How Do You Calculate the Residual Value of a Novated Lease?

When entering into a novated lease, one of the most important figures to understand is the residual value. This is the amount owed at the end of the lease term if you decide to purchase the vehicle, and it represents the car's projected value after depreciation. Calculating the novated lease residual accurately ensures that you know exactly what to expect at the end of your lease.

Let’s walk through the steps and factors involved in calculating novated lease residual, as well as how to use the ATO lease residual tool to make the process easier.

Step 1: Lease Period

The residual value is directly tied to the length of your novated lease. The Australian Taxation Office (ATO) sets guidelines on the minimum residual value based on the length of the lease. These are percentages of the vehicle’s original cost, which must be adhered to for tax compliance. Here are the ATO’s minimum residual percentages based on the lease term:

Lease Term	Minimum Residual Value (Percentage of Vehicle's Original Cost)
1-year lease	65.63%
2-year lease	56.25%
3-year lease	46.88%
4-year lease	37.50%
5-year lease	28.13%

The ATO guidelines help ensure that novated lease residuals are set in a way that keeps the lease arrangement compliant with Australian tax rules. Going below these percentages can lead to tax penalties or reclassification of the lease, so it’s important to stay within the prescribed values.

Step 2: Original Cost of the Vehicle

Once you know the lease term, the next step is to know the original cost of the vehicle. The residual value is a percentage of this original cost. To calculate it, simply multiply the cost of the vehicle by the ATO’s required residual percentage for your lease term.

Example Calculation:

Let’s say you are leasing a car that costs $40,000, and you’re entering into a 3-year lease. Using the ATO’s guideline for a 3-year lease, the minimum residual value would be:

• Original cost: $40,000

• Residual percentage for 3-year lease: 46.88%

• Residual value calculation:
  $40,000 x 46.88% = $18,752

So, at the end of the lease term, the residual value of the vehicle is $18,752. This is the amount you would need to pay if you want to purchase the car at the end of the lease term.

Step 3: Negotiating Flexibility

While the ATO sets the minimum residual percentages, there is sometimes flexibility in the residual value based on the terms of your lease agreement. However, you must be cautious about going below the minimum residual value. Doing so may result in your lease being reclassified as a finance lease, which could have tax consequences and potentially reduce the benefits of your novated lease.

In some cases, financiers may allow for minor variations in the residual value, but it is essential to stay within the general framework provided by the ATO to avoid tax issues.

Why Does Residual Value Matter?

Understanding the residual value of your novated lease is crucial for several reasons:

• Future Financial Obligations: The residual value determines how much you will owe if you want to buy out the vehicle at the end of the lease. If the residual value is higher than the car's market value, it may make buying the car less appealing.

• Return vs. Buy: If you decide not to purchase the vehicle at the end of the lease, the residual value is the amount you can return the car for. If the market value is less than the residual value, you may face a financial shortfall.

• Tax Implications: The residual value is also important for maintaining the tax advantages of a novated lease. Keeping the residual within ATO guidelines ensures that your lease remains tax-efficient.

Downloadable Templates and Tools

To make this process easier, we have provided an interactive residual value calculator and downloadable templates to help you calculate your novated lease residual value.

This tool simplifies your calculations and ensures you are staying within ATO guidelines.

Alternatively, you can download a residual value chart and template for manual calculations:

Download the Residual Value Chart ATO

Real-Life Example of Residual Value Calculation

Scenario 1: Corporate Employee Leasing a Car

Sarah, a corporate employee, is leasing a $45,000 car for 3 years. Using the ATO’s minimum residual percentage of 46.88% for a 3-year lease, her residual value at the end of the lease term is:

• $45,000 x 46.88% = $21,000

At the end of her lease, Sarah can either return the car or pay $21,000 to purchase the vehicle. This figure helps Sarah plan her budget and decide if she wants to keep the car.

Scenario 2: Small Business Owner with an Electric Vehicle Lease

James, a small business owner, leases a $60,000 electric vehicle for 5 years. Since the ATO’s residual percentage for a 5-year lease is 28.13%, the residual value of his vehicle after 5 years would be:

• $60,000 x 28.13% = $16,878

James can either buy the car for $16,878 or return it at the end of the lease. Understanding the residual value helps James decide whether the vehicle is worth keeping or if he should opt for an upgrade.

Conclusion

Calculating novated lease residual is an important part of understanding your future financial obligations and your options at the end of the lease term. The residual value is primarily influenced by the lease period and the original cost of the vehicle, with the ATO providing specific guidelines to ensure tax compliance. By knowing how to calculate your novated lease balloon payment, you can make informed decisions on whether to buy or return the vehicle at the end of the lease.

For a more accurate residual value chart ATO and personalised novated lease residual formula, use our interactive calculator or contact us today for expert advice!

FAQs

• How is the residual value of a novated lease calculated?

  The residual value is calculated by multiplying the vehicle’s original cost by the applicable percentage for the lease term set by the ATO.

• Why is the residual value important?

  The residual value determines the amount owed if you want to purchase the vehicle at the end of the lease or the amount you will receive if returning the vehicle.

• Can I negotiate the residual value on my novated lease?

  While there is some flexibility, it is important to stay within the ATO’s prescribed minimum residual value percentages to avoid tax implications.

• What happens if the market value of the car is lower than the residual value?

  If the vehicle’s market value is less than the residual value, you may face a shortfall when returning the car. You will need to cover the difference.

• How can I calculate the residual value of my novated lease?

  You can calculate the residual value by multiplying the original cost of the vehicle by the relevant residual percentage for your lease term. You can also use our residual value calculator for assistance.