ATO Compliance for Your Grey Fleet

When employees use their own cars for work, the ATO has clear expectations around records, reimbursements, and tax treatment. Most businesses aren't across all of it — especially when they're managing a mix of company-owned and employee-owned vehicles, where the rules shift depending on who holds the keys.

This guide covers the tax and recordkeeping obligations that apply when employees drive for work in Australia. It's written for finance teams, payroll officers, bookkeepers, CFOs, and business owners managing mileage reimbursements and FBT.

Note: This guide focuses on ATO rules and reimbursement. For the safety and duty-of-care side of grey fleet management, see our grey fleet risk assessment guide.

ATO mileage record requirements

When employees use their own vehicles for work and you reimburse them, records do the heavy lifting.

The exact tax treatment depends on how you pay employees for business travel. The three most common setups are:

1. Cents per kilometre reimbursement - paid after the employee records actual business trips
2. Actual expenses reimbursement - the employer covers documented running costs
3. Car allowance - a fixed amount paid regularly through payroll as part of salary

These aren’t interchangeable. Mixing them up in payroll is one of the most common mistakes, and it usually creates issues for both the business and the employee.

A cents-per-km reimbursement tied to actual business kilometres is generally treated as a reimbursement of expenses — not taxable income — when paid at or below the ATO rate. A car allowance paid as a fixed amount is taxable income, regardless of how it’s used. That distinction affects payroll, PAYG withholding, STP reporting, and what the employee can claim at tax time.

The ATO cents-per-km rate for 2025–26

The ATO publishes a cents-per-km rate each year. For 2025–26, that rate is 88 cents per kilometre.

A few things to know about this rate:

• It’s the rate individuals (employees, sole traders, partnerships) can use to claim a deduction on their own tax return under the cents-per-kilometre method, capped at 5,000 business km per car per income year.
• It’s also the benchmark most employers use when setting a reimbursement rate, because reimbursements paid at or below it — against actual km records — are generally tax-free for the employee.
• Reimbursing above the ATO rate is allowed, but the excess is usually treated as taxable income.
• The rate covers all running costs: fuel, maintenance, insurance, registration, and depreciation.
• The rate is advisory for employers, not mandatory. You can reimburse at a lower rate — employees can then claim any shortfall as a deduction at tax time.

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What employees need to record

Employees should keep accurate, trip-level records for all work-related travel. Per the ATO’s logbook requirements, a compliant record should capture:

• The date of the trip
• The start and end location
• The reason for the journey
• The total distance travelled
• Whether the trip was business or private

If an employee is claiming car expenses personally using the logbook method, the bar is higher: a valid logbook must cover at least 12 continuous weeks, include odometer readings at the start and end of each trip, calculate a business-use percentage, and record every trip — not just work ones. That logbook is valid for up to 5 years, provided the employee’s driving patterns don’t change significantly.

What employers need to keep

From the employer’s perspective, mileage records are evidence. To support any reimbursement or allowance, you should be able to show:

• Why the payment was made
• How the amount was calculated
• Which work-related trips it covered
• That the same standards applied consistently across the team

In practice, that means keeping employee trip logs or mileage reports, reimbursement records, payroll documentation, and the policy documents that set out how your business handles work-related driving.

How long should records be kept? As a baseline, tax records in Australia should be kept for 5 years from the date of lodgement. That covers mileage logs, reimbursement records, payroll documentation, and supporting policy documents.

Vehicle ownership: what changes for tax and compliance

Not all work-related driving is treated the same way. The tax and compliance position shifts depending on who owns the vehicle and how it’s used.

1. Employee-owned vehicles (the grey fleet)

This is the standard grey fleet scenario. The employee uses their own car for work and the employer reimburses them, pays a car allowance, or leaves them to claim their own deduction at tax time.

Documentation is the main safeguard here. Because the employer doesn’t control the vehicle, the records need to show the payment was tied to genuine business travel. Employees should be able to demonstrate:

• Which trips were for work, and which were private or ordinary commuting
• The date, route, distance, and purpose of each journey
• That the business-use pattern is supported by consistent records

A rule that applies regardless of setup: travel between home and a regular workplace is private travel (commuting), not business travel. The exception is when the journey itself is part of the job — travelling to client sites, between work locations, or where there’s no fixed workplace.

