Lease End Value
The lease-end value which may be thought of as an alternative to making a down payment or deposit at the start.
Understand & Optimise Novated Lease Residual Values
Before entering into a Novated Car Lease, employees should have a full understanding of the significance of the residual. As motor vehicle financing specialists, we assist customers to optimise the benefit of a residual with our lower interest rates on Novated Leases and our expertise in sourcing and structuring Novated Leasing to suit employee and employer. Speak with us to understand more about residual values.
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Understand Residual Value in Novated Leases for Tax Advantages
Novated Leasing can present employees with significant benefits by purchasing a motor vehicle with salary sacrificing. A key benefit is having a residual as part of the financing. This is a benefit not available on secured personal car loans.
The residual value is determined by the ATO and the term, impacts the monthly repayments and the amount required to be paid at the end of the leasing term.
Introduction to Residual Value in Novated Leases
The residual value is the balloon payment in leasing.
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Residual
The residual is due to be finalised at the end of the lease as a lump sum payment. The amount represents what the lender expects the vehicle’s value to be at the end of the leasing term.
Calculation of Residual
The residual is calculated as a percentage of the lease or vehicle value in accordance with the Australian Taxation Office (ATO) legislation. The longer the term, the lower the residual value percentage.
Fixed Value Residual
The value is established when the Novated Lease is arranged and remains fixed. We will advise the residual when we provide you with a quote.
Reduced Monthly Payment
As this percentage is set aside for payment at the end, it reduces the amount of the monthly lease payments. Allowing employees to sacrifice less salary.
All Vehicles Included
As the ATO sets the minimum percentage, the residual is the same for all types of motor vehicles. When due for payment, a residual may not be salary sacrificed, but must be finalised with other funds.
Final Payment
When due for payment, a residual may not be salary sacrificed, but must be finalised with other funds.
Explore Loan Options to Cover Your Novated Lease Residual Payment
Employees may speak with us about other loans which may be arranged to pay out the residual amount.
- Balloon payment with Novated Lease.
- Residual percentages set by ATO.
- Residual amount due at the end of the term.
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Understand the Process for Calculating Residual Value for a Leased Value
Residual values essentially represent the value of a vehicle at the completion date of the lease. In general terms, vehicles may be expected to be worth around 50-60% of the original price at the conclusion of the term, depending on the term.
The minimum percentage of residuals is established by the ATO under Taxation Ruling IT 28. This ruling applies to all types of motor vehicles and is intended to represent a reasonable estimated market value of the vehicle at the end of the leasing term.
The minimum residual is calculated with a simple formula – calculate the vehicle cost by the percentage set by the ATO for the relevant leasing term. Use our Lease Finance Calculator to work out repayments on a Novated Lease with the relevant residual.
Minimum ATO Lease Residual Percentages:
- 1 year lease term, 65.63% residual.
- 2 year lease term, 56.25% residual.
- 3 year lease term, 46.99% residual.
- 4 year lease term, 37.5% residual.
- 5 year lease term, 28.13% residual.
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Optimise the Role of Balloon Payment in Novated Lease
The residual value has great significance on the overall Novated Lease. It impacts the amount required for the monthly payments which in turn determines the amount to be salary sacrificed by the employee and the tax deduction for the employer.
Under ATO rulings, the term of the lease determines the residual. Buyers can look at varying the term to achieve an optimum outcome.
Interest is applied to the residual and factored into repayments. Securing the best interest rate when arranging a Novated Lease by using our services can lower repayments. Effectively reducing the overall acquisition cost of the vehicle. Lowering the repayments and salary sacrificed may enable employees to set aside funds to cover the residual when due at the end of the term. Speak with us at the initial stages of arranging your Novated Lease to find out what low rate we can secure for you.
GST is applied to the residual value. This can be claimed by the employer but would need to be covered by salary sacrificing and should be considered when making decisions on Novated Leasing.
The ATO sets the minimum amounts, but a larger residual value may be preferable, especially on higher-priced vehicles. A higher residual can significantly reduce the monthly payments, but it does mean a larger amount is due at the end of the term. When deciding what is the optimum residual, consideration should be given to how this amount is going to be covered when due.
Residual values are subject to lender approval. Our brokers negotiate with our lenders to secure the residual value that will best suit our customers. Contact us to discuss your options.
- Residual reduces monthly payments.
- Secure lower rates to reduce total vehicle acquisition cost.
- Expert services to negotiate optimum terms and residual value on Novated Lease.
