How to structure your cars properly for tax

Purchasing cars for many small and medium businesses can be a significant cost.  And as accountants in Perth, we have clients with a single car salary packaged in the business and clients with a fleet of over 50 cars.

Regardless of the size of your business the cost of buying, running and maintaining a car comes with a significant tax cost.

Don’t buy a car

It comes as no surprise that with the multiple layers of tax regulation on cars together with the fringe benefits tax compliance cost many employers are choosing to opt out of the tax burden of purchasing cars.

And in a world of staff who simply need vehicles to work the answer of saying “no” is not an answer. However, a car can be paid to an employee with a generous allowance.

Option 1 – a car allowance

If you pay an employee the car allowance will be tax deductible in full to the employer. And no fringe benefits tax will apply to the allowance paid to the employee. So a car allowance for many employees is a simple way of getting a car to an employee.

Further, an employer can apply to the Australian Tax Office and request that no PAYG Withholding Tax is deducted from the allowance.  This can then mean that the employee receives the full gross value of the car allowance now which they can then spend on their work car.

From the employee’s perspective the car allowance is then taxable to them in full. However, the cost they spend in maintaining and operating a car is tax deductible to them. So the obligation to properly prepare a motor vehicle log book rests in the employees hands and not that of the employer.

Further, if structured properly part of a car allowance is not subject to Western Australian payroll tax.  And depending on how the car allowance is structured: the allowance paid to the employee will also not be liable for the superannuation guarantee levy.

Option 2 – a small truck

A car is a vehicle licensed to carry 9 passengers or less or is able to carry less than one tonne in the tray. The requirement for the “one tonne” has given rise to the general myth that a “ute” is exempt from fringe benefits tax. However this is not the case.  Only cars with a license to carry more than one-tonne in the tray are classified as “something other than a car”.

However, some cars/utes are now big enough to carry a tonne in the bed of the truck (not the towing capacity). The ATO has a register of car makes that do qualify (and you will be surprised at the amount of “tradie utes” that are not able to carry a tonne).

If you purchase a small truck, you will enjoy additional tax concessions.  For example, tax law currently restricts the amount you can claim as a temporary full expensing claim on motor vehicles up to a threshold ($60,733 in 2022). However, if you purchase a truck (or a bus) the cost limit that is applicable to motor vehicles does not apply.

This does not mean it is all easy though.  The ATO has issued tax guidance (PCG 2018/3) which still requires an estimation and calculation of the private use of the truck to be made.  If the truck/bus is still being used privately: fringe benefits tax might apply.

Option 3 – a novated lease

If you enter into a novated lease, you are effectively renting the car of another person.  And the rental obligation to the employer terminates when the employment contract ceases (with the default obligation going to the employee).

The primary benefit of a novated lease is that the employer is not stuck with a car when the employee resigns.  And while most employees are great people: some are not.  Some staff who intend on resigning, who are not great people, will effectively damage the car or drive in a reckless way.

If the car is a novated leased the employee is stuck with their own actions.  After they have resigned, they own the car that they treated poorly.

And the employer is not in the awkward position of becoming a second-hand car yard.

If you are a small business operator however a novated lease can be harmful.  Some banks, for whatever reason, will count the cost of a novated lease in the serviceability of the trading company and then they will count the cost of the novated lease (again) in the assessment of the individual.

Other options if you buy the car

Option 4 – a log book

Getting a log book with a high business percentage is one of the most common ways of getting a car to become tax effective. However, employers need to be careful about “forcing” staff to prepare a log book with a high business percentage.

Typically, a log book prepared by a team member is of poor quality and prepared to “shut up” the complaints of the accounting team. So a “dodgy log book” prepared by an employee will often fail an ATO review.

Option 5 – cents per kilometre

For those who have purchased a car – but have no desire to keep receipts – the set rate per kilometre method can be attractive.

The method creates a much less effective tax outcome for those with new cars and a high cost of operating a car.  Effectively the total tax deduction for a car is limited at $3,600.

It is important to note that the set rate per kilometre method to claim motor vehicle tax deductions is not a “free kick” for 5,000km.  You will need a detailed and reasonable estimate for how you came up with the estimated number of kilometre’s travelled.

If you are purchasing cars for your staff, you can also look at options where staff co-contribute to the cost of running a car.  This is a viable option as it can reduce the cost of fringe benefits tax on the car (which effectively rates the tax at 47%) and allows the employee to contribute to the car cost at their marginal rate.

Further, other considerations must be given to providing employees with a car.  The HR issues with workers owning cars and the use while on holidays, off road travel, dangerous driving and other family members must be considered.

What is important to note is that there is tax opportunity when the structuring a car for employment, tax and HR reasons is concerned.  And cloud accounting, HR software and payroll can now be integrated into the tax positioning of cars.

At Westcourt we are uniquely placed to help Perth families in business to structure cars for the family members and the broader team within the business.  By understanding the business and family needs combined with deep tax knowledge – our independent view can make a significant difference when trying to structure and remunerate your team with cars.

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