Establishing an Employee Car Allowance

In order to determine the amount of the car allowance to be provided to a new employee, one method is to simply use the set rate determined by the ATO , which is $0.66 cents per kilometre effective from 1st July 2015. This will then need to be multiplied by the estimated amount of business kms that the employee will travel each month for work trips required by the employer. If the total kms in any financial year is going to be less than 5,000kms, then the employer will not need to withhold any tax on the car allowance payments. If the expected kilometers is going to exceed the limit, then the employer will need to apply PAYG withholding under the rules, which Xero will handle.

For example, lets say that the employer reasonably estimates 10,000kms, then the employer would pay a car allowance of $6,600 p.a. as the car allowance amount to the employee. The employer's estimate, has no limiting impact on the employee to be able to claim deductions personally. For example, if their annual running costs of their car are actually $8,000, then this is what they claim on their personal tax return against the car allowance. Any tax withheld will then be refundable to the employee in this situation. If the employee's costs were only $4,000 in the year, then enough tax would have been withheld by the employer during the year to cover the employees tax liability, which is the outcome the ATO wants.

An option for the employee is for them to apply to the ATO directly to have the tax withholding on their car allowance "varied". The reason they would do this is so that they get more money in their bank account each payday, rather than it being withheld and sent to the ATO by their employer. Here is a link to the ATO website to enable your employee to submit an application for this to occur: (PAYG withholding variation application (e-variation))
Once processed by the ATO, the employer will receive a notice from the ATO instructing them on what action to take to vary the withholding for the particular employee. The employer must have this notice before they can vary any withholding for an employee.

Steps Required:

1) Employer to determine the reasonable estimate of Kms to be traveled for the year. They can then use the ATO rate to calculate the annual 2017 car allowance amount to setup for their employee's salary.

2) Employer or mi-fi to attend to the payroll setup and any withholding in Xero as required.

3) Employer to provide direction to their employee about how they can go about varying the amount of withholding on their car allowance, should they wish to do this.