When employees require cars for performing part or all their work-related duties, the company usually provide company cars. However, more and more companies are opting to give their employees a car allowance, as doing so frees them from the challenges of managing a fleet of cars, including care and maintenance.
For employees, receiving a car or motor vehicle allowance is a benefit that can help them cover the cost of purchasing a vehicle or any costs associated with using their own car.
How Does a Car Allowance Work?
A car allowance forms part of the overall remuneration for the employee which is designed to cover the costs of using a car for business purposes. These costs include fuel, tyres, car repair and maintenance, insurance, and registration.
The allowance can also be used to pay for the purchase or lease of a vehicle. It is paid at the same time as the employee’s pay.
For companies, the car allowance is usually determined by the estimated annual costs associated with a defined car that would be deemed expected to be used in performing work duties. For example, it may be a mid-size SUV as the work requires the employee to carry work items, a twin cab Ute as work requires the employee to go to work sites, or a larger sedan as the employee is required to do country travel.
While each industry and job function affect the car allowance rates, it is usually the range from $18,000 to $22,000 per year. Senior executives may receive a higher amount.
Though the value of the allowance is determined by some defined cars, the employee is given the freedom to decide whether to get a new car, upgrade or keep their existing car.
The key benefit to the company is that when the employee takes the car with them when leave the company. The company has no further responsibilities to the car.
All legal responsibilities and obligations to owning and maintaining the car are with the employee.
How Are Car Allowances Treated For Tax?
Company
Many companies incorrectly pay the car allowance to employees without withholding any PAYG.
In other words, they pay the amount gross to the employee, report it on their Payment Summary, and then leave it to the employee to claim the relevant deductions against it and pay the relevant tax.
In essence, unless the payments made by the company directly relate to the work-related expenses incurred by the employee (eg: ATO defined cents per kilometre), PAYG must be withheld.
As identified earlier, car allowances are usually defined by an expected or estimated cost associated with having the car for work purposes so this ATO condition will usually not apply.
The treatment for PAYG withheld can vary depending on the amounts paid and the business use on the car and we refer you to the ATO website:
Car Allowances are also subject to payroll tax.
Employee
Car allowances are subject to personal income tax and the amount of tax an employee can reduce it by is dependent on their substantiated work-related expenses.
The tax payable on a car allowance tax is calculated depending on the employee’s total income less deductions for car-related expenses.
You also need to keep track of your mileage and receipts, which you’ll need for making reports or claims related to vehicle use for business purposes.
The most common form is to establish a logbook on the car usage to determine the proportion of overall use of the car was related to business use.
The employee will then add up all of the costs associated with the car ownership of the income tax year in question and determine the work-related deduction by applying the business use percentage calculated from the logbook.
Any amounts of the car allowance in excess of the business expense are part of the employee’s assessable income.
Another item to consider is that the employee receives no relief from the GST paid on the purchase of the car nor the running costs as they are not considered costs incurred by the company – even though the logbook would support that they are!
How Does a Novated Lease Work?
A novated lease involves a three-way agreement between the employee, the company, and the financier administered by Remunerator.
The price of the car and all its associated running costs are all bundled into one regular repayment.
The repayment comes out of the employee’s pay before income tax is applied.
This reduces the employee’s taxable income meaning they’ll make income tax savings by getting a new car.
As the underlying lease is between the employee and the financier, when the employee leaves, they the car with them leaving no further responsibilities with the company.
This is the same as a car allowance.
The employee has total choice of car and enables them to either contribute additional pre-tax money to upgrade the car that they want.
The car lease period is usually 4 years but can be a minimum of two years through to a maximum of 5 years.
At the end of the lease term, the employee can either:
- trade the car for a new model and sign a new lease agreement;
- pay out the residual and keep the car; or
- refinance the car and keep using it for work.
How Are Novated Leases Treated For Tax?
A large portion of the amount identified to meet the novated lease payments and running costs is not subject to PAYG as it is deducted pre-tax (in most instances this amount will be nearly half the total amount identified).
As it is deducted pre-tax, it will not be subject to Payroll Tax.
Furthermore, an added benefit over a car allowance, the expenses are deemed to have been paid directly by the company, so the employee will gain the benefit of the claiming back the GST on the car purchase price and the associated annual running costs.
What Are The Main Benefits Of a Novated Lease?
The main benefits include:
- Save on income tax
- Remunerator's buying power allows you to save on the purchase price of your new car
- Gain exclusive access to discounts from a wide network of tyre and servicing suppliers
- Don't pay GST on all your car's running costs
- Novated leasing aids in budgeting - all your car related expenses, running costs and finance payments are bundled into one affordable payment
- Flexibility in the choice of your car - you can lease any car, new or used
- No upfront deposit for your new car required
Important: All information provided is of general nature only and should not be interpreted as advice. Any taxation information or calculations are based on our interpretation of applicable legislation as at 1st April 2022 and should not be used for a substitute for professional advice.