Novated Lease Australia Guide

Car allowance in Australia: Your options explained

How much could you save on your car with a novated lease?

If you use your own car for work, there are a few different ways your employer can reflect this through your salary so you’re not out of pocket for any costs. A car allowance is one option. 

Let’s take a look at how a car allowance works and how it compares to the other main method of covering car expenses through your employer.

What is a car allowance?

A car allowance is an extra payment made to you by your employer that’s designed to cover car expenses you incur as part of your job. It’s sometimes used as an alternative to giving employees a company car. 

The idea is that it’s simpler to have staff use their own vehicles and then cover their work-related expenses than it is to manage a fleet of company cars.

A car allowance is different to an expense reimbursement, because it’s not based on actual costs. Instead, it’s generally a fixed amount that’s based on what costs you are likely to incur while using your personal vehicle.

Salary sacrifice car

What can you use a car allowance for?

A car allowance from your employer could be used to cover ongoing expenses you need to pay for to run your car and to get from A to B. The main costs here are the likes of fuel, parking and tolls.

It can also reflect other costs like insurance, registration, servicing and even the depreciation in the value of your vehicle while you are using it for work. These costs are not directly related to the use of your car for work purposes, but are costs of owning the car.

A car allowance could also be used to cover your car finance payments, which are, of course, another cost of owning your car. 

A car allowance is paid to you as cash along with your salary, so in reality you can use it for any purpose. It’s simply intended to cover your car costs.

How much should a car allowance be?

A car allowance is typically estimated to reflect actual costs the employee is likely to incur while doing their job. That means it will vary based on how much the employee uses their car and for what purpose.

Some companies may have a set policy that each car allowance is based on (e.g. according to estimated kilometres driven per year) or it may be calculated on a case by case basis.

To give you an idea of how much of a car allowance could be required to cover an individual’s car running costs, the average Aussie spends about $21,331 per year on their car, according to the Australian Automobile Association. That’s based on figures from the September quarter 2023 and includes car repayments, fuel, insurance, registration, CPT licensing, maintenance, roadside assist and tolls.


Is a car allowance taxable income?

Yes, according to the ATO a car allowance is generally taxed alongside your salary at the regular income tax rates. In other words, it increases your taxable income which is one of the ways it differs from the other main way an employer can help an employee with their car costs – a novated lease. 

Car allowance versus novated lease: how are they different?

A car allowance and a novated lease both perform a similar function for employers and employees: allowing you to cover car expenses through your salary. However, they are very different in terms of how they work.

In a nutshell, a car allowance is extra (taxable) income on top of your salary designed to cover work-related car costs. You may be able to claim a tax deduction on actual car expenses your car allowance is used to cover, according to the ATO. 

By contrast, a novated lease allows you to pay for your car and running costs using your pre-tax salary, meaning it lowers your taxable income and saves you on tax. 

You can get a novated lease either on a car that’s used for a mixture of work and personal use, or solely personal use.

With a novated lease, personal use of the car is subject to fringe benefits tax, which applies to most employee perks. But work use of the car is not subject to FBT, meaning it is effectively fully tax deductible.

A novated lease on an electric vehicle or plug-in hybrid will be exempt from FBT if the vehicle is valued below the luxury car threshold.

Can you use a car allowance to cover your novated lease payments?

Yes, it could be the case that an employee has both a novated lease through their employer and a car allowance. In fact, this can be one of the most cost-effective ways to drive, as you would enjoy a unique combination of extra salary (car allowance) and the ability to use your salary to cover car costs before tax is deducted (novated lease).

Here’s how it could work hypothetically:

  • Your novated lease payments would cover the entire cost of the vehicle and running costs (assuming it’s a fully-maintained novated lease). 
  • The car allowance would act as a top-up on your salary to offset the portion of the novated lease payment that is covering the work use of the vehicle.

However, the car allowance and novated lease would be shown separately on the employee’s income statements, according to the ATO – the car allowance as income and the novated lease as a reportable fringe benefit. Of course, if it’s an electric vehicle or plug-in hybrid that’s eligible for an exemption, there will be no actual fringe benefits tax liability.

We recommend getting personalised advice from a qualified tax professional to understand how a car allowance or novated lease could impact you based on your situation.

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Written by

Bevan Guest - NLA CEO


Bevan Guest

Reviewed by

Sean Callery Editor Novated Lease Australia


Sean Callery
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