Grey fleet vehicles vs. company cars: What’s the best option for your organisation?

For most Australian organisations, the choice comes down to two things: how many business kilometres your team drives, and what type of vehicle makes sense.

• Lower annual kilometres → a grey fleet is usually cheaper and simpler
• Higher annual kilometres → company cars often become more cost-efficient
• Electric vehicles can shift the balance further, thanks to the current FBT exemption for eligible EVs

This article breaks down the costs, tax implications, and non-financial trade-offs, so you can pick the setup that actually fits your business. It’s written for business owners, CFOs, finance and fleet managers, HR leads, and team admins making this call.

The two models explained

Company cars. The employer leases or purchases the vehicles directly and covers insurance, servicing, registration, and maintenance. If the car is available for private use, the employer may also be liable for Fringe Benefits Tax (FBT).

A grey fleet. Employees use their own vehicles for business travel, and you reimburse them per kilometre. You avoid vehicle ownership costs, but you take on compliance obligations around recordkeeping, insurance, and the duty of care. Grey fleets are potentially simpler to run day-to-day, but give you less direct control over vehicle safety, age, and consistency across the team.

Both models are common in Australia - and so is mixing them up. The right fit for your company depends on team size, how much employees actually drive for work, and how much fleet management you want to take on.

Which model suits which organisation?

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Costs for grey fleets

The biggest financial advantage of a grey fleet is what isn’t on the employer’s books. You don’t buy or lease the vehicles, you don’t pay for insurance, servicing, registration, or depreciation, and you don’t carry fixed costs for cars that sit idle.

The employee owns the vehicle and absorbs the running costs.

What you do pay for is the business use itself — usually through a cents-per-km reimbursement, or less often through a car allowance.

Cents-per-kilometre reimbursement

Employers commonly reimburse employees at the ATO cents-per-km rate — 88 cents per kilometre for 2025–26.

Reimbursements at or below this rate, paid for actual business travel, are generally treated as tax-free reimbursements of expenses for the employee.

The rate is designed to cover all vehicle running costs: fuel, wear and tear, insurance, registration, and depreciation.

For employers, the benefit is simplicity — costs scale directly with actual business use, with no fixed commitment per employee.

There’s no kilometre cap on employer reimbursement. The 5,000 km cap applies only when an employee claims a personal tax deduction using the cents-per-km method at tax time. Those are two separate things.

Tracking kilometres under the per-km rate

The cents-per-km reimbursement is tax-free, but only when you can show the ATO that claims are accurate and tied to genuine business travel. Manual logs and spreadsheets create predictable gaps — rounded distances, reconstructed trips, late submissions — which quietly weaken the tax position and inflate what you pay.

Automated mileage tracking removes most of that risk. Trips are recorded as they happen, records are stored digitally, and finance teams get consistent data instead of chasing employees at payroll time.

Car allowance

A car allowance is a fixed regular payment, typically added to salary monthly, that helps the employee fund their own vehicle. It’s fully taxable as income.

It can be combined with cents-per-km reimbursement, but this combination is the most expensive option for employers — you pay a fixed salary top-up and per-kilometre costs.

Costs: company cars

Fixed vehicle costs

When you provide a company car, you absorb the lease or purchase cost, insurance, servicing, tyres, and registration. Those costs are fixed, regardless of how many kilometres the car actually does — an idle car still costs you roughly $500–$800 a month in lease and running costs, depending on the vehicle.

Business fuel reimbursement

For business journeys in company cars, most Australian employers either pay fuel costs directly or issue a fuel card.

There’s no ATO-published advisory fuel rate in Australia, so employers typically use actual fuel costs or estimate a per-km fuel rate based on the vehicle’s consumption.

The ATO does publish a cents-per-km rate for FBT purposes when you’re reimbursing employees for business use of a company car, and it aligns with the standard 88c/km rate.

Real-world cost comparison

The table below walks through three scenarios for the same employee, so you can see how the numbers move. All figures represent employer cost only.

• Employee profile: field consultant, 18,000 business kilometres per year, mid-size petrol car.
• Note on the 5,000 km cap: these examples use 18,000 business km. That’s valid for employer reimbursement.
• The 5,000 km cap only applies when an employee claims a personal tax deduction — it doesn’t limit what an employer can reimburse.

Scenario 1: Grey fleet, cents-per-km only

Scenario 2: Grey fleet, car allowance + cents-per-km

Adding a car allowance increases total cost without reducing per-km spend.

