Common questions that we hear all the time are: What happens when my novated lease ends? And: How much does it cost to own the vehicle outright? The answer comes down to the residual value of your novated lease. But what is the residual value, and what does it mean?

At Novated Choice, we understand that feeling confident with a novated lease will help you make a choice that’s right for you. So, we’ve provided you with clear and simple information that helps you break it down. Understanding car leasing can feel a bit overwhelming and complicated, especially with the number of options available, the jargon used and navigating the information. If you’re an employee or employer, and you’re new to novated leasing, it’s important that you get the full picture.

So, let’s break it down. 

What Is The Residual Value Of A Novated Lease?

The residual value is the minimum amount your car is worth at the end of your novated lease. The amount is determined as per the Australian Taxation Office’s (ATO) minimum residual percentages. It is based on the original cost of the vehicle and the duration of your lease term, and determines its ‘final’ value, which can also be referred to as a balloon payment or lump-sum payment.

Generally, the longer the lease term on your vehicle, the lower the residual value will be when you want to make a lump-sum payment to own the vehicle. 

What Are The ATO Percentages?

The percentages are a good idea of what you can expect at the end of your lease when you’re considering your residual value. However, the residual value could vary slightly depending on the financier and the kilometres travelled. 

Why Is Residual Value Important?

The residual value is an ATO requirement to keep your lease legally compliant and determine how much is left to pay at the end of your term. Understanding the residual value helps you make your financial decisions at the end of the lease. It can determine:

• Your options
• The affordability of your lease payments
• Your tax savings during your lease term. 

What Can You Do At The End Of Your Lease?

At the end of your lease term, you have a few options. For example, you can: 

• Trade: If the value is higher than the residual value, you can trade your car in and start a new lease on a new car. The surplus amount is yours to keep tax-free.
• Refinance and Extend: If you want to keep your vehicle, you could be eligible to extend your lease term over an extended period of time, which will lower your residual value even further.
• Pay: You can pay the residual value to own the car outright. It will then be yours 100% so you can keep it or sell it privately.

What Are The Benefits of a Novated Lease and Residual Value For Employers?

A novated lease is beneficial to employers as it helps attract and retain talent by offering novated leasing as part of a salary packaging option that makes your company more appealing to employees.

The residual value offers an employer no financial risk, as you don’t need to worry about unexpected costs. For instance, if the employee chooses not to pay the residual value to own the car, then the residual value is the responsibility of the employee, not the employer.

A novated lease is simple, as it bundles running costs and lease payments into one pre-tax or post-tax deduction. These amounts are calculated by Novated Choice, who instruct the payroll department, simplifying the deductions they make from employees' salaries.

FAQ’s

Can I negotiate the residual value?
As the residual value is according to ATO guidelines, it is typically difficult to negotiate. However, it is always best to discuss your options with your leasing company to understand what flexibility you may have.

What if I can’t afford the residual value at the end of the lease?
If the residual value is out of your budget, you can consider your other end-of-term options (i.e. trade or extend. 

How does residual value affect monthly lease payments?
A higher residual value means lower monthly payments, as the car is expected to retain more of its value at the end of the lease. Essentially, you pay a lower amount for your car over the lease term, and you can then decide which end-of-lease option you take to manage your residual value. 

Understand Your Novated Lease With Novated Choice

Whether you’re an employer considering offering novated leasing to your employees, or you’re an employee trying to understand more about your options, Novated Choice can help.

The residual value is an element of your novated lease plan that can improve your tax benefits, make your novated lease more affordable and give you options. If you’re ready to take the next step towards your novated lease journey, contact our team for more information.

We’ll make it easy for you to get started.