The benefits and drawbacks of three popular car allowances and packages

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If you have your own small business or if you are a sole trader, you may be considering purchasing a car through your business. There are several ways to do this, and we’ll talk about three. Each car allowance option has its own benefits and drawbacks, and we’ll be discussing them in detail. This will help you get a good idea on which one would work the best for your situation.


Car Allowance

A car allowance is money that a business adds on to an employee’s income, and it allows them to purchase a car and cover any car-related expenses. This allowance can pay for the full cost of a vehicle, or it will cover things like maintenance, fuel, and insurance. If an employee uses their own car for business, the company will usually add a car allowance to the employee’s income.   

Pros

  • A car allowance can be easier to manage than using a company car.
  • The employee can choose the vehicle they want to use.
  • The employee keeps the car if they leave the company.

Cons

  • An employee is responsible for any accidents, repairs, or resales.
  • They must keep an accurate driving log, noting the kilometers they traveled.
  • The employee is responsible for sourcing the car and arranging to finance.

A car allowance has many benefits for the employer simply because it makes the entire process simple. The employer will give a car allowance, and the employee assumes the risks that go with purchasing the car. However, the employee will own the car, and they get the freedom to choose which car they want.


Chattel Mortgage

In a chattel mortgage, either a small business or a sole trader will borrow money from a lender to purchase the vehicle. It works like a mortgage and you must pay interest along with the standard payments. Once the vehicle is paid in full, the financial lender will release the title to the sole trader or business.

Pros

  • The vehicle becomes a business asset.
  • You choose a repayment plan between one and five years.
  • There are fixed interest rates and monthly payment amounts.

Cons

  • Your monthly payment amount is not tax deductible.
  • Claiming the deductions and GST requires a lot of accounting work.
  • Your business pays interest instead of purchasing the vehicle outright with cash.

If a small business or a sole trader doesn’t have the extra money to purchase a vehicle outright, a Chattel Mortgage may be a good option to look into. You may also find that the potential tax benefits and your current cash flow are more important, and buying the vehicle straight away could hurt your business operations.


Novated Lease

A Novated lease means that you purchase your vehicle under a contract, and there is a balloon payment attached at the end of the contract’s date. You’ll make payments each month, and the final payment will be your balloon payment or a lump sum for the remaining amount you owe. This type of lease contract is between your employer, you, and the finance lender. Your employer will make the vehicle payment for you by taking the payment out pre-tax.

Pros

  • Your employer takes the vehicle payment out of your pre-tax earning amount.
  • Flexibility to choose your repayment terms from one to five years.
  • You can upscale and purchase a better car for less money.

Cons

  • The tax benefits may only be worth it if you’re in a higher tax bracket.
  • You won’t have much flexibility to negotiate the vehicle’s price.
  • The balloon payment might be higher than you expect.

The benefits for the employer with this type of vehicle purchasing program is they’ll know that each payment is being made on time because it comes out of the employee’s earnings before taxes. The employee potentially gets a better car for less money, and they don’t pay tax.

All three of these vehicle purchasing options have advantages and drawbacks associated with them. It is up to you to decide which option will work best for your small business. Purchasing a vehicle is a big deal, and you should think hard about your options.

 

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