If you’re considering a novated lease, understanding how residual values work will help in making your decision.
What is a novated lease?
A novated lease is a car finance arrangement that involves three parties: an employee, an employer, and a finance company. The employee leases a vehicle of their choice, while their employer agrees to make lease payments on behalf of the employee. These payments are deducted from the employee’s pre-tax salary, which can result in tax savings.
Novated leases also allow employees to bundle their car’s maintenance and repair costs with their lease repayments. These expenses include car registration, insurance premiums, fuel/charging costs, servicing, tyres, and regular car washing.
Without Novated Benefits
Gross Salary
Income Tax
Take Home Pay
Car Cost
Disposable Income
With Novated Benefits
Gross Salary
Car Cost
Income Tax
Disposable Income
What is a novated lease residual value?
Residual value is the estimated worth of the car at the end of your novated lease term. The residual value is based on various factors, primarily set by the Australian Tax Office but also includes the initial purchase price, its expected depreciation, and general residual value guidelines from your leasing provider.
Understanding your residual value matters as it directly affects your lease payments. A higher residual value means lower monthly payments. However, it also means you’ll have a larger balloon payment (the final payment to purchase your car), if you decide to retain, sell or refinance the vehicle at the end of the lease.
Let’s find out how much you can save
Can you pay out a novated lease early?
It is possible to pay out a novated lease early, but it may incur a cost. This will depend on the terms of your lease agreement as well as your individual financier.
To find out more about this process, speak to the Clear Lease team.
What happens if you change jobs?
If you change jobs during the team of your novated lease, there are a few options you can consider.
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- Continue with monthly payments, paying them directly rather than through an employer.
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- Re-novate your lease with your new employer.
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- Pay out your lease early, along with the residual value.
How does Fringe Benefits Tax work for a novated lease?
Fringe benefits tax (FBT) is a tax applied to fringe benefits (non-wage compensation) that are received by employees from their employer. As novated leasing is a fringe benefit, this tax is incurred, and employers may cover this payment depending on your arrangements.
To offset potential FBT, you can use the employee-contribution method (ECM). By making after-tax and pre-tax payments, you can lower the taxable value of your car, minimising the risk of facing an FBT liability.
Getting started with a novated lease
If you’re ready to explore a novated lease and find out how much you can save, get in touch with the Clear Lease team who can give you more information and provide a detailed quote.
As a novated lease is a three-way agreement between an employee, employer and novated leasing provider, your employer will need to approve the lease terms in order to start deducting lease payments and running costs from your pre-tax salary.
