Car allowance in a nutshell…
- In a competitive labour market, many Australian businesses are introducing new ways of rewarding their employees.
- For staff who need to use their car for work, a car allowance is a common perk.
- It’s popular for employers as it’s often more straightforward than providing a company car.
- And there are major advantages for employees too.
What is a car allowance?
A car allowance is a benefit some employers offer instead of providing a company car. Rather than handing you the keys to a work vehicle, your employer gives you extra money on top of your salary to help cover the costs of owning and running a car.
This allowance is considered part of your income, so it’s taxable – just like your regular pay.
In Australia, car allowances are common in jobs that involve a lot of travel, like sales, client visits or field work. The idea is to help cover all the costs that come with using your own car for work. That includes things like:
- Car loan or lease repayments
- Fuel (i.e. petrol and EV charging costs)
- Car insurance
- Registration
- Servicing and repairs
- Tyres, tolls and even roadside assistance
Basically, anything that helps keep your car on the road and work-ready could be covered by your motor vehicle allowance.
How does a car allowance work?
A car allowance is an agreed amount of money paid by your employer – as part of your salary package – to help cover the cost of using your personal vehicle for work. It's treated as taxable income and paid directly to you, giving you the freedom to manage your own car expenses.
Here’s how it typically works:
Agreement on the allowance amount
The car allowance is negotiated between you and your employer and set out in your employment contract. The amount can vary depending on your role, expected travel and company policy.
Paid with your salary (minus tax)
The allowance is included in your regular pay and taxed like normal income. It’s not a reimbursement, so you don’t need to submit receipts or logs unless your employer requires it for record-keeping.
You decide how to use it
Once paid, it’s up to you how to spend the allowance. It’s commonly used to cover costs like fuel, car loan repayments, insurance, registration, servicing and maintenance. You’re responsible for managing all vehicle-related expenses.
How much is a motor vehicle allowance?
Based on an estimate of the actual costs that may be incurred by the employee for using their car for work purposes
To give you an idea of typical car running costs in Australia, the average car loan is $33,489 with an interest rate of 10.14% p.a. – that’s around $714 in monthly repayments, according to real Money.com.au customer data. On top of that, the average car insurance premium is $929 a year. Annual registration costs $1,752 while fuel adds up to about $4,726, based on data from the Australian Automobile Association.
As part of a broader remuneration strategy
In this case, the car allowance may not strictly reflect car-related expenses but rather serve as an incentive. It can represent the employer’s commitment to attracting and retaining talent – particularly for roles where a company vehicle isn’t provided, but personal transport is essential. The amount may also act as a perk to reward seniority, performance, or to remain competitive with industry benchmarks.
If you’re thinking of asking your employer for a car allowance to be added to your salary package, or you’re already in discussion about one, here are some things to think about.
- Will the car allowance actually reflect my costs (think direct costs like fuel, but also wear and tear and depreciation)
- If you’re considering buying a new vehicle with finance, you’ll want to calculate and factor in your loan repayment amount plus running costs
Car allowance to finance an existing vehicle
Naturally, many employees will already own a vehicle. This could either be one they own outright or through an existing finance arrangement.
You are free to use your car allowance to make repayments on your existing car loan. Or split the amount between payments and running costs.
Once you’ve finished repaying your loan, you can allocate your car allowance entirely toward operational costs of the vehicle. Or you might consider using your car allowance to finance a new vehicle and start over.
Car allowance to finance a new vehicle
If you’re thinking of using your car allowance to finance an entirely new vehicle, there are a few ways you could do that:
Novated lease
A novated lease is a unique form of finance that uses your pre-tax salary to make payments on a vehicle and its running costs (you're salary sacrificing your car).
If your employer offers a car allowance AND novated lease, this means multiple benefits.
Not only is your employer giving you money on top of your salary to help with car costs (the car allowance).
They’re also enabling you to pay less tax on those funds through the novated lease.
Chattel mortgage
If the vehicle is used for business purposes at least 51% of the time, it may qualify for a form of secured business finance called a chattel mortgage.
It’s a popular option with self-employed people.
A chattel mortgage can bring significant tax benefits that a personal loan won’t.
But you still have the flexibility to use the vehicle for personal use (up to 49% of the time).
Car loan
Lastly, you can always use your car allowance to make payments on a car loan.
While this may not offer the same benefits as the two options above, it’s still a very popular way to finance a vehicle.
Secured car loans typically have lower interest rates than unsecured personal loans but can still be used to buy a new or used car, depending on its age.
Comparing your options to finance a car
The comparison below shows the cost of financing and running a vehicle over a 5-year period with a novated lease, car loan or paying for it outright with cash.
The comparison includes indicative car running costs, based on 15,000km driven annually.
It’s based on a purchase of a Tesla Model 3 RWD, with a purchase price of $66,100 (with a novated lease residual value of $18,967). The comparison assumes an annual salary of $120,000.
Quickly work out
Compare your options
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