The Ultimate Car Depreciation Guide.
Whether you’re planning to buy a new or used car in Australia, the goal is the same: narrowing down your choices to cars that suit your needs and won’t destroy your budget.
It’s also important to search for cars that will hold their monetary worth over time. The value of a shiny, new car you’ve just driven off the lot bears little resemblance to the resale value of that same car several years later.
Buying a fresh-from-the-factory vehicle comes with obvious advantages. You get the latest infotainment, driver assist and safety features, lots of choices in colour, spec level, engine preference and optional extras, a full manufacturer’s warranty and the comforting knowledge that you’re the very first owner.
This peace of mind is harder to come by for used car purchasers, who may have concerns about how well — or how poorly – previous owners have looked after the vehicle.
A new car is a beautiful, pristine thing – free from dents, stains, engine wear, rust and accumulated dirt. That reassuring new-car smell, gleaming look and untouched feel simply can’t be replicated in a used version, no matter how well it’s maintained.
A new car purchase has its disadvantages too, of course. You may find that some dealers will only extend the factory warranty if you have your car regularly serviced at their dealership.
You also need to be aware of any on-road costs and taxes that aren’t built into the advertised retail price. And naturally, a new car will cost a bit more than its pre-loved equivalent.
The main drawback of buying a new vehicle is a pesky little thing called depreciation. The moment you get behind the wheel and make that first exciting journey from the dealership to your home, you’re losing money — sometimes thousands of dollars in the car’s value.
If you’re planning to keep your purchase for many years, this isn’t a big problem but if you decide to sell that car reasonably quickly, you’ll need to be mentally prepared for the harsh reality of its diminished resale value.
It doesn’t matter if you’re selling it next year, more than a decade from now or anything in between, or whether you’re unloading it privately or trading it in to a dealership — depreciation will always play its part in shrinking your profit margin.
A car’s depreciation rate isn’t solely an issue for new car buyers, either. If you’ve purchased a two-year-old car and then sell it six years later, depreciation still applies, although somewhat less dramatically than with a new car purchase.
Depreciation is an inevitable part of car ownership but that doesn’t mean you’re completely helpless to fight against it. With a little research and knowledge, you’ll find there are many ways to reduce the wallet-draining effects of car depreciation and save money — both on the day of purchase and when you sell it later.
Depreciation is not created equal
Buying the cheapest, most popular, safest or most fuel efficient car only tells you part of the story of its real-world value. To understand a car’s true worth, you should also compare depreciation rates between models and think about how long you plan to own the vehicle.
To spend $2,500 less on a car that loses its value twice as quickly as its nearest competitor isn’t necessarily a bargain. ‘Depreciation awareness’ helps you read between the lines and assess a car’s long-term value.
It’s safe, versatile, tech-rich, good-looking and has proven its worth on the road year after year. Unfortunately, these positive attributes don’t automatically bestow it with impressive resale value.
By hanging onto it for several years instead, its depreciation rate will become far less relevant.
It’s useful to compare private sale price depreciation rates with rates for trade-in, too.
A car’s long-term value isn’t just about when you sell – it’s also about who you sell to. Cars that depreciate the most are only an issue for owners who sell them quickly or aren’t too concerned about who buys them.
First-year car depreciation rates can look a bit scary, but they needn’t be. Most of us keep our new vehicles much longer than a year – the average age of an Aussie car is about ten years.
The longer you own your car and the better you maintain it, the less you will have to worry about depreciation. It’s simply one of many factors to consider when acquiring or replacing a vehicle.
If you’re someone who loves the idea of owning a luxury car, please beware: those $80,000-$130,000 vehicles with all the trimmings are some of the worst performers when it comes to retaining their value.
Both in terms of depreciation rates and dollar value, luxury cars don’t make the soundest automotive investment. Having the latest Lexus, BMW, Mercedes-Benz, Audi or Land Rover in your garage may provide lots of pleasure but when you sell, you may be less pleased with their high depreciation rates.
Car depreciation made simple
Depending on the new car model you choose, 10-15% of its value normally vanishes the moment you drive it off the dealer’s lot. By the end of the first year, another 10-15% will likely be wiped off its value.
Depreciation is the single biggest cost of car ownership in Australia – bigger than fuel, servicing or insurance.
Cars with typical depreciation rates might lose up to 58% of their value in three years, 49% in four years and 40% in five years.
And because car manufacturers seem to be bringing out new and improved models at ever-increasing rates, previous versions are becoming out of date faster than ever.
Factors that can influence the rate of car depreciation
- The brand of vehicle
- Make/model longevity
- Build/compliance date
- Any previous vehicle accidents
Claiming car depreciation on your tax
If you use your car for business, you might be able to claim a percentage of its depreciation against your tax if you meet the ATO’s deduction conditions, which include using the logbook method and either owning the car or hiring it under a hire-purchase agreement.
You’re only allowed to claim a deduction for a year in which you used the car for work-related purposes. If you only owned the car for part of the tax year, you must apportion your deduction accordingly.
The ATO’s Work-related Car Expenses pages can provide more information about deductions related to car depreciation (what the ATO calls ‘decline in value’). Claiming for work-related car depreciation can save some decent money at tax time, so it may be worth seeking professional advice from your Highview financial advisor or tax consultant to ensure you’re making the most of your permitted deductions.
There’s an upper limit on business-related car depreciation deductions put out by the ATO for each year. The car limit for 2020-21 is $59,136.
Always consult your Highview taxation specialist for tax advice on your situation.