An increasing number of companies in Australia are choosing to implement a car allowance system that covers employees’ work-related car expenses, including fuel costs, maintenance expenses, and car loan repayments. This scheme also gives employees the chance to use their own vehicle for work and eliminates the stress of having to maintain a company car.
But what is a fair car allowance in Australia and how much should your employer cover?
Read through this article for the answer and learn more about how car allowance works in Australia and how you get reimbursed for business-related car expenses.
What is a Fair Car Allowance in Australia
According to the latest statistics, car running costs in Australia can go up to $16,912 a year, so a fair car allowance should cover at least part of those expenses, i.e. all the costs regarding the ownership and the operation of a car used for business-related purposes.
These costs typically include fuel, repairs, and maintenance, as well as insurance and registration fees. The car allowance can also be used for the purchase or lease of a new vehicle (more on this below).
In practice, it’s the employee who decides how much of the car allowance will be allocated for work-related expenses and how much will be put aside for repayments of an existing car or the purchase of a new vehicle.
What is a standard car allowance?
Although there is no set amount for car allowance in Australia, automobile finance company EasiFleet estimates that the average car allowance is between $18,000 and $20,000 a year.
However, the amount you are entitled depends on several factors, such as your salary grade and your position in the company.
How Does Car Allowance Work in Australia?
Most employers provide workers with a car allowance that covers expenses incurred while using the vehicle for work.
The car allowance is paid into your bank account together with your salary, with the difference stipulated on the payslip.
Car Allowance vs Company Car in Australia
There are some pros and cons to using a car allowance scheme.
1. You can use your own vehicle
The biggest difference between having a company car and being awarded a car allowance is that you can use your own vehicle for work and cover operational costs with the allowance.
There are several perks to using your own car.
Firstly, you can save some of your car allowances and use it to upgrade or repair your existing vehicle. You also won’t have to waste time and money on buying a new, more expensive car.
Secondly, you will not bear the burden of being responsible for someone else’s car. The latest road stats show that as many as 73% of Aussies have experienced or displayed aggressive behavior while driving, increasing the risk of the vehicle getting damaged in a traffic accident.
However, if your existing car no longer meets your work requirements, it’s time to consider allocating funds from your car allowance towards purchasing a new vehicle or switching to a company car scheme.
2. You can use the allowance to buy a new car
Since the latest data shows Aussies spending an average of $40,128 on a new vehicle, a car allowance will go a long way towards reducing your expenses. What’s more, if you take out a car loan and change jobs before the loan is paid off, it carries on with you and the employer no longer has any claim over the vehicle.
3. You decide on what vehicle you want to use
Instead of driving the company car allocated to you, with the car allowance system, employees are the ones who decide on what car they will use—whether it is their existing or a new vehicle. Either way, you get to keep the car even after you quit the job.
4. A car allowance can have a positive impact on the company
These are some of the benefits businesses can experience when using the car allowance system:
- It saves time and money on procuring company cars
- Boosts employee retention
- Attracts new employees
- The company could be entitled to fringe benefits
To take advantage of these benefits, though, employers must ensure that the car allowance they provide is fair. Otherwise, they could face a drop in productivity and efficiency from employees who feel the car allowance they get is too low for their expenses.
What about the downsides?
Having a car allowance as part of a salary package comes with plenty of responsibilities.
If you want to buy a new car, you will have to find one that meets the requirements of the job.
What’s more, you will need to save receipts and keep track of your mileage so you can justify the monthly payments when you make claims or file reports. In general, there is no need to keep records of what you do with your allowance, however, since car expenses are eligible for a tax deduction, it’s vital that you keep track of how your car allowance is spent.
Using Your Car Allowance to Buy a New Vehicle
You can choose to use the car allowance to repay a car loan or as a downpayment for a new vehicle.
Which option you go for depends on the amount of car allowance you receive as well as the finance options available to you.
Here is a brief overview of some of them:
Consumer Loan
A car loan is the most common financing option for buying a new vehicle. With a car loan, the borrower owns the vehicle outright and makes monthly payments, while the car is used as security and will most likely be repossessed if you are unable to make regular payments.
With this finance option, though, you cannot borrow more than the vehicle’s value. You will also have to meet other conditions that will determine if and how much you can borrow for a car loan.
