Residual Balloon Payments on a Novated Lease Explained
A residual (or balloon) payment on a novated lease is the amount you need to pay at the end of your lease.
Set by Australian Tax Office (ATO) guidelines, the residual value is calculated as a percentage of the car’s purchase price and decreases the longer the lease term runs.
How does the balloon payment work?
The residual – or balloon payment – is calculated as a percentage of the finance amount required to purchase the car.
The amount of the balloon payment depends on the lease duration and the value of the car at lease end. Residual amounts also need to be paid with post-tax dollars and include GST – meaning funds within your novated lease account cannot be put towards the residual.
Another thing to keep in mind: the longer you re-lease the same vehicle, the smaller the residual payment will get.
What are the benefits of balloon payments?
While the prospect of a balloon payment is something to consider when you’re novated leasing, it doesn’t need to be intimidating.
Remember, while you’re on a novated lease, you’re partly (or fully with eligible EVs) using pre-tax dollars to pay for the car. This means you could save on tax.
That’s a big benefit. The trade-off is that you need to have the balloon payment in the back of your mind.
And once it does come time to settle up, it can actually work to your benefit (more on that in the ‘What happens at the end of your novated lease’ section).
It’s not bad. It doesn’t need to be scary. It’s just something to be aware of.
Calculating residual values on a novated lease
The ATO guidelines on residual values are based on a minimum percentage of the vehicle cost (e.g. the amount you purchased the car for) over the lease term. The table below shows the current ATO’s minimum values:
For example:
If you take out a novated lease on a vehicle with a driveaway price of $50,756 over five years, the ATO minimum residual is 28.13%. That means your balloon payment at the end of the lease would be $14,360.
No surprises balloon payments, please
Nobody likes surprise payments. That’s why we calculate the residual amount for you upfront. So if you have a five-year lease, you have five years to work out the option that best suits you and how you want to deal with the residual.
What happens at the end of your novated lease?
At the end of your novated lease, we’ll be in touch to discuss your residual payment. You’ll have access to a range of different options, including:
- Keeping the car by paying the remaining amount owing (conditions may apply); or
- Refinancing the car (conditions may apply if the car is more than seven years old at the end of the lease, or valued at below $5,000); or
- Upgrading to a new car: with Maxxia’s help you would trade in your current vehicle and pay any amount owing; or
- Returning the car and pay any residual amount owing once the vehicle is sold
Balloon hints and tips that aren’t full of hot air
Educate yourself – Knowledge is power: do your research, seek financial and tax advice and call us for a chat. The residual payment is not something to be afraid of.
Have a plan – Think about how you’d like to approach the balloon payment. Perhaps you can put a little bit of money aside each pay so you’re ready at the end of the lease. Or maybe you already know that you will sell the car and upgrade to a nice new vehicle. If you have any questions, let your Maxxia customer care consultant know.
Look at all the options – Not everyone needs a Porsche 911 (although we all probably want one). Look at a range of different vehicle prices and length of lease options, as these will also affect the residual.
Interested in learning more about how a Maxxia novated lease could be making your money work for you? Visit our novated lease page or get in touch today.
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