How Do You Calculate the Residual Value of a Novated Lease?
When signing a novated lease, one of the key figures to understand is the residual value. This value represents the car's worth at the end of the lease period and determines your financial obligations if you want to purchase the vehicle or return it.
Here’s a breakdown of how to calculate it:
1. Lease Period
The residual value is set based on the length of your novated lease. In Australia, the Australian Taxation Office (ATO) provides guidelines for minimum residual values. These are percentages of the vehicle's original cost based on the lease term.
For example:
1-year lease: Residual value must be at least 65.63% of the car's initial value.
2-year lease: Residual value must be at least 56.25%.
3-year lease: Residual value must be at least 46.88%.
4-year lease: Residual value must be at least 37.50%.
5-year lease: Residual value must be at least 28.13%.
2. Original Cost of the Vehicle
To calculate the residual value, multiply the car's purchase price by the applicable percentage. For example, if your car costs $40,000 and you have a 3-year lease, the calculation would be:
$40,000 x 46.88% = $18,752
This means the residual value after 3 years is $18,752.
3. Negotiating Flexibility
While the ATO sets the minimum percentages, there is sometimes flexibility, allowing for minor variations based on the agreement between you and the financier. However, going below these thresholds could have tax implications, so it’s important to stay within the guidelines.
Why Does Residual Value Matter?
Understanding the residual value helps you plan for the future. It affects whether you’ll buy the car at the end of the lease or return it. A higher residual value could make it less appealing to buy the vehicle, while a lower one could provide a good purchase option.
Ready to explore novated leasing and find out how much you could save on your next vehicle? Get in touch with us today to discuss your options!