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Motor vehicle allowances and payroll tax

Motor vehicle allowances for employees are liable for payroll tax. Learn if your business can claim an exemption.

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What is a motor vehicle allowance?

A motor vehicle allowance (MVA) is paid or payable to employees to compensate them for any business use of their own private vehicles.

The provision of a motor vehicle to an employee is a fringe benefit. The value of the benefit is determined by the Fringe Benefits Tax Assessment Act 1986 (FBTAA). Read the fringe benefits page for more guidance.

If you have any questions about fringe benefits tax on a motor vehicle contact the Australian Taxation Office (ATO).

 

Please note

References to an employee include a person deemed to be an employee, such as a contractor under a relevant contract.

How motor vehicle allowances are treated for payroll tax

All allowances paid or payable to an employee are generally liable for payroll tax. See section 13 of the Payroll Tax Act 2007 (PTA).

MVAs are liable for payroll tax, but an exemption is available up to specified amounts. See section 29 of the PTA.

A MVA is not subject to payroll tax if the amount paid or payable is less than or equal to the exempt component. Payroll tax only applies to the amount exceeding the exempt component.

Read how to calculate the exempt component.

Liability is based on how the MVA is paid

MVAs may be fully taxable, partially taxable, or fully exempt for payroll tax purposes.

Open the headings below to read more.

 

MVA paid on a per kilometre basis

The FBTAA exempts an expense payment benefit if it:

  • reimburses an employee for car expenses, and
  • the reimbursement is paid on a cents per kilometre (km) basis.

A car expense payment benefit paid in this manner, that is exempt from fringe benefits tax, is not subject to payroll tax.

MVA paid as a flat or fixed amount

A MVA paid as a fixed or flat amount is liable for payroll tax.

If you have not kept records, the total allowance is liable.

However, if you can produce records to verify the number of business km travelled, an exempt component can be calculated and deducted.

Example

Jackson received a fixed motor vehicle allowance of $12,000.

His logbook from 1 July 2022 to 30 September 2023 shows he travelled 30,000 km. The business portion was 10,000 km. For 2022-23, Jackson travelled 40,000 km.

The averaging method is used to calculate Jackson’s exempt km.

Jackson's percentage of business use 10,000 km ÷ 30,000 km = 33.33%
Exempt business km for 2022-23 40,000 km × 33.33% = 13,333 km
Exempt component of Jackson's allowance (using the exempt rate of $0.72) 13,333 km × $0.72 = $9,599
Taxable wages $12,000 − $9,599 = $2,401

$9,599 is considered exempt wages and the remaining $2,401 is liable for payroll tax.

MVA paid as a fixed amount plus a rate per kilometre

The taxable portion of a MVA paid as a combination of a fixed amount and an amount based on business km travelled depends on whether the component based on business km travelled is an exempt car expense payment benefit under the FBTAA.

If the component based on business km travelled is not an exempt car expense payment benefit, the taxable portion is calculated as follows in the example.

Example

In this example the MVA is paid as a:

  • fixed amount, and
  • an amount based on km travelled where that component is not an exempt car expense payment fringe benefit.
Total business km travelled during the 2022-23 year 10,000 km
Fixed amount $8,000
Amount based on a per km rate of 30 cents (10,000 km x 30 cents) $3,000
Total allowance payable $11,000
Less exempt component (using the 2021-22 ATO rate of 72 cents per km) $7,200
Taxable portion of the allowance $3,800

 

Calculating the exempt component

The formula for calculating the exempt component is:

E = K x R
Exempt component = Number of business kilometres travelled during the FY x Exempt rate for the FY

Kilometre rate used to calculate the exempt component

The exempt rate per km used for NSW payroll tax purposes is the ATO prescribed rate for the FY immediately before the FY in which the allowance is paid. For example, if a MVA is paid in the FY 2023-24, the exempt component is calculated using the ATO km rate for the FY 2022-23.

