The ever-changing value of cars is a tricky concept to wrap your head around.

From the moment a car rolls off the dealership lot, its value begins to depreciate, sometimes rapidly.

The introduction of new technology, changing styles, and even fuel costs can all have an impact on the depreciation rate of any vehicle.

Let’s explore what car depreciation is, why it's important to understand it when purchasing a car, and how you can use it to your advantage should you decide to sell or trade-in your vehicle down the road.

What is car depreciation?

Car depreciation is the decrease in a car's value over time due to wear and tear, age, or obsolescence. This decrease can be impacted by factors such as changing trends, the availability of new technologies, fuel costs, and even how a vehicle has been maintained.

When purchasing a car, it's important to take into account how much the car is likely to depreciate during its lifetime – especially if you're planning on selling or trading in your vehicle down the road.

Car depreciation can also be used strategically when negotiating prices at dealerships; if you understand roughly how much your car will depreciate over time, you may be able to get a better price on a new vehicle purchase by using this knowledge to your advantage.

What factors influence car depreciation?

When assessing the value of a car, it’s important to understand that car depreciation is influenced by a number of different factors.

Every car will depreciate at its own rate, depending on the make and model, the year it was manufactured, how much mileage it has, and other characteristics.

Factors like changing trends and styles, the availability of new technologies, fuel costs, and even how well a vehicle has been maintained can all have an impact on the rate of depreciation for any given car.

Build/compliance date

The build or compliance date of a car is an important factor when it comes to understanding its depreciation.  Car build dates refer to the specific dates on which a vehicle is manufactured or assembled in the factory. It represents the completion of the production process and marks the starting point for the vehicle's life cycle. On the other hand, compliance dates signify the date on which a car meets all the regulatory requirements and standards set by the relevant authorities or governing bodies. This includes safety regulations, emissions standards, and other legal requirements that must be met for the vehicle to be deemed compliant and eligible for sale or registration. While the build date indicates when the car was physically constructed, the compliance date is the milestone when it has been officially certified as meeting all the necessary legal and regulatory criteria. These two dates may differ, as there can be a time gap between the manufacturing and compliance processes.

The brand of vehicle

The brand of a car can have a significant impact on how much it depreciates over time. Certain car brands have established a reputation for producing vehicles that retain their value well over time, while others may experience more significant depreciation. A well-regarded brand, such as Toyota, known for its reliability, quality craftsmanship, and desirable features, often retains its value better. These brands tend to have a strong and loyal customer base, which can contribute to higher demand for their vehicles in the used car market. Additionally, brands that offer a wide range of models with strong resale values and have a reputation for longevity can also positively impact depreciation. On the other hand, lesser-known or less reputable brands may face higher depreciation rates due to lower demand, concerns about reliability, or limited availability of parts and service. The perception of a brand's quality, desirability, and long-term value can greatly influence how quickly a car depreciates in the market.

Make/model longevity

Certain makes and models may be more likely to hold their value over time due to high-quality construction, reliable performance, or brand recognition. On the other hand, some makes and models may have shorter lifespans and experience faster depreciation due to outdated technology or fewer features.

Kilometres

The number of kilometres a car has driven can have a significant impact on its depreciation rate. Generally speaking, cars that have been driven more than average are likely to depreciate faster than those that haven't. This is because cars with high mileage may be more prone to mechanical issues or require more frequent maintenance and repairs, which can add up over time. Additionally, higher mileage vehicles often look less attractive to potential buyers as they may not trust the condition of the vehicle.

Condition of car

The condition of a car can have a major effect on its depreciation rate. Generally speaking, cars that are in good condition and are regularly well maintained will have slower rates of depreciation than those that have been neglected or damaged. For instance, a car with scratches, dents, or rips in the interior may experience faster depreciation due to its decreased aesthetics. Similarly, cars with broken or non-functioning components such as windows, lights, and brakes may also depreciate faster due to their decreased value.

How to calculate car depreciation - and why you should do it!

Calculating the depreciation of a car can help you determine its true market value, which is especially important when buying or selling.

To calculate car depreciation, start by gathering information about your vehicle such as its year, make and model. Then research the car's estimated original cost and current market value to get an idea of how much it has depreciated since its original purchase price.

You can also look into other factors that may affect the car's value, such as its age, mileage, condition, and any added features like upgraded audio systems or sunroofs.

To manually calculate depreciation, you can use the following formula¹:

(new car value) - (current car value) = the difference

(the difference) ÷ (new car value) x 100 = depreciation rate

For example:

$37,200 (new car value) - $26,100 (current car value) = $11,100 (the difference)

$11,100 (the difference) ÷ $37,200 (new car value)  x 100 = 29.84% (depreciation rate)

To make it even easier, you can use a depreciation calculator to take all of this information into account and determine the amount of depreciation in percentage terms.

Calculating your car's depreciation can be beneficial regardless of whether you're buying or selling; this way, you will be able to ensure you're paying (or receiving) a fair price for the vehicle in question.

What is the car limit for claiming depreciation for tax purposes?

In Australia, the maximum car depreciation limit is determined by the Australian Tax Office (ATO).

Generally, vehicles that were purchased in the current financial year  (22/23) are eligible for a maximum of $64,741 in depreciation².

The amount you can claim varies depending on a number of factors such as when the vehicle was purchased and how it is being used (i.e. business use vs private use), so be sure to check with the ATO for any applicable rules or changes.

Additionally, cars with special features such as luxury features or electric/hybrid technology may have distinct depreciation thresholds compared to other vehicles, so take this into consideration before calculating your car's value.

