The hidden ‘luxury’ tax South Africans pay on all cars over R250,000

 ·1 Aug 2024

South Africa’s “luxury goods” tax, which applies to cars over R250,000 and has remained unchanged for almost 30 years, is increasing the high cost of vehicles in the country.

This is according to Greg Cress, the Principal Director of Automotive and eMobility at Accenture in Africa, who believes that adjusting the ad valorem tax could significantly benefit South African consumers and, specifically, the future of electric vehicles (EVs) in South Africa.

According to TopAuto’s list of cars available in South Africa, approximately 1,481 car models are currently available for sale in the country.

This count includes passenger vehicles and does not include medium and heavy commercial vehicles.

Out of these models, around 1,082 are priced at over R500,000, which accounts for almost 75% of the new car market.

This means that only 25% of the models are priced below half a million rand.

Car prices have risen significantly in recent years due to several factors, including inflation, supply chain disruptions, safety and legal requirements, and evolving consumer preferences.

During the Covid-19 pandemic, car manufacturers faced reduced demand, prompting them to increase prices to sustain their businesses.

Although consumer spending has since recovered, many companies continue to operate with decreased output as a result of employee layoffs and factory closures.

This has led to a supply and demand imbalance for certain goods, like cars and their components such as semiconductors, ultimately causing prices to rise.

South African economic conditions exacerbate car import costs due to high taxes, import duties and a weakening rand exchange rate.

One of these taxes, while only a small part of the taxes imposed on imported vehicles, is the Ad Valorem Luxury Tax.

Surprisingly, according to Cress, this ‘luxury tax’ has not been revised for nearly three decades.

This means South Africans are still paying this tax on all cars over R250,000. Thirty years ago, cars over R250,000 could afford luxury brands such as Jaguar, Porsche, and more.

1994 Jaguar XJ-6 AT

For example, you could buy a BMW 320i for R106,590, which, in today’s money, would be around R725,000.

Similarly, thirty years ago, one could buy a Jaguar XJ-6 AT for R369,505, worth R1,965,017 today if adjusted for inflation.

Therefore, a BMW 320i was not considered a “luxury” for the purposes of ad valorem in 1994, while a Jaguar was.

Today, only cars considered budget models are below R250,000, with only 14 models under this price currently on the market.

Under the current ad valorem tax, a Kia Picanto (starting at R260,995) is considered a “luxury” vehicle.

If inflation had been considered for the ad valorem tax today, only goods that cost more than R1,329,493.09 would be taxed as luxury goods.

The formula for the ad valorem tax is as follows:

  • % = [(0.00003 * retail value less 20%) – 0.75]

The maximum ad valorem tax that can be applied is 30%. At the moment, any vehicle imported above the price of R250,000 will have at least 5.25% added, which equates to a tax of R13,125.

2024 Kia Picanto 1.0 LX Manual

Cress argued that updating this tax, along with other notable policy and regulation changes, will play a big role in stimulating the uptake of Electric Vehicles (EVs) in South Africa, considering the global shift to greener fuels.

“Adjusting the tax would make electric vehicles (EVs) more affordable to a broader audience, thereby stimulating local demand.

“Moreover, a temporary removal of import duties on EVs could further boost consumption and prompt manufacturers to consider local production setups,” he said.

A recent BuinessTech poll asked 1,615 readers whether they would consider purchasing an electric vehicle.

672 (48%) said they would take the leap when prices come down.

Currently, most EVs are priced over R500,000, which limits their market penetration.

Cress stressed that targeting a price point of approximately R400,000 or lower is essential to foster local demand and lay the foundation for a thriving EV industry.

Achieving a target of more than 5% of new car sales being electric vehicles by 2026—equating to around 30,000 units annually—would mark a significant milestone.

He said, “This achievement would catalyze the development of necessary infrastructure, including the widespread deployment of EV charging stations that utilise renewable energy.”


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