What is the residual value on a novated lease — and what happens if my car is worth less?

The residual value is the amount you owe at the end of the lease term — set as a percentage of the vehicle's original price based on ATO guidelines. If the vehicle's actual market value at lease-end is below the residual, you need to either pay the difference, sell the vehicle to cover it, or roll into a new lease. On vehicles that depreciate faster than the ATO table assumes, this can be a significant unexpected cost.

Is a novated lease better than a car loan for an EV?

For eligible zero or low-emission vehicles, there is currently an FBT exemption for novated leases in Australia — meaning the private use component that would normally attract Fringe Benefits Tax may not apply. This has significantly improved the value calculation for EVs through novated lease compared to a standard car loan. The specifics change with government policy, so confirm current eligibility with your salary packaging provider or broker.

Novated Lease vs Asset Finance Australia: Which Option Is Right for You?

Q: What happens to my novated lease if I change jobs?

If you change employers, your new employer must agree to take over the novated lease agreement. Most employers will, but there's no guarantee. If your new employer declines, the lease typically reverts to a standard loan — potentially at less favourable terms. This job-tied risk is worth factoring into the decision, particularly if you're in an industry with higher employment mobility.

Q: What tax benefits can a self-employed tradie get on a work vehicle?

Self-employed tradies using a chattel mortgage or commercial hire purchase for a work vehicle can typically claim the GST credit on purchase (if registered for GST), deduct interest costs, and claim depreciation against business income. The ATO's instant asset write-off provisions may also apply depending on the vehicle's cost and eligible business use. Speak to your accountant about what applies to your specific situation.

If you're self-employed or running your own trade business, stop here: a novated lease is not available to you. It requires an employer to be part of the arrangement, and if you work for yourself, there is no employer. For sole traders and self-employed tradies, the right conversation is about chattel mortgage, commercial hire purchase, or a business vehicle loan, not novated leases. If you're a PAYG employee, read on, because the tax savings can be significant. The residual value at the end of the lease is a risk that rarely gets explained clearly enough.

Who can actually use a novated lease in Australia?

A novated lease is a three-party arrangement between you, your employer, and a finance company. Your employer agrees to deduct lease payments from your pre-tax salary as part of a salary packaging arrangement. Because the payments come out before tax is calculated, you reduce your taxable income and pay less tax overall.

This structure only works if you have an employer who participates. Most medium and large employers do. Many small employers do not. If you're self-employed, a sole trader, a contractor without an employer, or running a business under your own ABN, you cannot enter a novated lease: there is no employer to form the agreement with.

The practical test is simple: do you receive a PAYG payment summary (or income statement) from an employer at tax time? If yes, a novated lease may be available to you. If you lodge a business tax return as a sole trader or company, it's not.

For self-employed tradies, the most common alternatives, chattel mortgage and commercial hire purchase, offer their own tax advantages: GST credits on purchase, interest deductibility, and depreciation claims. These are the structures worth understanding if you run your own business. A specialist asset finance broker can walk through which structure produces the better outcome for your income type and business structure.

What are the real tax savings on a novated lease, and for whom?

For eligible PAYG employees, the savings are genuine. Lease payments are deducted from pre-tax salary, which reduces your taxable income. Running costs, including fuel, registration, insurance, and servicing, can also be bundled into the arrangement for a single predictable monthly cost.

The dollar value of the tax saving depends on your marginal tax rate. For someone in the 37% bracket, the saving is meaningful. For someone in the 19% bracket, the impact is smaller. The calculation is specific to your income level. General articles that quote "$3,000–$5,000 per year in tax savings" are using a middle-bracket estimate and may not reflect your situation.

For eligible zero or low-emission vehicles, the FBT exemption currently available in Australia has significantly changed the value calculation: private use of qualifying EVs through a novated lease may not attract Fringe Benefits Tax at all. This has made novated leases considerably more attractive for EV buyers who are PAYG employees.

Use our calculator to compare monthly repayment scenarios across different finance structures before your next conversation with a broker.

What is the residual value risk at the end of a novated lease?

This is the detail that most content buries or omits entirely.

