April 2002

Recent media headlines have hailed car allowance schemes as being preferable to the company car option. While this debate continues to rage, Clive Else, chairman of Savrala’s full maintenance leasing section has come out waving the flag in favour of Full Maintenance Leasing (FML) as an option either way.

“FML’s are available to companies who use them to finance company cars for employees. In addition, FML and similar operational leases with maintenance plans are popular with individuals who receive a travel or car allowance as part of their remuneration,” explains Else. “Lessors provide a number of ways in which the use of a motor vehicle may be structured, each with its own set of pros and cons.”

In all scenarios, the lessor usually bears the risk of ownership by taking a significant position on the residual value (RV) of the vehicle. This affects the lease pricing with a lower monthly payment for the lessee. “So in effect, the lessee pays only for the value of the asset “used up” over the duration of the lease,” says Else.

If properly structured, a full maintenance lease may qualify as “off balance sheet” finance under the “AC105” current Generally Accepted Accounting Practice (GAAP) accounting convention that regulates accounting for leases. This means that the lease has no effect on the balance sheet of a corporate lessee and therefore, from a balance sheet point of view, the company car / car allowance decision is not an issue.

A typical lease has a number of equal monthly payments that will fluctuate only if the prime overdraft rate shifts. Once the asset has been returned in the agreed condition at the end of the lease, the lessee has no further obligations to the lessor, although options to purchase at fair market value are commonplace.

Prior to the introduction of the Seventh Schedule of the Income Tax Act in 1985, the value of motor vehicle fringe benefits were ignored for the purposes of calculating gross income as defined in Section 1 of the Act. “The purpose of the Seventh Schedule is to tax non-cash earnings,” explains Else.

He goes on to say that this attempt to eliminate perceived distortions in remuneration policies has introduced a number of distortions of its own. As a result, many employers have moved from the provision of company cars to the provision of car allowances in an attempt to preserve the status quo.

“The antipathy of the Fiscus to company cars has been echoed in its attitude to car allowances and we have seen an escalation in the portion of a car allowance subject to PAYE to the current level of 50%.”

The pros and cons of company cars and car allowances – from both employer and employee perspectives – have been well documented and the facts and figures can very easily be engineered to show either option in a less or more favourable light. It just depends on who is doing the motivation.

“As long as there are cars and a Seventh Schedule, the arguments for and against company cars and car allowances will continue,” says Else. “By using one or other of the operating lease products available however, the car benefits of all employees can be structured to suit both employer and employee.”

Undoubtedly the operational lease concept has proved itself as offering the motorist – corporate or individual – a highly competitive and practical method of obtaining the use of either a single vehicle or an extensive fleet by, in effect, outsourcing the vehicle management function to a specialist third party enterprise.