A bit of careful consideration now can net better returns later
A novated lease is a great way to get into the vehicle of your choice, while at the same time taking advantage of a range of money-saving benefits as part of your lease.
As we’ve talked about before, a novated lease is offered through your employer via a service provider, with the lease paid from your salary before tax; thereby potentially reducing the amount of tax you have to pay. Another financial benefit of novating leasing is you don’t pay GST on the car you purchase, or its running costs – once again, potentially putting more money in your pocket.
However, there is another major benefit of a novated lease over other means of acquiring a vehicle, and the answer lies in residual value.
What is a residual value?
In the case of a novated lease, the residual value of a vehicle is what the vehicle is worth at the end of a lease term. This is calculated by a number of factors, including:
Market desire for that particular vehicle (e.g. Toyota RAV4), based on previous sales in your city and state
Assumed wear and tear on the vehicle over the term of the loan
Minimum residual value percentages set by the Australian Tax Office (ATO)
These factors all contribute to your new vehicle’s expected residual value at the end of its lease term, which will then inform how much money you need to pay to your lease provider if you decide to keep your vehicle. This is known as a balloon payment.
About ATO Minimum residual value percentages
The ATO has guidelines on residual values based on a minimum percentage of the vehicle cost over the lease term.
These percentages can be lower if the value of the vehicle is likely to be less at the end of the lease term – usually because you intend to add a lot of mileage to the vehicle. This is typically discussed and agreed to by all parties at the time of starting a new lease.
ATO Minimum residual value percentages:
12-month lease
24-month lease
36-month lease
48-month lease
60-month lease
65.63%
56.25%
46.88%
37.5%
28.13%
A few things to remember
01 /
You don’t have to keep your vehicle at the end of its lease term.
The great thing about a novated lease is the flexibility it can offer – you can also choose to return the vehicle to your provider or start a new lease with a new vehicle; it’s completely up to you.
02 /
If you do choose to keep your vehicle
(having formed an unbreakable bond with it over your time together – we get it…) you can opt to pay the previously agreed balloon payment to your lease provider, or even apply to re-finance the amount owing.
03 /
Typically, novated leases cost less than a standard car loan or purchasing a vehicle outright;
but many use novated leasing as a way to recoup even more money by selling their vehicle privately or to a dealer at current market value – which is often higher than the agreed residual value set at the beginning of a lease.
Here are some ways that you can ensure the highest possible return for your vehicle at the end of a novated lease:
- Do your research before you buy: by choosing a popular vehicle from a well-known brand you’re already setting yourself up for future resale success.
- Think about the resale value: Just because you like lurid green cars with purple interiors doesn’t mean that many others will. If you intend on selling your vehicle at the end of its lease, specifying it with options and features that have universal appeal is the best strategy.
- Take good care of your vehicle: Remember, it’s not just age and kilometres that determine residual and resale values. Having a regularly, and correctly, maintained vehicle free from damage dramatically improves its value.
What to do next
Interested to know more about how a novated lease might work for you? It’s important to consider all your options when deciding on whether a novated lease is right for you. Talk to your employer and your accountant first to understand the pros and cons that relate specifically to your financial position before making any decisions.
