Fleet leasing is becoming a bigger issue for organisations striving to cut costs and individuals looking for more efficient salary-packaging outcomes. Domini Stuart reports.
A company car once made absolute sense for employers, employees and the Australian car industry.
“There used to be a huge tax incentive to provide employees with a vehicle,” says David Sofrà, partner, people advisory at KPMG. “Government subsidies also enabled Australian car manufacturers to provide significant fleet discounts – as much as $10,000 on a Ford Falcon or Holden Commodore that would retail for about $35,000.”
But non-monetary benefits that are used to reduce tax are a drain on the economy. As there will soon be no Australian car industry to protect, the government no longer has anything to gain by encouraging employers to provide a car as a perk of the job.
“Since April 2014, when changes to the fringe benefits tax were introduced, the cost of providing staff with vehicles has increased considerably – and it will continue to increase,” says Sofrà. “If they haven’t already, boards should be asking management whether the cars they are providing are actually needed for business. If they are not, the company would be better off cashing out the benefit and providing a cash allowance or an incremental increase in salary rather than a car. This is definitely a trend we’re seeing at the moment.” However, changes must be handled with care. “Any suggestion that you are removing an entitlement could affect an enterprise bargaining agreement or even give rise to a union dispute,” Sofrà continues. “There may also be contractual issues. Boards should ensure that appropriate alternative entitlements are being negotiated and agreed.”
Many companies are replacing salary packages with novated leases. “This is a salary sacrifice arrangement where the employer agrees to make payments out of an employee’s pre-tax salary,” says Andrew Kerr, director, sales and marketing at Inside Edge Novated Leasing. “This reduces the employee’s taxable income and, as the employee owns the car, when he or she leaves the company, the employer isn’t left with a used vehicle.”
If the company wants to retain control of the car, Kerr suggests the board considers alternatives to a traditional operating lease. “The interest rate on most operating leases is around 13 or 14 per cent yet most organisations have the capacity to borrow at 2.5 per cent, or even call on reserves within their own organisation that aren’t attracting that level of return,” he says. “Resale values are also very stable so, if you’re prepared to keep a number of cars on your balance sheet, you might even make a profit on them.”
A new approach to mobility
Tax and legislation are just two examples of the changes sweeping through the fleet industry. “Companies used to think of their cars as a monthly rental cost,” says Aaron Baxter, chief executive officer of Custom Fleet Australia and New Zealand. “That moved to total cost of ownership and now it’s total cost of mobility, which could include multiple modes of transport such as rail, taxi, pool cars and a car-share program. As technology solutions mature, we may see these being rolled up into service offerings from technology companies as well as traditional fleet management organisations.”
Pool cars and “on demand” cars are two of the newer business models in the market. “Growth in the consumer car share market is trickling down into the business-to-business space,” Baxter continues. “For example, GoGet is a consumer car share operator that has started supplying on-demand cars to small and medium businesses. The challenge now is that the taxi/car share operators are not integrated. Over time, it’s likely that an aggregation platform will make it possible to book and invoice from a single point, which will mark the beginning of a truly comprehensive mobility solution.”
Boards need to keep pace with a changing paradigm and emerging opportunities. “If directors don’t have details of the company’s vehicle assets and the associated variables it’s impossible for them to make a fair assessment of the fleet’s efficiency and costs,” says Baxter. “Less-than-robust record- keeping and accounting result in poor decision making.”
New technology is making it easier to keep track of consumables such as fuel. “The latest fuel cards, for example, provide tools such as monthly financial and fuel consumption reports to help businesses of all sizes manage their expenses online,” says Margaret Kennedy, general manager sales, Viva Energy Australia. “The cards can be PIN-enabled, and smart alerts will flag any transactions outside of the parameters set by the business.”
Technology has also transformed the traditional logbook. “These days, every claim for business usage must be supported by a logbook,” says Sofrà. “This no longer has to be a physical book filled in by hand – you can now get an app for a smartphone, have a logbook function as part of your GPS or use a USB that plugs into your car and senses when you stop and start your engine. The Australian Taxation Office accepts all of these as legitimate substantiation of a claim.”
In the past, a fleet manager handled every aspect of the process. Today, it could pay to break it down into its constituent parts. “Rather than expecting one company to come up with all of the solutions you might go to a bank for your finance, employ a training company to keep employee driving skills up to scratch and use another company’s fuel card.”
