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 in Australia is a perk offered to employees by their employer instead of being given access to a company vehicle. It is essentially a top up on your salary and is considered taxable income.
But the specific aim is to cover the cost of financing and running a vehicle.
A car allowance can cover the likes of car finance repayments, car insurance, fuel, repairs, maintenance and registration & CTP cover.
Or more or less anything else related to your vehicle.
How does a car allowance work?
The way a car allowance works will depend on the individual company and its HR policies. Plus whatever terms the employee is able to negotiate as part of their salary package.
But here’s how it typically works:
1
You and your employer agree on the car allowance amount in your employment contract.
2
The additional car allowance is paid directly to your bank account (minus tax), usually along with your salary.
3
You choose how to spend it.
How much is a car allowance in Australia?
There’s no standard amount. It comes down to what the company is willing to pay. And what the employee can negotiate.
There are a couple of ways the amount could be calculated:
Based on an estimate of the actual costs that may be incurred by the employee for using their car for work purposes
An amount that reflects the employer’s desire to attract and reward employees
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
Using a car allowance to finance your 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.
Using a 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:
1
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.
2
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).
3
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.
Making your car allowance go further: Options compared
This comparison shows the cost 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.
The example is based on a purchase of a 2023 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.
