Novated Lease Residual Value Explained

For employees and drivers that are in need of a new car, Novated leasing has offered a practical solution. Almost everyone can relate to the struggles of forking out money for a big purchase. A Novated lease makes for an easy financial solution.

When an employer provides salary packaging on a car, it allows the employee to lease the vehicle on behalf of the company, thus leaving the employer responsible for the lease. Combined with the Fringe Benefits Tax (FBT) from the Australian Taxation Office (ATO) and the use of residual value, Novated leases can be a viable solution for many people. We uncover how the Novated lease residual value arrangement works and how it can benefit you.

1. What are Novated Leases?

Novated leases are a deed of novation (three-party agreement) between the employee, employer and finance company. Under the contract, Novated leases are effective in providing drivers and workers a fantastic opportunity to purchase a new or used car. As the employee, your employer will assist in arranged payments on the vehicle which can entitle you to a deduction of lease expenses as part of salary sacrifice arrangement.

By taking advantage of the benefits of a Novated lease, the running of your car can be made easier and much more cost-effective.  A Novated lease not only covers the lease finance, but also the maintenance of your vehicle including repairs and services, comprehensive insurance, registration and fuel. Additional benefits from Novated leases for employees are tax advantages, purchasing power and the choice of vehicle.

2. What is Residual Value?

Sometimes referred to as a “balloon payment”, the residual value is a lump sum of money owed to the financer at the end of a loan term.

For each lease term between 12 and 60 months, the ATO has a set guideline for residual value percentages. The larger the residual payment is, the less your regular payments will need to be throughout your lease. The size of the residual value can be represented as an absolute dollar value or as a percentage of the borrowed amount. This amount is usually determined by the term of the lease and the total vehicle purchase price, including GST.

3. What Happens When I Combine the Two?

To further assist with the amount you need to pay periodically off your loan, residual value will be incorporated into your Novated lease. For a vehicle to be Novated, the Australia Taxation Office (ATO) has set a number of guidelines including the need for finance to be established as a lease and the use of a residual (balloon) payment implemented. Thus, you will need to take advantage of both the Novated lease and residual payment for the agreement to be valid.

4. What is the Minimum Residual Value Payment I can make?

The minimum residual value is determined by the lease term in years and set by the Australian Taxation Office. For example: if your lease term was four years, the ATO minimum residual would be 37.50%. Once the term of the lease is completed, you will have a contractual obligation to pay the residual value or re-finance the lease for a further term.

5. What Happens at the End of a Novated Lease?

At the end of a Novated lease, the residual payment will need to be paid. If this arrangement cannot be met, there are other options available. You can trade your vehicle in and enter into a new Novated lease with a newer vehicle, sell the car privately and arrange to pay the residual value or re-finance the residual value over a new term that works best with your circumstances and needs.

You too, have the option to make an offer on the vehicle yourself to buy the vehicle for residual value. This means you will take full ownership of the car and run it privately.

If you would like to find out more about Novated leasing you can call us on 1300 777 600 or fill in our contact form here

For more information on residual value, click the link.

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