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Company car vs. travel allowance: Which option is right for your business?

by , 11 September 2013
The choice between the company car and the travel allowance isn't an easy one to make. Each option carries tax pros and cons for your company and for your employee. If you don't understand the tax obligations and requirements linked to each, you'll find yourself in danger of tax penalties. Luckily, that's a risk you can avoid. Here are the pros and cons between the two...

If you're trying to decide between a company car or a travel allowance for your employee, this article is a must read.

That's because, to choose an option that suits your company AND your employees, you need to understand how these perks compare to each other.

So what are the pros and cons between the company car and travel allowance?

According to the Practical Tax Loose Leaf Service, ownership is the main distinguishing feature separating a company car from a travel allowance

With a company car, you tax your employee on the private use of the car, but in the end he can't call to the car his own.

Your company will carry the costs of insurance, financing, maintenance and fuel in full.

With a travel allowance, you compensate your employee for the business use of his private vehicle, but he owns the car.

What's more, he bears the costs of insurance, financing, maintenance and fuel.

How does depreciation influence the choice between a company car and a travel allowance?

A car depreciates all the time. The older it gets, the less it's worth. This means you can use depreciation to shrink your company's tax bill over time.

Your employee won't need to concern himself with depreciation calculations in the case of the company car.

But if you give him a travel allowance as part of a lease agreement in which he can acquire ownership of the car tax-free at the end of the lease period, he'll have to consider the impact of depreciation on the value of the car.

There are other factors you must consider when deciding between a travel allowance or company car:

These include accidents (risk), maintenance and kilometres travelled.

If your employee travels many kilometres (such as a salesman would), then a company car could be the most cost effective, especially in light of the high fuel price and interest rates.

But he must keep a logbook to ensure that when he files his annual return, SARS only taxes him on the private use of the car.
If your employee doesn't travel long distances on business, then the travel allowance option may be the way to go. BUT only if he keeps a logbook!

Once you've considered all these factors, write out your own scenario, complete with calculations. This'll make it very clear which option is the best for your company.

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