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Comparative Analysis – Novated Lease Residual Values with Other Financing Options
Residual values apply to Vehicle Leasing, which is a commercial credit facility for businesses. Novated Lease is a facility which allows employees to acquire vehicles with a commercial credit product with salary sacrificing. The alternative vehicle financing for an employee would typically be a Secured Personal Car Loan.
There are benefits for employees with salary sacrificing including acquiring a vehicle at a lower commercial interest rate rather than a personal loan rate; realising lower income tax payable through salary sacrificing; and having a residual.
With a personal car loan, buyers would be required to make an upfront deposit to reduce the loan amount required and hence achieve lower repayments. With a residual value, that balloon payment with Novated Lease is payable at the end of the finance term. Allowing buyers more time to accumulate funds to make the payment.
The residual may allow for lower repayments compared with say a personal car loan. Resulting in less salary to be sacrificed. But a personal loan allows the buyer greater flexibility with their employment options. If they leave a job when a Novated Lease is in place, arrangements need to be made to finalise the ease in order to have ownership of the vehicle.
Our brokers can go through all options available to you to finance your motor vehicle and provide quotes at our low interest rates.
- Residual allows for lower monthly payments.
- Individuals finance vehicles at commercial rates.
- Personal Secured Car Loans may provide greater flexibility.
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Impact of Residual Values on End-of-Lease Options
When considering a Novated Lease with residual, it is important to consider the options for end-of-lease balloon payments. Planning these at the outset may contribute to a more effective transfer of ownership from employer to employee at the end of the leasing term.
The options to finalise the end-of-lease residual include:
- Employee refinances the residual with a Secured Car Loan or Unsecured Personal Loan.
- Pay the residual from after-tax funds not through salary sacrificing.
- Hand the vehicle back to the lender and relinquish ownership.
Until the residual value is finalised, the employee cannot take full ownership of the vehicle. We recommend that employees and employers with Novated Leasing arrangements start considering their residual finalisation options around 2-3 months prior to the payment being due.
Contact us and speak with one of our experts on how we may assist with low rate car refinancing where required.
- Pay residual from after tax funds.
- Refinance residual with personal loan.
- Return vehicle to lender, relinquish ownership title.
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Consider Risks and Rewards of Higher Residual Value in Novated Leases
While the ATO sets the minimum percentages for residual values, buyers may look to negotiating a higher percentage residual value. This can be tempting as it may lower the monthly lease payment and make that aspirational higher priced vehicle more affordable. But before committing, employees should fully consider the risks and rewards of that higher residual.
The key reward is the lower monthly repayment and greater affordability. The risks include that the funds may not be available at the time that the residual is due to be finalised; and that the trade-in or resale value may be below the residual, resulting in additional funds to be paid to the lender. If an individual opts to take on a personal loan to cover the residual, the vehicle would be assessed as a used vehicle for financing. Where a larger residual to be met with the loan, may impact any new financing arrangements.
Our expert services include sourcing and structuring a lease that best suits the requirements of all parties. Contact us to discuss your best option.
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THE COMPARISON RATE IS CALCULATED ON A SECURED LOAN OF $30,000 FIXED FOR A TERM OF 5 YEARS, NEW GOODS, EFFECTIVE 19/09/2024 AND SUBJECT TO CHANGE. WARNING: THE COMPARISON RATE IS TRUE ONLY FOR THE EXAMPLES GIVEN AND MAY NOT INCLUDE ALL FEES AND CHARGES. DIFFERENT TERMS, FEES OR OTHER LOAN AMOUNTS MAY RESULT IN A DIFFERENT COMPARISON RATE.
We work harder to secure the best rates.
Novated Lease Residual Values FAQs
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The ATO residual values apply to all types of vehicles.
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A residual amount is due to be finalised at the end of the leasing term.
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The ATO has the percentages for residual over different terms, they are:
- 1 year lease term, 65.63% residual;
- 2 year term, 56.25% residual;
- 3 year lease, 46.99% residua;
- 4 year lease term, 37.5% residual; and
- 5 year lease, 28.13% residual.
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Interest applies to the full amount of a Novated Lease including the residual.
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The residual value is a percentage of the value or price of the vehicle over varying lease terms. The residual can be calculated prior to applying for finance or advised with a quote.
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A residual is the percentage of the price of the vehicle that is set aside for payment at the end of the term. It is set by the ATO.
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The ATO sets minimum fixed percentages for residuals which typically are not usually negotiable. But some lenders may negotiate higher residuals.
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The residual can affect the amount payable each month.
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Yes, GST is applied to lease payments and the residual.
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The residual value owing can be paid from after-tax not salary sacrificed funds or refinanced. Another option is to hand the vehicle back to the lender.