Novated lease residual value: the ATO minimums and your options
Key takeaways
- Your residual is a fixed percentage of the car's cost, set when the lease starts. On a three-year lease the ATO minimum is 46.88%.
- The residual was an estimate made when the lease started, not a valuation of your car today. The car may sell for more or less, so get a genuine offer before the end date.
- Providers commonly let you pay the residual, refinance it, or sell or trade the car to cover it. Your contract sets the details.
- Two to three months out, ask your provider for the final figure in writing for a set date, and how a sale works with them.
A novated lease residual is a lump sum set when the lease starts, as a percentage of the car’s cost. It’s meant to be a reasonable estimate of the car’s value at the end of the term, and under the ATO’s fringe benefits tax rules it can’t be lower than the minimum for your term (46.88% for three years). When it falls due, providers commonly offer three ways to settle it: pay it and keep the car, refinance it, or sell or trade the car and use the money to cover it.
The residual was an estimate made when the lease started, not a valuation of your car today, so the real decision comes from comparing it with what the car would sell for now.
What is a novated lease residual, and why does the ATO set a minimum?
A novated lease is an arrangement between you, your employer and a finance company (the lessor). The ATO notes that car leasing is commonly done this way, through salary sacrifice. Your lease payments cover part of the car’s cost over the term. The rest is the residual, a lump sum due at the end. It’s usually shown in your lease schedule, so you can find yours now rather than waiting for the end-of-lease letter.
People often call the residual the balloon. It works much like the balloon at the end of a car loan, with one big difference: the finance company owns a leased car until the lease is settled. Our guide to balloon payments on car loans covers the loan version, and the car selling glossary explains the other terms you’ll see on lease paperwork.
The ATO cares about the residual because of fringe benefits tax. Its car leasing and FBT guidance sets conditions for a lease to count as a genuine (bona fide) lease. One is that the residual must be based on a reasonable valuation of the car’s estimated market value at the end of the lease, and must not be less than the ATO’s published minimums. The ATO says a lease that misses the conditions is taxed as a different kind of fringe benefit.
Two more parts of the ATO’s conditions are worth knowing.
- The residual is based on the car’s cost before any contribution. A trade-in or cash contribution you put towards the car at the start can’t be used to reduce the residual or the lease payments.
- No promise to buy. When the lease is set up, it can’t include an agreement for you to buy or keep using the car once it ends. That’s one reason the choice of what to do is made at the end of the lease, not locked in at the start.
What are the ATO’s minimum residual percentages?
The minimums come from ATO ID 2002/1004, an ATO interpretative decision on car lease residual values. It covers cars acquired from 1 July 2002 with an effective life of eight years, and the ATO lists it as current. Each percentage is of the car’s cost and depends only on the length of the lease.
| Lease term | ATO minimum residual | On a $40,000 car |
|---|---|---|
| 1 year | 65.63% | $26,252 |
| 2 years | 56.25% | $22,500 |
| 3 years | 46.88% | $18,752 |
| 4 years | 37.5% | $15,000 |
| 5 years | 28.13% | $11,252 |
The three-year row is the ATO’s own worked example. A $40,000 car on a three-year lease has a minimum residual of $18,752, and the lease payments are worked out to cover the other $21,248, plus interest, over the three years. The other rows apply the same percentages to the same $40,000. Your own lease schedule shows your actual figures.
Two things stand out. A shorter lease leaves a much bigger lump sum at the end. And the minimum percentage doesn’t change with the car’s price.
Why is my residual higher or lower than what the car will sell for?
Because the residual was fixed at the start, as a share of what the car cost, while the price it sells for is set by buyers on the day. Nothing in the ATO table knows how far you’ve driven, what condition the car is in, or how demand for your model has moved since you signed.
These are the things that push the real value above or below your residual:
- Demand for your model. New-car price cuts can pull down what used versions of the same model sell for. Several popular electric cars lost value quickly in 2023 and 2024 as new EVs got cheaper, and our guide on why used electric car prices dropped explains what happened.
- Kilometres. A car used for long work commutes or regional driving can finish the lease with far more kilometres than average for its age. The residual doesn’t move with the odometer, but value does.
- Condition and history. Body damage, kerbed wheels, worn tyres or gaps in the service history can all lower what a buyer will pay. A full logbook and both keys help.
So the residual is neither a promise of what the car is worth nor a ceiling. If the car is worth more than the residual, the gap is equity, though your contract decides how a sale pays it out. If it’s worth less, selling leaves a shortfall to cover. You won’t know which side you’re on until you have a genuine offer.
What are your options when the residual falls due?
The ATO’s rules shape how the residual is set, not what happens at the end. Your contract and your provider decide that. These options are commonly offered by providers, but check yours in writing well before the end date.
| Option | What happens | Suits you if | Watch for |
|---|---|---|---|
| Pay the residual | You pay the final figure and keep the car | You’ll keep the car for years and have the cash | Savings tied up in an ageing car |
| Refinance it | A new loan or lease covers the residual | You want the car but not a lump sum | Interest and fees on top of the residual |
| Sell or trade the car | The sale money goes towards the residual | You don’t need this car any more | A shortfall if it sells for less |
Paying out is simplest if you have the money and plan to keep the car for years. A car coming off a three- to five-year lease may soon need tyres, brakes or a major service, so check what warranty is left first.
Refinancing keeps the car without finding the cash, but it doesn’t make the debt any smaller. Moneysmart’s car loans guide notes that a lender must give you a comparison rate, which combines the interest rate and fees, so use it to compare offers. A new loan on an older car can leave you owing more than the car is worth.
Many people sell the car to cover the residual, and some start a new lease on another car at the same time. If you want out before the end of the term instead, our guide to selling a car on a novated lease mid-term covers what changes.
