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NEWS - PLANNING
The company car too expensive?
8/1/2002
Want to avoid many of the costs and problems of running the company fleet by asking employees to return their cars and take additional cash in their salary? You are not alone.
The Australian Fleet Managers Association says that the costs of running a fleet are adding up to the point where managers are considering getting rid of as much of the fleet as they can.
AFMA executive director Marja Thompson says that if fleet managers start asking employees to hand back their cars in return for an increase in salary, the Australian car industry will be the loser.
The bulk of new cars - perhaps up to half - find their way into fleets, but individual consumers tend to keep their cars far longer than fleet managers. Any significant shift towards personal buying away from fleet buying will mean a sharp reduction in new car sales, says Thompson.
In a recent submission to the Productivity Commission over assistance arrangements (mainly tariffs) for car makers, AFMA points out that as so many Australian cars end up in fleets, any tax concessions or assistance for fleets will help the car industry.
Recent additions to the costs of running a fleet are an Australian Taxation Office decision to change the effective tax life on a vehicle, and a significant increase in car insurance premiums. Neither problem is particularly serious in itself but, AFMA says, they represent additional costs and difficulties for managers who are already facing problems running a fleet.
Thompson says that the tax changes may add perhaps $600 to $700 to the total cost of ownership of each car (the total cost of the vehicle from purchase to disposal). But even if the cost is just $100 a year, for each vehicle in a 400- vehicle fleet that can add up to a substantial impost.
Companies that do find the costs adding up may still have to keep vehicles used by their technical or trade staff, but can reduce the often quite separate fleets driven by staff as part of their salary packages by offering employees cash instead of a car, Thompson says.
Just how much the recent ATO changes to tax depreciation to vehicles will cost fleet managers is the subject of some debate within the industry.
The change was part of a wholesale revision of the ATO's own schedule of depreciation rates for various types of equipment, including cars and computers. Among those changes was a rule requiring depreciation on new cars to be spread over eight years, rather than the previously accepted six and two-third years, from July 1 of this year.
At first glance the change, which received considerable publicity at the time, appears to reduce the depreciation that managers can claim as a cost for tax.
But a tax principal with Ernst & Young, Michael Ward, says that the main effect of the change will be to defer deductions. The annual tax deduction allowed on the car for depreciation will be lower but that only means the book value of the car will be higher, when the company sells it (usually for a loss). As the company will be able to declare a higher tax loss on the sale it will claim a higher deduction at the end of the lease period rather than during it.
However, as the company still has to pay more tax during the lease period there is some cost in financing the extra payments. The cost is in the time value of money.
For a $40,000 car, the eight-year rule means that depreciation will be $5,000 a year, as opposed to about $6,000 a year under the old rule. That $1,000 in deferred tax deductions will then have to be financed at somewhere between 6 and 8 per cent, depending on the company's own financing costs, Ward says. (Those additional annual financing costs are likely to be less than $100 a year.)
Jeffrey Strang and Jack Stuk at Jerrard & Stuk Lawyers in Melbourne also point out that there is no need to stick to the Tax Office's depreciation schedule.
Writing in a recent issue of CCH Tax Week, Strang and Stuk say that corporate taxpayers can self-assess their own vehicle depreciation life. If the taxpayer does an honest self-assessment then the Tax Office is obliged to accept it, even if tax officials disagree with the assessment.
"If an audit is conducted and the commissioner forms the view that the effective life is longer than what our taxpayer estimated, the commissioner cannot simply substitute his preferred effective life," they say.
Strang says that a prudent taxpayer will make sure that the procedure used for self-assessing the effective life of their cars is documented, but the law does not say anything about the self- assessment procedure itself.
The AFMA's Thompson says that ideally depreciation rates should reflect the use made of the car, particularly the kilometres driven, rather than its age. The used car buyer is effectively buying the car's unused kilometres.
Regardless of what actions the organisation takes, a vehicle still costs a great deal of money, with a $30,000 vehicle likely to lose half its value over three years of being in a company fleet, on top of the cost of running it. The cost of running an upper-medium vehicle such as a new Ford or Holden over a three-year period has been estimated at $50,000.
Another, potentially more important, increase in costs, depending on the fleet, is that of rising insurance premiums. As seems to be occurring right through industry, insurance companies are "cherry picking" clients.
They are boosting premiums to fleets with bad safety records and offering better deals to customers they are anxious to keep.
One fleet management industry response to the increasing cost of premiums has been to adopt improved risk management practices, which includes looking at how managers structure their insurance policies.
Apart from having to cope with increases in costs, the Australian fleet management industry is changing in a number of ways, with increasing emphasis on the environment - in controlling vehicle emissions and petrol consumption - and in demands for the customisation of fleet cars.
Ted Van Riel, the Asia-Pacific car industry leader for PricewaterhouseCoopers, says consumer expectations from other industries have entered the car market.
After the experience of buying a custom-assembled PC, delivered to their door within 48 hours of placing an order, or getting a home loan within two days, fewer fleet managers are prepared to wait for the vehicles they order.
Van Riel notes that fleet managers did have to wait for Holdens as that company's production remains "fully booked" but other manufacturers are more willing to deliver fleets customised on colour and accessories.
Whether the fleet management industry has "reached a crossroads" as AFMA says, in which the cost and trouble of keeping a fleet has become too much, remains to be seen.
Statistics collected by various industry bodies indicate that there is still plenty of fleet management and leasing business occurring.
But there is no doubt that running a fleet is becoming increasingly expensive and that the corporations that run them are looking for any way they can to keep costs down.
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