Company car or car allowance? How each is taxed, what each costs a small business, the risks when staff drive their own cars and the effect on borrowing.
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Company Car · Car Allowance · Staff Vehicles
An allowance looks like the easy option because nothing is financed. It still has payroll costs and a safety duty attached. Here is how the two compare on tax, yearly cost, risk and what the business can borrow next.
Quick Answer
A company car gives the business control of the vehicle but brings finance, running costs and fringe benefits tax, while a car allowance or cents per kilometre payment moves the cost and risk to the employee's own car but still has payroll and safety obligations. A company car is usually funded with business vehicle finance, and every loan counts when the business next borrows. The comparison below sets the two side by side.
Also called: car allowance, vehicle allowance, motor vehicle allowance. A cents per kilometre payment covers business kilometres actually driven, so it is not the same thing as a flat allowance.
Is it better for a small business to provide a company car or pay a car allowance?
Neither one is better across the board, and the common belief that an allowance is the cheap, simple option is only half right. Nothing is financed and no vehicle sits on your books, but the business still pays on-costs, still carries a safety duty and gives up any say over what turns up at a customer's site.
The real choice is control or cash. A company car costs more to run and brings tax and debt, and in return the business decides the vehicle, the signage, the servicing and who drives it. An allowance hands the employee cash and leaves those decisions with them.
| What you are weighing | Company car | Car allowance or cents per kilometre |
|---|---|---|
| Who owns the car | The business, or the financier until the loan or lease ends | The employee |
| Upfront cost | A deposit where the lender asks for one, plus any fitout and signage | Typically none |
| Running costs | Paid by the business: fuel, servicing, tyres, registration and insurance | Paid by the employee out of the allowance |
| Tax | Fringe benefits tax typically applies where the car is available for private use | Paid through payroll, with withholding and on-costs depending on how it is set up |
| Control and branding | The business picks the vehicle, the signage and the service schedule | The employee picks the vehicle, within any policy you set |
| Safety duty | Sits with the business, which also controls the maintenance | Still sits with the business for work driving, with less control over the car |
| Effect on borrowing | Each loan or lease is a commitment a lender counts, with treatment differing between lenders | No vehicle debt, though wages costs are higher |
In practice, the split usually follows the job. Where the vehicle is a tool of the role, carries stock or equipment, or needs to look like your business, a company car tends to suit. Where a staff member drives to the odd meeting in a car they already own, an allowance or a per kilometre payment tends to be enough.
What is the difference between a car allowance, cents per kilometre and an award vehicle allowance?
The three are different payments with different rules, even though staff often use the names interchangeably. Getting the label right matters, because it decides how the payment runs through payroll and whether an award minimum applies.
- A car allowance is a set amount paid each pay period for making a private car available for work. It is paid whether the employee drives a lot or a little that fortnight.
- A cents per kilometre payment is paid on business kilometres actually travelled, at a set rate per kilometre. The Australian Taxation Office publishes a rate that many businesses use as their reference point, and it is reviewed from time to time, so check the current figure with your accountant before you set yours.
- An award vehicle allowance is the amount a modern award or registered agreement requires when a covered employee uses their own vehicle for work. Fair Work's page on uniforms, vehicle and travel entitlements (read 13 November 2026) explains that payments for vehicles are set by the award or registered agreement that covers the employee.
If an award or agreement covers the role, start there. What the business pays on top is then a matter for the employment contract and your own policy.
Is a reimbursement the same thing as an allowance?
A reimbursement is not the same thing as an allowance. A reimbursement repays a cost the employee actually incurred for the business, backed by a receipt or a kilometre record. An allowance is a set amount that may or may not match what the driving really cost. The two can be treated differently at tax time, which is why the records matter. Asking staff to keep a logbook of business trips is typically what makes a per kilometre payment defensible.
How is a company car taxed compared with a car allowance?
A company car is typically taxed in the hands of the employer through fringe benefits tax, while a car allowance is typically taxed in the hands of the employee through payroll. That is the decision-level difference, and it is why the two cannot be compared on the headline amount alone.
The company car. Where a car the business holds is available for an employee's private use, FBT typically applies, and the employer pays it. Against that, the business generally claims the running costs and depreciation, and a registered business can usually claim GST credits on the purchase and expenses, within the limits that apply to cars. How the tax is calculated, and which vehicles sit outside it, is covered in our guide to FBT on a company car. The cap on what can be claimed for a higher value car is in our luxury car finance post.
