A car allowance Australia policy can simplify expenses for both employers and employees — but the tax treatment often catches people off guard. This guide covers what a car allowance actually is, how the ATO taxes it, and what records you need to keep.
A car allowance is usually added to your salary and taxed as ordinary income. You can then claim actual car expenses (or use the cents-per-kilometre method) to offset the tax — but only if you keep records.
What is a car allowance?
A car allowance is a regular payment from your employer to cover the cost of using your own vehicle for work. It is typically paid as a fixed weekly, fortnightly, or annual amount on top of your base salary.
Unlike a company car, you own (or lease) the vehicle yourself. You bear the running costs — fuel, insurance, servicing, registration — and the allowance is meant to compensate you for those costs.
Car allowances are common in roles that involve regular travel: sales representatives, field service technicians, social workers, and site supervisors, for example.
Car allowance vs kilometre reimbursement: what’s the difference?
These two arrangements look similar but work quite differently.
| Car allowance | Kilometre reimbursement | |
|---|---|---|
| Payment structure | Fixed amount (e.g. $300/fortnight) | Variable — paid per km driven |
| Tax treatment | Added to salary, taxed as income | Tax-free up to the ATO rate |
| Records required | You claim deductions at tax time | Employer requires a km log |
| Admin burden | Low for employer | Moderate — requires submissions |
A kilometre reimbursement at or below the ATO rate (88 cents/km in 2025-26) is generally tax-free for the employee. A car allowance is taxable income, full stop — the employee then claims deductions separately.
See our full guide: Kilometre Reimbursement Calculator
Is a car allowance taxable income?
Yes. Under ATO rules, a car allowance is assessable income. Your employer includes it in your gross wages, and PAYG withholding applies just like any other salary component.
This surprises many employees who assume the allowance is paid “tax free” to cover work costs. It is not.
The good news: you can reduce the tax impact by claiming a deduction for your actual work-related car expenses on your tax return — provided you have records.
Claiming car expenses when you receive an allowance
If you receive a car allowance, you can claim your work-related car expenses using one of two ATO methods:
1. Cents per kilometre Multiply your work-related kilometres by 88 cents (2025-26 rate). You can claim up to 5,000 km per car. No logbook required, but you need a reasonable basis for the kilometres — trip notes, calendar entries, or a route diary all work.
2. Logbook method Keep a logbook for a continuous 12-week period. This establishes your “business use percentage.” You then claim that percentage of all actual vehicle running costs, including depreciation. This method is best if your business use is high and your vehicle costs are significant.
You can only claim the deduction portion that exceeds the allowance — or you claim the full deduction and declare the full allowance as income. The net effect is the same; the ATO wants both declared correctly.
For a detailed breakdown of both methods, see: ATO Car Expense Guide
Award rates and approved amounts
Many modern awards set a minimum car allowance rate. The Fair Work Commission periodically updates these rates, so check the relevant award for your industry.
The ATO also publishes an “exempt rate” — the amount below which a car allowance does not need to be included on your payment summary as a reportable allowance. For 2025-26, this is 88 cents per km (the cents-per-kilometre rate). Allowances expressed as a per-km amount at or below this rate, and paid only for actual work kilometres, are not taxable.
Fixed car allowances (e.g. $600/month regardless of kilometres) are always taxable income, regardless of the amount.
What records you need
Whether you are an employee claiming a deduction or an employer paying the allowance, records matter.
Employees should keep:
- A trip log or diary showing dates, destinations, purpose, and kilometres for each work trip
- Receipts for fuel, servicing, insurance, and registration (logbook method only)
- Evidence of the car’s odometer reading at the start and end of the financial year
Employers should keep:
- The written car allowance policy or employment contract clause
- Payroll records showing the allowance component separately from salary
Using a kilometre tracking app like Tripbook makes it straightforward to build a compliant trip log throughout the year, rather than trying to reconstruct records at tax time.
Is a car allowance better than a company car?
It depends on the employee’s driving patterns and the employer’s priorities.
Car allowance advantages:
- Simpler for the employer — no fleet management, no FBT lodgement on the vehicle itself
- Employee has full choice of vehicle
- Can be more cost-effective for employees who drive a newer, fuel-efficient car
Company car advantages:
- Employer controls the vehicle standard and insurance
- Fringe benefits tax (FBT) applies, but the employer can manage costs with employee contributions
- Some employees prefer not to use their personal vehicle for work
For most small businesses, a car allowance or a km reimbursement policy is simpler than maintaining a fleet. See our guide on FBT Car Benefits if a company car is on the table.
How to set up a fair car allowance policy
A clear written policy protects both the employer and the employee. Your car allowance policy should cover:
- Who is eligible — which roles attract the allowance
- Amount — fixed monthly/fortnightly figure, or a per-km rate
- What the allowance covers — fuel, wear and tear, insurance, or all costs
- Excluded travel — commuting is not a work expense; the policy should say so clearly
- Record-keeping requirements — what employees must submit (trip logs, odometer readings)
- Review cycle — how often the amount is reviewed against the ATO rate and CPI
If you use a per-km rate, aligning it with the ATO cents-per-kilometre rate (currently 88 cents/km) gives employees a tax-free reimbursement and removes the need for complex deduction claims. Employees can use Tripbook to track each work trip and generate a report you can approve directly.
A well-designed car allowance policy reduces disputes, keeps your payroll compliant, and means neither party faces a nasty surprise at tax time.
Ready to track work kilometres accurately? Download Tripbook and start building a compliant trip log from your very first drive.
