What is a fair car allowance in Australia?

What is a fair car allowance in Australia?

There is no average car allowance Australia that's widely recognised but a few factors can help you work one out for your employment position.

The Australia Taxation Office (ATO) set a claimable ‘cents per kilometre’ rate every year which is a great starting point but a fair car allowance is one which is going to be determined by how much you use your vehicle for business-use and what you and your employer agree upon as being fair for both parties.

What is car allowance and how does a car allowance work?

For those who aren’t familiar with what a motor vehicle allowance (MVA) is, it is a separate amount offered by your employer to cover expenses you, the employee, incur while using your personal vehicle for business use.

To clarify, it is not a reimbursement of expenses or an employee fuel allowance (where you submit receipts of fuel or car-related expenditure to the employer for repayment) but, rather, the allowance is a fair estimate on what expenses you might incur during your taxable year while using your own car for work Australia-wide. A car allowance salary package if often how it is offered.

Why might a company use car allowances? And how does a car allowance work for employees?

A company might use car allowances because they don’t want the hassle of maintaining and financing a fleet of company cars for employee use. In which case, the car allowance puts the onus back on the employee to secure, run and maintain their own vehicle using the car allowance offered.

This means the employee is the one responsible for everything associated with the car – insurance, finance, maintenance, fuel etc.

It also means the employee has to keep all receipts and, more often than not, a logbook detailing the kilometres they travel for work for their own tax accounting.

Most industries accept a logbook that records a minimum of three months of work but it is in your best interest to maintain accurate recordings and document all car associated costs.

A MVA means more work for an employee but the advantage of a car allowance vs company car Australia is that the employee gets to choose their own vehicle, even upgrading to a vehicle that is more fit for purpose.

Think of an apprentice who, upon becoming a fully-fledged tradesperson, upgrades their little knock-about for a ute or SUV, which would better accommodate their tools of trade.

Plus, the employee retains their asset if they leave that employment.

How can employers/companies calculate a fair car allowance? How much is a typical car allowance?

There is no official set amount for a car allowance in Australia. If you want to know how to calculate car allowance and whether or not the amount being offered is fair, then it’s time to do some work!

Calculate all of your vehicle costs for a year. This includes insurance premiums, servicing fees, fuel per week, maintenance items (oil, wiper fluid), tolls (business use only), cleaning fees (if you ferry clients) and financing costs.

Then determine how much you might use your car for business vs personal use. For example, if 80 per cent of your car use is for your employment, you can argue that 80 per cent of your yearly costs should be your allowance.

As an employer, there isn’t a ‘one fit for all’ method as your employees will have different expenses, as they have difference vehicles, and will live in different areas or service larger areas for work. It would be fairer and more equitable to determine a MVA per employee in regards to their business-use and needs.

To further answer how is a fair car allowance determined, let’s look at a specific industry for context as there may be an Industry Award which outlines a fair and minimum amount.

For example, a property sales consultant is entitled to a car allowance under the Real Estate Industry Award 2020.

It’s important to note that for this industry, there are two types of allowances – a standing charge plus an amount per kilometre of use or an agreed lump sum per week.

The average car allowance for sales consultants, who have a car under five years old with an engine over 2600cc (think Toyota Camry), the standing charge is $138.78 plus $0.21 per kilometre used, per week.

Or, if employee and employer agree, a lump sum payment of $248.87 per week, which equates to $12,941.24 over the course of a year.

In this instance, the Real Estate Industry Award makes it simple for both parties to determine if the rate of compensation is fair, as it’s an industry standard.

It is also easy for either party to calculate the allowance as it’s based on the employee’s engagement (full-time/part-time), the age of the car and engine cc size.

In general, you could negotiate for a higher car allowance, if you determine your business use and expenses exceed the award rate or the proposed car allowance being offered by the employer. Like any negotiation, the end figure will be determined by what you and the employer are willing to agree on.

But here is the big question - is car allowance taxable in Australia?

Yes. Generally, all allowances paid or payable to an employee are taxable for payroll tax purposes. However, motor vehicle allowances that do not exceed the exempt component are not subject to payroll tax. Payroll tax only applies to the amount exceeding the exempt component (Revenue NSW Gov).

There are two ways to determine car allowance tax when it comes time to claim at tax-time!

The first is the ‘cents per kilometre’ method which uses a set rate for each kilometre travelled for business.

The pros

• Doesn't require written evidence to show exactly how many kilometres you travelled but you may still be asked for proof on how you determined your business km use. So, it’s best practice to still keep a diary/logbook of business travel.

The cons

• Allows you to claim a maximum of 5000 business kilometres per car, per year but this might be too low if you travel a lot for your employment.

For the ‘cents per kilometre’ method, the claimable rate set by the ATO is at 0.85 cents per kilometre for 2023–24 but the maximum number of km that can be claimed is 5000.

With this method, you would multiply the total business kilometres travelled by the per cent rate. For example; 5000km x 0.85 = $4250 is claimable as a tax deduction.

The second option is the ‘logbook’ method.

This is where you have to keep very detailed record keeping; like a logbook for a minimum of 12 weeks, receipts on all expenditure on car-related items including (but not limited to) fuel, oil, servicing, finance etc.

This is an evidence-based method and ATO will expect you to have all of those records, should they require proof. You are required to have this record for five years.

The pros

• Can claim a higher tax deduction for car-related expenses for a FY.

The cons

• A lot of work is involved with this method – which might be hard for those who struggle with record-keeping.

There are two formulas for the ‘logbook’ method. First you have to work out your business-use percentage: distance travelled (business) divided by the total km travelled x 100.

For example – 7000km of business km/10,000km of total km travelled x 100 = 70 per cent of business use for the year.

The second formula is then working out what is claimable. Work out all of your car-related expenses and then multiply by your business-use percentage.

For example - $11,000 (car related expenses) x 70 per cent = $7700 is claimable.

If you have a set car allowance, as in the real estate example above, you want to be use the full MVA during your financial year towards car costs because if you get to tax time and you haven’t made sufficient deductions, you may owe tax.

It’s important to get professional financial advice regarding MVAs and subsequent financial, taxation and record-keeping responsibilities but as a former real estate agent, be smart. Don’t head into your office first and then head to an appointment; make your first destination a business-appointment to maximise your business-use percentage.

Is super payable on car allowance?

Superannuation is calculated and paid to eligible employees based on their ordinary time earnings (OTE). To not be considered a part of an employee’s OTE, a car allowance NSW needs to be an expense that is expected to be fully expended (fully used). If the car allowance is an unconditional extra payment, then it's considered OTE for super purposes. Find more information here on how to work out your OTE requirements.

This material has been prepared for information purposes only. It should not be taken as constituting professional advice and you should consider seeking independent legal, financial, taxation or other advice to check how the information relates to your unique circumstances.