2. Employee-leased vehicles

If the lease is in the employee’s name, the vehicle is treated much like an employee-owned car for tax purposes. The same practical points apply: business and private use need to be clearly separated, and any reimbursement should be backed by accurate trip records. A lease in the employee’s name doesn’t make the vehicle a company car.

3. Company-owned or employer-leased vehicles

When the business provides the vehicle, the rules shift.

In Australia, private use of a company car can trigger Fringe Benefits Tax (FBT). FBT applies when the car is made available for private use — not just when the employee actively uses it that way. The current FBT rate is 47%, and the liability sits with the employer.

FBT on a car benefit can be calculated one of two ways:

Accurate vehicle records help you apply the right method, support FBT reporting, and keep the audit trail clean. They also let you reconcile fuel costs and allocate travel expenses across teams, sites, or clients.

When FBT may not apply

Some vehicles and situations are exempt. Cars that may be exempt from FBT include:

• Single-cab utes
• Dual-cab utes or 4WDs designed to carry more than 1 tonne or more than 8 passengers
• Panel vans and goods vans
• Certain modified vehicles (such as hearses)
• Eligible electric vehicles first held and used on or after 1 July 2022, priced below the Luxury Car Tax threshold for fuel-efficient vehicles ($91,387 for 2025–26)

There’s also a limited private use exemption for any vehicle, but the conditions are narrow: private travel must not exceed 1,000 km per FBT year, no single trip can exceed 200 km return, and the employer must have a written policy in place restricting private use to work-related travel and minor, infrequent, irregular use.

If private use is prohibited, records still matter. A policy on its own isn’t enough if the business can’t show how vehicle use was actually monitored.

The risks of poor recordkeeping

Weak documentation creates tax risk, payroll friction, and admin drag at the same time.

Reimbursements become harder to defend

If the business can’t clearly show what a payment relates to, justifying the tax treatment gets harder. The ATO may decide that reimbursements don’t qualify for tax-free treatment if the underlying records are incomplete, inconsistent, or created long after the travel happened.

Common red flags:

• Rounded or estimated distances
• Missing trip purposes
• No clear separation of business and private travel
• Records submitted weeks after the fact
• Car allowance and cents-per-km reimbursement treated as the same thing in payroll

Car allowance reporting errors

Car allowances are taxable income and must be reported correctly through Single Touch Payroll (STP). Under STP Phase 2, there are two distinct allowance types:

• Cents-per-km allowance — paid based on actual business kilometres driven
• Flat-rate car allowance — a fixed amount paid regardless of distance

Confusing the two, or treating a flat-rate allowance as a cents-per-km reimbursement, creates reporting errors that flow through to both the business and the employee.

FBT exposure on company vehicles

Where company-owned or employer-leased vehicles are involved, weak records make FBT harder to calculate and harder to defend. If the business can’t show how much private use occurred, which FBT method applies, or whether an exemption is available, the tax position deteriorates quickly.

Payroll and admin friction

Poor records also create operational drag. Late or incomplete claims typically lead to:

• Back-and-forth between employees, finance, and managers
• Delays to reimbursement
• Manual corrections close to payroll cut-off
• Inconsistent treatment across teams

Over time, that becomes a process problem as much as a compliance one. Workarounds — approving incomplete claims to keep payroll moving — quietly undermine the records you’d need if the ATO ever asked questions. A clear grey fleet policy stops this from becoming the norm.

Manual logging vs automated mileage tracking

The problem with manual methods:

Paper logs and spreadsheets rely on memory, manual entry, and consistent follow-through. In practice, that creates predictable problems: trips get forgotten, distances get rounded, claims arrive late, and finance teams spend time chasing missing details before payroll can close.

The result is exactly the kind of documentation that creates compliance risk — inconsistent, incomplete, and difficult to verify after the fact.

What automated mileage tracking changes

Automated mileage tracking records trips as they happen using GPS and motion detection, then lets drivers classify each trip as business or personal. Records are stored digitally rather than scattered across spreadsheets and email threads, and reports can usually be exported in PDF or Excel for payroll, reimbursement, or audit use.

For employers managing a grey fleet across teams, a shared tracking setup standardises reporting across the whole business: drivers spend less time on admin, and finance teams receive consistent, structured mileage reports they can review and approve directly.

The practical difference: instead of chasing spreadsheets, finance teams receive consistent reports. Drivers are less likely to under-claim, over-claim, or make errors that create problems further down the line.

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