People’s obsession with cars and taxes
The cars. Remember that song in Transformers. Drive? Megan Fox? Well, this post is unfortunately not about that. Taxes instead.
For some reason, people are obsessed with cars and what deductions are available around them. The more we obsess, the more the ATO finds creative ways to take away more from us. They understand it’s a shiny object for us. And that we will always try to get something deducted there. So, the barriers get more and more unsurmountable. In fact, in all honesty, cars have officially become the worst investments as a result of that and other things too. Next time a client asks about how to use a car to reduce taxes, I will .. well, I am not sure what I will do. But I will have to do something. In the meantime..
Some of our best strategies for optimizing your allowance in Australia. We’ve also included responses to frequently asked questions.
What does a car allowance entail?
A car allowance represents compensation provided by your employer to assist in offsetting the expenses associated with operating your vehicle. These expenses encompass items such as:
- Gasoline or petrol
- Vehicle servicing
- Registration (rego)
- Insurance
- Tire replacement
- Repairs and maintenance
Additionally, a car allowance can facilitate the affordability of purchasing a new vehicle by rendering your loan payments more manageable. It serves as an alternative choice to acquiring a leased company car.
Tip 1: If you utilize your personal vehicle for work purposes, consider discussing the possibility of receiving a car allowance with your employer.
How does a car allowance function?
When you receive a car allowance, it typically gets deposited into your bank account alongside your regular salary. Its purpose is to assist you in covering your work-related vehicle expenses, but you have the flexibility to utilize the allowance as you see fit.
The amount of your car allowance is usually listed separately on your payslip, distinct from your salary or wages. Additionally, it will be itemized on your payment summary, which is submitted to the Australian Taxation Office at the conclusion of the fiscal year.
Car allowance in Australia
In Australia, any allowance provided by your employer is considered taxable income. Consequently, it will be included on your payment summary, subjecting it to taxation. However, the favorable aspect is that you can offset your vehicle-related expenses against your allowance. We will delve further into the details of calculating these expenses later in this article.
Tip 2: Optimize your tax-deductible vehicle expenses in order to minimize your tax liability while receiving a car allowance.
Car Allowance Policy
When you are the recipient of a vehicle allowance from your employer, the terms and conditions are typically outlined in a specific allowance policy, which may include:
- Eligibility criteria
- The amount of the allowance you receive
- Requirements for maintaining log books to record kilometers traveled
Is a car allowance obligated to be spent on a car?
No, you have the freedom to allocate your allowance towards any expenses or purposes you desire. However, it’s essential to acknowledge that you will still need to cover your vehicle-related expenses, and a car allowance can significantly augment your income to meet these financial obligations.
According to a recent survey, the average two-car household incurs annual running costs of $16,912 for their vehicles, equating to over $8,000 per vehicle. Any reduction in these costs can positively impact your household budget. But remember what we said before. (above, way above)
Moreover, your allowance can also be utilized to facilitate the purchase of a vehicle, such as contributing to loan repayments, if you so choose.
Tip 3: You aren’t obligated to exhaust your entire car allowance on your vehicle.
Is a car allowance eligible for tax deduction?
The tax deductibility of a car allowance hinges on your perspective. While the allowance amount you receive is not inherently tax deductible (as it constitutes income), you have the opportunity to claim work-related vehicle expenses as deductions against your income. This practice ultimately reduces the amount of tax you owe.
The total sum of your work-related car expenses may either exceed or fall short of your allowance income. The outcome depends on the specific allowance amount you receive and the extent to which you employ your vehicle for work-related purposes.
How to calculate your tax-deductible car expenses
There are two viable methods at your disposal:
1) The logbook method
2) The cents-per-kilometre method
We will delve into each of these options in the following sections.
The Logbook Method
As the name implies, the logbook method entails maintaining a detailed record of your work-related travel. You are required to keep a logbook for an uninterrupted period of at least 12 weeks during the fiscal year.
Additionally, you must diligently document your vehicle’s odometer readings throughout the entire period for which you are making a claim.
Under this method, you can claim the work-related portion of your car’s running expenses, which encompass items such as:
– Petrol
– Oil
– Vehicle registration (rego)
– Insurance
– Servicing
– Depreciation in value
For instance, if you covered a total of 30,000 kilometers during the year, with 6,000 of those kilometers being work-related, you can deduct 20% of your vehicle’s running expenses as a tax deduction.
It is crucial to retain your logbook records for a minimum of 5 years. It’s worth noting that you generally cannot claim expenses for commuting to and from work, as this is typically considered private use of your vehicle. However, you can claim expenses for driving performed as part of your job during working hours.
A lot of people don’t maintain logbooks and think they will “just do it” when the ATO comes knocking. We don’t think it’s Nike, so ..
Tip 4: Maintaining accurate logbook records is essential for maximizing your tax-deductible expenses.
The Cents per Kilometre Method
This method allows you to claim a maximum of 5,000 kilometers per year at a fixed deduction rate established by the Australian Taxation Office (ATO).
For the 2021/22 financial year, the tax-deductible rate stands at 72 cents per kilometer. This rate is intended to cover all your vehicle’s operating costs and depreciation.
For example, if you accumulated 4,000 business kilometers throughout the fiscal year and choose to utilize the cents per kilometer method, you could claim a tax-deductible car expense of $2,880.
