Are cheaper cars on the way?

The recent tax cuts might look attractive, but they also diminish a car’s residual value

CAR DEALERS AND buyers alike have welcomed the news of an impending reduction in the additional registration fee (ARF) for cars.

Transport minister Raymond Lim last week announced a 10 percent cut in the ARF to 100 percent of a car’s open market value or OMV. This will apply to cars bought using Certificates of Entitlement (COEs) secured from next month onwards. Road tax will also be cut by 15 percent for all cars.

The ARF is an upfront tax which has been progressively lowered over the last few years, in line with the government’s plan to shift the cost of owning a car from buying to using it.

A car’s OMV is essentially its cost plus insurance and freight, and it’s what the dealer pays to have the car imported into Singapore.

ARF was last cut in March 2004, from 130 to 110 percent of OMV. But will the latest adjustment definitely lead to lower car prices?

Let’s crunch some numbers. A Mitsubishi Lancer 1.6 automatic has an OMV of around $12,000, which means its base selling price will fall by $1,200 next month.

That’s not a small amount, but a rise in the COE premium (likely, because buyers will flock to showrooms hoping to gain from the ARF cut) could more than wipe out the potential savings.

There’s also the often-overlooked factor of residual values. Less ARF paid upfront translates to a car that fetches less money when it’s scrapped or sold.

This is because the owner of a car that’s being deregistered before its 10th birthday is entitled to a partial rebate of the ARF, called the preferential additional registration fee or PARF.

The PARF ranges from 50 to 75 percent of the ARF paid, depending on when exactly the car is deregistered. Assuming the Lancer is scrapped when it turns 10, the PARF rebate under the new scheme is $6,000, down from $6,600.

So before any COE fluctuations are taken into account, the savings over the entire ownership period is actually just $600.

Similarly, the buyer of a BMW M3 (OMV $102,000) stands to save $10,200 upfront, but taking into account the lower PARF amount the net savings over the car’s lifespan is just $5,100.

Commenting on the tax adjustments, Automobile Association of Singapore president Bernard Tay said the reduction in road tax and ARF does not come as a surprise.

“In fact, the reductions fall short of market expectations,” he said. “Nevertheless, they will help to offset part of the costs that motorists will have to bear with the significant increase in the ERP charges.”