Quick answer. The residual value is the amount still owing on your novated lease when the term ends. It isn’t picked at random: the ATO publishes a table of minimum residual values in Taxation Determination TD 93/142, and for a car — assessed on an eight-year effective life — a three-year lease sits at 46.88% of the original cost. Longer terms mean smaller residuals. The table is the standard benchmark for a bona fide lease rather than an absolute prohibition: TD 93/142 allows a lower residual where a well-considered and fair estimate of the vehicle’s likely market value at lease end supports it. That is a judgement made on evidence, not something a borrower simply elects.
What a residual value actually is
Every novated lease finishes with a balance still owing. That balance is the residual value — sometimes called the balloon or the final payment. Your regular salary-packaged payments cover the lease over the term; the residual is what remains at the end.
The principle behind it is set out in the first line of TD 93/142: the residual value of a leased item should reflect its market value at the end of the lease, not its written-down book value. In other words the residual is meant to be a genuine estimate of what the car will be worth — not an accounting artefact.
That matters practically, because it’s a real amount of money you will have to deal with on a known date. A lease with a comfortable fortnightly figure and a large residual hasn’t made the car cheaper. It has moved the cost.
If you’re still working out how the arrangement between you, your employer and the financier operates, start with how a novated lease works and come back here.
Where the ATO’s minimum residual table comes from
If residuals could be set very low, a lease would start to look like a purchase funded from pre-tax income. So the ATO publishes guidance on what an acceptable minimum looks like.
TD 93/142 describes its table as a rough guide to the minimum market value of items with different effective lives. It’s built on a straight-line amortisation of cost across the item’s effective life, holding a minimum residual of 75% of the cost written down that way. The Determination expresses it as a formula:
Minimum residual value (% of cost) = 75% − [ (75% ÷ effective life) × total leased period ]
Cars are assessed on an eight-year effective life, which is the column that applies to a novated lease.
The minimum residual value table — cars (8-year effective life)
| Total leased period | Minimum residual (% of original cost) |
|---|---|
| 1 year | 65.63% |
| 2 years | 56.25% |
| 3 years | 46.88% |
| 4 years | 37.50% |
| 5 years | 28.13% |
Three details worth knowing:
- It’s a benchmark, not an unconditional bar. TD 93/142 (paragraph 4) states that a residual lower than the table may be used where a well-considered and fair estimate of the likely market value at lease end would produce a lower figure. That is an evidence-based position taken by the parties structuring the lease — not something you nominate because you’d prefer a smaller balloon.
- Successive leases are added together. The minimum is worked out on the total period the asset has been leased, whether under one agreement or several, using the cost at the start of that total period.
- Changing financier doesn’t reset the clock. TD 93/142’s own example is a car leased for one year and then re-leased for two: the total leased period is three years, so 46.88% applies — and the Determination is explicit that this holds “irrespective of whether the car is leased through the same leasing company or another leasing company.”
What the residual does to your repayments
The relationship cuts both ways.
A higher residual leaves more of the vehicle unpaid during the term, so packaged payments are lower — and the amount owing at the end is larger.
A lower residual means the reverse: more paid off through the term, less at the end.
Neither is automatically better. It depends on what you plan to do with the car at the end of the term and whether you’d rather carry the cost now or later. What’s worth avoiding is choosing the largest permitted residual purely to soften the fortnightly figure, with no plan for the balance.
For how the moving parts fit together, see how novated lease costs are worked out.
Your options when the lease ends
- Arrange to purchase the vehicle. It’s common for the lessor to offer the car for sale at the end of the term, often for an amount corresponding to the residual. In a bona fide lease this is generally a separate transaction rather than an automatic right under the lease itself — the lease gives you use of the vehicle, not a built-in entitlement to buy it by paying the residual. Check what your actual lease and end-of-term documentation provide.
- Re-lease the vehicle. Continue salary packaging under a new lease. Remember the minimum residual for the new term is worked out on the total leased period and the original cost, not restarted.
- Trade it in or sell it. If it realises more than the residual you’re ahead; if not, see below.
- Return the vehicle, where the arrangement provides for it. This is less universal than people assume — confirm it rather than relying on it.
Your position can also be affected by changing employers, since the lease is novated to your employer. That’s covered in how a novated lease works.
