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how is a car allowance taxed

[ 28-Oct-2012 ]

Just wondering if you can assist or point me in the right direction please?

Firstly, we are in South Australia.

In the past senior council employees and those who require a vehicle have been provided with a council owned vehicle.

Recently 2 staff members have opted to forgo the council supplied vehicle to receive an annual payment for vehicle allowance eg: $20,000 pa.

Both have leased vehicles in their own names, with payroll deductions to the lease company, the majority of the repayment as salary sacrifice and part after tax – as advised by the lease company.

I set the allowance up as a ‘taxable allowance’ I believe this to be correct, then when the employee lodges their tax return they would claim work related vehicle expenses as a tax deduction.

Please can you confirm if my understanding above is correct or not and where I can go for supporting documentation?

I have looked on the ATO site but have not found anything relating to my question.

Good question and one that brings a tear to some employees eyes when tax time comes around…

There are 2 separate points to consider:

  1. The payment of the motor vehicle allowance – this allowance is generally made to cover the expected deductible costs associated with the business usage of the employees vehicle. This allowance is effectively assessable income to the employee in their tax return. An employee can then claim a tax deduction for their actually business motor vehicle expenses in their tax return, pursuant to taxation law. Now if the employer sets up the motor vehicle allowance as being 100% deductible ( i.e. the

    employee pays no tax on that allowance during the year), the allowance then appears on the employee’s payment summary and treated as assessable income in the eyes of the ATO. At the end of the year when the employee completes their tax return and only claims the business use of the vehicle – which is very rarely ever 100% of the allowance paid – the employee ends up with a tax bill which could effectively equate to the personal use of the motor vehicle. The employee may lodge a PAYG withholding variation short application 2013 - Allowances or HELP/Financial Supplement with the ATO who will then notify you of any applicable variation to the withholding rate on the motor vehicle allowance.

  2. Leased vehicles - when an employee salary packages a car using pre-tax dollars, they are effectively reducing their taxable income, therefore reducing their PAYG income tax. Now as a very basic rule of thumb (and subject to many variables), an employee cannot claim motor vehicle expenses in their income tax return if they salary package the vehicle as they have already received the tax “saving” by way of paying the vehicle costs out of pre-tax dollars. Furthermore, to offset some of this reduction in income tax, the Australian Tax Office levies another tax – FBT - on the benefit that has been provided and generally, the post- tax employee contribution is designed to negate this liability.

So yes, the motor vehicle allowance is taxable (subject to any withholding variation) however the employee may not necessarily be able to claim the associated leased vehicle expenses in their individual tax return depending on the nature of the lease.

Maria Nikoletatos

Chief Knowledge Officer

Category: Taxes

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