Friday, April 5, 2013

Company Cars vs. Car Allowance – Which one suits you?

By guest writer Phillip Owen

Does your employer give you the option between choosing a company car and a car allowance? Are you unsure on what option to choose?

Let us help you decide which option is best suitable for you. It makes sense to choose the path that allows your hard earned money to work smarter and give you some financial relief in one way or another.
Obviously both options have some advantages and disadvantages, but the key is to understand what both options entail.

The Pros and Cons: Company Car
A company car is a vehicle that the business owns and is then provided to their employees for use. Depending on the employer, a company car can be used for only business use or for both business and personal use. From both an employers and employees point of view, a company car can result is some distinct benefits.

For employees a company car can eliminate the need to purchase a vehicle and maintain it (fuel, service and maintenance, tyres and insurance) for business purposes. For employers, a company car can be promoted by the business as a perk reserved for high-achieving employees. It could also be used as a means of attracting new skilled employees and persuading them to relocate. On the other hand disadvantages of a company car include; restrictions on the choice of the vehicle, restrictions on the amount of personal use, the car has to be returned when the employee leaves the business and the fuel card provided can also be restrictive on where they can be used, plus a significant fringe benefit tax of 20% of the vehicle value.

The Pros and Cons: Car Allowance
A car allowance is a set amount of money that a business adds to an employee’s incomes to cover the cost of a car or car-related costs. Depending of the employer, a car allowance may pay for the full price of vehicle or, often, a car allowance is provided to only cover the cost of fuel, service and maintenance. A business usually provides the car-related costs car allowance to an employee that uses their personal vehicle for business purposes.

From an employer’s perspective, a car allowance can produce a number of attractive benefits. A car allowance is often easier to manage than a company car as the business is not responsible for the vehicle. As the vehicle is not owned by the business, it is owned by the employee by choosing a car allowance the business is saving time and money by not having to go through the process of sourcing, maintaining and administering a fleet of company cars.

From an employee’s perspective, they can benefit from a car allowance by having the freedom to choose what they want. As the car would be owned by the employee, there is no restriction to what make, model, colour and extras they wish to choose. In addition, of the employee decide to leave the company they are able to take the car with them, unlike the company car option where the car is kept with the company.

Although there are some convincing advantages of a car allowance, it is also important to note and understand its disadvantages. With a car allowance the employee is required to assume all of the risks associated with owning a vehicle (e.g., repairs, accidents and resale). An employee is also required to keep an accurate record of kilometres travelled and expenses used and required to drive a nominated business usage amount. Furthermore, when purchasing a vehicle the employee is responsible for sourcing and purchasing their car, arranging finance, organising maintenance and fuel, keeping track of kilometres and receipts and submitting a claim to an accountant. However, while noting this, employees do have the option to get a Novated Lease with their vehicle and by doing so are allowing a salary packaging company to do all the hard work for them.


------------------------------------
Phillip is a senior manager at Boost Salary Packaging Pty Ltd and prides himself on his knowledge and expertise, offering employees a cost effective and pro-active solution to meet their vehicle and salary packaging requirements. With over 25 years of experience within the vehicle fleet leasing and financing services industry within Australia and UK, as well as an Executive MBA, Phil takes a strong interest in ensuring that employee’s needs are met through the effective financing and salary packaging solution tailored to meet their needs now and into the future.

20 comments:

  1. Thanks Alton. This post has been the second highest read post since this blog commenced, but interestingly, nobody but you has commented.

    ReplyDelete
  2. Anonymous2:29 AM

    Can you receive a car allowance for simply driving back and forth to work

    ReplyDelete
  3. Sometimes a company provides an allowance for staff to use their cars for company business eg, to attend an intrastate training event or conference and they pay a car allowance of say $0.58 cents per kilometre to cover petrol and associated costs. It means not having a company car parked at a conference venue for a day or two that is unavailable to other staff.

    ReplyDelete
  4. Cars are very valuable nowadays. It determines access to job opportunities and economic advancement. It is no longer considered a luxury but a necessity. it gives a different sense of security and safety on the road. The excitement of looking for that right car often fuels the drive of the potential car owner to no end. Then again, there is the issue about financing a new car. This is one reason to dampen the spirant of the potential buyer and change his mind from purchasing his dream car.Oneminutecarloans.com offers an alternative way of owing a new car without the usual streets and headache. All it takes is initiative on the par of the potential car owner and oneminutecarloans.com will do the rest.

