A growing number of Australian companies are offering car allowances instead of providing company cars as it unloads them of the burden of car ownership, including maintenance and tax obligations (if their staff use the company vehicle for personal use).
For workers, a car allowance offers flexibility and convenience. However, it also comes with financial considerations that deserve a closer look.
What is a car allowance?
A car allowance is a regular payment employers pay on top of employees' salaries to help cover the costs of using personal vehicles for work. It is paid directly to you and treated as part of your income - therefore, it's taxable just like your regular pay.
In Australia, car allowances are common for jobs that involve frequent travel, client visits, or fieldwork.
The allowance can be used to cover the running costs of your existing car, such as fuel (i.e. petrol or EV charging costs), servicing and repairs, registration and insurance, tyres, tolls, and roadside assistance. Basically, anything that helps keep your car on the road could be covered by your car allowance.
In addition to those, your motor vehicle allowance can also be used to pay for the purchase or lease of a car.
Car allowance vs reimbursement
A car allowance tends to be a fixed amount paid regardless of the exact kilometres travelled or wear and tear incurred. This differs from a reimbursement that is paid to you by your employer for specific work-related kilometres or expenses.
An employer might be more inclined to reimburse you on your existing vehicle, for example, if you are using the vehicle for incidental use, rather than regular work, e.g. a travelling salesperson.
Why employers prefer car allowances
Employers often choose a car allowance instead of providing a vehicle because it avoids fringe benefits tax (FBT).
A company car allows private use, triggering FBT for the employer. The compliance and tax burden can be significant; therefore, paying an allowance shifts responsibility to the employee and removes FBT obligations altogether.
For this reason, many employers prefer to provide car allowances rather than company cars, as they can be simpler, cheaper, and reduce administrative overhead.
How car allowances work
How much do you receive?
There is no standardised rate or legal minimum for car allowances. They can vary widely depending on the role, industry, and other factors. Employers generally set the allowance based on:
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Expected annual work travel
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Industry benchmarks
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Cost of running and maintaining a car
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Whether the role is metropolitan, regional, or requires fieldwork
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Whether employees frequently visit clients, job sites, or multiple locations
Some sales and field-service positions offer $15,000-$20,000 per year, but allowances can be much lower or higher depending on travel needs.
The agreement on the allowance amount is typically negotiated between you and your employer and set out in the employment contract.
How do you receive it?
The car allowance is typically paid weekly or fortnightly (depending on your regular paycheque interval) along with your wages and remains part of your taxable income.
How do you use it?
It is entirely up to you how you spend the car allowance. You can use it to cover costs of fuel or EV charging, registration, insurance, servicing and repairs, tyres, and other things that keep your car work-ready.
Because a car allowance is not tied to specific kilometres or receipts, employees tend to have more freedom - and more responsibility, though (more on that below).
You can even use your car allowance to finance an entirely new vehicle through various ways, such as a novated lease, chattel mortgage, or car loan.
Financing a new vehicle using a car allowance
Besides helping cover the running costs of your vehicle, you can use your car allowance to make repayments on your existing loan (if you currently have one) or finance an entirely new vehicle.
Novated lease
A novated lease is a three-way agreement between you, your employer, and the finance or leasing company. In this form of financing, your employer makes the loan repayments from your pre-tax salary on your behalf through a salary-sacrificing plan.
This means if the company you're working for offers both a car allowance and a novated lease, you could unlock multiple benefits. Not only does your employer pay you money to help with costs (car allowance), but they're also enabling you to reduce your overall tax liability as the payment comes from your pre-tax salary (novated lease).
However, the trade-off is reduced flexibility. You must choose a vehicle that meets the leasing provider's criteria and commit to a set lease term (usually two to five years).
Chattel mortgage
If your vehicle will be used mainly for business purposes (at least 51% of the time), it may qualify for a chattel mortgage. Under this arrangement, the lender takes a mortgage or a security interest over the vehicle until the loan is repaid. Once it's fully paid off, the security is removed, and the business gets ownership.
A chattel mortgage is popular among self-employed individuals as it allows them to own the car outright while potentially accessing business-related tax deductions (if eligible).
It's also ideal for employees who use their vehicle extensively for work. Suppose you also receive a car allowance, you can use it to cover the monthly repayments. With a chattel mortgage and car allowance combination, not only do you own the car, you also get the money to help you pay it off.
