Car allowance rates increases for FY24/25

When it comes to managing employee vehicle expenses, businesses in Australia have several options to consider, each with its own advantages and disadvantages. The three primary methods are offering a car allowance, providing a novated lease, or allowing employees to claim expenses using the cents per kilometre method. Each approach has distinct financial, logistical, and tax implications for both the employer and the employee. Understanding these differences is crucial for making an informed decision.

With an increase for FY24/25 in the Australian Tax Office (ATO) cents per kilometre rates for claiming a car allowance for work-related travel to 88 cents, we decided to outline the pros and cons of all options for HR Mangers to consider when staff travel for work purposes..

Car Allowance

A car allowance is a fixed sum of money provided to employees to cover the costs of using their personal vehicle for work purposes. This allowance is typically added to the employee’s salary and is subject to income tax.

Pros:

1. Flexibility: Employees have the freedom to choose their vehicle and manage it according to their personal preferences.
2. Simplicity: From an administrative standpoint, providing a car allowance is straightforward. Employers do not need to manage vehicle procurement, leasing, or maintenance.
3. Attractiveness: A car allowance can be seen as an attractive benefit, offering employees more cash in hand.

Cons:

1. Tax Implications: The car allowance is considered taxable income, which means employees will pay tax on the additional amount, potentially reducing the net benefit.
2. Cost Predictability: Employees may not allocate the allowance efficiently, leading to higher out-of-pocket expenses than anticipated.
3. Record-Keeping: Employees must keep detailed records of their business-related travel to claim deductions, which can be cumbersome.

A car allowance introduces Grey Fleet into a business which needs to be managed via a robust grey fleet policy.

Novated Lease

A novated lease is a three-way agreement between the employer, employee, and a finance company. The employer deducts lease payments from the employee’s pre-tax salary, reducing their taxable income. The employee gets to use the vehicle for both personal and business purposes.

Pros:

1. Tax Efficiency: By deducting lease payments from pre-tax salary, employees can reduce their taxable income, resulting in significant tax savings.
2. Convenience: The lease agreement often includes vehicle maintenance, insurance, and registration, simplifying vehicle management for employees.
3. Employee Retention: Offering a novated lease can be a valuable perk that helps attract and retain employees.

Cons:

1. Complexity: Managing novated leases can be administratively complex for employers, requiring coordination with finance companies and payroll adjustments.
2. Long-term Commitment: Employees are typically locked into the lease agreement for several years, which can be a disadvantage if their circumstances change.
3. Fringe Benefits Tax (FBT): Employers must account for FBT, which can complicate tax reporting and increase administrative burdens.

Novated leasing can introduce Grey Fleet into a business which needs to be managed via a robust grey fleet policy.

Cents Per Kilometre Method

The cents per kilometre method allows employees to claim a set rate for each kilometre travelled for work purposes. The Australian Tax Office (ATO) sets this rate, which was 88 cents per kilometre for the 2024-2025 financial year.

Pros:

1. Tax Simplicity: Employees can easily claim deductions without needing to provide detailed receipts, simplifying the tax reporting process.
2. Fair Compensation: This method ensures that employees are fairly compensated for their business travel without the need for complex agreements or allowances.
3. Flexibility: Employees can use any vehicle and are not tied to a specific allowance or lease arrangement.

Cons:

1. Rate Limitation: The ATO caps the claimable kilometres at 5,000 per year, which may not be sufficient for employees with extensive business travel.
2. Potential Shortfall: The fixed rate may not always cover the actual costs of operating a vehicle, such as fuel, maintenance, and depreciation.
3. Record-Keeping: Employees must keep a log of their business travel, which can be an administrative burden.

Allowing a cents per kilometre claim introduces Grey Fleet into a business which needs to be managed via a robust grey fleet policy.

Choosing the right method for handling employee vehicle expenses requires careful consideration of the pros and cons of each option.

Car Allowance: Ideal for its simplicity and flexibility but may result in higher tax liabilities and require diligent record-keeping by employees.

Novated Lease: Offers significant tax advantages and convenience but comes with complexity and long-term commitments that may not suit every employee.

Cents Per Kilometre Method: Provides a straightforward and fair way to compensate employees for business travel but may be limited by the ATO’s kilometre cap and could result in inadequate coverage of actual expenses.

Employers should assess their workforce’s specific needs, travel patterns, and administrative capabilities to determine the most suitable approach. Additionally, consulting with a tax professional or financial advisor can help ensure compliance with tax regulations and optimise the benefits for both the business and its employees. By understanding the distinct advantages and drawbacks of each option, businesses can make informed decisions that support their operational goals and enhance employee satisfaction.

Click here to find out more on the ATO website.