Can a car allowance put an employee’s earnings over the high income threshold?

In short, yes, but exactly how is a bit more complicated.

The high income threshold is currently $175,000 (revised annually on 1 July). This figure is important because employees who earn above the high income threshold may not be protected from unfair dismissal under the Fair Work Act 2009 (Cth).

When determining whether an employee earns more or less than the high income threshold, the Fair Work Commission (“FWC”) will calculate an employee’s “earnings.”

An employee’s earnings includes:

• wages;
• money that is applied or dealt with on their behalf; and
• non-monetary benefits with an agreed value.

An employee’s earnings do not include:

• payments which cannot be determined in advance;
• reimbursements; and
• superannuation contributions.

The question for the Fair Work Commission

In a recent decision, the FWC had to determine whether an employee’s $21,000 car allowance pushed the employee over the high income threshold and prevented them from bringing an unfair dismissal claim.

In applying the relevant test the FWC first had to determine whether there was a requirement or expectation that the employee would use their car for work purposes. If there is no requirement or expectation to use the car for work purposes, then the whole amount of the car allowance would be included when calculating an employee’s earnings.

However, where there is an expectation or requirement that an employee will use the car for work purposes, the amount of private usage needs to be calculated. Only the private usage amount will be included when determining an employee’s earnings. The private usage amount is calculated as follows:

• determine the annual distance travelled by the car (which can be extrapolated from a shorter period if the car allowance has been paid for less than a year);
• determine the percentage of the annual distance travelled for business use which:
  • does not include travel from home to work;
  • would be worked out based on a year or the period the car allowance was paid for (if it was less than a year);
• multiply the percentage of business use by the annual distance from the first step to arrive at the annual distance travelled for business purposes;
• estimate the cost per kilometre for a car of the type used (which can be obtained from a local motoring organisation such as the NRMA or RACV);
• multiply the annual distance travelled for business purposes by the estimated cost per kilometre to calculate the annual cost of using the car for work purposes; and
• compare the cost of using the car for work purposes with the annual rate of the car allowance (if the car allowance was paid for a period less than a year, it can be extrapolated to an annual amount).

If the annual car allowance exceeds the cost of using the car for work purposes, then the difference is the amount of private usage. The private usage amount forms part of an employee’s earnings.

In this recent FWC case, there was some argument around how many kilometres were travelled for business purposes. Ultimately, the FWC calculated the usage based on the maximum distance the employee could have travelled for work. This was multiplied by the cost per kilometre. In this case the cost of using the car for business purposes was calculated to be around $600. The remaining amount of the car allowance was for private usage and this was considered to be part of the employee’s earnings. The car allowance pushed the employee over the high income threshold and the employee could not bring an unfair dismissal claim.

If an employer is relying on a car allowance to push an employee above the high income threshold, they need to have a good understanding of how often the car is being used for work purposes and the distances travelled. Employees should be required to keep detailed records of work related travel so that business use vs personal use can be easily calculated.