The allowance. Because the employee owns the car, there is typically no car fringe benefit. But an allowance is still a payroll item. It is generally reported through payroll, tax is typically withheld from it, and depending on how it is structured it may count toward the earnings that super is paid on and toward wages for payroll tax in your state. Those rules vary by state and by how the payment is set, so the after-tax cost of an allowance is usually higher than the amount on the payslip.
Which side comes out ahead for your business is a calculation, not a rule of thumb. Your accountant can run both using your actual vehicles and pay arrangements, and if a company car looks like the answer, you can check eligibility for the finance before you commit.
What does each cost the business over a year?
Over a year, a company car costs the business the finance plus everything it takes to keep the vehicle on the road, while an allowance costs the payment plus its payroll on-costs. The trap on the first side is that the car costs more than the repayment, and the trap on the second is treating the allowance as the whole bill.
| Cost line | Company car | Car allowance |
|---|---|---|
| The vehicle itself | Loan repayments or lease rentals, and any balloon payment at the end | Nothing. The employee funds their own car |
| The regular payment | None beyond normal wages | The allowance or per kilometre amount, every pay run |
| Fuel, servicing and tyres | Paid by the business, and they rise with kilometres | Paid by the employee |
| Registration and insurance | Paid by the business | Paid by the employee, though you should confirm work use is covered |
| Tax and on-costs | Fringe benefits tax where private use applies | Super and payroll tax where they apply, varies by state and structure |
| Downtime | A replacement or hire car while yours is off the road | The employee's problem, but the work may still stop |
| Administration | Fleet records, fines, servicing and fuel cards | Kilometre records, licence and insurance checks |
| End of the term | Resale value comes back to the business, or the vehicle is handed back on a lease | Nothing to sell and nothing to hand back |
No dollar figures sit in that table on purpose. The numbers move with the vehicle, the kilometres, the state and the tax position of the business, so an illustrative layout is more honest than an average.
Where is the break-even point between a company car and an allowance?
The break-even point is set mainly by business kilometres and the type of vehicle, not by a single number that suits every employer. A company car carries fixed costs whether it moves or not, so a car that barely leaves the yard is expensive per kilometre. A per kilometre payment grows with every trip, so a role that covers long distances every week can cost more on an allowance than a financed vehicle would. Ask your accountant to model the crossover using a year of real trip data. How quickly the vehicle loses value also feeds the answer, and our business vehicle depreciation post explains that side.
What risks come with staff using their own cars for work?
The main risks are a safety duty you still hold, insurance that may not respond and a vehicle you have never inspected. Paying an allowance moves the cost of the car to the employee. It does not move the responsibility for work driving. The short version is their car, your duty.
- Work health and safety. In principle, an employer's duty to provide a safe workplace extends to driving done for work, including in a car the employee owns. A business is generally expected to take reasonable steps to check the vehicle and the driver are fit for the job.
- Insurance for business use. A private motor policy may not cover business use, or may cover commuting only. A claim can be reduced or declined if the insurer was never told the car is used for work. Ask each employee to confirm in writing that their comprehensive insurance covers the way the car is really used.
- Vehicle condition. You have no control over servicing, tyres or the age of the car unless your policy sets a standard.
- Licence and registration. A lapsed licence or unregistered car is the employee's breach, and it can become the business's problem after an accident on a work trip.
- The customer's view. An unmarked private car at a client's premises says nothing about your business, and sometimes says the wrong thing.
The fix is to pick the vehicle policy before the vehicle. A short written vehicle use policy typically covers who may drive for work, the minimum standard for a private car, the insurance staff must hold, how kilometres are recorded, what happens after a fine or an accident, and how the payment is reviewed. It applies just as well to company cars, where it also sets the rules on private use.
How does a small business finance vehicles for staff?
A small business usually finances staff vehicles in one of three ways: a chattel mortgage where the business owns the car, an operating lease where it rents the car, or a novated lease where the employee leases the car and the business makes the payments from their salary. The right one depends on whether you want the vehicle on your books at the end.
- Chattel mortgage. The business owns the vehicle from the start and the lender holds security over it. A chattel mortgage is the most common structure for a car or ute the business intends to keep, and the glossary entry covers the mechanics.