Some fleet managers are struggling to cope with that shift. “Boards should question whether their own fleet management organisation is prepared to help them make the most of the disruption,” says Baxter. “You need to be working with one that is open, transparent and willing to suggest and assess all available options based on an analysis of your own fleet.”
The last automotive manufacturer in Australia may not close its doors until 2017 but companies are already moving away from locally-made cars.
“They have plenty to choose from,” says Kerr. “There are over 50 brands on the market at the moment and, on average, at least five or six models within each brand. When they’re considering their options, many boards are surprised to find they can now purchase a diesel-fuelled Mercedes Benz, Audi or BMW for less than an Australian-built station wagon.”
Some manufacturers are rising to the challenge by stepping up their corporate programs, offering packages that range from free servicing and road care to preferential finance rates. Environmental impact is not yet a significant factor but many shareholders are expressing greater interest in sustainability and, as boards are now required to measure and report on their environmental performance, this is likely to start moving up the list of priorities.
“We have recent hybrid analysis from Europe and, while it’s based on a slightly different market, the economics stack up here in much the same way as there,” says Baxter. “The analysis suggests that, as hybrids have a higher capital cost, poorer resale values and sometimes overstated fuel economy, a fuel-efficient petrol or diesel vehicle may be a better solution. But, with the exception of light commercial vehicles, there is certainly an opportunity to cut costs by choosing smaller, fuel-efficient cars.”
So far, electric cars have made little headway into fleets. “They’re still expensive and still very underserviced in terms of infrastructure and range,” says Baxter.
Companies like Tesla are working on changing this – and the Queensland Government is seeking expressions of interest from companies capable of building a service station at Oonoonba that offers both traditional and alternative forms of energy.
“Oonoonba is less than three kilometres from the Bruce Highway and the Townsville central business district, so it is well positioned to cater for local motorists as well as those travelling along the highway,” says Coralee O’Rourke, Minister Assisting the Premier on North Queensland. “Our vision is for this to be the start of an ‘electric super highway’ by facilitating fast-charging service locations for drivers travelling up and down the length of Queensland.”
A hidden threat
The decline of the traditional company vehicle has triggered a corresponding expansion of the so-called “grey fleet” – cars that are under a novated lease or purchased using a company cash allowance, or private vehicles that are sometimes used for work.
As the grey fleet blurs the line between business and private use, it has introduced a new set of challenges for boards in their governance of work health and safety (WHS), particularly as the recent harmonisation of WHS laws in Australia has increased the focus on the vehicle as a workplace.
“Managed correctly, a comprehensive fleet leasing solution can help to mitigate the risk,” says Baxter. “But directors need to be very sure that an appropriate vehicle, driver and employee policy is in place and that it is being applied in a consistent and auditable way. Mitigating the risks associated with WHS must be part of the organisation’s culture. At the recent Australasian Fleet Management Association conference it was made clear that, in the eyes of the law, your “say:do” ratio needs to be faultless.”
Eight questions to ask the management
1. Are we still providing company cars for employees who don’t need them for business?
2. Is every employee who uses a company car for business keeping a logbook?
3. Have we considered the potential benefits of borrowing from the bank or using our own resources to finance business vehicles?
4. Are we monitoring the total cost of mobility and considering forms of transport other than a car?
5. Do we have the technology in place to measure and monitor variables such as fuel consumption and usage?
6. Are we working with a fleet management organisation that alerts us to the full spectrum of emerging opportunities?
7. What criteria are we using when we select new cars? Do they need to be revised?
8. How are we mitigating the work health and safety risks introduced by a grey fleet?
Mitigating the risk
Harmonised laws and the growth of the grey fleet are making WHS governance a growing challenge for directors. Custom Fleet’s Aaron Baxter suggests a three-step approach to mitigating the risk.
1. Develop a robust company policy. This should set out what constitutes an acceptable vehicle in terms of fuel consumption, safety features, age, fitness for purpose and any accessories or fit-outs. It should also clearly state the drivers’ responsibilities in areas such as managing fatigue, maintaining and checking the vehicle, licensing, the use of mobile devices and the use of alcohol and drugs, including prescription drugs.
2. Develop a robust system of measurement that provides the board with clear metrics and lead indicators relating to safety issues. This could include driver acknowledgements, driver risk profiling, feeds from tracking and diagnostics systems, infringement tracking and license validation.
3. Develop a solid framework for embedding the right behaviours. This should pick up both positive and negative trends and include rewards, recognition and training as well as performance reviews and disciplinary action.
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