Many employers these days are offering car allowances as opposed to company cars, as then the employee is required to go and take out a form of car loan for themselves and if their employment ceased with their current employer, the car loan carries on with them and there is no ongoing commitment to the employer.
There are a few things to consider when using up your car allowance to assist with your vehicle purchase.
When being provided a car allowance, it is not just the car loan repayment that needs to be factored in. You also need to estimate how much you need to put aside for running costs and these costs could include fuel, annual insurances and registration costs, ongoing servicing and maintenance to name a few. Your car allowance is designed to cover all of this, so you’ll need to keep that in mind when budgeting and looking at various vehicles.
The most common form of a car loan for a car allowance in the past was a “Commercial Hire Purchase”. This form of car loan is being used less now due to new taxation rulings in regards to GST implications. Unless you are registered for GST and have the ability to claim the GST, this form of car loan may be the most costly, which is why a “Commercial Hire Purchase” is being used less and less.
Either a Chattel Mortgage or Consumer Loan are quite commonly used with car allowances. Both have the same outcome as to the ownership of the car, yet the Chattel Mortgage is declaring that the usage of the vehicle will be wholly or predominantly for business use. A Chattel Mortgage may have less favourable terms if the loan were to be terminated early though, so ensure that this is factored in when weighing up your decision. Because you own the vehicle, the available tax deductions may be the same with either structure, but speak with a tax professional first.
A Finance Lease is another option that can be used for a car allowance with the main point of difference with this structure is that the financier owns the vehicle, which you lease from them. This could result in the repayments being subject to GST. There is less flexibility of Lease Agreements in regards to the structure, due to the requirement of having a Residual Value at the end of the Lease.
Whichever way you decide to go, you should discuss your options first with a tax professional, then with a professional credit assistance provider so that you have the best outcome for your own intentions, which would include what your future intentions may be with your job and your car.
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