Company Car vs. Employee Car Allowance: Pros & Cons
Managing a fleet of company vehicles can often feel like a never-ending headache. From ensuring every vehicle is roadworthy and reliable to juggling the costs and logistics, it’s a complex and resource-intensive task. But there’s an alternative that could simplify this process: the car allowance. While it may not be the perfect solution for every industry, in many cases, offering employees a car allowance can either fully replace company vehicles or significantly reduce the burden by providing them with a choice.
Company Vehicles
Managing a fleet involves multiple challenges and expenses, including:
Ensuring all vehicles are roadworthy and maintenance schedule up to date
Registration & Insurance policies
Vehicle are replaced effectively
Vehicle pool is large enough to cater for the employees
Vehicles are not underused when employees leave
Finding reliable & cost effective funding options
Limited choice
Employee might not see the company car as a perk if the vehicle isn't suitable
Managing personal use for FBT purposes if allowed
How Novated Leasing Can Simplify Fleet Management
Novated leasing offers a solution that alleviates many of the challenges associated with managing a company fleet, without simply shifting the burden onto employees. When implemented correctly, both employers and employees can benefit from this arrangement.
Employer Benefits
Fleet management is transferred from the company to the employee and the novated leasing provider, freeing up company resources.
Underutilized vehicles are no longer a burden—when an employee leaves, the vehicle leaves with them.
Maintenance is included in the lease, making it easy to manage.
Simple FBT reporting with reports provided by the novated lease provider
Happy employees enjoy an extra company perk at no additional cost to the employer.
Employee Benefits
Employees have the opportunity to choose a vehicle that is more desirable and suitable for their needs, turning the company car into a genuine perk.
Employees can build equity in their vehicles, potentially earning tax-free profit once the lease ends.
Personal use of the vehicle is no longer an issue, as long as the employee maintains records when necessary.
With costs deducted directly from the salary, employees benefit from tax savings every pay cycle, making this option cash flow-friendly.
Additionally, GST savings on the vehicle and running costs are passed through to the employee, stretching their allowance even further.
Transitioning to a novated leasing program, whether partially or fully, can be smooth and successful with the right approach. We have extensive experience assisting with these transitions and can support you in several key areas:
Car Allowance Payment Analyse
Getting the program off the ground starts with a fair and well-considered car allowance payment structure. Factors to consider include the type of vehicle required for the job, the distance driven (and whether fuel costs are included in the allowance or covered by a company-paid fuel card), and the proportion of business-related driving. Generally, employees expect to lease a vehicle comparable to their current company car, though this may not always be feasible moving forward.
Education and relevant marketing material
A poorly communicated transition away from company vehicles can be perceived negatively unless the benefits to employees are clearly demonstrated. We can provide tailored marketing materials, complete with examples based on the proposed car allowance. Additionally, we can support the launch with a presentation or webinar to address employee questions with expert guidance.
Structured Vehicle Policy
Providing a car allowance and reducing compliance obligations is beneficial, but only if employees choose suitable vehicles. Establish a structured policy that employees must sign before receiving a car allowance. For example, if your engineers need to transport tools between jobs, include a clause in the policy. If your company is committed to reducing its carbon footprint, include that as well. You don’t have to lose control over your fleet—you’re simply offering perks and flexibility to your employees.
Example
A medical sales company has multiple sales reps stationed across Australia, each earning a base salary of $100k (excluding superannuation) and provided with a fully expensed Toyota Camry Hybrid, with limited private usage. As the company expands, managing an increasing fleet of vehicles is becoming challenging, and employees are frequently requesting changes to the current arrangement, expressing dissatisfaction with the provided vehicle.
Company example
Currently, the fleet vehicles cover on average 25,000 km per year with minimal personal use, finance allow for 5% in their FBT reporting. Given this usage, the company typically replaces each vehicle every four years.
Based on these factors, they determined that an employee's car allowance would need to be $16,000 gross per year to replace the vehicle with a fully maintained novated lease on the same vehicle. This figure will now serve as the standard car allowance for sales reps going forward.
Employees will be able to arrange their own vehicles through the company’s novated lease provider, Auto Deduct, as long as they adhere to the company's vehicle policy, which emphasizes sustainability and safety. The policy requires vehicles to have a 5-star safety rating and a fuel efficiency of 7L per 100km or better.
One of the longest-serving sales reps Tom is thrilled with the policy change. He spends hours on the road each day and has never enjoyed driving the Toyota, which also sits unused on weekends. With the new policy, he eagerly opted for a Tesla Model Y. He anticipates driving an additional 5,000 km per year now that personal usage isn’t restricted, and although the Tesla is 50% more expensive than the current company vehicle, Tom calculated with Auto Deduc that it would only cost him an extra $120 per month (above the car allowance) to drive a car he loves.