The GST is almost upon us and still confusion reigns. Nowhere is this more so than in the motor vehicle industry. Opinion is split as to whether it is better to buy a new car before or after July 1. If the prices of new cars do come down, then it stands to reason that the same fate will befall used cars. Thus trade-in prices will be directly affected by the price structure of their new replacements.
However, if you currently own a company vehicle, particularly in the luxury bracket, then it appears you will most certainly lose. Assume you own a vehicle, worth $80,000 in today's terms If you sell after the July 1 deadline, then not only will you suffer any downturn in the market price, but you will also lose 1/11th of its value in GST. $7273 will need to be taken from the sale price and forwarded to the GST authorities, reducing the price of the vehicle from $80,000 to $72,727, whereas a private sale would see the owner of the vehicle receive the $80,000 in full!This is clearly inequitable, given that wholesale sales tax of 22 1/2 per cent was paid when the car was originally purchased. This represents nothing more than a straight out tax grab! If you own a company vehicle below the luxury tax threshold, don't feel smug. The same principal applies regardless of the price of the vehicle. Thus someone trading in a company car worth $33,000 after July 1 will lose $3000 of its value in GST remittance.
The claim that this is offset by the fact that the company can in turn claim back the GST charged on the replacement vehicle is not true. During the first year after introduction of the GST, a company cannot claim any GST charged on the purchase of a new vehicle. In the second year they can only claim 50 per cent and it is not until 2002 that the company will get a full credit for GST on a new vehicle. That is, provided the cost of the new car falls below the luxury car limit of some $55,000. Above this figure, the GST amount paid cannot be claimed.
The kickers for owners of luxury vehicles appear to just go on and on! If you buy a vehicle after July 2002, for $110,000 including GST of $11,000, only the GST up to the luxury car limit can be claimed back. Currently that would be $5012. However, if you sold the vehicle at a later date for say $88,000, then the full GST amount of $8000 would have to be remitted to the GST authorities.
If considered as a single transaction this would mean that the total GST paid on the purchase and sale of this vehicle would be $13,988.
So what should your strategy be if you happen to own a company vehicle? If you want to get the full value for it and not lose 1/11 in GST, it is clear that you should dispose of the vehicle before June 30 this year. If you then buy a new car after the introduction of the GST, you will enjoy the benefit of any drop in retail sales prices. However, under the transitional arrangements you will not be able to claim a credit for any GST charged on the purchase. This makes the money you saved on disposing of your existing vehicle somewhat of a hollow victory.
However, the transitional arrangements apply only to new cars. The best strategy therefore appears to be the purchase of a pre-loved vehicle. Better still, if the suggested drop in the price of used cars eventuates, then you should be able to obtain a very good car at below the luxury tax threshold.
Your strategy should be to keep this car until after July 2002, when the transitional arrangements over new cars ends and you will be able to claim a tax credit (up to the luxury car limit) for any GST paid on a new car.
Marnie King is the International Business Development Manager at Solomon Software. Reach her at firstname.lastname@example.org.