How does selling the car cover the residual?
Selling covers the residual in full when the car sells for at least the final figure your provider quotes. Take it in this order:
- Get the final figure in writing for a set date. It can differ from the residual in your schedule, for example if there’s a last lease payment or a fee on top.
- Ask how a sale works with your provider. Do you pay the residual first and sell the car as its owner, or can the buyer pay the provider directly? Who signs, and how does any money left over reach you?
- Get a genuine offer. An online estimate isn’t enough to make this decision. You need a figure a buyer will actually pay.
- Work out the gap. Our car equity calculator does the sum for you.
- Plan for any shortfall before you accept an offer, not after.
A private buyer can’t take ownership until the provider has been paid. Unless you pay the residual yourself first, a private sale means coordinating a stranger’s payment with the finance company.
If you’re selling to us, tell us the car is on a novated lease when you send it through. We’ll confirm who needs to sign the sale paperwork and how the payout works. After you accept our offer, the inspection happens at a time and place that suits you, and the car is only collected after you confirm the funds have cleared.
What does each option cost? A worked example
These numbers are made up to show the maths. They aren’t a valuation, a quote or a figure from any real lease, and your own numbers will differ.
Say Mia has an SUV on a three-year novated lease, and the car cost $50,000. Her residual is set at the ATO minimum: 46.88% of $50,000, which is $23,440. Three months before the end date, her provider confirms a final figure of $23,440, and she gets an offer of $27,500 for the car.
| Option | What it costs Mia | Where she ends up |
|---|---|---|
| Pay the residual | $23,440 from savings | Owns the car outright |
| Refinance over 3 years at an example 10% a year | About $756 a month, about $27,230 in total, before fees | Keeps the car, with a new loan to repay |
| Sell for $27,500 | Nothing up front | Lease settled, $4,060 left over, no car |
The refinance row shows the price of not having the cash: about $3,790 in interest in this example, plus any fees. The sale row shows why the offer matters more than the residual, and it assumes the $4,060 reaches Mia, which is a point to confirm with your own provider. If her best offer had been $21,000 instead, selling would still settle the lease, but she’d need to cover a $2,440 gap first. At that point it’s worth comparing the shortfall with the full cost of refinancing and keeping the car longer.
Starting a new novated lease? Compare these first
- Keep the two deals separate. Get the final figure and an outright offer for your current car first, then the price and terms of the new car. When an old car, a new car and a lease are rolled into one weekly figure, it’s hard to tell which part is good value.
- Ask how your old car’s equity is used. Under the ATO’s conditions, a trade-in or cash contribution can’t be used to reduce the new lease’s payments or residual. Ask your provider exactly where that money goes.
- Match the term to your plans. The table above shows a shorter lease leaves a bigger residual. Think about your job, your driving and what you’ll want to do when the new lease ends.
- Get the new residual in dollars. Ask for it on the quote, in writing, so you know the lump sum you’re signing up for.
- Ask about tax separately. How a new lease affects your take-home pay and FBT is a question for your provider or accountant.
Questions to ask your provider before the end date
Ask these two to three months before the lease ends, and get the answers in writing:
- What is my exact final figure on the end date, and does it include GST or any fees?
- Is there a last lease payment due as well as the residual?
- Which end-of-lease options do you offer, and is there a deadline for choosing?
- If I sell, do I pay you first, or can the buyer pay you directly? Who needs to sign?
- If the car sells for more than the final figure, how does the difference reach me?
- If I refinance with you, what rate, term and fees apply?
- What happens if the residual isn’t settled on the end date?
Keep answers 1, 4 and 5 handy for any valuation call.
Making the call before your lease ends
The residual is fixed, and the value of your car isn’t. Get the final figure from your provider and a genuine offer on the car, and the choice is usually clear. If the offer is comfortably above the residual and you don’t need this car, selling can settle the lease with money to spare, depending on how your contract handles any surplus. If you want to keep the car and have the cash, pay it out. Refinance only if you need the car and have compared the full cost.
Check your lease contract and talk to your provider, and we can give you a firm offer to compare. We buy cars, utes, SUVs and 4WDs 2021 or newer with 100,000 km or less, anywhere in Australia. A licensed dealer calls you with a genuine offer, not an online estimate, with no obligation and no fees taken out of the offer. If yours is older or has more kilometres, send it through anyway and we’ll tell you straight away if we can help. Start with a free valuation or call us on 1800 73 55 73.
Questions sellers ask
Can I negotiate my novated lease residual?
The residual is set when the lease starts, as a percentage of the car's cost, and for the lease to count as genuine for FBT it can't be below the ATO's minimum for that term. By the end of the lease it's a figure in your contract, not an opening offer. What you can shop around is what happens next: the offer you get for the car, or the rate on any refinance.
Is a novated lease residual the same as a balloon?
People use both words for the same thing: a lump sum left to pay at the end. Moneysmart notes that a balloon payment on a car loan is also called a residual payment. The difference is the arrangement around it. A balloon sits at the end of a car loan on a car you own, while a novated lease residual sits at the end of a lease, with ATO rules on how low it can be set.
Do I pay GST on the residual?
Check your lease schedule and ask your provider whether the residual figure includes GST, then get the final amount in writing, including any fees. How GST and the rest of your salary packaging apply to you is a question for your provider or your accountant. We don't give tax advice.
Can I sell before the lease ends to avoid the residual?
You can usually sell partway through, but you don't avoid the residual. An early payout figure usually covers the residual and the rest of the lease balance, and it can include interest to the payout date and early termination costs. Talk to your employer and your provider before you agree to sell, and get that figure in writing.
