16 May 2024

Novated Lease Residual Value

Have you been looking into financing a new or used vehicle? Considering Novated Leasing as an option (if not, you should be!)?

You might've seen the term 'Novated Lease Residual Value' being bandied around while you're doing your research and wondering what it means.

Allow us to debunk this for you - it's actually quite simple!

Novated Lease residual values explained

The Novated Lease Residual Value is simply the vehicle's value at the end of the lease term.
Or in other words, it's the final payment that you have to make, after which point it's no longer a Novated Lease (but rather, you now own the car - or someone else does if you decide to sell it).
It's reasonable to ask why the value of the vehicle isn't just amortised over the life of the lease. Why is there any outstanding amount to pay at all?

The answer is that Novated Leasing Residual Values are actually a mandatory requirement from the Australian Tax Office (ATO). It's not up to the Novated Leasing provider.
At the conclusion of your Novated Lease, you have the following residual payment options:
•    Paying the residual amount to take ownership of the vehicle.
•    Paying the residual amount and then selling the car. Any profit made over the residual value is tax-free for you. You can then get a quote for a new vehicle lease.
•    Paying the residual amount and then trading the vehicle for a new car. Again, any profit over the residual value is tax-free profit.
•    Extending the current lease if the contract meets eligibility requirements. Your new lease will be financed on the residual value.

Learn more about what happens at the end of a Novated Lease.

How is the residual value calculated?

The ATO set these guidelines and they are based on a percentage of the original 'drive away' cost of the vehicle. The standard minimum residual values are as follows:
12 Month Lease – 65.63%
24 Month Lease – 56.25%
36 Month Lease – 46.88%
48 Month Lease – 37.5%
60 Month Lease – 28.13%
It's clear from the above that a longer lease term means a lower residual value at the end of the lease.

Which factors influence the residual value in a Novated Lease?

Once the Residual Value is determined at the start of your lease term, it's then fixed. As these are default percentages set by the ATO.
The ATO percentages above are generally seen as fairly conservative; meaning that it's quite likely your vehicle will be worth more than this at the end of the lease term.
If that's the case and you decide to sell the vehicle, you then get to keep any profit (i.e. the difference between the residual value and the final purchase price).

Factors that influence what the car eventually sells for include:
•    Market forces (i.e. supply and demand, inflation and used car availability)
•    Condition of the vehicle 
•    Service and maintenance history
•    Total kilometres driven

Novated Lease residual value frequently asked questions (FAQs)

Is a Novated Lease residual value the same as balloon payment?

'Residual value' and 'balloon payment' are generally used interchangeably.

Can I pay out the residual value early in a Novated Lease?

Yes. Although that means you will also be terminating the Novated Lease early.
This can be quite costly. In the event of an early termination for a Novated Lease, the payout is calculated as the remaining rentals (lease payments) plus the residual value and any termination fees applied by the financier.
Your Novated Leasing provider may also add their own additional termination fee on top of the financier's fee however, FleetPartners does not do this.

What risks are associated with residual values in Novated Leases?

The main risk is that the Residual Value may be higher than what the car is actually worth at the end of the lease.
However, as noted above, the ATO residual values tend to be on the conservative side and if you take good care of your vehicle, it's likely that you'll be able to sell the car and cover the residual value or even make a profit when the lease ends.

Does a higher residual value mean lower lease payments in a Novated Lease?

The short answer is yes. This might seem appealing as your weekly, fortnightly or monthly lease payments are lower, but it does mean more money to find in a lump sum at the end of the lease. 
On the flip side, a residual value that's too low might deliver a nice cash bonus for you when it sells at the end of the lease, but you'll be paying inflated rental payments through the life of the lease term.
There's a healthy middle ground which balances affordability with the pay out at the end - and our FleetPartners consultants can help guide you through the process.

What happens to the residual value at the end of a Novated Lease?

The simple answer is that whether you pay the Residual Value yourself (from your savings) or pay it by selling the car, it needs to be paid.
As part of FleetPartners Novated Lease management, we ensure you are aware of your options at lease end. We'll contact you end of the lease to discuss your options.
You can also contact us to discuss and facilitate the end of lease method that best suits you.