Residual Values (aka Balloon Payments) on Novated Leases
Residual value (aka the Balloon payment) is the pre-agreed value of your car at the end of your novated lease. Learn how it's calculated depending on the lease term, why it exists, and what your options are when the lease ends.
What is the 'residual value' balloon payment?
Residual value (the balloon payment on your novated lease) is the car’s estimated value at the end of your novated lease, and it is the amount you'll need to pay out at the end of the lease.
It’s essentially the "ballpark resale value", and it gets agreed upon before your lease begins.
How is residual value calculated?
The residual value is calculated as a percentage of the vehicles value, and the percentage drops the longer the lease is (roughly to line up with expected depreciation on the car each year).
The ATO has clear, set guidelines on what the minimum residual value is based on the lease length. See below:
| Lease Term | Minimum Residual Value (% of purchase price) | Example Residual Value on $50,000 Car |
|---|---|---|
| 1 year | 65.63% | $32,815 |
| 2 years | 56.25% | $28,125 |
| 3 years | 46.88% | $23,440 |
| 4 years | 37.5% | $18,750 |
| 5 years | 28.13% | $14,065 |
Source: ATO ID 2002/1004 | Income Tax: car lease residual values
At Clear Lease, we follow these minimums as a default to ensure you stay tax-compliant while salary packaging the most value possible. If you like, you can also request a higher residual value percentage, but you cannot go lower than these minimums as set by the ATO.
What happens to the Residual Value at the end of the Lease?
When your Novated Lease ends, you've got 3 main options:
1. You can buy the car outright
You’ve looked after your car, it's in great condition, and you don’t want to give it up. If you have the funds available, buying it outright can be a great value move.
2. You can refinance the residual
Drivers who want to own the car eventually but need to manage cash flow, or who plan to keep the vehicle for several more years.
3. You can upgrade to a new lease
Drivers who just want the most tax savings possible, and would otherwise switch/upgrade cars every 3-7 years anyway.
Can the Residual Be Negotiated?
Not really, the ATO sets the minimums shown above that lease providers like Clear Lease must comply with.
Lowering it below the threshold could trigger FBT complications or see your lease reclassified as a loan, which comes with major tax consequences.
Clear Lease Tip: Choosing the right car can help you come out ahead on the residual.
The residual value is a set percentage of the cars original price, regardless of the make or the model.
But in reality, some cars hold their value far better than others.
We recommend models that are known for strong resale values, like popular SUVs and Sedans. You'll have a much better chance of selling it and making a nice profit on the residual balloon payment.
Why does the residual value exist?
Residual value exists to keep things fair, and to make sure novated leases don’t get treated like just another car loan with a tax loophole.
Think of it like this: when you lease a car, you’re only paying for how much it goes down in value while you’re using it, not the whole car. The residual value is what’s left over at the end. It’s the value of the car that you didn’t “use up.”
The ATO (Australian Tax Office) introduced this rule to make sure people don’t use novated leases to effectively buy the whole car tax-free. By locking in a minimum end value, the lease stays a genuine lease, not a sneaky workaround.
This protects your tax benefits and gives you options at the end of the lease, like buying the car, trading it in, or handing it back.
Key Takeaway:
Residual value is a mandatory part of of a novated lease, it keeps you tax compliant, while giving you flexibility at the end. Just be sure to factor the balloon into your long term plan.
Related Information:
The Luxury Car Charge is a salary deduction used to offset the extra tax your employer pays when you lease a car above the ATO’s luxury car depreciation limit. It helps them recover the shortfall from reduced tax deductions.
Please note, this is completely separate from the Luxury Car Tax (LCT).
FBT is a tax (with a rate at 47%) applied to fringe benefits (incentives beyond salary/wages received from an employer). A non-electric car under a novated lease is a fringe benefit (electric cars are completely FBT exempt in Australia).
The employer is responsible for paying the FBT, but at Clear Lease - we use the employee contribution method (contributing post-tax funds) to offset any FBT to zero.
Our regular novated lease package (fully-maintained) usually includes your car lease repayments, fuel/charging, servicing, maintenance & repairs, registration, insurance, and tyres - all bundled into a single pre-tax deduction.
Yes, but it’s treated as a financial termination. You'll need to pay out the remaining lease value (and any fees), and you may lose some tax benefits. Talk to us to get a payout quote from your financier.
No, when your employer leases the car, they claim the GST credit, meaning you don’t pay GST on the purchase price. The same applies to most running costs. You will, however, pay GST if you buy the car at lease end.
Yes, if you’d like to keep the car, you simply pay the residual value set at the beginning of the lease. You can pay this from your personal funds, or refinance it separately. Once paid, the car is yours. You can also sell or trade it in and start a new lease.
Yes, if your new employer supports novated leasing, you can transfer your lease by signing a new agreement. If they don’t, you’ll need to make private repayments, refinance, or consider ending the lease.
Your lease doesn’t end if you change jobs. You can either transfer it to your new employer, pay privately until the lease ends, or choose to end the lease early.
Cars that are too old, unroadworthy, imported, heavily modified, or intended for commercial use typically don’t qualify for novated leasing. Motorcycles are also excluded under current ATO guidelines.
Luxury Car Tax (LCT) applies to vehicles that exceed the government’s set price thresholds. For the 2024–25 year, it’s $76,950 for standard vehicles and $89,332 for fuel-efficient ones. If your lease includes a car above these values, LCT may be added to your lease costs.
Please note: This is very different to the Luxury Car Charge (LCC).