In Australia, it’s standard practice for employers to offer company cars. However, more and more companies are opting to give their employees a car allowance. This is because car allowances free them from the usual stresses of car ownership, including care, maintenance and fringe benefits tax obligations if they allow their employee to use the company vehicle for personal use rather than just work-related travel.
For employees, receiving a car or motor vehicle allowance is a benefit that can help them cover the cost of purchasing a vehicle or any actual costs associated with using their own car.
But what exactly is a car allowance? How does a car allowance work? And is a car allowance taxable in Australia? Is it enough if you want to get a new car, and how do you make the most of it? Our car allowance guide aims to answer these questions and more - covering work-related mileage, capital costs, and more.
How does a car allowance scheme work in Australia?
Australian companies typically include an employee company car allowance as part of the compensation they offer new hires to cover the costs of using a car for business purposes. These costs include fuel use, tyres, car repair and maintenance, insurance and registration.
The allowance can also be used to pay for the purchase or lease of a vehicle. It goes straight to the employees’ bank account during payday, although it can be specified separately in the employment contract.
In practice, though, the employee decides how much they spend on car-related expenses and how much they’ll keep as extra cash or allocate toward car allowance payments for an existing vehicle.
Ultimately, having a car allowance gives you the freedom to decide whether to get a new car, upgrade or keep using your old vehicle. If you use it to purchase a new car, you can take the vehicle with you when you resign from your job.
Having a car allowance also comes with responsibilities. You need to take care of finding a car (if you don’t own one yet) that’s suitable for your job, as well as insurance, other documentation and expenses.
You also need to keep track of your mileage and receipts, which you’ll need for making reports or claims related to vehicle use for work-related purposes.
Calculate how much a novated lease could save you each year.
Employee car allowance rates
While there aren’t any average car allowance rates or data, we usually come across figures ranging from $18,000 to $20,000 per year. However, your car allowance can also depend on other factors, such as your role in the company and your salary grade.
If you’re looking to buy a new vehicle, you can use part of your car allowance to finance it (but more on this later).
Using your existing car
You can also decide to use your current vehicle. This way, you can use your allowance as your vehicle’s running and maintenance allowance. You can then allocate part of your allowance toward the vehicle’s running costs – the very same ones you need to budget for if, say, you decide to buy a new vehicle.
However, you won’t need to worry about shelling out a substantial amount or making repayments if your old car is already fully paid. If it’s not, you still won’t have to worry about paying for a more expensive, brand-new car.
Finance options if you buy a new car
If you don’t have a vehicle yet or if your current car is in urgent need of replacement or doesn’t meet your work and lifestyle requirements, you may use your car allowance to service a loan or use it as down payment as opposed to using your allowance on maintenance and vehicle running expenses.
Your car allowance salary package should help in determining your options: Should you buy a new vehicle outright, and can you afford it? Or should you get financing?
Take a long hard look at your car allowance and finance options, make calculations and look at possible alternatives.
Chattel mortgage
Employees who get a car allowance and meet other application criteria typically qualify for a chattel mortgage. In this case, you’ll be borrowing money to finance the purchase of your vehicle to be used mainly for business purposes. You will then make fixed monthly repayments and own the vehicle outright. However, the vehicle is “mortgaged” to the lender as security.
Car loan
Getting a car loan is another option you can consider. You’ll be using your intended vehicle as security for the loan, and you won’t be able to borrow an amount that’s higher than the value of the car in question.
Home loan
You could also use equity in your mortgage if you have an existing home loan to finance your car purchase. This way, you can enjoy the low-interest rates that typically come with mortgages. However, you need to ensure to pay on time, as missing any repayments can lead to costly penalty fees or added interest.
Novated lease
A novated lease, aka salary sacrifice car scheme, is the gold standard of finance options and frankly the most beneficial one. It’s a three-way salary sacrifice or salary packaging agreement between the employer, the employee and the lease provider and provides a significant tax deduction and comes with many other benefits discussed below.
Why a novated lease is the best finance option
What happens here is that in the agreement, you are permitted to pay for your vehicle as part of your salary through car payments taken from your pre-tax earnings. Your income tax is then calculated based on your “reduced salary,” so you save a lot of money in the process.
You also won’t have to pay for goods and service tax (GST) on the car purchase price since you’re technically leasing it. This can save you a further 10 per cent on the cost of buying the car as opposed to regular consumer loans.
