What is a residual value on a novated lease?
A residual value (also known as a balloon or lump sum) is the amount you must pay at the end of a novated lease term for you to own the vehicle. It’s a percentage of the car’s original purchase price designed to represent the value of the vehicle at the end of the lease term once depreciation has been factored in.
The residual value percentages are set by the Australian Taxation Office (ATO), and apply to new and used car novated leases.
How do novated lease residual values work?
Your regular novated lease payments cover use of the vehicle and any bundled running expenses, such as fuel or charging, servicing, tyres, and registration – but they don’t actually contribute to you owning the vehicle.
Instead, the ‘residual’ or remaining value of the car is payable at the end of the lease term, when you’ll need to settle it in full. You can either pay the amount outright to own the car, or sell or trade in the car and use the proceeds to cover the balance.
Shorter lease terms have higher residual values as a percentage of the car’s original value, while longer lease terms result in lower residuals.
ATO minimum residual value percentages
The ATO guidelines on residual values are based on a minimum percentage of the vehicle cost (e.g. amount you purchased the car for) over the lease term.
The table below shows the ATO’s minimum values.
A lower minimum may be allowed if the value of the asset is likely to be lower than the calculated residual based on a fair estimate.
For instance, if you are adding a lot of mileage to the car, you may want a lower residual. This is best discussed when taking out your novated lease.
You can calculate the residual amount of your novated lease by multiplying the cost of the vehicle by the applicable percentage according to your lease term. The residual should also be shown on the quote provided to you by a novated lease provider.
You can see in the table below how the residual value will be calculated according to the length of your novated lease deal.
Novated lease term | 12 months |
|---|---|
Residual value percentages | 65.63% |
Novated lease term | 24 months |
Residual value percentages | 56.25% |
Novated lease term | 36 months |
Residual value percentages | 46.88% |
Novated lease term | 48 months |
Residual value percentages | 37.5% |
Novated lease term | 60 months |
Residual value percentages | 28.13% |
| Novated lease term | Residual value percentages |
|---|---|
12 months | 65.63% |
24 months | 56.25% |
36 months | 46.88% |
48 months | 37.5% |
60 months | 28.13% |
Novated lease residuals on popular vehicles
The residual values for some of Australia’s top-selling vehicles are shown below:
Car | Toyota RAV4 (AWD Edge Hybrid) |
|---|---|
Driveaway price | $58,360 |
Residual value 1-year lease | $38,302 |
Residual value 3-year lease | $27,359 |
Residual value 5-year lease | $16,417 |
Car | Ford Ranger (XLT) |
Driveaway price | $63,890 |
Residual value 1-year lease | $41,931 |
Residual value 3-year lease | $29,952 |
Residual value 5-year lease | $17,972 |
Car | Toyota HiLux (SR5 4x4) |
Driveaway price | $60,670 |
Residual value 1-year lease | $39,818 |
Residual value 3-year lease | $28,442 |
Residual value 5-year lease | $17,066 |
Car | Chery Tiggo 4 Pro (Ultimate) |
Driveaway price | $24,990 |
Residual value 1-year lease | $16,401 |
Residual value 3-year lease | $11,715 |
Residual value 5-year lease | $7,030 |
Car | Isuzu Ute D-Max (SX 4x4) |
Driveaway price | $49,200 |
Residual value 1-year lease | $32,290 |
Residual value 3-year lease | $23,065 |
Residual value 5-year lease | $13,840 |
| Car | Driveaway price | Residual value 1-year lease | Residual value 3-year lease | Residual value 5-year lease |
|---|---|---|---|---|
Toyota RAV4 (AWD Edge Hybrid) | $58,360 | $38,302 | $27,359 | $16,417 |
Ford Ranger (XLT) | $63,890 | $41,931 | $29,952 | $17,972 |
Toyota HiLux (SR5 4x4) | $60,670 | $39,818 | $28,442 | $17,066 |
Chery Tiggo 4 Pro (Ultimate) | $24,990 | $16,401 | $11,715 | $7,030 |
Isuzu Ute D-Max (SX 4x4) | $49,200 | $32,290 | $23,065 | $13,840 |
What are the benefits of having a novated lease residual?
The benefits of a residual are pretty simple:
- Your regular salary sacrifice car payments are considerably lower than other types of car finance (e.g. car loans without balloon payments).
- Having lower repayments means it’s easier to manage day-to-day expenses, particularly as payments are automatically deducted from your pre-tax salary.
- When the lease ends, you have three choices, which means paying it isn’t your only option (more on this below).
What are the downsides of having a novated lease residual?
- There’s a big one-off cost to contend with at the end of the lease if you want to keep the car. This lump sum can be a shock if you don’t plan for it.
- Unlike the regular lease payments and running costs, there is no GST saving on the residual payment.
- There’s little wiggle room to negotiate the residual payment level as the standard percentages are set by the ATO.
Options at the end of a novated lease
Your options at the end of your novated lease are:
- Refinance the vehicle over an additional lease term
- Pay out the remaining residual on your car to own it outright
- Trade in the car and use the money you receive to cover the residual on your lease
Residual value vs car loan balloon payment
The residual payment on a novated lease is similar to a car loan balloon payment in that both defer a portion of the vehicle’s cost until the end of the term. The main difference is a novated lease residual is set in line with ATO guidelines and reflects the estimated value of the vehicle, while a car loan balloon payment is chosen by the borrower, may be larger, and is primarily used to reduce loan repayments rather than meet tax or leasing requirements.
If you choose a vehicle with a strong resale value, you'll most likely be able to sell your car at the end of the lease for a higher amount than your residual payment. In this instance, any difference is yours to keep as tax-free profit. It's one of several advantages of a novated lease.
Novated lease (with residual) vs car loan vs cash: Which is cheaper?
Driveaway price (BYD SEALION 7 Premium) | |
Novated lease | $54,900 |
Car loan | $54,900 |
Cash | $54,900 |
GST saving on purchase price | |
Novated lease | $4,991 |
Car loan | n/a |
Cash | n/a |
Monthly cost (finance and/or running costs) | |
Novated lease | $864 |
Car loan | Loan: $1,087 Running costs $325 Total: $1,412 |
Cash | Running costs $325 |
Cost over 5 years | |
Novated lease | $51,940 |
Car loan | $84,720 |
Cash | $74,408 |
Residual payment | |
Novated lease | $15,433 |
Car loan | n/a |
Cash | n/a |
Total cost to own car and run for 5 years | |
Novated lease | $67,373 |
Car loan | $84,720 |
Cash | $74,408 |
Cost difference | |
Novated lease | |
Car loan | $17,347 |
Cash | $7,035 |
Total tax saving over 5 years | |
Novated lease | $37,042 |
Car loan | n/a |
Cash | n/a |
| Novated lease | Car loan | Cash | |
|---|---|---|---|
Driveaway price (BYD SEALION 7 Premium) | $54,900 | $54,900 | $54,900 |
GST saving on purchase price | $4,991 | n/a | n/a |
Monthly cost (finance and/or running costs) | $864 | Loan: $1,087 Running costs $325 Total: $1,412 | Running costs $325 |
Cost over 5 years | $51,940 | $84,720 | $74,408 |
Residual payment | $15,433 | n/a | n/a |
Total cost to own car and run for 5 years | $67,373 | $84,720 | $74,408 |
Cost difference | $17,347 | $7,035 | |
Total tax saving over 5 years | $37,042 | n/a | n/a |
Note: While this example highlights significant savings for an electric vehicle novated lease, the figures will differ for a petrol car. It is not a one-size-fits-all estimate, as your actual savings will depend on your personal circumstances and the vehicle you choose.
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