Period Allowance per km
1 July 2024 – 30 June 2025 $0.85
1 July 2023 – 30 June 2024 $0.78
1 July 2022 – 30 June 2023 $0.72
1 July 2021 – 30 June 2022 $0.72
1 July 2020 – 30 June 2021 $0.68

Keeping records of business kilometres travelled

You must use the “Continuous recording method” or the “Averaging method” to record the business kilometres (km) travelled by an employee using their own vehicle during the financial year (FY).

Open the headings below to read how to use the different methods.

Continuous recording method

You are required to record the following:

  • The odometer readings at the beginning and end of each business journey undertaken by the employee in their own vehicle.
  • The specific purpose for each business journey.
  • The distance travelled by the employee during the FY calculated on the odometer readings referred in point 1. The distance travelled is taken to be the number of business kilometres travelled during the FY.
Averaging method

You must record the details for each journey by the employee in their own vehicle for a continuous period of at least 12 weeks.

A percentage (relevant percentage) is calculated with this information that represents the business km travelled by the employee for the 12-week period.

The relevant percentage is multiplied by the distance travelled during the FY to ascertain the number of business km travelled for that year.

The relevant percentage, in this case 56%, can be conditionally used for the next 4 FYs to calculate the business km travelled by the employee for each year.

Example

A real estate agency, Business B, employs John to sell properties in the inner west suburbs of Sydney.

In the 2021-22 FY, Business B used the averaging method to calculate business km travelled by its employees.

The motor vehicle allowances paid to employees are paid on a per km basis. The payments are not an exempt car expense payment benefit under the FBTAA.

For the 12-week period from 1 July 2021 to 23 September 2021 John travelled 14,000 business km using his own private vehicle. For the same period, the logbook shows that he travelled 25,000 km in total.

For 2021-22 John travelled 100,000 km in his vehicle.

In the 2021-22 FY, John was paid $60,000 as a motor vehicle allowance. The liable portion of the allowance subject to payroll tax is calculated as follows:

John’s relevant percentage for the 12-week period 56% = (14,000 km ÷ 25,000 km x 100)
MVA paid to John in 2021-22 $60,000
Less the exempt component $40,320 = (100,000 km x 56% x $0.72# cents per km)
Liable portion must be declared as taxable wages $19,680

# The 2020-21 ATO rate applies as 2020-21 is the FY immediately before the FY in which the allowance is paid (allowance was paid in the 2021-22 FY).

 

Read Part 5 of Schedule 1 of the PTA for more details about the methods used for record keeping of business km for MVAs.

Employers in the real estate industry may use 250 km per week as a substitute for business km travelled by a salesperson to calculate the exempt component. For more details read Revenue Ruling PTA 025 v2 – Motor vehicle allowance paid to real estate salespersons.

An alternative recording method must be approved by the Chief Commissioner. Send your written request for an alternative recording method to:

 

Need more detailed information?

Revenue Ruling PTA 011 – Allowances and reimbursements explains the payroll tax treatment of allowances and reimbursements paid to an employee and any person taken to be an employee under the PTA.

Revenue Ruling PTA 005 v3 – Exempt allowances: motor vehicle and accommodation has an example for calculating the taxable portion of a MVA consisting of a fixed amount and an amount based on business km that is an exempt car expense payment fringe benefit.

Revenue Ruling PTA 025 v2 – Motor vehicle allowance paid to real estate salespersons explains the payroll tax treatment of a MVA paid as a fixed amount to a real estate salesperson.

Revenue Ruling PTA 003 v3 – Fringe benefits clarifies how to calculate the value of fringe benefits for payroll tax purposes.

Common errors with motor vehicle allowances

Payroll tax audits have found these common errors relating to MVAs.

  • Failing to declare a MVA paid on a per km basis when the allowance is not an exempt car expense payment fringe benefit.
  • Declaring a MVA paid on a per km basis when the allowance is an exempt car expense payment fringe benefit.
  • Failing to declare a MVA paid as a fixed or flat amount.
  • Declaring reimbursements for motor vehicle costs incurred by employees.
  • Calculating the exempt component using an incorrect per km rate.
  • Failing to keep adequate records such as logbooks to substantiate claims.

Contact the payroll tax team

If you have questions about this topic call 1300 139 815 or +61 2 7808 6904 for international callers.

You can also email [email protected]