How to make the most of your car allowance

We’ve all heard someone tell the clichéd story about starting in the mailroom of a company and, through hard work and determination, eventually working their way up to CEO. But that was back when a smoke was a smoke, and groovin’ was groovin’ (thanks, John Mellencamp).

Basically, it was a long bloody time ago.

Things have most certainly changed. Now, the vast majority of people don’t stick with one employer their entire career. In fact, according to McCrindle we’ll have as many as 17 employers throughout our working lives.

As such, the days of company cars have gone the way of the dodo. You’re now much more likely to receive a car allowance instead.

What is a car allowance?

Because nowadays staff can be expected to be quite mobile (client and inter-office visits, etc.), employers will provide some extra money in addition to salary referred to as “car allowance”.

This additional income is made available to allow for fuel, maintenance and other running costs of an existing vehicle, or can be put towards payments for a new vehicle. Alternatively, you can keep it and pay for things as they arise out of your own pocket.

If you decide to use your own car, make sure it ticks all the boxes necessary to complete the tasks required for your job. For example, if you’ll be driving long distances it’s probably not a great idea to be doing so in a big V8 - as enjoyable as it is listening to the rumble and giving it a bit of a squirt every now and then, it’s not going to be great with fuel efficiency. If you’re towing something heavy, you’ll need something with a bit more torque than a Mitsubishi Mirage’s 100Nm.

Also consider how you would like to use your car outside of work hours, how often you want to upgrade and how important ownership is to you. If it does make sense to keep your existing car, treat the car allowance as some extra cash to put towards running costs and any repayments.

To make things easy for you, we’ve developed a calculator that’ll help clarify how to calculate a car allowance and how it can impact a lease.

What car allowance finance options are available?

The following three options are available for you to utilise your car allowance to get car financing. Which one is right for you will depend on your specific circumstances.

1. Commercial finance/Chattel mortgage

Many employees who get a car allowance will qualify for a chattel mortgage. If most of your driving is done for business purposes and you meet the application requirements, a chattel mortgage will typically offer you a better deal and more flexibility than other consumer loan products.

Alternatively, you may be eligible to apply for a car lease. While there's no option for trade-in or deposits (and you should be aware of the fixed minimum residual values set by the ATO), this option gives you the flexibility to either pay out the residual at the end of the term, or upgrade to a newer vehicle.

1. Consumer Loan

If you're not eligible for commercial finance, you may consider a car loan or secured personal loan. By using the car you're buying as security for the loan, you can lock in a great rate (but you won't be able to borrow above the value of the car you're buying).

If you have a home loan, you may be able to use equity in your mortgage to buy a car. While this will typically offer you a low rate, unless you pay the extra loan amount off quickly, you may end up paying a very high amount of extra interest over the life of the loan – far higher than you'd pay with a typical three- to five-year car loan. We’ve got another article here which explains why this isn’t always a great idea.

1. Novated Leasing (and salary packaging)

Your employer may offer you the option to forego a car allowance in favour of a novated lease, also known as salary packaging or salary sacrificing. Novated leasing allows you to pay for your car (and, in the case of a Fully Maintained Novated Lease, your operating costs) with your pre-tax income.

It can save you GST and income tax, and also gives you the convenience of a simple regular payment that covers all the expenses of owning and running your car, which can be really beneficial for budgeting purposes.

Is car allowance taxable or not?

Contrary to popular belief, car allowance is not actually taxable. However, running costs of your car that relate directly to using it for business purposes may be tax deductible, therefore reducing the total amount of tax you pay.

It’s always a good idea to speak with your accountant and/or check out the ATO website for what is and what isn’t deductible.

Speak with us to maximise your car allowance

We have a huge amount of experience working with Aussies to get the absolute most out of their car allowance. Speak with us today to discuss your car allowance options on 1300 787 288 or by sending us a message online.