Car Allowance and Novated Leasing: Are You Using Your Salary Package the Smart Way?

Across Australia, car allowances are a common part of salary packages, particularly for employees in sales, field roles, construction and professional services. While we don’t have official statistics, it is estimated that hundreds of thousands of Australian workers have a car allowance. If your job requires travel, there is a good chance your employer has included a car allowance as part of your total remuneration. But here is the question most employees are now asking: Are you actually getting the most value out of your car allowance? With rising vehicle costs, interest rates, and fuel prices, many Australians are starting to rethink how they use this money. Increasingly, the answer is turning to novated leasing.

How Common Are Car Allowances in Australia?

Car allowances are widely used across Australia as an alternative to providing a company vehicle. They are typically offered to employees who need to use their own car for work purposes or as a way to enhance their salary package. While there is no fixed national average or mandated amount, most data shows that:

Typical car allowances range between $10,000 and $20,000 per year
In some roles, allowances can reach $20,000 to $25,000 annually

That equates to roughly $800 to $2,000 per month being paid to employees specifically to cover vehicle costs. This is a significant amount of money. The challenge is how effectively it is being used.

The Problem with Car Allowances

A car allowance is paid as taxable income, which means it is subject to your marginal tax rate. In practical terms, that means:

A portion of your allowance is lost to tax immediately
You are responsible for all vehicle costs
Rising fuel, insurance, and maintenance costs eat into your allowance quickly

While you can claim work-related usage through the ATO, many employees still find that their allowance does not stretch as far as expected, particularly with the rising cost of running a vehicle in Australia.

A Smarter Approach: Using Your Car Allowance for a Novated Lease

What many employees do not realise is that you can combine a car allowance with a novated lease, and this is often one of the most cost-effective ways to drive. Instead of using your allowance on after-tax expenses, a novated lease allows you to:

Pay for your vehicle using pre-tax salary
Bundle running costs into one structured payment
Potentially reduce your taxable income
Avoid paying GST on the purchase price and a significant component of the running costs for a new car

Reducing FBT with Business Use

One of the most powerful advantages of combining a car allowance with a novated lease is how it can interact with Fringe Benefits Tax. If you get an EV that is under the Luxury Car Tax threshold, it is exempt from FBT. There are ways however, to reduce the FBT liability for petrol/diesel vehicles as well. Fringe Benefits Tax is applied to non-cash benefits such as a vehicle provided through salary packaging. However, where a vehicle is used for business purposes, there are ways to reduce this liability. Using an operating cost method (logbook method), employees can:

Track business versus personal usage
Attribute a higher proportion of costs to business use
Potentially reduce the FBT component on any vehicle, not just EVs

This is particularly relevant for employees who:

Travel between client sites
Work across multiple locations
Use their vehicle regularly for business purposes

In these scenarios, the more business use recorded, the lower the FBT impact can be.

Why This Matters Now

Vehicle ownership in Australia has become more expensive than ever. According to this great resource from the Australian Automobile Association the average Australian household spends $23,555 on transport costs per year. Over 96% of this cost is vehicle related. This will likely see large increases for Q1 2026 when the data is released. At the same time:

Fuel prices remain volatile
Interest rates on car finance have increased
Insurance and servicing costs continue to rise

This is putting pressure on employees who rely on their car allowance to cover these expenses.

The Bottom Line

A car allowance is a valuable benefit, but on its own, it is often not the most efficient way to fund a vehicle. By combining your car allowance with a novated lease, you can:

Improve your tax position
Gain access to structured, predictable vehicle costs
Potentially reduce FBT through business use via the operating cost method
Get more value out of money you are already receiving

At CarBon Novated Leasing, we work with employees across Australia to help them maximise their salary package and make smarter financial decisions. If you are receiving a car allowance, there is a good chance you could be doing more with it.