At the end of a novated lease, several outcomes are possible, depending on the structure of the lease, and the terms agreed upon between the employee, employer, and the leasing company.
First, however, let’s remind our readers that a novated lease is a popular vehicle financing option allowing an employee to lease a car through their employer, with payments being made from their pre-tax salary. This offers tax benefits and convenience.
At the end of the lease, you may choose to:
Pay the Residual Value and Own the Car Outright
At the end of the novated lease, the employee has the option to pay the residual value of the car, which is a predetermined amount set at the beginning of the lease.
The residual value is based on the expected depreciation of the vehicle over the lease term and is mandated by the Australian Tax Office (ATO) to prevent excessive tax avoidance. Typically, the residual value for a lease is between 30% and 40% of the original car value for a 3-5 year lease.
Once the residual payment is made, ownership is transferred to the employee, and they can choose to keep the car, sell it privately, or trade it in for a new vehicle.
Extend the Lease
Another option is to extend the novated lease for an additional term. This is often referred to as a refinancing of the residual value. Extending the lease allows the employee to continue using the car without needing to pay the residual amount upfront.
In this scenario, the employee and employer will enter into a new lease agreement, typically with lower monthly payments since the car has already depreciated.
This option may appeal to employees who want to continue driving the same vehicle without committing to the lump-sum residual payment, but still prefer the salary packaging benefits of a novated lease.
Trade in the Vehicle for a New Lease
If the employee prefers to upgrade to a new car, they can trade in the vehicle at the end of the novated lease and apply the trade-in value towards a new lease on a different vehicle.
In some cases, the trade-in value might cover the residual amount, allowing for a smooth transition to a new lease without any out-of-pocket costs.
This option is ideal for those who like to drive new vehicles and wish to avoid the responsibility of owning an older car. It also allows the employee to continue benefiting from the tax advantages of salary packaging a novated lease.
Return the Car to the Leasing Company
Though not as common, some leasing companies offer the option to simply return the car at the end of the lease without purchasing it. This can be seen as similar to renting the car for the duration of the lease.
However, this option often comes with conditions, such as ensuring that the vehicle is in good condition, has been well-maintained, and does not exceed any kilometre limits. If the car shows excessive wear and tear, or has surpassed the agreed-upon mileage, the employee may be liable for additional fees.
Final Thoughts
Regardless of which option you may choose to pursue at the end of a novated lease, it is important to remember that additional costs may be incurred, such as servicing, repairs, among others.
It is also well worth reviewing your tax situation, as you could lose salary packaging benefits if you decide to purchase the vehicle outright. On the other hand, if the residual value is more than the market value of the vehicle, you could end up paying more than the car is worth.
The Fincar team is here to help you with all your financing needs. Contact us today to help arrange your next car or equipment loan.