Novated Lease Residual Values by Term
The residual is the balloon you owe when a novated lease ends, and its minimum is set by the ATO, not the financier: 65.63% of the amount financed for a one-year lease, 56.25% for two years, 46.88% for three, 37.50% for four and 28.13% for five. These are the percentages in ATO ID 2002/1004 for an asset with an eight-year effective life, and a lease below them is not a bona fide lease for FBT. On a $55 000 car, where the financier funds $50 000 after claiming the GST, a five-year lease leaves $15 472 to pay at the end including GST, and a three-year lease $25 784. Enter your price and term below to see the balloon and the monthly payment that goes with it.
Residual (balloon) at the end of a novated lease
Residual to pay at the end, GST included
$15 472
Shorter terms leave a larger balloon and lower monthly payments are not cheaper overall: the residual still has to be paid, refinanced or the car handed back.
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Every term on a $55 000 car
Same car, same 8% rate: the term changes both the payment and the balloon.
| Term | Minimum residual | Residual, GST included | Payment per month, GST included |
|---|---|---|---|
| 1 year | 65.63% | $36 097 | $1 873 |
| 2 years | 56.25% | $30 938 | $1 286 |
| 3 years | 46.88% | $25 784 | $1 080 |
| 4 years | 37.50% | $20 625 | $970 |
| 5 years | 28.13% | $15 472 | $899 |
A short lease keeps a large balloon: after one year almost two thirds of the car is still owed. A five-year lease repays more during the term, so the monthly figure looks higher but less is left at the end.
How the percentage is applied
The ATO's bona fide lease test says the residual must be based on the cost of the car, not on a reduced cost after a trade-in or a cash contribution, and must not fall below the guideline percentages. In the ATO's own example, an employee's car has a cost of $40 000 for the lessor after he pays $1 600 of on-road costs himself; the three-year residual is 46.88% of $40 000, or $18 752. Paying the on-road costs from your own pocket is allowed. Using a trade-in to lower the lease payments or the residual is not.
Your three choices at the end
- Pay the residual. You buy the car for the residual plus GST and own it outright. Many people fund this from savings built up during the lease.
- Refinance it. The residual becomes the amount financed on a new novated lease on the same car. For a petrol car the new lease starts with the employee contribution method; for a plug-in hybrid it also ends any remaining FBT exemption (see the PHEV page).
- Sell or trade it. The car is sold, the residual paid from the proceeds, and any surplus is yours. Any shortfall too.
Planning for the balloon
The residual is a known amount on a known date, so it can be saved for. On the $55 000 example with a five-year term, putting aside $258 a month from take-home pay covers the $15 472 payout exactly. Many people do the opposite and refinance, which adds interest on an amount that was always going to be due. The other way to shrink the balloon is a cheaper car rather than a longer term: the percentage is fixed by the ATO, so only the amount financed changes the dollar figure. Electric car resale values have been less predictable than petrol ones, which is a reason to compare the residual with realistic market prices for a five-year-old version of the same model before choosing the term.
When comparing quotes, check that each one states the residual as a dollar amount and as a percentage of the amount financed. Two leases on the same car with different residuals are not comparable on the monthly figure alone: the one with the lower payment may simply leave more to pay at the end.
Why the lease cannot promise you the car at the end
A bona fide lease must not contain an agreement for the employee, or a relative, to buy the car or keep using it when the lease ends. In practice you are offered the car at the residual and almost everyone takes it, but the right to buy cannot be written into the lease itself. A trade-in credit or cash contribution used as a deposit towards that future purchase breaks the same rule.
The residual is part of every comparison on the novated lease calculator, which uses the minimum for the term you choose.
Sources
Frequently Asked Questions
What is the residual on a 5-year novated lease?
Can I choose a lower residual to reduce the balloon?
Do I pay GST on the residual?
Is the residual based on the car being worth that much?
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