COMPANY CARS Geared Up – The ego and economics of the company car

New Zealanders, like most other nationalities in the world, love their cars. And the company car is right up there in the affections of business executives and managers.

The company car holds the key to staff morale – workers rate them higher than generous holiday allowances, flexi-time working or healthcare provision, according to one British national study.

And recent international survey of drivers in 26 countries revealed that company cars are still the key benefit in attracting and retaining personnel. In the survey, fleet management and finance company LeasePlan found that more than 70 percent of company car drivers rated their wheels their number-one choice. In other words, cars represent juicy carrot to dangle when prospecting new executive talent.

Company car sales are the lifeblood of New Zealand’s new vehicle market. Of the almost 80,000 new cars and commercials sold every year in this country, around 75 percent of them are paid for by companies and fleet buyers. Of that figure, between 35 and 40 percent are leased, rather than owned or financed by the company itself. Aside from Japanese imports, private car buyers would have little to choose from if fleet vehicles weren’t regularly turned over.

Company car value
It’s difficult to calculate exactly what, in real dollars, car is worth to an executive. The figures used in the car-leasing industry range from $8000 up to $48,000 year, depending on the make and model.

“Our experience shows that companies are valuing car at between 35 and 52 percent of purchase price, excluding GST,” says Bob Renton, fleet manager at Cardlink Systems. “So vehicle purchased for say $30,000, can be valued at between $10,500 and $15,600 for salary purposes.”

Some executives prefer to bury the dollar value of the vehicle in their grossed-up salary package and, to large extent, this seems to be the market direction, particularly at the top echelons of management. “There is trend for senior executives, especially CEOs, to move to package deals that include vehicle,” says LeasePlan managing director Charles Willmer. “This total cost of employment can be broken down however the recipient chooses.” The approach provides managers with more personal flexibility in selecting vehicle.

On the other hand, Willmer also knows several senior executives who switched back to driving company-provided car. They simply didn’t want “to deal with hassles such as registration, maintenance and insurance – they’d rather just pick up the vehicle and run with it”, he says. “The other reason is cost – company can provide car at cheaper rate to an individual than an individual can. Companies can, for instance, negotiate better finance rates.”

Grossed-up packages have their advantages – such as allowing companies to fix their vehicle costs. However, the overall tax implications must be considered – grossed-up salary package that includes vehicle costs may put an executive into the 39 percent tax bracket.

Choosing vehicle
The New Zealand new car market offers executives and companies unparalleled choice in makes and models but, when it comes to selecting executive vehicles common sense prevails. “The advice we give to companies relates to number of key issues,” says Mike Warmington, national manager sales and customer service for Custom Fleet New Zealand. “Firstly what will the vehicle be used for? This impacts on such things as off-road capability, seating capacity, diesel or petrol options, and low or high kilometres. Other issues include the length of the lease period, the image the company wants to convey, and of course, budget.

“Managers are generally offered choice of vehicles within vehicle or dollar value bands. The level of flexibility differs according to whether the vehicle is job required or not. Four-wheel-drive and some mid-priced European models are now being requested more often.”

Natalie Milicich, sales manager fleet for Orix New Zealand, agrees that 4WD vehicles are more popular now, “as are three-litre vehicles, due to the shortage of two-litre wagons in the marketplace”. And, she says, New Zealand fleet managers are aligning themselves with their Australian counterparts on vehicle selection, to provide consistency across the board.

When it comes to personal preference, men are generally “petrol-heads” and shoot for horsepower, while women are more concerned about safety, accessories, and other features – however, both sexes are influenced by lifestyle, and whether the vehicle is also intended for family use.

Most companies listen to their lease or fleet management partner when it comes to vehicle selection. And almost without exception that advice will factor in resale potential. “Don’t look at the buy price, look at the total cost of ownership,” says Willmer. “It’s how the vehicle holds up in the second-hand car market that counts. He compares Holden with Daewoo, both retailing at around $30,000. No prizes for guessing which one will be worth more on the used car market.

Leased or owned, understanding the total lifetime operating costs of company’s vehicle fleet is crucial. All decisions relating to the fleet must be properly informed to avoid putting unnecessary cost burdens on the business three to five years down the track, says Cardlink’s Renton. “Whether it’s vehicle selection, finance options, or leasing plans, the manager must understand the total life costs.”

How leasing stacks up
According to Renton the decision whether to lease or own vehicles depends on the company’s return on capital policy. “Companies may decide the ROC is greater by leasing the fleet, while others decide they can gain greater return on capital by owning their cars. In the case of smaller companies, they may not have the capital to outlay, so they lease and look for the most competitive interest rate.”

The old school of accountants taught managers to buy company vehicles and maximise tax and depreciation benefits. The new school generally encourages managers to lease vehicles, free up capital and invest it in other more critical areas such as sales and marketing.

A “full maintenance” operating lease is the most preferred lease option for businesses in Warmington’s view. “Increasingly large corporates and government organisations want leasing companies to provide other fleet management services.” These services can include accident management, fuel cards, consolidated invoices, management reporting down to cents per kilometre, registration and WOFs, road user charges, online services for card and driver management, servicing, repairs and maintenance. Both leasing and full fleet management can be covered in one monthly instalment – which provides very attractive budgeting proposition for companies.

In May 1999, the maximum term for vehicle lease rose from 36 to 45 months – however the majority of companies prefer to stick with the three-year term, which usually coincides with the term of the vehicle’s warranty. If vehicles are covering low to moderate kilometres, there may be case to push the term out to the maximum allowable.

The FBT factor
In the past two years there has also been trend to one-year consecutive lease packages, prompted by the application of Fringe Benefit Tax in this country. Compared to three-year term, where the FBT is calculated on the original value of the vehicle for the whole 36 months, one-year lease renewed consecutively allows the FBT to reflect the vehicle’s worth each year. So car could be assessed at $50,000 the first year, $30,000 the second year, and $22,000 the third year.

The Government is reviewing the FBT regime with the aim of making it more effective, simplified, and cheaper to comply with. It has stated that the “levying of FBT at single rate and basing FBT on the depreciated cost of motor vehicles should be considered as part of the review”. Few are predicting dramatic change in the market as result of new policy, b

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