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Early termination payouts: how bad can it get?

Early termination is the single largest asymmetric risk in a novated lease.

When it does happen, the financial impact is severe and often counter-intuitive.

This page is not about whether novated leases are usually a good idea.

It focuses on demonstrating, with real numbers, how large the downside can be when early termination occurs, and why this risk deserves explicit consideration, even if the probability feels low.

For a conceptual explanation of why early termination causes financial damage, see the early termination overview.

If you would like to see how early termination plays out across time, including the changing break-even point and comparison against a cash purchase, see Section 7: Early Termination Risk in the novated lease calculator. That section provides a visual, time-based illustration of the same mechanics discussed below.

Example 1: Being made redundant 3 months into a 5-year lease

I am going to use my actual lease as an example.

  • Tesla Model 3 Long Range (2023)
  • Drive-away price: $81,422.50
  • Lease duration: 5 years
  • Income tax bracket: 45+2%
  • Lease (only the vehicle component), pretax figure: $597.47 per fortnight, or $77,671.10 over 5 years.
  • Lease (only the vehicle component), post-tax equivalent (i.e. actual take home impact): $316.66 per fortnight, or $41,165.68 over 5 years.
  • Residual value payable (inc GST): $23,234.63.

Original car funding:

  • Under FBT-exempt novated lease, the take-home impact for 5 years: $41,165.68 + $23,234.63 = $64,400.31.
  • Compare this to the drive-away price of $81,422.50 which is a full $17k cheaper from cashflow perspective. (Note that this is only a consideration of the vehicle cost alone, running cost is skipped in this analysis)

Now consider the scenario where I am made redundant 3 months (6 fortnights) into the lease.

  • Lease paid so far (only the vehicle component), post-tax equivalent: 6 x $316.66 = $1,899.96.
  • Lease still owing (from remaining 4 years 9 months commitment):
    • I have to pay with post-tax dollars, so 124 x $597.47 = $74,086.28
    • Note that I will also have to pay the GST, so another 10%: $74,086.28 x 1.1 = $81,494.91.
  • Residual value payable (inc GST): $23,234.63.
  • Grand total paid for the car: $1,899.96 + $81,494.91 + $23,234.63 = $106,629.50.
  • Observe this is now $25k costlier than the drive-away price of $81,422.50.

The damage arises because the remaining lease commitments lose their pre-tax treatment.

Note that

  • This assumes that I choose to pay out the termination in a lump sum with cash — the worst-case cashflow scenario. There are other options, such as continuing the lease directly with the financier as a non-salary-packaged arrangement, or refinancing it as a personal loan. These alternatives spread payments over time, preserving the time value of your cash and avoiding depleting your offset account in one hit. However, all pre-tax and GST advantages are still lost regardless of which path is taken, so the total financial penalty over the remaining term is broadly similar. The lump-sum payout numbers above represent the worst-case cashflow outcome, not the only one.
  • There is also the option of de-novating the lease and continuing payments post-tax, with the view to finding new employment that supports novated leasing and re-novating as a new FBT-exempt novated lease.

Example 2: Insufficiently insured vehicle write-off at 2-year 1-month.

Let us reuse the identical vehicle. Re-attaching the details here:

  • Tesla Model 3 Long Range
  • Drive-away price: $81,422.50
  • Lease duration: 5 years
  • Income tax bracket: 45+2%
  • Lease (only the vehicle component), pretax figure: $597.47 per fortnight, or $77,671.10 over 5 years.
  • Lease (only the vehicle component), post-tax equivalent (i.e. actual take home impact): $316.66 per fortnight, or $41,165.68 over 5 years.
  • Residual value payable (inc GST): $23,234.63.

Assume that this car is unfortunate enough to be written off in an own-fault accident, 2 years and 1 month after the lease.

Typically comprehensive insurance only provides new-for-old car replacement in the first 2 years, therefore if the car is assessed as a write-off, the most I will receive is the agreed value payout. Imagine that I have left the "agreed value" to the automatically generated figure, which in this case was $52,000 on the renewal of third-year insurance coverage.

Now let's analyse what happens to the lease payout:

  • Lease paid so far (only the vehicle component), post-tax equivalent: 54 fortnights x $316.66 = $17,099.64.
  • Lease still owing (from remaining 2 years 11 months commitment):
    • I have to pay with post-tax dollars, so 76 x $597.47 = $45,407.72
    • Note that I will also have to pay the GST, so another 10%: $45,407.72 x 1.1 = $49,948.49
  • Residual value payable (inc GST): $23,234.63.
  • Grand total paid for the car: $17,099.64 + $49,948.49 + $23,234.63 = $90,282.76 (of which $52,000 comes from the insurance)

Note two things:

  • My insurance agreed value payout is $52,000; however I am actually supposed to pay $73,183.12 to conclude the lease. Therefore I will be out of pocket a further $21,183.12 to fully settle the account.
  • This is the ultimate irony of novated leasing: in a write-off with insufficient insurance coverage, you can receive a large insurance payout yet still face a five-figure out-of-pocket bill — and have no car at the end of it.
    • Contrast this with typical arrangement of an outright car ownership: The agreed value is typically the estimated market value of your vehicle, so when you receive the payout, you could theoretically use it to buy an equivalent vehicle as replacement without significant out of pocket expense.
    • Theoretically in the case of novated lease, once the bill is settled, you could also "continue ownership" by starting a new lease; however the total amount spent would remain higher, and frankly after such experience most users may no longer wish to take up another lease.

Risk mitigation ideas (not financial advice)

It is important to be precise about what this page is — and is not — saying.

Early termination does not mean:

  • novated leases are bad on average, or
  • early termination is likely.

It means:

The downside is huge during these uncommon events.

Therefore it is extremely important to anticipate, quantify and mitigate the various potential risks of early termination.

These are some suggested strategies (not financial advice and not a comprehensive list)

  • job security: if redundancy risk is significant, either split the lease to 1 + x; and/or consider "lease protection" insurance.
  • possibility of relocating internationally, going sole trader etc in the future: minimise lease duration.
  • insufficient insurance payout: either consider "gap assist" type insurance, go for insurance with extended new-for-old option, or consider increasing agreed value such that it would cover the payout.

Key takeaway

If you remember nothing else:

Early termination can destroy the entire financial benefit of a novated lease, therefore understanding, quantifying, and mitigating this scenario should form part of the decision to enter a novated lease.

Novated leasing should therefore be evaluated not only on expected savings, but on:

  • worst-case exposure,
  • employment stability, and
  • whether the upside adequately compensates you for the rare but impactful downside risk.

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If it has helped you think more clearly, avoid a costly mistake, or saved you meaningful money, you're welcome to support its ongoing maintenance and improvements:

I'm backing Dr Michael Keane's fight for salary packaging transparency

Workplaces with an exclusive salary packaging provider tend to have noticeably higher effective interest rates on novated leases — yet the commercial terms behind these exclusive arrangements are rarely disclosed to employees.

Dr Michael Keane, a Melbourne anaesthetist, is taking a Victorian health service to the Victorian Supreme Court to obtain the unredacted contract between the hospital and its exclusive salary packaging provider. The unredacted version may shed light on alleged sign-on fees associated with exclusive access to hospital employees — an arrangement whose financial terms employees are rarely privy to.

To date, Dr Keane has personally spent around $15,700 pursuing this case, with further legal costs anticipated. I believe this matters to anyone in a workplace with an exclusive provider. If you agree, consider supporting his GoFundMe GoFundMe.