• The cost of petrol is per metropolitan Melbourne (using a six months average to the time the analysis was carried out, unleaded 135.9c per litre and premium unleaded 142.9 cpl).
• Comprehensive insurance is calculated using RACV premiums for male owner-drivers age 30 and over, garaged in a medium-risk, metropolitan suburb. Annual registration at $168.60c, and car club membership of $66 p.a. are included.
• Vehicle service costs are calculated using manufacturers’ recommended schedules, using appropriate replacement parts, under normal driving conditions, and assumed 15,000 km p.a. distance travelled.
• Tyres are assumed to last 45,000 km.

A total annual cost formula was derived for each car in each category, and an overall average formula was determined for each category.

The NRC determined total annual cost or salary package value, V, for each category is:

Cars

SUVs

Where P, the initial cost of vehicle to the purchaser, is the total of: new car list price, deliver fee, stamp duty, and number plates.

In these formulas the multiplier (e.g. 0.31) gives the fixed or standing cost (such as depreciation, registration, interest), and the dollar amount (e.g. $2,220) is the variable or running cost based on the annual distanced travelled (15,000 kilometres assumed).

While vehicles in all categories are evident in NRC salary surveys, the majority are cars in the categories Small, Medium and Large. An aggregated formula covering these three categories (with weighting towards the medium size category) is:

and is suggested as a current formula to calculate the annual package value of an employer provided vehicle where the employee has full private use of the car and the employee does not make any after-tax contribution to its costs. FBT may also be charged separately, depending on the employer’s policy.

See below for an adjusted formula where the employee does not have full private use of the car and/or makes an after-tax contribution to its cost.

A further question arises when some non-private use of the car is made by or on behalf of the employer.

The above Total Annual Cost formula applies where the employee has full, unrestricted, private use of the car. Where there are restrictions on its use, such as where it cannot be taken on holidays or where other employees have use the car, then some cost compensation could be provided to the employee.

One approach is to pro-rata the total annual vehicle cost on the basis of private versus business usage. (Travel between home and one’s normal place of work is classified as private usage.) Another approach is to give a cash compensation based on a per kilometer rate for those kilometers for which the car has been used for or by the employer.

These sound like two reasonable approaches, but they are fundamentally incorrect. Here, a further question is what is the dollar value of the compensation to be provided.

The NRC formula assumes that the employer pays all vehicle costs, and charges a particular amount to the employee’s salary package. (In this arrangement however the employer does not normally pay fuel and oil costs when the car is taken on holidays.) So in this regard, extra non-private mileage travelled and the resultant extra wear and tear and fuel cost is borne by the employer: because of the fully maintained car assumption. Hence no compensation is due to the employee on this account. Because compensation is not due on account of the additional running costs, it must relate to the fixed costs.

Fixed costs are independent of the number of kilometers travelled, i.e. registration, insurance, and interest on capital invested. (Depreciation may however increase due to the extra usage.) Because here the employer receives a benefit through use of the car, compensation to the employee should be for part of these costs. An equitable method would be to pro-rata the total annual fixed cost on the basis of private versus business usage: and for the sake of simplicity, usage on the basis of the respective numbers of kilometers travelled. This is the method used by the NRC for its surveys.

The NRC takes one further simplifying step for the practical purposes of conducting salary surveys by assuming three, broad car usage levels. These levels give some variation in the formula to recognise, for example, variations in the level of access, conditions of usage, and the extent of employer use of the car:

Level 1: Full private use. Vehicle can be taken on holidays. Car is not usually available for use by others on company business. 100% of fixed cost charged to the salary package.

Level 2: Part-private use. Employee has use of vehicle after work and on weekends. Car cannot be taken on holidays. Car is available as required for use by others on company business. 75% of fixed cost charged to the salary package.

Level 3: Commuter use only. Employee uses car to travel between home and place of work. Employee may have use of vehicle after work and on weekends. Car is available for use by others on company business. 25% of fixed cost charged to the salary package.

This yields the formula:

Where Usage Factor = 100%, 75%, or 25% as defined above.

For levels 2 and 3 the employee does not have use of the car on annual leave. Here one could say there would be a corresponding lesser opportunity for the employee to achieve the 15,000 km on which the formula is based. If one assumes that annual leave is four weeks, then for one-thirteenth of the year the employee has no access to the vehicle. If we reduce the $2,800 variable costs allowance in the formula by one-thirteenth it gives an annual reduction in the value of the car of $215. This may not be sufficient to warrant a further adjustment to the formula in light of the broadness of other assumptions.

Where an employee makes an after tax contribution to the running costs of the car, (i.e. they pay back to the employer a dollar amount out of their own pocket, not as part of a salary sacrifice arrangement), then the salary package value of the car is reduced correspondingly (as should the amount of any FBT charged to the package be reduced). This gives the final formula as:

This NRC method is a consistent, easy to verify, and equitable method for valuing cars for salary package comparison purposes. It is independent of individual organisation factors such as funding mechanisms e.g. lease or outright purchase, cost of capital, tax status, or fleet administration costs. It is also independent of any particular organisation’s internal car valuation policy, and where an organisation uses NRC survey results they are able to make adjustments to convert the results to align them with their own policies.

Two reasonable adjustments to the NRC formula for organisation internal policy purposes are where the employee has private use significantly different to the assumed 15,000 km per annum, and where the vehicle retention period is substantially different to the four years assumed by the model.

Novated lease cars are not considered in this analysis because they are not employer-owned vehicles.

The text of this analysis can also be viewed at the NRC website at www.natrem.com.au/cars2008. A companion article on car FBT is at www.natrem.com.au/carfbt.

Disclaimer.
The National Remuneration Centre provides this analysis for information only and is exempted from any liability arising from its use however construed.