Written by 
Reviewed by 
- The Savvy Promise
At Savvy, our mission is to empower you to make informed financial choices. While we maintain stringent editorial standards, this article may include mentions of products offered by our partners. Here’s how we generate income.
Car allowances are a perk offered by some Australian employers, giving employees a helping hand with their car expenses. This guide covers what you need to know about car allowances to help you maximise the benefits.
What is a car allowance and how does it work?
A car allowance is additional income provided by your employer to cover the costs of buying or operating a car. It is an alternative to providing a company car and offers employees the flexibility to use their own transport for business purposes. The extra pay goes straight into your bank account, generally as a flat rate per month. The money is intended to go towards car-related expenses, such as fuel, repairs, maintenance and registration costs, parking fees and tolls. However, in reality you can use your car allowance for anything you choose since it is provided as cash, giving you control over how you allocate the funds.
Are car allowances taxed?
Yes, car allowances are seen as part of your taxable income in Australia and taxed at regular rates by the Australian Taxation Office (ATO). However, you may be able to offset this tax liability by claiming a deduction for the business-related portion of your motor vehicle expenses.
Motor vehicle tax deductions cover expenses linked to owning and using a car for work purposes. You can submit your claim to the ATO for car-related costs like fuel, repairs, registration, insurance, car loan interest, lease payments and depreciation. The ATO provides two main methods for calculating these deductions: the cents per kilometre method and the logbook method. Such deductions can be a boon for Australians who rely on their cars for work, offering the potential to lower their taxable income and increase their savings.
What is a fair car allowance in Australia?
A fair car allowance in Australia varies depending on individual circumstances and the nature of the employee's work. It's typically tailored to reflect the employee's anticipated expenses related to using their car for work tasks, such as fuel, maintenance, insurance, and depreciation. The allowance may also take into account the frequency and distance of work-related travel.
While there's no fixed standard, some companies may have a set policy for calculating car allowances, such as estimating kilometres driven per year or using industry benchmarks. Alternatively, allowances may be determined on a case-by-case basis through negotiation between the employer and employee.
When considering a car allowance, employees should assess if it truly covers their car running costs. According to the Australian Automobile Association’s Transport Affordability Index for September Quarter 2023, average transport costs are $24, 262 per year for capital cities and $20,404 per year in regional areas. This data can serve as a useful reference point for evaluating the adequacy of a car allowance.
What are my car allowance finance options?
Employees receiving a car allowance often meet the criteria for a chattel mortgage. This type of loan is suitable if most of your driving is for business purposes. With a chattel mortgage, you borrow money to buy a vehicle primarily for work, make fixed monthly payments, and eventually own the vehicle outright. However, the vehicle serves as security for the lender until the loan is fully repaid. You may also use your car allowance to help cover the costs of a secured car loan.
Alternatively, your employer might offer you the option of a novated lease in the place of a car allowance. In this arrangement, you essentially lease the vehicle through your employer, who deducts lease payments directly from your pre-tax salary. This can offer certain advantages, such as potential tax savings and the convenience of having your employer manage aspects of the lease, such as maintenance and insurance. However, it's important to carefully consider the terms and assess whether it fits with your financial goals and driving needs.
Did you find this page helpful?
This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.
The content on our website is produced by experts in the field of finance and reviewed as part of our editorial guidelines. We endeavour to keep all information across our site updated with accurate information.
Approval for car loans is always subject to our lender’s terms, conditions and qualification criteria. Lenders will undertake a credit check in line with responsible lending obligations to help determine whether you’re in a position to take on the loan you’re applying for.
The interest rate, comparison rate, fees and monthly repayments will depend on factors specific to your profile, such as your financial situation, as well others, such as the loan’s size and your chosen repayment term. Costs such as broker fees, redraw fees or early repayment fees, and cost savings such as fee waivers, aren’t included in the comparison rate but may influence the cost of the loan. Different terms, fees or other loan amounts may result in a different comparison rate.
