How does a novated lease help manage car depreciation?

A novated lease manages depreciation by using pre-tax salary to cover vehicle costs, effectively subsidizing the car's loss in value. Additionally, it uses ATO-set residual values which are often lower than the actual market value, potentially allowing for a tax-free profit when the car is sold at the end of the lease.

What is the ATO minimum residual value in a novated lease?

The ATO minimum residual value is a mandatory final payment based on the lease term: 1 year (65.63%), 2 years (56.25%), 3 years (46.88%), 4 years (37.50%), and 5 years (28.13%). This value acts as a conservative estimate of the car's worth at the end of the lease.

How a Novated Lease Fixes Car Depreciation

13 February 2026

How a Novated Lease Manages Your Depreciation

Let’s be real: buying a car is usually a terrible investment. Unless you’ve stumbled upon a pristine 1967 Mustang in a barn and have the mechanical soul of a wizard, your new ride is a depreciating asset. The moment you drive it off the lot, its value starts a slow, agonizing slide toward zero.

For most Australians, a car is just a tool to get from A to B. But if you’re buying one outright with a “reverse-mortgage” (otherwise known as a standard car loan), you’re effectively paying interest on a shrinking pile of cash. Here’s the good news: A novated lease flips the script on car depreciation. It doesn’t stop the vehicle from losing value, but a novated lease fundamentally changes the math behind how that depreciation impacts your wallet.

The ATO’s Crystal Ball: Residual Value

In the world of novated leasing, we don’t just guess what the car will be worth in five years. The Australian Taxation Office (ATO) provides a set of mandatory “minimum residual values.” Think of this as a pre-determined final payment (or balloon payment) that keeps the lease legit.

The percentages are fixed based on your lease term:

Lease TermATO Minimum Residual Value1 Year65.63%2 Year56.25%3 Year46.88%4 Year37.50%5 Year28.13%

Why This Matters for Your Bank Account

Because these percentages are set by the ATO, they are notoriously conservative. This is where it gets interesting. While your car is losing value out in the real world, the “paper value” (the residual) is often dropping faster than the actual market price; especially if you take care of the car and keep the kilometres reasonable.

When your lease ends, you have a few ways to play it:

The Upgrade: Trade the car in. If the trade-in price is higher than that ATO residual (which it often is), that “profit” is yours to keep, tax-free.
The Keeper: Pay the residual and own the car outright.
The Pivot: Sell the car privately, pocket the difference, and start a fresh lease on a shiny new EV.

Softening the Blow with Pre-Tax Dollars

The real magic isn’t just in the resale; it’s in how you pay for the car’s “life” while you own it. With a novated lease, your lease payments and running costs (like rego, insurance, and even charging/fuel) are taken out of your pre-tax salary.

By reducing your taxable income, the government is essentially subsidizing the cost of that depreciation. You aren’t just watching a car lose value; you’re using that “expense” to lower your overall tax bill.

The Bottom Line

Depreciation is inevitable, but paying for it with your hard-earned, after-tax cash shouldn’t be. By aligning your car’s declining value with the ATO’s residual guidelines and paying for the journey with pre-tax dollars, you’re not just driving a car; you’re managing an asset like a pro.