Novated Lease Residuals

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In order to avoid liability for Fringe Benefits Tax (FBT) a novated lease must have a Residual Value. We have a look at what this means, covering all the things you need to be aware of including residual value percentages and what your options are.

What is a Residual Value?

What this means, essentially, is that at the end of a lease term there must be a remaining amount to be paid to purchase the car.  This payment, inclusive of GST, must be made in one go and you, not your employer, are responsible for making the payment. This is also known as a “balloon payment”.

How Much is the Residual Value?

The Residual Value depends on the Residual Value percentage as well as other interrelated factors such as the price of the car and the length of the lease.

The minimum residual value percentages are set by the Australian Taxation Office (ATO).  They are designed to roughly reflect the value of the car at the end of the term.  They are set in a scale which depends on the term of the lease.   The longer the term of the lease, the lesser the residual payment.


What are the Residual Percentages?

Currently, the minimum residual percentages look like this:

Lease Term
(Years)

ATO Minimum
Residual %

1

65.63%

2

56.25%

3

46.88%

4

37.50%

5

28.13%

Certain questions are asked to determine the residual percentage value.  For example, whether or not this is your first time with a novated lease will make a difference to the set percentage.

If the answer is yes, this is your first novated lease; the residual value will be the purchase price including GST multiplied by the residual percentage set for the length of the term.  For example, if you were financing a car that costs $20,000 (including GST) for a 2 year term, your residual value will be $20,000 multiplied by 56.25%.  However, if you are refinancing your residual, the residual value will be the original value times by the residual percentage for the combined years.  So, if you were refinancing your $20,000 car for a further two years, the residual value would be the result of $20,000 multiplied by 37.50% (the residual percentage set for 4 years).

Ford C-MAX

What is the Purpose of All This?

The purpose of residual value is to ensure that the lease is classified as bona fide for tax purposes.  To be more specific, the ATO says that a novated agreement will be considered to be a bona fide lease if:

a) There is no express or implied agreement that the ownership would pass to the lessee at the end of the lease. That is, that the car won’t become the property of your employer at the end of the term.

       and:

b) The residual value as per the lease is the same as (or higher than) the minimum residual value calculated in accordance with Taxation Ruling IT 28.

If the lease isn’t considered as a bona fide lease (i.e. you don’t pay the residual payment and take ownership of the car) then your employer will be subject to Residual Fringe Benefits Tax.

novated-residual-percentages

Do I Have to Pay the Residual Value?

At the end of your term you have several choices.

You can pay the full residual amount and drive away with full ownership of the car.  This also means the end of your novated lease agreement, so repayments will stop and you will become responsible for payment of petrol, servicing, insurance and repairs.

Your second option is to sell the car.  If you sell and you make a profit from the sale, you are entitled to keep the profit tax-free.

Thirdly, you can refinance the car and take on a new novated lease.

 

Your available options mean that meeting the residual payment is something you do not necessarily need to stress about.  Of course, you should always be wary and think to the long term, rather than the immediate benefits of having a new car right away.  You don’t want to find yourself in a situation where the value of the car is much lower than the residual payment.  Seek advice and make sure the lease and residual payment is right for you based on your circumstances.

To find out more about residual values and what it might mean for you, contact us today.