The West Australian, 17 August 2015
No matter how indifferent you try to act in the showroom, there’s nothing quite like picking up a brand new car.
The smell, the feel, the comfort that the thing will just go when you need it to and, if it doesn’t, there’s a new-car warranty to fall back on.
Any excitement for people borrowing money to buy their new wheels should be tempered somewhat by traditional bean-counting analysis focusing on depreciation and borrowing costs.
However, there can be extra financial benefits for pensioners affected by the assets test in buying a car with a market value that falls by 10 per cent to 20 per cent of the purchase price as it leaves the dealership and when its market value keeps sliding.
Depreciation features heavily in the running costs of luxury and budget vehicles alike, something confirmed in a recent RAC survey of the five-year cost of buying a new car and trading it in after five years and 75,000km.
A small car like a Mazda 2 would have a cost, excluding interest, of about $114 a week, to fuel, insure, service and depreciate the purchase cost, according to RAC.
The biggest single item is depreciation at $38 a week based on a list price of $17,990 and a trade-in value of $8096 after five years.
A medium sized Mitsubishi Outlander SUV would cost about $175 all up, with depreciation the stand-out item at $80 a week under the RAC formula.
Sure, the RAC analysis is based on the list price of vehicles, whereas keen dealers will regularly advertise and sell new cars for well below the list price, but it points to the curious upside in the downside of depreciation.
For those on asset-tested Centrelink income support payment, the numbers can look even better.
It is more easily demonstrated with an example. Let’s say our home-owning couple presently has $800,000 invested in a range of investments.
With a clapped-out old commodore and contents, their total assessed assets total $820,000. In their mid-70s, they decide that a Winnebago tour around Australia would do nicely but with a $200,000 price tag, the figure is a little daunting.
Let’s assume an immediate 20 per cent depreciation, which would take $40,000 off the value of the scrap resale of the vehicle using trade-in prices.
Under the pension assets test as it stands now, every extra $1000 you have over your assets test threshold will result in you losing $1.50 a fortnight, or $39 a year.
The corollary of this is that a $1000 reduction in the value of your assets increases your pension by $1.50 a fortnight.
The $40,000 wiped off the value of your Winnebago would increase your pension by $60 a fortnight, or $1560 a year.
If the vehicle lost another $40,000 in value on your Centrelink-subsidised holiday around Australia, you would be rewarded with another$60 a fortnight of pension.
Under the present asset test rules for that $40,000 decline in asset values, each $1000 will lift the total age pension by $1.50 a fortnight.
In this example that will be an extra $60 a fortnight or $1560 a year.
The planned doubling of the asset test taper rate from $1.50 to $3 a fortnight in January 2017 will double the amount of extra pension you get for the same amount of depreciation.
If your Winnebago is worth $100,000 by the end of 2017 and you are still affected by the asset test, you could be enjoying $300 a fortnight in Federal compensation.
The perverse incentive also applies to any car.
Let’s assume you paid the RAC guesstimate of $37,000, including more than $3600 of on-road costs, for a new Outlander and it had a trade-in value of about $26,500 by the end of the year.
Under the current rules, the $10,500 reduction in value of the car would give you an extra $15.75 in pension each fortnight under current rules and an extra $31.50 come 2017, even before the extra depreciation is considered.
After five years, the car would have a trade-in value of $12,559 according to the RAC figures.
Under the post-2016 asset test taper rates that would be giving you around $73 a fortnight in extra pension but you would still have a car with plenty of useful life.