It is important to note that if you have purchased a car and the price exceeds the car limit, there are certain considerations to be aware of, particularly in relation to the instant asset write-off. The instant asset write-off is a tax provision that allows businesses to claim an immediate deduction for the cost of eligible assets, including cars, up to a certain limit. However, if the purchase price of the car exceeds this limit, the maximum GST credit you can claim (except in certain circumstances) is one-eleventh of the car limit. It is essential to take this into account when determining the tax benefits and deductions associated with your car purchase³.

Claiming car depreciation on your tax return

Always seek professional advice, but as a general rule, claiming car depreciation on your tax return can be a beneficial strategy to reduce your tax liability in Australia. However, it's important to note that depreciation can only be claimed if the car is used for work purposes. If you use your car for both personal and work-related activities, you can only claim the portion that is directly related to your work. 

To determine the eligible depreciation amount, you may need to keep accurate records of your business use, such as the mileage driven for work or the percentage of time the car is used for work-related activities. Consulting with a tax professional can provide you with specific guidance tailored to your situation and ensure compliance with tax laws while maximising your deductions.

As mentioned above, the ATO determines the maximum allowable amount that can be claimed in any given year. So it is important to check with the ATO periodically for updates and changes related to car depreciation rules and take into account any deductions or credits available due to electric/hybrid technology before filing your return.

Can I claim depreciation on my car?

As a general rule, you can claim car depreciation on your tax return as long as you own a car. The amount you will be able to claim is the tricky part.

Seeking professional advice will help you ensure that you are maximising the benefits of your car-related business expenses.

How to reduce car depreciation

For drivers looking to save money, understanding how to reduce car depreciation can be an invaluable skill.

Depreciation is a cost of owning a vehicle that can significantly reduce its resale value over time.

However, there are certain steps you can take to minimise the rate at which your car depreciates and ensure that it retains its value for longer.

The fastest depreciating cars - new or used?

A significant portion of a typical car's depreciation occurs within the initial three years of ownership. During this relatively short period, the value of the vehicle can diminish considerably. Several factors contribute to this accelerated depreciation, including market demand, the introduction of newer models, and wear and tear. This highlights the importance of carefully considering the purchase of a new car and weighing the potential financial implications. Alternatively, opting for a slightly used or pre-owned vehicle could help minimise the impact of this rapid depreciation, allowing for a more cost-effective and practical choice.

Make informed choices and negotiate wisely

Prior to making a purchase, conducting thorough research is key to finding the best value for your money. It is important to consider additional expenses like taxes, insurance, and maintenance fees associated with the car. While in the past bargaining may have been common practice, nowadays the advertised price is often the best offer available, especially at dealerships that are well-informed about the market. By approaching the buying process with knowledge and careful consideration, you can mitigate the risk of experiencing significant depreciation in the future.

Limit your mileage

The more a vehicle is driven, the less valuable it is likely to become over time. By limiting how much you use your vehicle, you can help maintain its value when you want to trade it in for a newer model. Additionally, lower mileage cars tend to perform better and require fewer repairs than those with higher mileage, so not only will you be preventing large depreciation losses but you’ll also be improving your car’s performance over time.

Cleaning and maintenance

Keeping a car clean helps to maintain the value of its exterior, as dust, dirt and other debris can degrade or scratch the paint job over time. Additionally, it's important to routinely service a vehicle as this can help keep parts working effectively and prevent further damage down the line. Regular maintenance can also indicate that the car has been well looked after which may make it more desirable when looking at trade-in values in the future.

Choose wisely

The choices you make can make a big difference. When buying a vehicle, consider the resale value and how much wear and tear it may incur in the future. Opt for fuel-efficient models that run on diesel or electric as these tend to offer better long-term performance than petrol-based cars. Additionally, stick to recommended maintenance schedules, keep your car safe with any necessary security features and limit mileage whenever possible. By making wise choices when selecting and caring for your vehicle, you can significantly reduce depreciation over time.

Subscribers need not worry

If you want to skip depreciation altogether, there is a solution. Choosing to sign up for a car subscription will not only save you the stress of traditional car ownership, but it will also mean that the depreciation of the vehicle is not on you. All of your car expenses are rolled into one weekly subscription payment, making it easier than ever to have the car of your dreams.

What will my car be worth in 5 years?

Unfortunately, it's impossible to predict what your car will be worth in 5 years with certainty.

A variety of factors including the current market conditions and the type of vehicle will contribute to its expected value.

Doing your research, negotiating smartly and making wise choices when buying a car will all contribute to keeping depreciation low over the long term. By following these steps, you should find that your vehicle retains its maximum value.

There is no way to avoid depreciation, unless...

Understanding the various factors that contribute to depreciation can help you make wise decisions when buying and caring for your vehicle.

Keeping up with recommended maintenance schedules, limiting mileage and utilising safety features are all good ways to reduce the rate of depreciation over time.

With the right knowledge and care, you can maximise the value of your car in the years to come.

And if you want to forget about depreciation altogether, why not try a car subscription? 

You could enjoy all the perks of car ownership without any of the hassles. Depreciation can be a thing of the past!

¹ https://www.budgetdirect.com.au/car-insurance/guides/car-buying/car-depreciation.html
² https://www.ato.gov.au/Newsroom/smallbusiness/Lodging-and-paying/Cars-and-tax/
³ https://www.ato.gov.au/Newsroom/smallbusiness/Lodging-and-paying/Cars-and-tax/