Car loan
Many employees who receive a car allowance may opt to put that allowance toward their loan repayments, effectively using it to offset the cost of owning and running their vehicle.
This setup gives you more flexibility: you get to choose the car you want, the lender you prefer to take the loan out from, and how you manage your vehicle - all with the financial support (car allowance) from your employer.
Note, however, that with freedom and flexibility comes responsibility. Since the loan is in your name, you are solely responsible if the car breaks down, loses value, or needs repairs. Additionally, if you choose a more expensive vehicle, your allowance may only cover part of the monthly repayment, so make sure it fits your budget.
Here are a few car loan options you may consider.
Tax considerations and benefits of a car allowance
Because a car allowance is added to your pay, it is considered taxable income. This means it increases your gross income for tax purposes. Additionally, it is taxed at your marginal rate.
However, the upshot is that you can usually claim deductions and depreciation against the car, because it is for work-related purposes. You can usually claim for car expenses as long as you use the ATO-approved methods.
1. Cents-per-kilometre method
This way, you claim a set rate per kilometre (up to the annual kilometre limit), which means there is no need to keep receipts, but you must be able to show how you calculated your work kilometres. The rate is set by the ATO each financial year.
This is best for employees with moderate travel.
2. Logbook method
The logbook method allows you to claim a percentage of all car running costs, based on how much you use the car for work. To use it, you must keep a 12-week logbook documenting work and private kilometres, record odometer readings at the start and end of work trips, and keep receipts for all vehicle expenses.
This is best suited for employees with high work travel or expensive running costs. There is more onerous documentation required, but potentially bigger tax deductions available.
More information can be found on the ATO website.
Take note: A major caveat is that you usually can't claim expenses if you have acquired the car through a novated lease, as you don't technically own the car and you are already claiming tax benefits.
Pros and cons of a car allowance
A car allowance can be a convenient way for employers to support staff who use their personal vehicle for work. But like any vehicle benefit, it comes with advantages and drawbacks.
Advantages
Full flexibility and choice
You can choose any vehicle you like - new or used, petrol or electric, budget-friendly or premium. There are no employer restrictions or fleet policies to follow. You also decide when to upgrade, sell, or modify your car.
You own the vehicle
Because the allowance is simply a cash payment, you retain complete ownership. If you change employers, you keep the car and any benefits that come with it. No returning vehicles or cancelling leases to be done.
Simple to administer
A car allowance is easy for both employee and employer. It's paid alongside your salary, with no need for complex leasing arrangements, fleet management, FBT calculations, or employer approvals.
Potential to come out ahead financially
If you drive a low-cost, fuel-efficient car or keep your running expenses down, the allowance may exceed your actual costs, leaving you with some extra cash.
Ability to combine with financing options
You can use the allowance to help fund a traditional car loan, a chattel mortgage, buying a car outright, or covering running costs (fuel, rego, servicing). Basically, it offers versatility other vehicle benefits don't provide.
Possible tax deductions
Receiving a car allowance does NOT prevent you from claiming work-related car expenses. You may be able to claim fuel, servicing, insurance, depreciation, interest on a car loan, and registration using the cents-per-kilometre or logbook method, provided you meet ATO rules.
Drawbacks
It is fully taxable income
This is the biggest downside. A car allowance increases your assessable income, which means you pay tax on the allowance, thus the amount you keep is less than what you receive.
You carry all costs and financial risks
Repairs, breakdowns, insurance increases, depreciation, tyre replacement, and major service costs all fall on you. An allowance may be able to help you cover a portion of it, but rarely fully.
If costs are high, you may go out of pocket
If you drive long distances for work, run an older car, or choose an expensive model, the allowance may not come close to covering your actual expenses.
Requires record-keeping if claiming deductions
The responsibility of record-keeping to claim tax deductions also falls on your shoulders. To claim car expenses, you need to track kilometres, keep receipts, and maintain a logbook (if using the logbook method).
This adds an administrative effort many employees overlook.
Not as predictable as a novated lease or company car
Running your own vehicle means variable fuel expenses, unexpected mechanical repairs, fluctuating insurance costs, and depreciation. These costs can be unpredictable, unlike structured lease arrangements or employer-provided vehicles.
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