At the end of a novated lease term, you owe a residual value: a lump sum set at the beginning of the lease, calculated as a percentage of the vehicle's original purchase price using ATO guidelines. The percentage is fixed regardless of what the vehicle is actually worth at the end of the term.

If the vehicle's actual market value equals or exceeds the residual, this isn't a problem: you can sell the car, pay the residual from the proceeds, and come out neutral or ahead. But if the vehicle has depreciated faster than the ATO table assumed, which happens with certain makes, models, and economic conditions, the market value at term-end may be below the residual. You then owe the difference.

The most common ways to handle this are: pay the residual and own the vehicle, sell the vehicle and cover any shortfall from your own funds, or roll into a new novated lease on a new vehicle. The third option is what many employees choose, but it also means you're perpetually in a lease, never owning a vehicle outright.

If you're self-employed: what are the comparable options?

For sole traders and self-employed tradies, chattel mortgage and commercial hire purchase provide the most comparable tax efficiency:

Which financing structure applies to you?

Feature	Novated Lease	Chattel Mortgage	Commercial Hire Purchase
Who qualifies	PAYG employees with an employer only	ABN holders, sole traders, companies	ABN holders, sole traders, companies
Ownership during term	Finance company	You, from day one	Finance company
Ownership at end	You (after residual payment)	Already yours	You (after final payment)
GST claim on purchase	No: employer claims it	Yes: claim via next BAS	Yes: claim via next BAS
Tax benefit	Pre-tax salary deduction reduces taxable income	Interest + depreciation deductible against business income	Interest + depreciation deductible against business income
Residual value risk	Yes: ATO-set lump sum due at term end	No (balloon optional)	No (balloon optional)
Running costs bundled	Yes: fuel, rego, insurance, servicing	No	No
Best suited for	PAYG employees wanting predictable total vehicle costs	Self-employed wanting ownership and maximum tax deductions	Self-employed preferring lower monthly payments

Chattel mortgage: You own the vehicle immediately. The loan is secured against it. If registered for GST, you can claim the full GST on purchase in your next BAS. Interest and depreciation are deductible against business income.
Commercial hire purchase: The finance company owns the vehicle during the term; you make fixed payments and take ownership at the end. Similar tax treatment to chattel mortgage in most respects.
Finance lease (commercial): The finance company retains ownership throughout. Lower monthly payments, but a residual (balloon) applies at the end, similar to the novated lease residual risk described above.

The right structure depends on your GST registration, business structure, income, and how the vehicle is used. This is a conversation for both your accountant and a specialist broker. The finance structure and the tax treatment need to align.

Frequently Asked Questions

Can a sole trader or self-employed person get a novated lease? No. A novated lease requires three parties: you, your employer, and a finance company. Self-employed individuals and sole traders have no employer to form that agreement. Chattel mortgage or commercial hire purchase are the typical alternatives.

What happens to my novated lease if I change jobs? Your new employer must agree to take over the arrangement. Most will, but there's no guarantee. If they decline, the lease typically reverts to a standard loan at less favourable terms. This job-tied risk is worth factoring in, particularly in industries with higher employment mobility.

What is the residual value and what if my car is worth less than that at lease-end? The residual is a lump sum you owe at the end of the term, set at the start based on ATO guidelines. If the vehicle's actual market value is below the residual, you pay the difference: either directly or by rolling into a new lease. On vehicles that depreciate faster than the ATO table assumes, this can be a significant surprise cost.

What tax benefits can a self-employed tradie get on a work vehicle? A chattel mortgage or commercial hire purchase allows GST credit on purchase (if GST-registered), interest deductibility, and depreciation claims. The ATO's instant asset write-off provisions may also apply. Speak to your accountant about what's available for your specific situation.

Is a novated lease better for an EV? For eligible zero or low-emission vehicles, there's currently an FBT exemption for novated leases in Australia. The tax advantage is significantly better than for petrol vehicles. Confirm current eligibility with your salary packaging provider, as government policy on this can change.

This article is general information only and does not constitute financial advice. For advice specific to your situation, speak to a licensed finance professional with one of our listed brokers or visit ASIC's MoneySmart website.

Novated lease or asset finance — which one actually applies to you?