    ReplyDelete
  5. I currently give my employees a car allowance for traveling, but have been debating on allocating money to get fleet vehicles. This idea would basically be the same as a company car although I don't think I would let them take it home at night. After reading this I think it is something I should definitely push for and I think my employees would greatly appreciate it.

    ReplyDelete
    Replies
    1. Check out the taxation impact, if any, for the country in which you live before you take any final action Clarissa.

      Delete
  6. Anonymous7:36 PM

    I have just been offered a job with a 17k (Aus Dollar) car allowance. My current job has a company car-who can advise me on what to do next?

    ReplyDelete
  7. Anonymous ... contact a firm that manages novated leases and get some figures for leasing a company car of various types available eg, 4 cylinder, 6 cylinder, 4WD etc. When you find out how much it will cost, you can compare it with your offered car allowance which would need to cover fuel, maitenance and registration, insurance etc. Remember that use of a personal vehicle for approved company use is a taxable deducation against your income also, so that's worth checking out with an accountant or Tax Office too.

    ReplyDelete
  8. Anonymous3:09 PM

    We are setting up reimbursements for employees who are using their own vehicles. Are there specific forms to be completed? Should reimbursements be according to kilometers or depreciation value of the vehicle. Thank you.

    ReplyDelete
  9. The normal approach is to pay an amount per kilometre which incorporates wear and tear on the vehicle and estimated fuel usage. This approach is more equitable than a depreciation-based payment.

    You need to produce a policy which, among other things, requires employees to record their trips and a claim form completed at regular intervale eg, fortnightly.

    ReplyDelete
  10. Anonymous10:05 PM

    HI if I have a car allowance in the UK how much can I claim back per mile

    ReplyDelete
  11. Anonymous - A search on Google revealed the following details about UK taxation relief for car allowances: http://www.taxrebates.co.uk/mileage-allowance-relief/

    If your answer can't be found there, I suggest you contact the taxation office in your region and ask them.

    ReplyDelete
  12. Anonymous1:49 PM

    Possibly a stupid question....if I chose a car allowance and purchase a new car, are the car repayments tax deductible?? I know I can research it but can u summarise what a novated lease means? can I just hand back the car to the car dealer if I want to get a new car?

    ReplyDelete
  13. Anonymous, I've done your surfing for you: Read this and your question will be answered:
    https://www.strattonfinance.com.au/car-finance/learn/faq/novated-lease-salary-packaging/what-is.aspx
    The terms of any agreement you make with the novated leasing body will indicate when, how and under what conditions you can return the vehicle - or you can pay out the value and keep it.

    ReplyDelete
  14. Is parking expenses included in a company car?
    If not are these then tax deductible?

    ReplyDelete
  15. Parking expenses are not included in car lease agreement. Some companies may provide parking spaces or an allowance for same. I don't believe parking costs are tax deductible in Australia, but they could be elsewhere under specified circumstances. Check your local taxation office.

    ReplyDelete
  16. I got the offer from a company to get AU$ 18K as a car allowance in Brisbane. I am puzzled to select the allowance or a company car. in my job will have a moderate travelling. Can i ask my company to select any of the option later 6 months,completing probation period and till i will use company car. Is there any KM limit or boundary defines generally in car allowance, beyond that company will pay per KM.? What could be Tax benefits in car allowance?

    ReplyDelete
  17. Company car allowances and cars usually require payment of a "fringe benefits tax." A company can determine what it pays your for km allowance if you use your own car. However, I'm not qualified to provide taxation advice. I suggest you visit the Australian Taxation Office site (http://ato.gov.au) and do a search for fringe benefits tax. Alternatively, visit an accountant who can advise you properly. Thanks for your comment.

    ReplyDelete
  18. Anonymous6:55 AM

    Thanks this article helped me alot because we are rolling out benefits and need to choose what type of benefit to roll out. This HR person appreciates this!

    ReplyDelete

Thanks for commenting. Comments with inappropriate content or spam will not be approved.