Tax deductions and general advice on cars
Batman once said, “Chicks dig the car”. For some reason, the ATO doesn’t though. But people are always trying to get something for their cars, in terms of deductions. Well, every year the ATO gives less and less. Not to mention, in most cases, cars are a bad investment on a good day. Regardless, they are shiny – so we fall for it & buy them, then try to force the accountant to get something for it, somehow.
What exactly can you get? Is it all bad news, really? Sorry, but, yes. However, every now and then there is something e.g. the electric vehicle “free ride”.
A car allowance not only provides assistance with your work-related car expenses but can also make purchasing a new vehicle more affordable by reducing your loan repayments. It serves as a viable alternative to acquiring a leased company car.
My personal tip: no matter how flashy the car. After 3-6 months it will just be another car. So, don’t overspend here. That money can buy a lot more fun and pleasure in just about anything else – other than cars. And I don’t mean anything salacious either, so take your mind out of the gutter! But the kind of holidays you can have for $60k – wow, imagine all the dopamine and cancer-bursting happiness natural body chemicals you can have. Instead of something that just wears off in a few months? But I still buy them too. Biologic wins over logic.
Not convinced yet? Still want to keep reading. Fine!
Tip 1: If you use your personal vehicle for work purposes, consider discussing the possibility of obtaining a car allowance with your employer.
How does a car allowance function?
When you receive a vehicle allowance, it typically gets deposited into your bank account alongside your regular salary. Its primary purpose is to alleviate the financial burden of your work-related car expenditures, but you have the flexibility to utilize the allowance as you see fit.
The amount of your car allowance is typically listed separately on your payslip and included in the payment summary submitted to the Australian Taxation Office at year-end.
Car allowance in Australia
In Australia, any allowance provided by your employer is considered taxable income. Consequently, you are obligated to pay taxes on this income, which can be perceived as unfavorable news.
However, the positive aspect is that you have the opportunity to offset this tax liability by deducting your vehicle-related expenses from your allowance. We will delve further into the details of calculating these expenses later in this article.
Tip 2: To minimize your tax obligations, make the most of your tax-deductible vehicle expenses in relation to your allowance.
Car allowance policy
If your employer offers you a vehicle allowance, the terms and conditions surrounding its usage may be outlined in an allowance policy. This policy typically covers aspects such as eligibility criteria, the allocated allowance amount, and the requirement to maintain logbooks for recording kilometers traveled.
Is a car allowance tax deductible?
The tax deductibility of a car allowance depends on how you approach it. The allowance amount you receive is not inherently tax deductible as it constitutes income. However, you have the option to claim work-related vehicle expenses as deductions against your income, effectively reducing the amount of tax you owe.
The total value of your work-related car expenses may vary, potentially exceeding or falling short of your allowance income. This discrepancy hinges on factors such as the amount of your allowance and the extent to which you use your vehicle for work-related purposes.
How to Calculate Your Tax-Deductible Car Expenses
There are two methods available for calculating your tax-deductible car expenses:
- The Logbook Method
As the name implies, the logbook method involves maintaining a logbook of your work-related travel. This logbook should be kept continuously for a minimum of 12 weeks during the financial year. Additionally, you must diligently record your speedometer readings throughout the entire period for which you’re claiming deductions.
With the logbook method, you can claim the work-related portion of your car’s running expenses, including expenses such as petrol, oil, registration (rego), insurance, servicing, and depreciation. The percentage of these expenses that can be claimed is determined by the ratio of work-related kilometers to the total kilometers traveled during the year.
For example, if you covered a total distance of 30,000 kilometers during the year, and 6,000 kilometers of those were work-related, you can claim 20% of your vehicle’s running expenses as a tax deduction. It is crucial to retain your logbook records for at least five years.
Please note that commuting to and from work is generally not eligible for deduction as it’s considered private use of your vehicle. Similarly, capital costs of your car, such as the initial purchase price or expenses related to improvements like tinted windows, are also not deductible.
Tip 4: Maintain thorough and accurate logbook records to maximize your tax-deductible expenses.
- The Cents-Per-Kilometer Method
This method allows you to claim deductions for a maximum of 5,000 kilometers per year at a fixed rate established by the Australian Taxation Office (ATO). For instance, in the 2021/22 financial year, the rate stood at 72 cents per kilometer. This rate is intended to cover all your vehicle’s running expenses and account for its decline in value.
To utilize the cents-per-kilometer method, you must be capable of demonstrating how you determined the number of kilometers being claimed.
Tip 5: If your annual work-related car travel exceeds 5,000 kilometers, the cents-per-kilometer method provides a convenient option for calculating your tax-deductible expenses. However, meticulous record-keeping remains essential to support your claims. Is a Car Allowance a Business Expense?
Indeed, a car allowance is considered a business expense for the company offering it. It falls under the category of employee expenses, akin to salary or wages. As businesses provide vehicle allowances, they effectively reduce their taxable business income, resulting in lower tax payments.
For entrepreneurs and business owners, offering car allowances can be an attractive option to consider. These allowances can serve as an effective means to reward and retain valuable staff members.
It’s important to note that, for the individual receiving the car allowance, it constitutes income rather than an expense, as previously explained. However, you can offset this income by claiming work-related vehicle expenses against it, ultimately reducing your overall tax liability.
Tip 6: If you are running a business, keep in mind that vehicle allowance expenses are tax-deductible, offering potential tax benefits.