In practice, this combination is often the most expensive setup for employers.
 

Scenario 3: Company car (petrol, leased)

With a company car, costs are more fixed, regardless of how much the vehicle is used.

FBT isn’t included here — see the tax section below.

At around 18,000 km a year, a company car can come out cheaper on direct costs than reimbursing at the ATO rate. At lower annual distances, a grey fleet typically remains more cost-effective. As kilometres rise, the fixed-cost nature of a company car starts to work in your favour.

The exact crossover point varies with lease costs, fuel prices, and vehicle type — but for many organisations, it sits somewhere between 15,000 and 20,000 km a year.

Note: these figures are illustrative. Actual costs vary by vehicle, lease terms, location, and employee driving patterns.

Why the comparison matters

The fundamental difference comes down to how costs behave:

• A grey fleet is a variable cost that scales with each kilometre driven
• A company car is a fixed cost that becomes more efficient with higher usage
• That’s why many organisations end up running a hybrid — reimbursing occasional drivers through a grey fleet, while providing company cars for high-mileage roles.

Tax implications compared

Company cars and FBT

If a company car is available for private use, the employer is liable for Fringe Benefits Tax (FBT). The current FBT rate is 47%, applied to the taxable value of the car benefit. FBT is calculated using one of two methods:

• Statutory formula method: 20% of the car’s base value, adjusted for days available and any employee contributions
• Operating cost method: actual running costs multiplied by the private-use percentage, based on a valid logbook

One thing worth knowing: FBT is the employer’s liability by default, but the employee contribution method lets the employee pay an after-tax contribution toward the car’s running costs. That contribution reduces the taxable value of the benefit, and with it the FBT bill. It’s a common way to share or effectively shift part of the FBT cost to the employee in a compliant way — usually set out in the employment contract or a salary packaging arrangement.

EV exemption

Eligible electric vehicles first held and used on or after 1 July 2022 are currently exempt from FBT, provided the vehicle is below the Luxury Car Tax threshold for fuel-efficient vehicles ($91,387 for 2025–26) and meets the other eligibility criteria. That materially reduces the total cost of ownership compared with a petrol equivalent.

From 1 April 2025, plug-in hybrid electric vehicles (PHEVs) are no longer eligible. Only fully battery electric and hydrogen fuel cell vehicles qualify. See the EV FBT exemption guide for full details.

A grey fleet: cents-per-km and tax efficiency

When trip records are accurate, and business journeys are clearly documented, cents-per-km reimbursements are tax-free for both employer and employee, and there’s no FBT on a personal vehicle.

Key risk: if the ATO challenges mileage claims as inaccurate or misclassified, reimbursements may be reclassified as taxable income, triggering PAYG obligations and potential penalties. Automated mileage tracking reduces that risk by creating a contemporaneous, auditable record.

Car allowance

Treated as income by the ATO — subject to income tax and PAYG withholding regardless of how the car is actually used. No mileage evidence is required for the allowance itself, but it provides no tax efficiency for either party. See the car allowance guide for employers for a full breakdown.

Quick comparison

So which option should you choose?

Cost is a loud factor, but it’s not the only one. Once the financial picture is clear, most decisions also turn on people, brand, and risk:

• Kilometre profile. Under ~15,000 km/year, a grey fleet with cents-per-km reimbursement is usually the simplest and most cost-effective option. At higher annual distances, company cars become more cost-efficient because fixed costs get spread across more kilometres.
• Electric vehicle strategy. If EV adoption matters to you — for emissions reporting, sustainability commitments, or employee demand — company cars are often the most tax-efficient route thanks to the FBT exemption on eligible EVs.
• Fleet safety and duty of care. Company cars give you direct control over vehicle age, safety ratings, and servicing. A grey fleet can include a much wider mix of vehicle ages and conditions, which affects risk and your WHS obligations.
• Attraction and retention. For some roles, a company car — particularly a novated-lease or salary-packaged EV — is a meaningful perk. For others, a grey fleet arrangement with a clear reimbursement process gives employees more flexibility in the vehicle they actually want to drive.
• Brand and presentation. If employees visit client sites or represent the business visibly, company cars offer consistency in how your brand shows up. A grey fleet leaves that to individual choice.
• Admin capacity. Company cars come with ongoing fleet management — procurement, servicing and FBT. 

Most organisations end up running a mix — company cars for high-mileage roles, and a grey fleet for everyone else. The decision is worth revisiting every couple of years as kilometres, vehicle prices, and tax settings change.

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