When your novated lease ends, you’ll have the option to extend your lease with the same vehicle, pay the residual amount to own the car outright or upgrade to a new vehicle with a new novated lease.
It’s entirely up to you which of these three options you choose based on what’s best for your situation. There are, of course, pros and cons to each scenario and your novated lease consultant can help you to understand what will happen in each of these instances.
But to help you understand what these options could mean generally, here’s a simple explanation of each.
When you take out a novated lease, the agreement will clearly state what the residual value of your vehicle will be. This is the amount owing on the vehicle at the end of the lease term.
When you pay the residual amount you take full ownership of the car. Here's what happens:
This is what most people do as it means you continue to benefit from the tax savings resulting from paying for your car and running costs from your pre-tax salary.
You also get to upgrade to a newer model of vehicle with a GST saving on the up-front purchase price.
If needed, you will have the opportunity to change your novated lease car-running budget to reflect changed costs (e.g. if your new car is an electric vehicle with lower charging costs compared to paying for fuel).
The residual value on your initial lease is cleared using the trade-in value of the car when you upgrade it (meaning you generally don't need to pay anything). If the trade-in value ends up being more than the residual, you get to keep the profit, tax-free. If the trade-in value is less than the residual for any reason, you will need to cover the difference.
If you choose to renew the lease (essentially you are simply extending the arrangement), very little changes apart from the amount of the regular lease payment that’s made from your pre-tax salary.
That's because the new lease amount is based on the residual value from your initial lease. It means in most situations, the lease payments will be lower under a new lease, with your running costs being much the same unless your driving habits have changed.
Let’s take the example of a novated lease for a vehicle initially valued at $60,000 (excluding GST).
This will depend on your situation and the vehicle. Here are some of the main questions to consider:
Is the car still fit for purpose based on your current situation?
If yes, then you could consider either paying the car off and keeping it, or renewing your lease to continue getting the novated lease tax savings.
If it’s time to upgrade your car (e.g. if your family has grown in the meantime), starting a new lease with a new vehicle would allow you to do that while maintaining the tax savings.
Do you have funds available in savings to make the residual payment?
The residual value of the vehicle is usually a large amount of money and not everyone will have the funds available in savings to cover it. If that’s the case, renewing the lease may be a suitable option.
Alternatively, if you decide to upgrade your car and start a new lease, the residual amount of the old car is generally covered by its trade-in value.
Is the warranty on the vehicle still valid?
If there is still time to run on your vehicle’s standard warranty, you may get a better price for it if you choose to sell it or trade it in than you would if you decide to hold onto it and sell it later on.
If that’s the case, you could decide to upgrade your vehicle to take advantage of the potentially high resale value and start a new novated lease.
This is a question we’re commonly asked and the answer is (as it so often is in life): it depends. If you make the residual payment (i.e. you do not extend your current lease), yes you will own the vehicle outright.
If you extend your current lease, you won’t own the vehicle during that extended term, but you will have the ability to own it at the end of that new lease term.
If you do decide to take ownership of the vehicle, the tax benefits available to you during your lease will end. For example, you will no longer be able to pay for any of your running costs using your pre-tax salary.
In our experience, it is relatively rare for people to simply pay the residual and take full ownership of the car. We find most people trade in their current vehicle, use the sale value to clear the residual on their lease, and then begin a new lease with a new car.
It’s possible to end a novated lease early, but it can be expensive to do so. You may be required to pay the residual value of the vehicle, plus the remaining lease finance costs. If there is a significant portion of your lease remaining, ending it early could be particularly expensive.
This is why our consultants work with our clients to understand their needs to help ensure the term on the lease is suitable for them. We’re experienced at asking the right questions and explaining the implications of various lease terms.
We also offer the flexibility to choose ‘odd’ lease terms, which means it doesn’t need to be exactly 1, 2, 3, 4, or 5 years. You can choose any duration in between to suit your needs. Ultimately it’s up to you to choose a suitable term duration but it helps to have flexibility and expert guidance along the way.