Can an employee have a novated lease as well as a car allowance?

Our payroll helpdesk is often asked this question, which you may think should have an obvious answer. The easiest way to understand the answer is to distinguish between the two concepts.

1. A car allowance is (in most cases) a taxable allowance paid to an employee to compensate them for expenses incurred by using their vehicle for business purposes. The allowance is generally paid unconditionally – whether or not the employee incurs an expense.

2. With a novated lease, the employee enters into a salary packaging arrangement where the cost of the lease and associated vehicle expenses are paid out of the employee’s pre-tax income and PAYG is applied on the reduced salary. Note that there may also be an FBT liability with a novated lease.

So, it really makes no difference whether the employee has a lease arrangement or not – if they are still incurring expenses by using their personal vehicle for business purposes, the taxable car allowance should still apply. How the employee chooses to finance their personal vehicle (under a salary sacrifice arrangement or otherwise) would be of no consequence as to whether they receive the allowance or not.

The distinguishing feature is that by entering into a novated lease arrangement, the employee has effectively been claiming their motor vehicle expenses throughout the year by paying tax on a reduced salary as opposed to making a claim at the end of the year, resulting in a tax refund.

Generally, you cannot claim motor vehicle expenses in your income tax return if you salary package the vehicle.

In a nutshell, yes – the employee can receive a taxable car allowance at the same time as entering into a novated lease arrangement.

If you have any topics you’d like me to cover in future blog posts, please get in touch with me at [email protected]


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