However, it is imperative that you are able to demonstrate how you arrived at the number of kilometers you are claiming.
Tip 5: If your annual work-related car travel exceeds 5,000 kilometers, the cents per kilometer method offers you a viable means to calculate your tax-deductible expenses.
Is a car allowance considered a business expense?
Indeed, a car allowance is classified as a business expense for the business providing it. It is treated as an employee expense, akin to salary or wages. Consequently, businesses that disburse vehicle allowances are able to reduce their overall business income, resulting in lower tax obligations.
For entrepreneurs, offering allowances can be an appealing option. It can serve as an effective means of rewarding and retaining their staff.
It’s important to emphasize that a car allowance constitutes income for the individual receiving it and is not an expense, as previously mentioned. However, individuals can offset work-related vehicle expenses against their income, thereby reducing their tax liability.
Tip 6: For businesses, vehicle allowance expenses are tax-deductible.
Is it more advantageous to have a company car or a car allowance?
The suitability of either option depends on your specific circumstances, needs, and objectives. Both choices come with their own set of advantages and disadvantages.
The advantages of having a company car:
- If you possess a company vehicle, your employer assumes responsibility for all costs associated with its purchase and maintenance, reducing administrative burdens for you.
- Depending on the type of company vehicle provided, you may enjoy the use of a higher-quality car while working for your employer.
The drawbacks:
- If you leave your job, you will typically need to return the company vehicle to your employer.
- Opting for a company car might limit your freedom in choosing the type of vehicle you drive.
The advantages of having a car allowance:
- You are not required to return your vehicle if you decide to leave your job.
- You have greater flexibility in selecting the type of car that suits your preferences.
The drawbacks:
- Your allowance will cease if you leave your job.
- Your vehicle may not match the quality of a company car provided by an employer.
- You are responsible for all vehicle-related payments. Tip 7: Assess which option—company car or vehicle allowance—best suits your unique circumstances.
Novated Lease vs. Car Allowance
You might be contemplating whether a novated lease is a more advantageous choice compared to a vehicle allowance.
A novated lease presents itself as a financing alternative for a car, particularly if you work for an employer offering salary packaging, also known as salary sacrificing. Through salary packaging, your employer makes vehicle lease payments using your pre-tax wages, resulting in reduced taxation on your lower income.
In return, you gain the privilege of acquiring a new car for your exclusive private use or a combination of business and private purposes.
It’s important to note that novated lease payments typically encompass a portion for vehicle operating expenses in addition to the vehicle’s purchase price. However, novated lease payments are not eligible for tax deductions.
Employers are also obliged to pay fringe benefits tax (FBT) for novated lease vehicles. The prevailing FBT rate in Australia stands at 47%.
It’s worth mentioning that not all employers offer salary sacrificing, so if your employer does not provide this option, a novated lease may not be available to you.
Tip 8: If your employer provides the option of salary packaging, carefully evaluate whether a novated lease or a car allowance is more advantageous in your specific situation, keeping in mind that novated leases entail hidden costs.
Utilizing a Car Allowance to Aid Vehicle Loan Repayments
Car allowances can serve as a valuable resource to assist with loan repayments, particularly when obtaining a loan under a chattel mortgage arrangement—a financing option increasingly popular for new vehicle purchases. A chattel mortgage constitutes a secured car loan applicable to a vehicle used for at least 50% of business purposes. PAYG employees meeting this requirement may be eligible for a Chattel Mortgage. Secured loans typically come with lower interest rates compared to unsecured loans.
Whether you operate your own business or are an employee frequently utilizing your vehicle for work-related purposes, an allowance can be utilized to facilitate payments for your secured (chattel mortgage) loan. This approach can make a higher-priced car more affordable or expedite the loan repayment process.
Tip 9: Leverage a car allowance to assist in meeting your vehicle loan repayments. Other Car Allowance FAQs
What happens if I forget to claim my tax-deductible car expenses against my allowance?
Failure to claim your tax-deductible car expenses will result in 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 can opt for the logbook method if it yields 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 must utilize the logbook method in such cases.
Is there a minimum or maximum car allowance amount in Australia?
There is no specific minimum or maximum limit, but it’s important to note that the more you receive as an allowance, the higher your tax liability will be if you don’t have substantial tax-deductible expenses.
What is the most effective way to increase my car allowance?
Negotiating with your employer is the best approach. If you are a valued member of the staff, your employer should be willing to consider your request to keep you satisfied.
What is it all about then?
Car expenses constitute a significant financial commitment for many individuals. It is crucial to thoroughly evaluate all your financing options, including a car allowance, novated lease, or secured loan, to determine the most suitable choice for your situation.
Tip 10: Carefully assess all available vehicle finance options before making a decision that aligns with your needs. If you’re uncertain, consider consulting with a broker who specializes in vehicle finance.
There you have it folks, again. So many posts on cars. All leading to the same conclusion. That is they are generally speaking a bad idea. Both in terms of an investment. Or in terms of minimising your taxes. My advice, hang on to your car as long as possible. But, bear in mind that I don’t know your specific circumstances. At best, what you have just read is very generic advice. Don’t try to apply any of it without speaking to us first.
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