Car allowances are offered by employers across Australia and far too many people are unsure of how they work from a tax perspective. You need to determine what is the best way to use this car allowance, whether that comes in the form of own vs lease, or own vs finance. There is a lot of moving parts with car allowances that can lead to you saving a lot of money on tax and this article details what you should be focusing on.
What is a car allowance?
Your employer may pay you a car allowance to remunerate you for the expense of using your own car for business purposes. You typically would receive it along with your usual salary. The specific breakdown will be mentioned in your employment contract and on your payslip.
A car allowance is intended to cover the running costs of your car, including fuel, tyres, repairs, maintenance, registration, and insurance. The onus is on you to determine how much of the allowance you choose to spend on your car, how much you put toward running costs, and how much you may choose to keep in your pocket.
Can I save on tax with a car allowance?
Receiving a car allowance doesn't save you tax. It is a common misconception that a car allowance is automatically treated as tax-free income.
Regardless of the percentage of your car allowance spent on a work-related vehicle and its running costs, or what proportion of your driving is work-related, the entire allowance is treated as taxable income. This income may then be partly or wholly offset by claimable car-related tax deductions.
If your employer offers Fully Maintained Novated Leasing, you may have the option of foregoing your cash-in-pocket car allowance and instead put it towards salary sacrificing a car, which may reduce your income tax.
What can I claim as a tax deduction?
Simply put, at tax time you can claim a tax deduction for using your car for business purposes, in the same way, that you could even if you didn't have a car allowance. You can claim a deduction for work-related car expenses if you use your own car to:
- perform your work duties, for example, if you travel from your regular place of work to meet with a client.
- attend work-related conferences or meetings away from your regular place of work
- deliver items or collect supplies
- travel between two separate places of employment, but not if one of the places is your home (for example, when you have a second job)
- travel from your regular place of work to an alternative place of work (that isn't a regular place of work) and back to your regular place of work or home
- travel from your regular place of work or your home to an alternative place of work that is not a regular place of work – for example, a client’s premises
Car allowances are a great way of attracting employees to the business, however, when you receive one, there is a lot to consider ensuring that it is tax effective. If you receive a car allowance and think that you could be claiming more, contact Link Advisors and we will provide you with our thoughts.