The tax benefits of a novated lease residual value are often a key benefit when negotiating a new contract. In addition to this, a novated lease can have other benefits, such as reducing out-of-pocket expenses. This article will go over the options for negotiating the residual value of a novated lease, as well as common sources of novated lease residual value. Regardless of the agreement type, here are a few ways to calculate novated lease residual value.
The value decreases as the lease term goes on, and the longer you keep it, the lower its residual value. In other words, if you lease a car for three years for $3000, you’ll end up with a car worth only $15,000, and that’s all. So what is residual value? It’s the difference between the original MSRP sticker price and your lease payment, plus any taxes you’ll owe.
Calculating novated lease residual value
In the industry, calculating a novated lease residual value is important for evaluating the financial risk of leasing a vehicle. Residual value refers to the projected value of an asset at the end of its useful life or the lease term. This value is often used when leasing a car and plays a major role in the monthly cost of leasing a vehicle. Let’s look at how the residual value is calculated.
The term residual value is often used in automobile leasing. Knowing how to calculate residual values before signing a lease is important. In many cases, residual values are high because car manufacturers are in the business of selling cars. Because residual values are high, car makers can keep payments low by artificially inflating them to make the deals look attractive. Because of this, many leased vehicle consumers are unaware of how to calculate their lease residual value.
Options for negotiating novated lease residual value
There are several options for negotiating a novated lease residual value. The value is based on the residual percentage of the MSRP of the vehicle. For example, a car with a residual percentage of 60% has a value of $13,800. Using this formula, the monthly payment would be $2,040. However, if you do not plan to buy the car at the end of the lease, you may want to negotiate a higher residual.
One way to negotiate the lease’s residual value is to negotiate the length of the lease term. Usually, leases last between 24 to 60 months. Some lessors offer leases longer than 60 months, but others may offer 39-month leases. Even if you are buying the car, you will still have to pay early termination fees, ranging from $200 to $500. Other costs can include financing arrangements and name change fees.
Tax benefits of novated leases
The Australian tax office recognizes the many tax benefits of a novated lease. While this method of financing your fleet is limited to Australia, it could benefit many other countries. A novated lease can also benefit your employees, thanks to its three-pronged benefits. The most obvious of these is fleet discount pricing. It can also work with fuel cards, which saves you money.
Because your employer is paying for the lease, you don’t have to worry about paying for running costs or paying for registration. Unlike a car lease, a novated lease residual value doesn’t transfer ownership to the employee. This makes it easier for the employee to budget expenses such as car insurance. Further, the novated lease doesn’t require a down payment. Instead, the employee pays for the car through salary sacrifice. In short, your employee pays most of the vehicle’s operating costs out of their post-tax salary.
Common sources of novated lease residual value
As you’ve probably guessed, residual value is one of the most important aspects of leasing a vehicle. Otherwise known as the balloon payment, this payment is required by the Australian Tax Office (ATO) at the end of the lease term. The ATO provides a scale of minimum residual values that leases can receive, but in most cases, these values are far higher than they’re worth. After all, vehicles typically sell for much more than their residual value.
The value of your car after a novated lease is the residual percentage of its initial purchase price. The value decreases as the lease term goes on, and the longer you keep it, the lower its residual value. In other words, if you lease a car for three years for $3000, you’ll end up with a car worth only $15,000, and that’s all. So what is residual value? It’s the difference between the original MSRP sticker price and your lease payment, plus any taxes you’ll owe.