The car lease period usually lasts for a minimum of two years. You can then trade your vehicle for a new model and sign a new lease agreement at the end of the previous novated lease period. You also have the option to purchase the vehicle and pay a preset amount to keep it.
Because this type of lease is considered a win-win solution for both employers and employees, your Boss will likely have open ears to enter a lease agreement.
It not only allows you to upgrade or change car models every time the lease period ends, but it also helps you save on taxes. Your employer also benefits as the lease salary packaging doesn’t cost them extra.
Novated lease summary
WHAT IS IT?
A novated lease is a salary packaging arrangement whereby an employee pays for a car and all of the associated operating costs out of their pre-taxable income.
WHAT DOES IT COVER?
The cost of using a vehicle for business purposes - also known as business-related driving expenses:
Operational costs – fuel, servicing, maintenance, tyres, carwashes.
Ownership costs – registration, depreciation, roadside assistance, car insurance.
PURCHASE NEW, UPGRADE OR KEEP EXISTING CAR?
Purchase new
Upgrade
Keep existing
WHAT IS THE EMPLOYEE RESPONSIBLE FOR?
Financial
Legal
WHAT IS THE EMPLOYER RESPONSIBLE FOR?
Making the necessary deductions via payroll
The employer pays the lease rentals and operating costs directly to the lease company
WHAT ARE THE FINANCE OPTIONS?
Salary packaging
TAX BENEFITS?
With a novated lease, your employer will pay the leasing fees to the novated leasing company from your pre-tax income. This means you will pay less overall tax, even with the same tax deduction. This is not to be confused with when an employer chooses to withhold income tax of an employee.
BOTTOM LINE
Reduces your overall taxable income. Save money on taxes.
Special discounts related to running expenses such as fuel and servicing.
Package finance payments and running costs into one simple payment.
Don’t pay GST (paid for by lease provider).
When the lease comes to an end, you have the option to pay off the car or extend the lease agreement.
If an employee loses their job and the new employer doesn’t want to take over, the lease reverts to a finance lease without the Tax and GST benefits.
Don’t own the car – under a lease, you don’t technically own the vehicle. However you do have the option of owning the vehicle at lease end.
Is tax payable on car allowance?
Although employees can claim tax deductions on work-related car expenses, car allowance is considered taxable income. As stated on the ATO website, “it is assessable income, and the allowance must be included on your tax return.”
In Australia, you can calculate car allowance depending on your total income. What you can do is claim tax-deductible expenses in your year’s tax return, indicating work-related matters.
To be sure of what’s tax deductible, it’s best to discuss this with your accountant. You can also check the Australian Taxation Office (ATO) website to know exactly what items may or may not be tax deductible when it comes to a car’s actual expenses.
CAR ALLOWANCE TAXATION EXAMPLE (WITHOUT NOVATED LEASE):
If you earn $90,000 pa and your employer grants you a $10,000 car allowance, you will be taxed $3,700 additional to the $20,797 you would owe the ATO without a car allowance. Thus, your car allowance is essentially reduced to $6,300 (after tax). However, again, keep in mind that tax deductions on business-related car expenses can be claimed.
CAR ALLOWANCE TAXATION EXAMPLE (WITH A NOVATED LEASE):
With a novated lease however, your employer will pay the leasing fees to the novated leasing company from your pre-tax income, which means you will pay less tax and you can drive your dollars further. Because many car running costs are included in the novated lease, you are not able to claim those expenses in your tax return again.
Is super paid on car allowance?
Superannuation is generally calculated and paid to eligible employees based on their ordinary time earnings (OTE).
Your car allowance superannuation is determined by checking if the allowance provided by your employer is an expense that’s expected to be used. In such cases, your car allowance won’t be part of your OTE. But if there are no conditions attached to the allowance, then it will be calculated as part of your OTE and subject to superannuation.
How car allowance can affect a company
Benefits of a Car Allowance for Employers
For employers, providing a car allowance relieves them of the stress of procuring, maintaining and supervising the use of company cars, effectively saving them time and money. It can also help answer questions from employees such as “how much is a company car worth in salary terms?”
Attraction and Retention of Employees
Initially, having a car allowance can be an attractive prospect for new employees. With a car allowance, employees can purchase a car they want or pay for costs associated with a vehicle for work-related purposes. If they decide to buy a new vehicle, they get to keep it should they decide to leave the company.