If you have a home loan, you could use the equity in your mortgage to buy a new vehicle. This way you will get lower rates, but you will pay more interest over the life of the loan as mortgages tend to have a longer lifespan than car loans.
Chattel Mortgage
Employees who receive a car allowance could also apply for a chattel mortgage. This product is the same as a secured car loan but is mainly used for assets purchased for business use.
With it, you could deduct some costs as business expenses and pay less in GST, interest, and depreciation.
However, if you end the loan early you could face higher fees, so it is advisable to talk to a tax advisor who can tell you exactly what kind of deductions and penalties you could get with a chattel mortgage.
Car Lease
In this scenario, the lender owns the vehicle and is leasing it to you for a certain period of time. When the lease ends, you can either trade the vehicle, pay the residual value and keep the car, or simply give it back.
Novated Lease
A novated lease, or a salary sacrifice car scheme, is a three-way agreement between you, your employer, and the lease provider.
With a novated lease, your employer agrees to make the car loan repayments on your behalf from your pre-tax salary, which means your income will be lower and so will your income tax, making this scheme one of the best ways to save on tax in Australia.
You won’t pay GST either as you are basically leasing the car, instead of purchasing it.
Another benefit is that the lease covers operational and ownership costs, such as fuel, maintenance, registration, roadside assistance and insurance. Once the lease ends, you can opt to keep the vehicle or trade it in, so even if you move to another company you will not be stuck with a car loan repayment.
Is Car Allowance Taxable?
In short, yes. A car allowance is not tax-free income. In fact, a car allowance is treated as any income and taxed as such.
However, this income could be partly or wholly offset by claiming car-related tax deductions, which works in the same way as claiming ordinary work-related car expenses.
For more information on the difference between tax deductions and tax offset, read through this article.
Some examples of situations where you could claim for car-related tax deductions include:
- Going to meetings or conferences that do not take place at your office
- Collecting or delivering items
- Going from one job to another (if you have a second job)
- Visiting a client’s office or worksite
- Traveling to several locations a day as part of your job
There are two methods you can use to calculate tax deductions for car expenses:
- The cents per kilometer method: The current ATO rate is 72 cents per km for 2021/22. This method is suitable for those who only use their vehicle for work moderately since it is capped at 5000km, or at a maximum claim of $3,600.
- The logbook method is more suited to employees getting over $15k in car allowance and frequently using their car for work. You can create a physical logbook or use ATO’s myDeductions tool (free to use through the ATO app) to keep records of your expenses.
Note: If your car is provided under a novated lease, you cannot claim car expenses on your individual tax return as the tax deduction has already been claimed as part of the salary sacrifice scheme.
Mileage Reimbursement In Australia
Instead of getting a set amount each month as a car allowance, your employer could reimburse you for expenses incurred while using the vehicle for business-related trips.
This applies to scenarios where you use your own, the company or someone else’s car.
Note: Your employer does not have to use the ATO’s rate as they could choose to reimburse you for expenses at their own rate. But, if you get reimbursed at a higher rate than the current ATO rate you must declare the excess as income when filing your tax return.
Wrapping Up
A car allowance is one of the standard perks employers offer to their workers, particularly those who rely on a vehicle to do their work. And while some might still prefer to use a company car, more and more organizations are seeing the benefits of the car allowance system, which can result in a win-win situation for both the employer and employee.
FAQs:
1. How much is a typical car allowance in Australia?
The amount of car allowance on average in Australia ranges between $18,000 to $20,000 per year. That said, how much you actually get a year depends on the company you work for, the nature of your work, and the position you hold in that organization.
2. Does gross salary include car allowance?
Yes, although your employer could pay your car allowance as a gross or pre-tax payment, i.e. they won’t withhold income tax on your car allowance payments. In either case, you still have to declare the full amount in your tax return.
3. How is a car allowance calculated?
To determine what is a fair car allowance in Australia, employers calculate the work-related mileage an employee is expected to drive and the cost of using a personal vehicle.
However, even when using this model, it is difficult to get an exact estimate of how much a car allowance should be, resulting in situations where the allowance is not enough to cover the operating costs of a car.
