Determining an employee’s car allowance
20 November 2015
When organisations look to review their fleet policies, one of the most common questions we are asked is how they should determine their car allowances in an employee’s total remuneration package (TRP). Many organisations offer the option of a business supplied car (either one they own or lease) or the employee can take a cash component in lieu of the company car to use towards their own personal vehicle finance, a novated lease (if the employer allows it) or simply pocket the cash.
This article will look at how to determine the car allowance cash figure in lieu of providing a car from the employer’s perspective, understanding that the value that is usually shown in a TRP for the value of the vehicle is not directly interchangeable with a cash component.
The rates and figures used in the below examples are current at the time of publication (November 2015) and will fluctuate from year to year, so it is important to revisit these calculations each time a cash component has been requested.
Sarah has been offered a job with ABC Pty Ltd and part of her TRP includes a company car to visit clients, shown on her TRP with a nominal value of $14,000. ABC Pty Ltd operates a fleet of plain beige sedans (that it owns outright), which doesn’t seem too appealing to Sarah, so she has asked to receive a car allowance in lieu of the company car and the option to novate/salary package a car of her choosing. ABC Pty Ltd are happy for her to take out a novated lease as the car goes with her if she leaves, but need to come back to her on how much her car allowance will be; here is what they need to look at:
By using this cashflow example Sarah’s employer will be no worse off, from a cash perspective, if they offered her a minimum cash allowance of $10,552.98.
You should note that this model is just for illustrative purposes to show how a car allowance could be calculated and it makes several assumptions that should be taken into account:
- The vehicle is either owned outright or under a straight finance arrangement with interest rate of 7% pa and that the employer can get access a return of 7% if funds are invested
- The on road & running costs are estimations
- The vehicle is available for use by the employee for the full FBT year
- That the depreciation and tax rates are as shown
- The employer must pay 30% company tax rate
Whether a car allowance or company car is better for the individual is something that has to be looked at on a case by case basis and is a topic for another article, but for more information on putting a comprehensive fleet plan strategy, contact StreetFleet today.
Wanting to know if your own car allowance is enough? Check out our article here.