Novated lease residual value (balloon payment)

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What is the novated lease residual value?

The novated lease residual value is the amount required at the end of the lease term for you to own the car. It’s also known as the novated lease balloon payment. The residual amount is calculated as a percentage of the cost of the vehicle, with the percentage depending on the length of your lease.

The residual payment on a novated lease is designed to reflect what the vehicle will be worth at the end of the lease term, “based on a reasonable valuation of estimated market value”, as the ATO puts it.

During the novated lease term, your payments cover leasing the vehicle plus your running costs. The residual is required for you to gain ownership of the car.

A shorter lease term will mean a higher residual amount, as the car will have retained a higher percentage of its value. A longer lease means a lower residual.

ATO novated lease residual value guidelines for 2024

Novated lease termMinimum residual payment

1 year


2 years


3 years


4 years


5 years


Source: ATO

Novated lease residual value example

Let’s imagine a hypothetical driver who gets a novated lease for a Toyota RAV4 Edge costing $61,200. On a five-year lease, the residual value of the vehicle would be 28.13% of the vehicle’s cost, or $17,301 (including GST).

If the driver opted for a shorter lease term of three years on the same car, the residual would be higher – 46.88% of the cost of the vehicle, or $28,833 (including GST).

How the residual payment works on a novated lease

Here are the key points to understand about how the novated lease residual value works:

  • The residual value is set at the start of your novated lease agreement and is fixed at that point. If you request a quote from us, the residual amount will be clearly shown on your price and savings estimate.
  • Residual value percentages are generally the same for all vehicle types (i.e. on electric car novated leases and traditional ICE-engine cars)
  • The residual falls due at the end of your lease term. As the end of your lease approaches, we’ll be in touch to discuss your options.
  • You can’t salary sacrifice your car’s residual value – it must be covered with after-tax money.
  • The residual amount owed on the car is inclusive of GST.
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What are my options for making the residual payment?

Here are the main options you’ll have when the residual payment on your novated lease is due.

If you want to own the car outright with no further payments owing on it, you can make the residual payment to the lease finance company using cash. The payment must be made with after-tax funds (e.g. your savings).

This brings your novated lease to an end, meaning you will no longer have salary sacrifice car payments deducted from your pay. You will also no longer enjoy a tax benefit on your car running costs, which will need to be covered separately once your lease ends.

This is generally the more common approach and involves upgrading your vehicle when your novated lease ends. The residual value on the lease that is ending is cleared using the sale value of the old vehicle, and then you start a new novated lease with a new car. 

If the sale value of the old car is higher than the residual on that novated lease, you get to keep the profit, tax-free. If the sale value is lower than the residual, you’ll need to cover the difference.

Refinancing your novated lease’s residual value simply means extending your existing lease for a new term. This new lease, in turn, will have a residual value which will be a percentage of the residual on the old lease. All other aspects of the new lease will be the same – essentially it becomes a used car novated lease.

Making the balloon payment work for you

The residual value is sometimes viewed as a disadvantage of getting a novated lease. After all, it’s a large amount of money to pay in one go. But it can actually work to your advantage.

Here's how

  • As we discussed already, your residual will be a percentage of the value of your vehicle when it's purchased. It is a fixed amount that's set at the start of your lease.
  • This means that even if vehicle prices increase between the time you start your lease and when it comes time to trade in your vehicle, your residual will not change.
  • In other words, if inflation in the market means used cars cost more when you’re trading in, you could stand to sell your car for more than the residual amount that’s due. Any profit is yours to keep, tax-free.

Residual example...

Let’s go back to the example of the Toyota RAV4 Edge. The novated lease residual on that vehicle in our five-year lease example was $17,301. At the time of writing, five year-old RAV4 Edges in Australia are advertised with sale prices ranging from around $36,000 - $48,000. Based on that example (Toyotas tend to retain their value better than some other brands), that’s a potential tax-free profit of between $19,000 and $31,000.

But don't assume you're guaranteed to make a profit

There are a couple of very important caveats you should consider here. The resale value of your vehicle will depend on a number of factors, including but not limited to the make and model of the car, its condition and how many KMs it has on the clock.

Your ability to sell it for a profit could also be impacted by the overall market for used cars at that time and any government regulations that may have been introduced since you acquired it initially.

If for any reason your vehicle sells for less than the residual owing, you will need to pay the difference.

Vehicle choice is important

Choosing a vehicle that will retain its value well will help you make the most of your trade in when the residual on your novated lease is due.

Remember, the residual percentage is generally the same whether you pick a car that will hold its value well, or one that won’t.

Our novated lease consultants are experts on the car market in Australia and can help you when it comes to deciding which cars tend to hold their value best.

Can I request a higher or lower residual value for my novated lease?

Because the ATO sets the minimum residual value levels on novated leases, it’s generally not possible to change your residual. However, there can be exceptions to this rule. For example, if you will accumulate a significantly higher-than-normal number of KMs using your car, it may be possible to request a lower residual to take account of your vehicle’s likely lower value at the end of your novated lease term.

You can discuss your residual options with your Novated Lease Australia expert consultant.

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Written by

Bevan Guest - NLA CEO


Bevan Guest

Reviewed by

Sean Callery Editor Novated Lease Australia


Sean Callery
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