The drive for efficiency

If you have the responsibility of managing your company’s vehicles, you’ll be looking to avoid the potential potholes out there and aiming for a smooth ride. ‘Efficiency’ and ‘value’ will be top of mind – and that’s exactly what the vehicle leasing experts tell us people are looking for.

 

In the words of ORIX New Zealand sales manager Nigel Bell-Booth, customers, as always, are seeking “safe, practical and appealing vehicles for their staff at the lowest possible cost. 

 

“The good news is that the motor vehicle industry continues to improve and renew itself, producing efficient, high quality vehicles at ever more competitive prices. Coupled with strong residual positions in the used vehicle market, there has never been a better time to lease a new vehicle for your business,” he says.

As reported last year, the word ‘transparency’ inevitably crops up whenever there is discussion around business vehicles. “Greater transparency in 2013 has led to increased analysis around all the attributes involved in fleet ownership in 2014,” says Geoff Tipene, managing director NZ of SG Fleet. “Vehicle selection is very important with more analysis being completed around ‘the total cost of ownership’, ‘fit for purpose’, ‘sustainability’ and ‘safety’.”

 

Looking at the overall market, Charles Willmer, managing director of LeasePlan New Zealand, has seen a drive from customers for their suppliers to deliver value on the back of cost saving initiatives – whether it be car fleet design, more outsourcing or cost transparency.  

 

“We’re noticing a distinct shift away from a purely price driven market towards more value based decision making with a greater understanding of the financial benefits that can be achieved from leasing,” says Willmer. “We’re also noticing a move away from the New Zealand-based love of ownership.  Businesses often lease all of their equipment – from photocopiers to plants – but in the past there has been an attachment to owning their vehicle fleet. We’re seeing a distinct shift away from ownership now, and its picking up speed. 

 

“Our customers also want us to know more about their businesses – we work in partnership rather than just a supplier/customer relationship,” he adds.

Going forward there is potentially much to occupy the minds of fleet managers and suppliers – and yes, the lawmakers are involved.

“Fleets can expect greater scrutiny by the government under the Fleet Safety program and the Safer Journeys Strategy,” suggests SG Fleet’s Tipene. And the reason for this?

 

Internationally, it is estimated work related incidents make up 25 percent of the road toll, he says. 

Approximately 30 percent of all workplace fatalities happen in road crashes. On average, 31 New Zealanders die in work-related road crashes every year, and around 

13 percent of workplace injuries are caused by motor vehicle accidents (MVAs).

 

Thankfully there have been limited changes to fleet/leasing legislation since the major review of Fringe Benefit Tax (FBT) in 2006, says Nigel Bell-Booth. “However, there is a pending change to international accounting standards which, amongst other things, is expected to align the balance sheet treatment of Operating and Finance leases. While this is still in the consultation stage internationally, if this change is ratified it would be expected to have a significant impact on the future decision-making of company fleet operators – particularly regarding vehicle leasing verses ownership models.”

 

Without doubt, and not surprisingly, the most common piece of advice offered by the vehicle lease providers is that it’s not about getting the cheapest lease rate. And no fleets are created equally, so beware of one-size-fits-all solutions.

“Make sure analysis is completed around the ‘Whole of Life’ costs,” advises Tipene, “not just the monthly rental. Too many companies are now paying the real costs of selecting the ‘cheap’ rental as vehicles are handed back at lease end.”

Bell-Booth agrees that ‘Whole of Life’ financial modelling is an excellent method of gaining an insight into expected vehicle expenses and is often used when comparing various models. 

 

“This modelling takes into account the lease rental, maintenance, FBT, fuel, and road user charges (RUC) expected over a specific term and kilometres. It often throws up some interesting results when all the variables inherent in new motor vehicles are quantified,” he says. 

“Many fleet users have changed their fleet vehicle selection when it is discovered that the lowest lease rate does not necessarily result in the lowest net cost to the business.”   

 

The greening of New Zealand’s vehicle fleets is not as clear cut as it may have seemed pre-GFC.

‘Green fleeting’ was quickly replaced by ‘cost effectiveness’ when the economic squeeze came on, believes ORIX’s Bell-Booth.

“When people hear ‘green’ they typically think of hybrid vehicles, and while offering excellent fuel efficiency, hybrids have largely remained as ‘token’ green vehicles within high-profile corporate fleets and, of course, taxi companies. 

 

“However, there has been a significant uptake in the selection and use of diesel vehicles over the past five to six years – though this has been driven predominantly by cost efficiencies. 

“With the advent of the new generation of petrol engine vehicles with upgraded and highly efficient technology, I predict a move back to petrol vehicles as the real world convenience (no RUCs) and benefits of petrol are recognised, and the cost efficiencies of diesel are reduced,” says Bell-Booth.

 

SG Fleet’s Geoff Tipene agrees that New Zealand’s company vehicle fleet has greened both by circumstance and motivation to drive out cost.