Is It Better to Have a Company Car or a Car Allowance?
The choice between having a company car and receiving a car allowance depends on your unique circumstances, needs, and objectives. Both options come with their own set of advantages and disadvantages.
Pros of Having a Company Car:
– Your employer takes care of all payments related to the purchase and maintenance of the vehicle, reducing administrative hassles for you.
– Depending on the type of company vehicle provided, you may get to drive a higher-quality car while working for your employer.
Cons of Having a Company Car:
– If you leave your job, you are typically required to return the company vehicle to your employer.
– Choosing a company car over a car allowance may limit your choice in the type of vehicle you drive.
The decision ultimately hinges on your personal circumstances and priorities. Assess the advantages and disadvantages of each option to determine which aligns best with your specific needs and goals. The Advantages of Having a Car Allowance:
- Retention of the Vehicle: You are not required to return the vehicle if you leave your job.
- Flexibility in Car Choice: You enjoy greater flexibility in selecting the type of car you drive.
- Loss of Allowance: If you change jobs or leave your current employment, you may lose your car allowance.
- Potential for Inferior Vehicle: Your vehicle might not be as high-quality as the company car offered by an employer.
- Responsibility for All Vehicle Payments: You are responsible for handling all vehicle-related expenses.
Tip 7: To determine whether a company car or a vehicle allowance is more advantageous for you, carefully evaluate your individual circumstances.
Novated Lease vs. Car Allowance
You may be contemplating whether a novated lease is a more suitable option compared to a vehicle allowance.
A novated lease is a financing option for a car, typically available to employees of companies that offer salary packaging or salary sacrificing benefits. Under this arrangement, your employer makes vehicle lease payments using your pre-tax income, reducing your taxable earnings. This allows you to enjoy the benefits of a new car, which you can use for private purposes, business use, or a combination of both.
Novated lease payments usually encompass expenses related to vehicle operation and maintenance, as well as the purchase price of the vehicle. It’s important to note that you cannot claim novated lease payments as tax deductions. Additionally, employers are obligated to pay fringe benefits tax (FBT) on novated lease vehicles, with the current FBT rate in Australia being 47%.
It’s worth mentioning that not all employers provide salary packaging options. If your employer does not offer this benefit, a novated lease will not be a viable choice for you.
Tip 8: If your employer offers salary packaging, carefully evaluate whether a novated lease or a car allowance aligns better with your specific circumstances. Keep in mind that novated leases may have hidden costs, so thorough research is essential.
Utilizing a Car Allowance to Assist with Vehicle Loan Repayments
Car allowances can serve as a valuable resource for managing loan repayments, particularly in the context of financing new vehicles. An increasingly popular method for financing new cars is through a chattel mortgage arrangement. A chattel mortgage represents a secured car loan designed for vehicles used at least 50% for business purposes. PAYG (Pay As You Go) employees may qualify for a Chattel Mortgage if they meet this criterion. Notably, secured loans like chattel mortgages typically come with lower interest rates compared to unsecured loans.
If you operate your own business or are an employee with regular work-related vehicle usage, you have the option to leverage your car allowance to facilitate the payment of your secured chattel mortgage loan. This approach can make a more expensive vehicle more financially accessible or enable you to expedite the loan repayment process.
Tip 9: Consider using your car allowance to contribute to your vehicle loan repayments for added financial flexibility.
Other Car Allowance FAQs
– What if I forget to claim my tax-deductible car expenses against my allowance? You may end up paying more tax than necessary.
– Do I have to use the cents-per-kilometer method to calculate my tax-deductible expense amount if I traveled less than 5,000 kilometers in the financial year? No, you have the option to use the logbook method if it results in a higher deduction.
– Can I use the cents-per-kilometer method if I drove more than 5,000 kilometers in the financial year? No, you are required to use the logbook method in such cases.
– Is there a minimum or maximum car allowance amount in Australia? There is no specific minimum or maximum, but it’s essential to be aware that higher allowances may result in higher tax payments if you do not have significant tax-deductible expenses.
– What is the best way to increase my car allowance? Consider negotiating with your employer, particularly if you are a valuable team member. A satisfied employee is a valuable asset.
The Bottom Line
Car-related expenses constitute a significant financial commitment for most individuals. Therefore, it is crucial to carefully assess your financial options, including car allowances, novated leases, or secured loans, to determine which aligns best with your financial situation and goals.
Tip 10: Before making a decision, thoroughly evaluate all your vehicle finance choices. If you’re uncertain about which option is right for you, consider consulting with a broker who specializes in arranging vehicle finance—they can provide valuable insights and guidance based on your specific circumstances.
It’s important to note that the thoughts and opinions presented on this website are solely those of the authors and are of a general nature. This information should not be considered as personalized financial or general advice on cars and their associated taxes. Before making any decisions related to finance, insurance, tax or car purchasing, we strongly recommend seeking independent advice from a qualified professional tailored to your specific circumstances. Your individual financial situation should always be taken into account when making such decisions. Sometimes, people try to guess the tax implications. Or listen to their friends. And make gigantic mistakes with their money. And look the fool publicly.
There’s no need for that kind of shame in your life too. It’s not worth it financially either. There’s always a smarter way to do things. Just reach out to us & we can advise you about the latest batmobile tax deductions!
Don’t take advice from the Joker, raise the bat-signal.