Of course, employees who receive a car allowance are also responsible for the vehicle, including financing, insurance, maintenance, repair, etc. However, when a vehicle is nominated for business use, the employee also needs to keep track of business mileage and receipts for making reports or to claim mileage deductions.
Risk Management & Employee Productivity
A car allowance can also be less or more attractive depending on the actual going expenses of each employee. One might find their average vehicle-related work expenses to be higher or lower than the car allowance package allows. Even just a single employee can have variable expenses month after month due to fuel price fluctuations, actual mileage based on territories covered, and eligible expenses that may be higher or lower depending on location.
So, this variability can increase further when two or more employees’ car expenses are considered. Employees who need to shoulder additional costs out of pocket might find having a car allowance to be highly disadvantageous. Conversely, those who incur fewer costs but receive the same car allowance stand to gain from what they receive.
When this happens, employee productivity might take a dip. Those who feel they are being paid unfairly might resort to sabotage or avoid taking certain business trips to save on motor vehicle expenses. Others might just decide to leave, including high performers. Taken together, these can all impact your company performance and reduce employee morale.
So, even if the intent behind a uniform company car scheme is to give equal amounts to everyone, it can lead to problems and complications that require well-thought-out solutions.
What to be aware of when calculating car allowance amount?
Car Expenses Differ
One-size-fits-all cannot be your solution. Since no two employees in the same company can incur the exact same cost when it comes to work-related vehicle expenses, there is no quick and easy formula for calculating car allowances.
What employers usually do is estimate the business-related mileage an employee is expected to drive and the cost of using a personal vehicle. They start with the cost of fuel and move on to other expenditures, such as insurance, taxes, repair, maintenance and depreciation. Still, even with this model, a fixed car allowance may turn out to be too much or too little if it is implemented uniformly in a company.
Factors to Consider on Motor Vehicle Expenses
To make a car allowance fair, equitable and attractive to employees, you need to consider certain individual factors and actual data that can impact the amount spent on vehicle-related work expenses. These factors include the geographical location of your employees, the size of the territory they typically cover, and the vehicle type — which can significantly impact fuel use.
Doing this will make your car allowance calculation more realistic and fair. Moreover, you’ll also be boosting employee morale which, in turn, can positively impact productivity. A well-defined, individualised car allowance will not only attract new employees but also work to improve employee retention rates.
Average annual car running costs in Australia
Average annual car operating and running costs vary greatly and depend on a range of factors, such as the car/model, how far you travel, fluctuating fuel prices, etc…Below illustration will give you some rough overall average costs per annum.
References: Budgetdirect | Carchase
With a novated lease, most car running costs are included in the lease deal and you save big time. If you salary sacrifice a car, you could get a brand new Kia Seltos for $193/week (inclusive of the main running costs).
Car allowance summary
WHAT IS IT?
A car allowance in Australia is where an employer offers an employee benefit that helps cover the cost of purchasing a car or running costs. Employees can claim tax back at the end of the financial year by either using the cents per kilometre method or the logbook method.
WHAT DOES IT COVER?
The car’s business-related expenses, the cost of using a vehicle for work purposes:
Operational costs – fuel and oil costs, servicing, maintenance, tyres, carwashes.
Ownership costs – registration, depreciation, roadside assistance, car insurance.
PURCHASE NEW, UPGRADE OR KEEP EXISTING CAR?
Purchase new
Upgrade
Keep existing
WHAT IS THE EMPLOYEE RESPONSIBLE FOR?
Sourcing the vehicle
Insurance
Mileage Reimbursement
Receipts
WHAT IS THE EMPLOYER RESPONSIBLE FOR?
Administration of the allowance
Implementing a fair system
WHAT ARE THE FINANCE OPTIONS?
Chattel mortgage
Car loan
Home loan
Novated lease
TAX BENEFITS?
A car allowance will go directly into your account on payday. It’s considered taxable income and therefore is indeed taxable. Employees can however claim tax on their business kilometres using the logbook method by keeping a reccord of their business mileage by taking odometer readings. Alternatively, employees can use the cents per kilometre method to claim up to 5000 kilometres for tax mileage reimbursement.
DOWNSIDE
Tax waste
Variation in expenses
Risk management
Make things easy with easi
The decision to get a new vehicle is not to be taken lightly – even with a car allowance. There are costs, car loan repayment plans, interest rates, documentation, taxes, claiming car expenses and your super to consider.
So, why not consider getting a novated lease with Easi? If you still have questions regarding novated leasing, please contact us today or see how much you could save with our novated lease calculator!
