Luxury tax isn’t exactly new. Every imported or locally produced vehicle over a certain amount continues to pay the price that includes a hefty tax. This ultimately impacts local manufacturers' costs and daily operations, as well as consumers' buying behaviour. The ripple effect from inflation won’t just impact the automotive industry as a whole, but the broader market too.
Luxury Goods Tax and How it Affects New Car Prices in South Africa
What is Luxury Goods Tax?
In layman’s terms, luxury Goods Tax (also known as Ad Valorem Excise Duty) is a tax calculated based on the item's selling price, whether locally manufactured or imported. Products taxed include cosmetics, motor vehicles, electronics, and other high-end items.
The only issue is that - according to Greg Cress, Africa Principal Director of Automotive and eMobility at Accenture (Business Tech) – the Ad Valorem tax structure hasn’t changed or has not been adjusted for inflation. This is just one factor contributing to inflating costs of products and services, especially vehicles. The automotive market in particular has been described as an “excessively taxed market.”
How it Impacts New Car Prices
If we go back 30 years (around the time that luxury tax was set in South Africa), R250,000 used to get you a top-of-the-market car compared to today. For example, you could purchase a Mercedes E220 for R180,000 in 1994. Adjusted for inflation, that would amount to R956,700 today.
For R106,590, you could buy a BMW 320i, which would amount to R725,000 today. Likewise, for R369,505, you could buy a Jaguar XJ-6 AT, worth R1,965,017 today when accounting for inflation. As a result, the BMW 320i wouldn’t have been considered a 'luxury' for ad valorem purposes in 1994, while a Jaguar was.
In 2024, new vehicles face a 5.25% luxury tax if they cost more than R250,000, which amounts to R13,125. This is where the threshold starts. If your car costs over a million rand, expect a tax rate of up to 30%, which could add over R300,000. Not exactly a budget-friendly lineup with the economic climate we’re in today.
Implications From Ad Valorem Tax
“If you buy a family motor car (SUV) in South Africa for example, you're already getting a 30% luxury tax, and on top of that, the environmental levy and the tyre levy. So, we have a very, very highly taxed market and the elasticity calculations we've done show how much damage that is doing to consumption in the market,” says Just Barnes, Toyota Wessels Institute for Manufacturing Studies manufacturing ambassador Professor, noted (Business Tech, 2024).
As a result of new vehicle prices, many people are turning to pre-owned vehicles that still have their car warranty or choose to hang onto their cars for much longer.
The Future Ahead
Some are calling for a re-evaluation and readjustment of the tax threshold. With that, entry-level and mid-level vehicles could become more affordable to consumers (all depending on what new amount counts as luxury). Hopefully, we see a notable change for the automotive market’s sake. It’s only a matter of if and when we will see any adjustments or possible tax incentives to lighten the load for local manufacturers.
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