Everything you need to know about car expense reimbursement in Australia as an employer

Employees generally expect to be reimbursed by their employer for business driving.

When employees use their personal or company vehicles, the ATO provides ways in which you can reimburse them.

Do I have to reimburse my employees?

That depends on the agreement you have with your employees.

If they fall under an enterprise agreement or a modern award, you might be required to reimburse them for business-related driving expenses.

Even if you are not required to reimburse employees, it is a good idea to do so, as it keeps employees happy and your business claims a tax deduction on all paid out reimbursements.

Keep in mind that if employees drive company cars they can’t be reimbursed with the ATO standard rate method, as this rate includes the ownership costs of a vehicle.

Instead, they should be reimbursed for the actual expenses of using the vehicle for business purposes (e.g. fuel, tolls, parking).

You have to prove that the reimbursement you’ve paid out for company vehicles is connected to your business and may need to pay fringe benefit tax (FBT), which is tax-deductible.

How do I reimburse employees

If your employees use their personal vehicles for work, there are two ways you can reimburse them for their business-related driving – by the ATO standard rate or with a mileage allowance.

The ATO standard rate

The ATO sets a rate per kilometre annually for business-related car expense reimbursement. The rate includes all car expenses, like fuel, repairs, insurance, depreciation.

The kilometre rate is the maximum amount you can reimburse your employees with, without your business or your employees being taxed for it.

You can choose a higher or lower reimbursement rate than set by the ATO, but most businesses stick to the standard rate, as it maximises both employees’ satisfaction and keeping the paid out amount tax-free for the company.

The ATO updates the standard rate each year and it is valid for the duration of that tax year.

The current tax year’s (2020-2021) kilometre rate is $0.72. The ATO has already confirmed that the standard rate will be the same for the new tax year of 2021-2022.

Mileage allowance

Another way you can reimburse employees for their incurred business kilometres is through a mileage allowance. A mileage allowance is typically paid upfront each month to provide employees with cash for running their vehicle for business purposes.

Your employees should be aware that a mileage allowance is treated as income and will be taxed accordingly. They can then claim actual vehicle expenses for their business-related driving on their tax return.

How to reimburse employees with the ATO standard rate

Employees should keep continuous records of their business-related driving in order to prove their claim for car expenses reimbursement. The records should also be compliant with ATO.

This means the logbook they keep of their business kilometres should contain:

  • The period of time the records are from
  • Odometer reading at the beginning and end of the period
  • The total kilometres driven (both personal and business-related)
  • The percentage of total kilometres driven for business

For each logged trip, the following should be stated:

  • Start and finish time of the drive
  • The total distance travelled
  • Reason for the trip

For each business-driven kilometre, employees are entitled to ATO’s rate. So, if an employee has driven 100 kilometres in a month for business, you will have to reimburse them $72.

The calculation goes 100 kilometres x $0.72 = $72 in reimbursement

You can claim tax deductions for your business when you reimburse employees.

As a company, you are required to keep your employees’ logs for 5 years for the company’s tax deduction claim and in case of audits by the ATO.

How should my employees keep a logbook

There are a few ways employees can keep logbooks for reimbursement. They can keep a paper logbook, a spreadsheet, or use a mobile application.

As a company, you can accept individual logbooks, or implement a business-wide solution – e.g. a mobile app for uniform kilometre tracking.

A mobile application for everybody will ensure consistent logbooks for easy reimbursement.

It is a good idea to look for a solution that is ATO compliant and offers automatic tracking – it’ll make your employees’ lives easier and you’ll be sure you’re reimbursing employees the correct amount instead of over- or underpaying for their business-related car expenses.

A system like this will also help you keep all kilometre logs safe and available at any time should you be audited by the ATO.

Katerina Nikolova is an International Sales and Marketing Management graduate with practical experience in Digital Marketing – SEO, keyword analysis , and creative writing with skills in digital marketing, strategy planning, communications and marketing campaigns.

Katerina Nikolova, Marketing and communications specialist at Driversnote