Company Car or Car Allowance: Which one to choose?
One of the employment benefits most often talked about in Australia must be the company car. It’s a valued benefit, but with a variety of options due to tax law changes back in 2002, it’s hard to tell what is the right choice for you. Let’s walk through the two options, and explore some of the advantages and disadvantages of each.
What is the difference between a company car and a car allowance?
It’s important to make clear the distinction between these two choices, before drilling down into the details of each. First, the company car. As the name implies, in this situation the car is owned by the employer – that means loan payments and tax bills are all the responsibility of the employer. The employer/employee contact will state what types of maintenance issues are the responsibility of the employer versus the employee, whether or not the employee can add additional drivers (spouse, child, etc.), fuel and any other costs and restrictions.
A car allowance is an amount paid to an employee for the explicit purposes of purchasing and maintaining a car – sometimes it is called “cash for car.” When it comes to taxes, this option is tricky: you are not taxed on a weekly basis for the allowance, but does contribute to your overall taxable income. You’ll be expected to document how much of the allowance you did use for work-related driving expenses; any underages are highly taxed, and any overages can be used as a tax deduction.
What are the advantages/disadvantages of company car vs car allowance?
For employers, the distinction is usually clear: companies pay tax on the value of the company car benefit, so it may be in their best interest to negotiate car allowances as this means less overhead and maintenance on their part. However, this comes with less control and for companies that have a lot of employees driving significant amounts, a company car plan might be a better option.
For employees, there are more factors to consider, if you are lucky enough to have the option to choose. Firstly, you’ll want to be familiar with the deductions available to you from the Australian Tax Office – you may want to talk with an accountant before choosing, since understanding your potential tax in advance can be tricky.
Many Australians feel that the company car is a better deal, because most things are taken care of (accidents, oil changes, etc.) and it is less hassle. A car allowance requires a bit more paperwork on the employee’s part, but you do plan on using the car a lot for both work purposes and household, you might find that it provides a good savings cushion to reduce your car costs.
In any case, it all depends on the company car allowance offered versus your options for a company car, and any restrictions that come with it, so be sure to do all of your research before making a decision.
This was a guest blog post by Platinum Direct Finance. If you would like to learn more about how you can make a car allowance work for you, contact us today.
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