“The recession provided great impetus for motor manufacturers to look at global vehicle platforms and fuel efficiency of the motor vehicle. This investment has meant we’ve seen massive change in vehicle pricing and the efficiency of the petrol engine over the past four years. The consumer is the benefactor of this R&D as we now have vehicles that offer great value for money and fantastic fuel efficiency.”

 

Tipene says the Holden Volt (an extended range electric car) and the Plug-In Hybrid Electric Vehicle (PHEV) such as the latest Mitsubishi Outlander SUV, have shown a glimpse into the future of the [business] motoring world. He also believes fuel efficiency will continue to be a motivating factor in motor vehicle selection.

Fuel consumption rates are also acknowledged by LeasePlan’s Charles Willmer as a primary consideration by firms when selecting their vehicles. He says the ‘greener’ technology vehicles have fuel consumption rates that do not offset their higher cost on a ‘Total Cost of Ownership’ model.

“This is now resulting in step change reductions of some green technology vehicles. Our view is that the technology/price equation has some way to play out yet; so watch with interest as the story unfolds,” he says. 

 

It goes without saying that the vehicle leasing marketplace in New Zealand – a small, near mature market with four key providers and a number of emerging smaller players – is extremely competitive. New products are regularly being offered, so business owners would be wise to shop around.

SG Fleet, for example, has endeavoured to help clients with fleet safety issues by introducing ‘Risk Mitigation’ products and services. These are designed to ensure that not only the client’s fleet is safe and fit for purpose, but that the drivers of the vehicles are licensed, educated, capable and well informed – to ensure that they are making the best decisions whilst in control of the motor vehicle.

 

ORIX has been promoting its Novated Leasing product, introduced here last year after taking off in Australia where, according to Nigel Bell-Booth, it now represents around 35 percent of the vehicle leasing market.

In simple terms, Novated Leasing is a salary packaging tool that allows a company driver to sacrifice a portion of their pre-PAYE salary to fund a new (or near new) vehicle. 

 

“The vehicle itself ‘novates’ (means the substitution of a new obligation for an old one) to the company at inception, allowing favourable tax treatment for the employee, says Bell-Booth. “However, overall responsibility for the vehicle and its operation remains with the employee, removing any risk from the company. This product has proven extremely popular with businesses looking to move away from salary ‘benefit’ vehicles, or for businesses looking to improve the packaged benefits for their staff.”

There are tangible benefits for employees too – ORIX has produced a cost comparison between a $40,000 private car purchase and a leased vehicle of equivalent value. 

The annual savings after tax is just over $5,000.  

 

As outlined earlier, more companies are favouring leasing over owning company vehicles – but it’s still useful to compare the two options.

John Dazley of CMK Accountants in Taranaki points out that over the normal period (usually three years) for lease or hire purchase, the overall cost of owning or leasing a vehicle works out around the same over the three years when all cost factors are taken into account.

When making a decision to lease or buy, look at your personal priorities and financial situation, says Dazley. Consider:

These days there are no risks of major repairs because all new cars have extended warranties of three to five years and a minimum of 100,000 kilometres on the speedometer.

 

There are two types of lease:

An Operating Lease is a contract for the use of a new vehicle for a fixed period. It is usually 36 months (with a maximum term allowed for tax purposes of 45 months for a motor car) and the first payment is in advance. At the end of the lease period you hand the car back.  Assuming the mileage is within the range set in the contract there will be no further payments required from the user. Operating Leases can either be inclusive of full maintenance or not. The full maintenance option could mean significantly higher monthly lease payments.

 

A Finance Lease is also a contract for the use of a new vehicle for a fixed period. However, a Finance Lease takes into account the likely value of the car at the end of the lease period (the ‘residual value’). A Finance Lease with a residual value tends to have a lower monthly payment than either type of Operating Lease. Further, the lessee can usually buy the vehicle for the residual value at the end of the lease period. If the user’s vehicle use is greater than normal then there is a chance that the vehicle will be worth less than its residual value. If that is the case then there is an extra cost to the lessee.

 

When you lease, you pay an amount based on only a portion of a vehicle’s cost, which is the part that you use for the duration of the lease. You have the option of not making any deposit and your monthly payments are fully claimable as an expense. You make your first payment at the time you sign the lease. If you are short of cash up-front, but do have good cashflow, a lease is a great way to acquire a new vehicle, says Dazley.

 

When you buy, you pay for the total cost of a vehicle regardless of how many kilometres you drive. You make a deposit, and pay an interest rate determined by the finance company or bank. You make the first payment a month after signing the contract and can select the period of time you wish the HP/Loan to be spread over. 

Once the HP or loan balance has been repaid, you will own an asset.  Given the nature of most vehicles the asset will be worth less than what you paid for it but it will still have a value. If at this point you want to upgrade to a newer vehicle you will have some equity that you can use as a deposit on a new vehicle.  Alternatively you could continue to use the vehicle debt-free.  

 

“For tax purposes we treat the vehicle as a fixed asset and depreciate it at the appropriate rate. We also claim the interest on the HP or loan.  The depreciation and interest claimed is often similar to what you would be paying if you were leasing the vehicle. Generally we find that the tax implications of leasing versus buying are minimal,” says Dazley.