Nowadays, employers are more dependent on a mobile workforce than ever before. This means more employees are expected to make visits to clients, third-party premises, or work from alternative offices. This has led to another incentive that employers have at their disposal, which is a car allowance.
A car allowance is not necessarily a work vehicle per se, rather it is the added income to either buy a new vehicle or cover the expenses associated with operating an existing vehicle for business purposes. For example, if you use your car more often than normal, it is likely to be exposed to increased maintenance requirements and costs. Expected fuel costs are another area which is covered under a car allowance. In the event there is money left over from the car allowance, an employee may retain this.
What should I be aware of?
Although the temptation may be to buy a new vehicle, there is a downside to this as far as your personal income. This is due to the fact that residual income from a car allowance is yours to keep. So if you purchase a new car, you’re more likely to be eating into funds that you otherwise would be able to put away in your bank account. The same goes for any cars that are high maintenance.
When you also consider that the allowance is taxable income, you will need to pay tax on this at the end of the financial year. Certain tax deductions may be available, however if you’re not aware of these before you accept the car allowance, you could be in for a surprise.
A car allowance should not be mistaken for a novated lease, since the latter involves three parties – you, your employer, and the financier of the car. There is a legal contract in place to buy a car, with the responsibility falling on the employee to fulfil their financial obligations.
Although a car allowance may be used to directly pay down a vehicle purchase if you don’t have a loan, you may also have the option to put it towards a chattel mortgage. This requires that you use the car at least 50% of the time for business purposes. Through a chattel mortgage, you immediately attain ownership of the vehicle.
The caveat however, is that the financier holds a mortgage over the car as collateral. You may opt to use the income from a car allowance to make repayments on the chattel mortgage, which is removed once paid in entirety. As a final note of caution, do make sure you are familiar with all the ins and outs of the agreement, including the likes of any fees for early loan settlement.