- Operating lease. The business pays a rental and hands the vehicle back at the end, often with servicing bundled in. An operating lease suits a business that wants a predictable cost and no resale risk. What is and is not inside the rental is in our comparison of a fully maintained operating lease and a chattel mortgage.
- Novated lease. The lease belongs to the employee and moves with them if they leave. A novated lease sits between a company car and an allowance, and our post on novated leases for business owners covers how it works.
Whichever structure you use, a lender will want to know who drives the vehicle and what it is used for. A car with several regular drivers is assessed a little differently to one with a single nominated driver, as our post on vehicle finance with multiple drivers explains. For the broader picture, the business vehicle finance guide walks through the structures side by side, and the Business Owners Hub collects the related reading.
Do company car loans affect what the business can borrow next?
Company car loans do affect what the business can borrow next, because each one is a commitment a lender counts when it assesses the following application. The rule of thumb is that every car loan counts at the next application, though how much weight each lender gives it differs. This is the cost of a company car that never shows up in a running cost comparison.
How do lenders count existing vehicle loans?
Lenders typically count the repayment on every existing vehicle loan and lease as a fixed commitment against the income of the business. Lease rentals are usually treated the same way as loan repayments, even where the vehicle is not owned. A staff car that earns no revenue directly still uses up servicing capacity, so four cars for four sales staff can weigh on a later request for equipment, working capital or a property loan.
Who signs and guarantees a loan for a staff vehicle?
The business is the borrower, and the directors or owners are typically asked for a personal guarantee, though each lender sets its own requirement. The employee who drives the car does not sign. That means the debt stays with the business and its owners if the staff member leaves, and the vehicle has to be reassigned, sold or handed back.
How many vehicles can a business finance before limits apply?
There is no single number of vehicles, because each lender sets its own ceiling on how much it will lend to one business. Once a business is close to that ceiling with one lender, the next vehicle may need a different one. Our post on fleet lender exposure limits explains how those ceilings work, and the fleet finance guide covers what changes as the vehicle count grows. Spreading applications across several lenders at once has its own cost, covered in our post on how many credit enquiries is too many.
The question is rarely the first staff car. It tends to be the third or fourth, when the owner wants to borrow for something else and finds the vehicles have used more capacity than expected. An allowance adds wages cost but no debt, which is a fair reason to choose it if a larger loan is on the horizon. In practice, the cleanest approach is to map the next two years of borrowing before deciding how staff vehicles are funded.
A company car and a car allowance solve the same problem from opposite ends. The company car gives the business control of the vehicle and brings finance, running costs, fringe benefits tax and a commitment that lenders count. The allowance keeps debt off the books and hands the vehicle decisions to the employee, while leaving payroll on-costs and the safety duty with the business. Kilometres, the role and your borrowing plans decide which side wins.
Key takeaway: decide how much control you need, write the vehicle policy, then have your accountant cost both options on real kilometres before you finance or pay anything.Frequently Asked Questions
Whether a car allowance or a company car is better for a small business depends on how much control the business needs over the vehicle and how many business kilometres the role covers. A company car suits roles where the vehicle is a tool of the job, and it brings finance, running costs and FBT. An allowance suits occasional driving in a car the employee already owns, and it still carries payroll on-costs and a safety duty.
How much a car allowance should be in Australia is set by the award or agreement covering the employee, the employment contract and the business's own vehicle policy, not by one national figure. Where an award applies, it sets the minimum and the business cannot pay less. Above that, many employers size the amount against the running costs of a comparable vehicle and review it against a logbook of actual business kilometres.
A car allowance is not automatically taxed more than a company car, because the two are taxed in different ways and on different parties. An allowance is typically paid through payroll with tax withheld from the employee, while a company car available for private use typically brings fringe benefits tax for the employer. Our guide to FBT on a company car covers how that tax is worked out, and your accountant can compare both for your business.
Your business can generally pay staff cents per kilometre instead of a flat car allowance, provided any award or agreement covering the employee is still met. A per kilometre payment is made only on business kilometres recorded, so the cost follows actual use. It relies on staff keeping a trip record such as a logbook, and how it is taxed depends on the rate and the records, which is a question for your accountant.
A staff member's own car used for work is insured by the staff member under their own policy, not by the business, unless the business arranges cover itself. A private policy may not cover business use, so employers typically ask each employee to confirm in writing that their comprehensive insurance extends to work driving. Whether a particular policy responds is a question for the insurer or an insurance broker.
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