What is a balloon payment or residual value on a novated lease?

When you take out a novated lease with Smart™, you’ll notice a residual value, often referred to as a ‘balloon payment’, listed on your quote as part of your lease. This amount might feel confusing if you’re new to novated leasing.

However, it plays an important role in how the Australian Tax Office (ATO) regulates novated leases, how repayments are calculated and how much tax you may save.

This guide aims to break down everything you need to know about novated lease residual values.

We will explain what they are, why the ATO requires them, and how they are calculated. We will also outline the flexible options available to you when this payment is due.

 

What is a novated lease ‘balloon payment’?

 

A novated lease residual value (or balloon payment) is a lump sum payment required at the end of your lease term. 

It represents the remaining value of the car after all your regular salary packaging deductions have been made over the life of the lease.  

When you enter into a novated lease, you do not pay off the entire purchase price of the vehicle during the lease term. The portion of the car’s purchase price that is left unpaid at the end of the lease is your residual value. 

The fixed residual value of the vehicle will be displayed on your novated lease quote.  

Smart makes the process easy by: 

• clearly displaying your residual value upfront on your novated leasing quote; 

• providing an online calculator to provide you estimates so you can forecast end of lease scenarios; and 

• sending reminders as you approach the end of your lease. 

 

Why is a balloon payment required?

 

1) Because the ATO provides guidance on minimum residual value percentages

 

Novated leases must comply with ATO rules to qualify as a genuine lease arrangement (and therefore potentially provide tax benefits).

Smart ensures every lease we arrange meets these compliance requirements.

 

2) To potentially lower your ongoing lease deductions

 

Because you’re not paying off the full purchase price of the car during the lease, your repayments may be lower than other forms of vehicle finance.

With Smart:

• your payments are partly made pre-tax, reducing taxable income;
• Smart’s large buying power often secures better pricing on the car, meaning you could pay less residual; and
• your lease is structured to help you could get the greatest benefit from salary packaging.

 

What is the balloon payment on a novated lease?

 

The balloon payment on a novated lease is a pre-calculated percentage of the vehicle’s original purchase price. This percentage is directly determined by the duration of your lease term, in accordance with the minimum residual guidelines established by the ATO.

The longer your lease term, the lower your required residual value percentage will be. This makes sense, as the car will depreciate more over a five-year period than it will over a one-year period.

Here is a general breakdown of how the ATO sets minimum residual values based on lease length.

Time frame	Typical minimum residual value
1-year lease	65.63% of the vehicle’s original purchase price
2-year lease	56.25% of the vehicle’s original purchase price
3-year lease	46.88% of the vehicle’s original purchase price
4-year lease	37.50% of the vehicle’s original purchase price
5-year lease	28.13% of the vehicle’s original purchase price

 

For example, if you finance a car with a purchase price of $40,000 on a 3-year novated lease with Smart, your residual value at the end of the term will be approximately $18,752 (46.88% of $40,000). Smart presents this figure in your personalised quote.

 

When do you pay the balloon payment?

 

You have to pay the balloon payment at the end of your novated lease term. Whether you choose a one, three, or five-year lease, the residual value becomes due when the lease expires.

However, paying this lump sum out of your own savings is not your only option. The end of a novated lease is designed to be highly flexible, giving you multiple pathways to handle the residual value depending on your financial situation and driving needs at that specific time.

 

What are your options when the balloon payment is due?

 

When your lease concludes and the residual value is due, you are in the driver's seat. You have three options to choose from, each offering distinct benefits.

 

1) Can you upgrade to a new car?

 

Yes, upgrading to a new car is one of the most popular choices at the end of a lease.

If your lifestyle has changed, perhaps you need a larger family car, or you want to transition to an eligible electric vehicle^ (EV) to take advantage of the Federal Government’s FBT exemption, you can start a fresh lease.

When you upgrade, you can sell your current vehicle. Services like Smart Sell™ make this incredibly convenient. The proceeds from the sale of the vehicle may be used to pay off the residual amount on your old lease.

If the car sells for more than the residual value, the remaining surplus is yours to keep. You then roll seamlessly into a new novated lease, enjoying the latest automotive technology, a new warranty, and continued tax savings. 

 

2) Is it possible to refinance your current car?

 

If you love your current car and it has been a reliable companion, you can choose to refinance the residual amount and start a new lease term for the same vehicle.

Refinancing means you do not have to pay a lump sum out of pocket at the end of your lease. Instead, the residual value becomes the starting balance for your new novated lease.

Because this new starting balance is lower than the original purchase price of the car, your regular pre-tax salary deductions may be much lower than before.

You can also continue to benefit from having all your usual running costs (like fuel, insurance, and servicing) bundled into one convenient deduction each pay day.

 

3) Can you pay the residual value and buy the car outright?

 

Yes, if a novated lease no longer suits your financial goals, you can choose to purchase the vehicle outright at the end of your lease. To do this, you simply pay the pre-agreed residual amount directly to the financier.

Once this lump-sum payment clears, the car belongs entirely to you. There are no more lease payments or salary deductions, and you are free to keep the vehicle, sell it privately, or trade it in whenever you see fit.