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.
