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Reviewed by Car allowances are a perk offered by some Australian employers, giving employees a helping hand with their car expenses. From buying a brand-new vehicle to helping them cover the cost of using their existing one, car allowances come in all shapes and sizes. Here’s what you need to know about them to help you maximise their benefits.
How do car allowances work?
Car allowances are decided by individual employers, so they’re likely to be different depending on where you work. However, the way they’ll generally work will be that, once you’ve agreed on an allowance with your employer, it can be included in your contract. From there, your allowance can be paid to you alongside your payslips.
What can I use my car allowance on?
There’s a range of different things you can use your car allowance on. Whether there are any restrictions on its usage will depend on the terms of the agreement between you and your employer. Here’s what you can expect to be able to do with your allowance:
- Cover running costs on your existing car: if you’re having to use your current vehicle for business purposes, your allowance can help cover its running costs. This can include things like petrol, car insurance, servicing and even existing car loan repayments.
- Buy a new commercial-use car: if you need a new vehicle that’ll be used for business purposes at least 51% of the time, you can qualify for a chattel mortgage. This loan product offers tax benefits like claimable interest, depreciation and GST on the purchase (up to the percentage of business usage).
- Take out a novated lease: novated leasing is another popular option for employees who need to finance a new car. Your lease payments and car expenses are deducted from your payslips before tax, reducing the amount of income tax you’ll have to pay.
- Buy a new private-use car: even if you don’t qualify for a chattel mortgage, standard car loans are still an option. This won’t offer any tax incentives, but having your car allowance help with repayments can be a significant boost.
How much can I receive as a car allowance in 2025?
There’s no definitive answer to how much you’ll receive for your car allowance. What it’ll ultimately come down to is the amount you’re able to negotiate with your employer.
However, according to novated leasing provider Vehicle Solutions Australia, annual allowances in 2025 usually vary from $10,000 to $20,000. The Australian Automobile Association’s Transport Affordability Index for Q4 2024 reports that the average annual transport cost for a two-car household in Australia is $24,486 for those in capital cities and $21,618 in regional centres.
Another factor that impacts allowances is their overall intent. For example, if employers are offering to partly or fully finance a new car, a larger allowance is more likely than if they’re just chipping in for on-road costs. If they want to entice new employees or reward existing ones, they might also bump up their allowance.
Example: using your allowance to run your car
Chloe works at a consultancy firm and needs to be on the road almost every day to meet clients around the state. To compensate her for this, her employer offers to pay $100 per week on top of her salary to go towards on-road costs. This amounts to an extra $5,200 per year.
With this allowance, Chloe is able to almost entirely cover her annual car insurance premium of $2,100 and petrol costs of $3,380 per year (based on $65 per week). Based on these costs, she’d only be less than $300 out of pocket at the end of 12 months for insurance coverage and fuel costs.
Do I have to pay tax on my car allowance?
Yes – car allowances are seen as part of your taxable income in Australia and taxed at regular rates by the Australian Taxation Office (ATO). However, you may be able to offset this tax liability by claiming a deduction for the business-related portion of your motor vehicle expenses.
Motor vehicle tax deductions cover expenses linked to owning and using a car for work purposes. As mentioned, you can claim car-related costs like fuel, repairs, registration, insurance, car loan interest, lease payments and depreciation. However, if you use your car for business purposes 65% of the time, you can only claim up to 65% of each of these costs.
The ATO provides two main methods for calculating these deductions: the cents per kilometre method and the logbook method.
How is a car allowance different from using a company car?
While a car allowance is offered to you to help cover the cost of running your car, a company car is one provided by your employer. This means you don’t own the car and won’t have full control of it.
The main benefit is that you won’t have to worry too much about the admin with a company car, as your work’s finance department will usually be on top of this. However, there may be restrictions on how you’re allowed to use it; for example, you may not be permitted to drive it for non-business reasons. If you have the choice between the two, it’s worth weighing them up to see which aligns best with your needs.
