FBT on a car fringe benefit. Taxable value = total operating costs × (1 − business use %). Requires a 12-week logbook (valid for five years) documenting business kilometres and total kilometres driven. Only beneficial when business use is consistently high — typically 80%+ is needed to outperform the statutory formula. Rarely used in personal novated leases where private use dominates.
Origination Fee
A one-off fee charged by the lender or broker when the lease is established — also called a brokerage fee, documentation fee, or application fee. For novated leases, market range is approximately $300–$800. This fee should be listed separately on your quote; if it isn't, it may have been capitalised into the finance principal. Origination fees differ from establishment fees: origination is typically the broker's margin, while establishment is the lender's admin cost.
Payment Timing (Advance vs Arrears)
Lease payments can be structured as 'in advance' (first payment due at signing, before you take delivery) or 'in arrears' (first payment due one period after signing). Payments in advance mean the financier collects the first instalment upfront — which slightly reduces the principal and, all else equal, lowers the effective interest rate compared to the same nominal rate in arrears. Arrears is the more common convention. When LeaseAudit reverse-engineers an implied interest rate from your instalment, it assumes arrears. If your lease is structured in advance, the implied rate will be marginally understated.
PMT Formula (Lease Payment Calculation)
The standard finance formula for calculating a regular loan payment: PMT = P × r(1+r)^n ÷ [(1+r)^n − 1], where P is the principal (amount financed minus the present value of the residual), r is the periodic interest rate, and n is the number of payment periods. Novated lease finance instalments are calculated using this formula. Because providers often don't disclose the interest rate, if you have the instalment, term, amount financed, and residual, you can reverse-engineer the implied rate.
Post-Tax Contribution (Employee Contribution)
An after-tax payment the employee makes toward the novated lease, typically used under the Employee Contribution Method (ECM) to reduce the taxable value of the car fringe benefit and offset FBT liability. For non-exempt vehicles, post-tax contributions directly reduce FBT costs. For FBT-exempt vehicles (eligible BEVs), post-tax contributions serve no FBT purpose — there is no FBT to offset. If your lease for an FBT-exempt EV includes post-tax deductions, query them: they reduce your take-home pay without any corresponding tax saving.
Registration (Rego)
Annual state or territory vehicle registration, which must be kept current for the vehicle to be legally driven on public roads. In a novated lease, rego is typically bundled into the running-cost budget and paid from pre-tax funds. The cost varies significantly by state: it includes a base registration fee, compulsory third-party insurance (CTP), and in some states a transport accident charge or motor accident insurance component. Typical annual rego ranges from $600–$1,200 depending on vehicle type, state, and whether it's a new car (first-year rego is included in drive-away price and not re-charged until renewal).
Reportable Fringe Benefits Amount (RFBA)
The grossed-up value of your car benefit reported on your income statement each year — even for FBT-exempt EVs. Calculated as the taxable value (typically 20% of the vehicle's base value via the statutory formula, prorated for days on lease) multiplied by the Type 1 gross-up factor (2.0802). No FBT is actually payable on exempt vehicles, but the RFBA counts toward income tests for Medicare Levy Surcharge, HECS-HELP repayments, and Division 293 super tax. A $65,000–$70,000 EV typically generates $25,000–$30,000 RFBA annually — check your income statement after the first FBT year.
Residual Denomination (Drive-Away vs Amount Financed)
The ATO's minimum residual percentages are applied against the amount financed — not the drive-away price. This becomes important when a provider bundles upfront fees (establishment fees, origination fees) into the amount financed, inflating the base and making the residual percentage appear compliant while the absolute residual may effectively be lower than the ATO intended relative to the car's true cost. LeaseAudit shows the residual as both a percentage of amount financed and of drive-away ex-GST. If these figures diverge by more than a few percent, ask your provider what's included in the amount financed.
Residual Value (Balloon Payment)
The amount you owe at the end of the lease to buy the car outright. Set as a percentage of the amount financed (not the drive-away price) based on ATO minimum residual tables — e.g. 46.88% for a 3-year lease, 28.13% for a 5-year lease. These are ATO minimums: providers cannot set residuals below them, but they can set higher residuals. A higher residual lowers monthly payments but increases the balloon you owe at the end — and increases your shortfall risk if the car's market value has fallen. If the car is worth more than the residual, you have equity; if less, you have a shortfall payable from after-tax funds.
Running Cost Surplus (Unspent Pool)
The unspent balance that accumulates in your running-cost account when actual expenses are lower than the budgeted amount. This money is yours — providers do not keep it. What happens depends on your contract: during the lease, many providers allow reimbursements on demand or can reduce future deductions if a surplus builds up; at lease end, unused funds are returned to your employer who processes them through payroll (PAYG tax applies) and pays the net amount to you as taxable income. Some providers allow rolling the surplus into a new lease or applying it toward the residual. Always request the surplus policy in writing before signing — an overstated running-cost budget means you are effectively giving the provider an interest-free loan for the lease term, which is one of the main reasons to insist on realistic budget figures from the start.
Running Costs
The day-to-day costs of operating the vehicle: registration renewals, insurance, fuel/electricity, tyres, servicing, and roadside assistance. In a novated lease, these are budgeted and deducted from pre-tax salary alongside the finance instalment.
Salary Packaging Cap
The ATO limits the total value of FBT-exempt salary packaging benefits an employee can receive each FBT year. Most private-sector employees are subject to the standard cap. Employees of public benevolent institutions (PBIs), public hospitals, and registered charities have access to significantly higher caps, making salary packaging considerably more valuable in those sectors. FBT-exempt EVs sit outside the FBT system and don't consume the general packaging cap — but non-exempt vehicles (ICE cars) do. Check your employer's sector classification before assuming the standard rules apply.
Salary Sacrifice (Salary Packaging)
An arrangement where you agree to receive less pre-tax salary in exchange for a benefit — in this case, the lease payments. Because the payment comes from pre-tax income, you pay less income tax. The effective cost of the car is reduced by your marginal tax rate.
Statutory Formula Method (FBT on Cars)
The default ATO method for calculating the taxable value of a car fringe benefit. Taxable value = (base value × 20%) × days provided ÷ 365 − any employee contributions (ECM). The 20% statutory rate applies regardless of how much you use the car for work. Most novated leases use this method. The base value is generally the GST-inclusive purchase price of the car at the time of first lease. The alternative — the operating cost method — can reduce taxable value if business use is genuinely high.
Tyre & Rim Insurance
Tyre and rim insurance covers repair or replacement costs for tyres and alloy wheels damaged by road hazards — potholes, nails, kerb strikes. It's a common add-on in novated lease packages, sometimes bundled into the running-cost budget without the employee explicitly requesting it. Check your quote to confirm whether it's mandatory or optional and compare the annual premium against the realistic likelihood of a claim for your typical driving environment. It can be worthwhile for regional drivers or vehicles with low-profile tyres on large-diameter rims; for standard metropolitan driving it's often unnecessary.
Quick Jump
Last reviewed: May 2026