GST at the end of the term
Because an end-of-term acquisition is generally a separate sale by the lessor rather than a continuation of the lease, GST is determined by that transaction and the arrangement it sits in — not by a blanket rule that “the residual includes GST”.
How GST applies across the lease itself, and on any end-of-term purchase, depends on the parties, whether the supply is a taxable supply, and how your employer and packaging provider have structured the arrangement. It’s worth asking your packager to set out the GST position in writing before the end of the term, and confirming your own position with a registered tax agent.
For how the tax side of a novated lease works more broadly, see FBT on a novated lease.
What if the car is worth less than the residual
The residual is a contractual amount. It doesn’t adjust because the market moved.
If the vehicle is worth less at the end than the residual agreed, that gap is yours to cover. It’s most likely where a high residual was chosen to reduce payments, where the car has done heavy kilometres, or in a segment where values have fallen quickly.
What helps:
- Setting the residual with genuine regard to likely market value — which is exactly what TD 93/142 says a residual is meant to reflect
- Being realistic about annual kilometres at the outset
- Keeping service history complete
- Reviewing your position well before the final months
None of that removes the risk. It stops it being a surprise.
Residual value vs a car loan balloon
They look alike and behave differently.
| Novated lease residual | Car loan balloon | |
|---|---|---|
| Benchmark | ATO minimum residual table (TD 93/142) applies, based on effective life and total leased period | Set by lender policy — no ATO table |
| Flexibility | Can be set higher. Can be set lower only where a well-considered and fair estimate of market value at lease end supports it | Negotiable within the lender’s limits |
| Ownership during term | Financier owns the vehicle | You own it, secured to the lender |
| Paid from | Salary packaging via your employer | Your own post-tax funds |
| At the end | Purchase (usually a separate sale), re-lease, trade, sell or return | Pay out or refinance |
If it’s a balloon on a conventional car loan you’re weighing up, see balloon payment car loans explained. If you’re choosing between the two products, novated lease vs car loan sets them side by side.
Where Alpha390 fits
Alpha390 Finance facilitates novated leases through a partner — we don’t provide the lease ourselves. What we can do is help you work out whether a novated lease suits your situation, and what residual position makes sense given what you intend to do with the car at the end.
If you’d rather compare it against straightforward car finance first, that’s often the more useful starting point.
Talk to us about your options →
Frequently asked questions
Can I choose my own residual value on a novated lease?
Not freely. The ATO’s table in TD 93/142 sets the standard minimum residual for a bona fide lease, based on the vehicle’s effective life and the total leased period. A residual above the table is straightforward. A residual below it may be supportable where a well-considered and fair estimate of the car’s likely market value at lease end justifies a lower figure — but that’s an evidence-based position taken when the lease is structured, not something a borrower elects.
What is the minimum residual on a 3-year novated lease?
46.88% of the vehicle’s cost at the start of the lease, using the eight-year effective-life column of TD 93/142.
Do I automatically own the car if I pay the residual?
No. In a bona fide lease, buying the vehicle at the end is generally a separate transaction — the lessor commonly offers it for sale, often at an amount corresponding to the residual, but the lease itself doesn’t usually give you an automatic right to acquire it. Check your lease and end-of-term documentation.
Is GST payable on the residual?
An end-of-term acquisition is generally a separate sale by the lessor, so GST depends on that transaction and how the arrangement is structured — there’s no blanket rule. Ask your packaging provider to confirm the position in writing, and check your own circumstances with a registered tax agent.
What happens if my car is worth less than the residual?
The residual is contractual and doesn’t adjust to market value, so you’d be responsible for the shortfall. Setting the residual with genuine regard to expected market value reduces that exposure.
If I re-lease the car, does the minimum residual start again?
No. The minimum is calculated on the total period the asset has been leased across all agreements, using its original cost — and TD 93/142 confirms this applies whether or not you use the same leasing company.
Written and reviewed by the Finance Director at Alpha390 Finance.
This article is general information only and does not constitute credit, financial or tax advice. Alpha390 Finance facilitates novated leases through a partner and does not provide the lease directly. Tax outcomes, including FBT and GST, depend on your circumstances and your employer’s arrangements — speak to a registered tax agent. Alpha390 Finance operates under Australian Credit Licence 506065 (Five Tees Pty Ltd). Lending is subject to approval, lending criteria, terms, conditions and fees. Consider whether this is appropriate for your circumstances.
