If you've ever wondered what happens when your novated lease ends or how much it costs to own the car outright, the answer lies in the residual value. So, what exactly is the novated lease residual value? How is it determined? And what are your options if you're not ready to purchase the car at the end of the lease? This key factor is crucial for both employees and employers alike.

What’s Inside:

1. What Is the Residual Value in a Novated Lease?
2. How is the Residual Value Calculated?
3. Why is Residual Value Important?
4. What Happens at the End of a Novated Lease?
5. Benefits of Novated Lease Residual Value for Employers
6. Common Questions About Novated Lease Residual Value
7. Final Thoughts: The Importance of Understanding Your Novated Lease Residual Value

What Is the Residual Value in a Novated Lease?

Let’s start with the basics. The residual value in a novated lease is the estimated worth of the car at the end of your lease term. When you enter into a novated lease, you agree to lease the vehicle for a set period (typically between two to five years). By the end of this period, the car still retains some value—this is referred to as the residual value.

In simple terms, the residual value is the amount you’d need to pay if you choose to buy the car outright at the end of the lease. It's determined by the car's expected depreciation over the lease term. The longer the lease, the lower the residual value, as vehicles tend to lose value over time.

How is the Residual Value Calculated?

The novated lease residual value is not an arbitrary figure. It is usually calculated based on guidelines set by the Australian Tax Office (ATO). These guidelines help ensure that residual values are fair and consistent across different lease agreements. The ATO prescribes minimum residual values based on the length of the lease:

These percentages give both employees and employers a good idea of what to expect when the lease ends. But it’s important to note that the actual residual value can vary slightly depending on the leasing provider, the vehicle, and market conditions.

Why is Residual Value Important?

Understanding the novated lease residual value is crucial because it impacts your financial decisions at the end of the lease. Here’s why:

• End-of-lease options: When your lease ends, you’ll have three choices: upgrade to a new car, adjust your lease or own your car outright. Knowing the residual value helps you prepare for these options.
• Affordability: The residual value plays a big role in determining how much your monthly lease payments will be. A higher residual value means lower monthly payments, but it also means you’ll have to pay more if you choose to buy the car at the end of the lease.
• Tax savings: Because novated leases are paid using pre-tax income, the residual value indirectly affects how much tax you save over the lease term. The higher the residual value, the lower your taxable income is during the lease period.

What Happens at the End of a Novated Lease?

Reaching the end of your lease term brings some important decisions. Let’s explore your options and how the novated lease residual value comes into play:

Option 1: Upgrade to a new car.

Keep benefiting from a novated lease while enjoying the enhanced features and technology of a new model upgrade. Your payments can stay the same and you get a brand new novated lease vehicle of your choice.

Option 2: Adjust your lease.

Happy with your car and want to continue with the benefits and potentially pay less? You can refinance the residual amount and extend your lease to lower repayments and ease the financial burden.

Option 3: Own your car outright.

Love your car and want to own it outright? Pay the balance of your lease and the car is yours. Keep in mind when selling your existing car the residual payment is often less than the car’s value at the end of the lease. This can mean you could get to pocket the difference.

Benefits of Novated Lease Residual Value for Employers

While employees are the ones primarily affected by the residual value, employers can also benefit from understanding how it works. Here are a few reasons why employers should pay attention to the residual value:

• Attract and retain talent: Offering novated leasing as part of a salary packaging option can make your company more appealing to potential employees. Understanding the residual value helps employers explain the full range of benefits to staff.
• No financial risk: The residual value is factored into the employee’s payments, so employers don’t need to worry about any unexpected costs. If the employee chooses not to buy the car, the residual value is the responsibility of the leasing company.
• Simplified payroll: Novated leasing simplifies the payroll process by bundling the car’s running costs and lease payments into one deduction. Employers can easily calculate these amounts with the residual value in mind, ensuring smooth payroll operations.

Common Questions About Novated Lease Residual Value

As you explore novated leasing, you might still have questions about how the novated lease residual value affects your overall decision. Here are some common questions to help clear things up:

Can I negotiate the residual value?

The residual value is typically set by the leasing company and follows ATO guidelines. However, there might be some flexibility depending on the specific lease agreement and the provider you choose. It’s always worth discussing your options with the leasing company to see if there’s room for negotiation.

What if I can’t afford the residual value at the end of the lease?

If you reach the end of your lease and find that paying the residual value is out of your budget, you have other options. You can either trade in the vehicle for a new lease or return the car without purchasing it.

How does residual value affect my monthly lease payments?

A higher novated lease residual value generally means lower monthly payments. This is because the car is expected to retain more of its value at the end of the lease, so you’re effectively financing a smaller portion of the vehicle’s total cost during the lease term.

Final Thoughts: The Importance of Understanding Your Novated Lease Residual Value

Whether you're an employer providing novated leasing as a salary package option or an employee taking advantage of its tax-saving benefits, understanding the residual value is key. It impacts your lease payments, the choices available at the end of the lease, and your overall financial decisions.

By grasping the fundamentals and staying informed about residual value guidelines, you can make smart decisions that work for you—whether it’s upgrading to a new vehicle, adjusting your lease, or purchasing the car outright.

So, are you ready to take the next step in your novated leasing journey? Now that you know what the novated lease residual value is and how it works, you’ll be well-equipped to make the best decision for your situation. Reach out to Novated Choice team for all things novated leasing.