The ATO minimum residuals
| Lease term | Minimum residual | On a $50,000 car cost |
|---|---|---|
| 1 year | 65.63% | $32,815 |
| 2 years | 56.25% | $28,125 |
| 3 years | 46.88% | $23,440 |
| 4 years | 37.50% | $18,750 |
| 5 years | 28.13% | $14,065 |
These come from the ATO's Taxation Determination TD 93/142 (the 8-year effective life column, which applies to cars). The percentage applies to the car's cost for the lease; providers differ on exactly which costs are in the base, so ask your provider.
How the residual changes your payments
The lease payments repay the amount financed minus the residual, plus interest on the whole balance. A higher residual means lower payments, smaller pre-tax deductions and therefore a smaller tax saving, and a bigger bill at the end. In the calculator, raising the residual by 10 percentage points on the $55,000 EV example lowers the fortnightly cost by about $22 but adds about $5,900 to the payout. You still pay interest on the residual throughout the lease.
GST and after-tax money
The residual is not packaged: you pay it from after-tax money, plus GST, because you are buying the car from the finance company. In the 5-year EV example the residual is $15,050 and the payout $16,555. Budget for it from the start, for example by saving the tax you save.
Your options at the end
- Pay it: you own the car outright.
- Refinance: start a new novated lease on the same car for the residual amount; the minimum residuals apply again.
- Sell or trade in: if the car is worth more than the residual, you keep the difference (it is not taxed as income for most people, but check your situation).
- Upgrade: trade the car in and start a new lease on another car.
Choosing a residual
The minimum gives the biggest tax saving and the smallest end payment. A higher residual can help if your pay is tight now and you expect to sell the car at the end, but you pay more interest overall. Compare both in the calculator with the residual slider.
How a novated lease works
A novated lease is a three-way agreement between you, your employer and a finance company. The finance company leases you a car; your employer agrees to make the payments out of your salary for as long as you work there. Your employer also pays the running costs (fuel or charging, registration, insurance, servicing and tyres) from the same budget. Because these come out of your pay before tax, your taxable income falls, and because your employer is registered for GST, it claims back the GST on the car and its running costs. At the end of the lease you pay a lump sum, the residual, to own the car, or you refinance or sell it.
The catch is fringe benefits tax (FBT). A car your employer pays for is a fringe benefit. For petrol and hybrid cars, providers cancel the FBT by having you pay part of the cost out of your after-tax pay: the employee contribution method (ECM). For eligible electric cars there is no FBT at all, so the whole cost can come out of pre-tax pay. That is why novated leases have become popular for electric cars.
What providers don't show, and how to read a quote
- The interest rate. Many quotes show only a weekly or fortnightly deduction. Ask for the interest rate, the amount financed and the residual in writing; with those, this calculator reproduces the lease payment.
- Fees. Establishment fees, monthly management fees and "budget" fees for running costs add up over five years. Enter them all.
- Running-cost budgets. Quotes often include generous fuel, tyre and servicing budgets that inflate the per-pay deduction. Unspent budgets are usually returned, but check how and when.
- Insurance and extras. Gap insurance, extended warranties and paint protection are often bundled. They are optional.
- The residual. It must be at least the ATO minimum for the term. A higher residual lowers your deductions but leaves more to pay at the end.
- Discounts on the car. Providers negotiate fleet prices, but compare the drive-away price with what a dealer would offer you directly.