How much does a company car depreciate over time?

By Martin Pretorius 

Just as with a privately-owned car, company cars are also subject to depreciation due to age and use. This depreciation is usually used as a tax write-off, because a depreciating asset really represents a nett loss to the company, which can have favourable tax implications. The tax advantages don't extend to the car's user, however, as changes to the tax laws have clamped down on such perks.

What is depreciation and how bad can it be?

Depreciation is defined as the financial value reduction of an asset, due to ageing, which reduces its usefulness and thus its value. When applied to cars, depreciation begins the moment a new car is driven off the showroom floor, and it happens on a sliding scale over time – the steepest depreciation happens in the first year, thereafter diminishing every year.

However, for company asset management purposes, a fixed depreciation rate of 15% is assumed in tax law. This means that a car will lose 15% of its value with every passing year, calculated on a year-on-year basis. In real terms, this loss will be even greater, because the car's cost when new is used as a baseline figure, which obviously doesn't take new-car price increases into consideration.

Taxable depreciation

Company cars are generally taken as fully depreciated after 5 years, with the compounded effect being that the car will lose more than half of its new value over this period. After this, the 15% rule is still applied, albeit to the ever-diminishing value of the car.

This is the main reason why company fleet buyers pay so much attention to depreciation: if a car loses more of its value in the marketplace than the tax law allows, it amounts to poor financial management to choose that car in the first place.

Please consult a tax expert on this matter, as there are still some loopholes left for a skilled accountant to exploit. But if the opportunity presents itself to buy a company car once it's fully depreciated, by all means jump on it: this could be a great way to acquire a high-value car for much less than you'd pay at a dealership, simply because the company would rather lose a little on the car's resale value than pay extra tax on a car which is sold for more than its officially depreciated value.