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Running a business

Company cars: The pros and cons

A company car scheme: will it propel your business into the fast lane with happy, motivated employees, or send your balance sheet into a spin? There are pros and cons when providing company cars, so it’s wise to weigh up everything before making a decision.

Advantages of a company car scheme

Company cars can be a very attractive perk for staff as they’re a highly popular and visible reward. They give colleagues something to aspire to and may also attract new talent.

There are also several benefits for your business. You could turn your fleet into rolling billboards by having your logo or other company imagery and information painted across them. Even when the vehicle is parked, it’s still working for you, promoting your brand and raising visibility. A smart, clean vehicle also enhances an employee’s professional image when meeting with clients.

Having a company car is also very convenient – employees can easily travel to meetings without having to wait around for taxis. If you have invested in vans or utes, you can also use them for any delivery needs, saving on hire costs.

Businessman standing next to car

Costs of a company car scheme

Despite these advantages, providing a company car doesn’t just mean handing over the keys and being done with it. It means you as the employer are now ultimately responsible for a fleet of vehicles, which costs time and money to manage.

You will have to pay for the registration and insurance, as the car is ultimately owned by your company.

It’s also usual for all costs associated with damage to a company vehicle to be the responsibility of the company. You may have an excess provision for the driver, depending on your insurance contract. But unless you have made other arrangements, it’s down to you if the car is damaged.

Company car tax issues

There are also tax issues associated with providing vehicles. In most cases, you’ll have to pay fringe benefits tax (FBT).

That’s because a company car is nearly always considered a fringe benefit by the ATO if it’s also used for private use. “Private use” generally includes a vehicle being kept at the employee’s home, even if they only use it for work purposes and don’t have permission to use it privately. There are some rare exceptions, but in most cases FBT will apply.

Also note that as an employer, you still have to pay FBT if the vehicle is provided by a third party, for example if one of your business partners is a car dealer. If the employee receives the benefit in their capacity as an employee, it’s liable.

Novated leases: another option

One possible option is novated leasing – a potentially cost-effective alternative to managing a fleet of company vehicles. A novated lease involves a three-way agreement between the employer, the employee and a leasing company. The employer makes the lease payments out of the employee’s pre-tax income, thereby reducing their taxable income.

Unlike with company cars, the business doesn’t have to assume any risk and the employee vehicles are off the balance sheet. But you still may be able to access volume discounts if you have many vehicles under the scheme.

If you do introduce a company car scheme, it’s important to draw up a clear policy and sign a contract with each employee detailing the conditions. These may include who is responsible for running costs and maintenance issues, what the vehicle can be used for (business only or private use as well), as well as if any additional drivers are allowed, such as the employee’s spouse.

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