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Is There Anything Wrong With The Current COE System

Here are some reasons why the current COE system requires some changes

 

There are some things in life that divide people. These are the matters that people cannot agree on, and in which everyone has their own opinion about how it can be improved on. The Certificate Of Entitlement (COE) system in Singapore is one such matter.

For those of you who are not familiar with the COE, it is basically a system in Singapore to help manage the number of vehicles on the road. Potential car owners would need to buy the rights to drive their cars on the road. The rights, in the form of a COE, would need to be purchase via an open auction system that happens twice a month.

Like all true blue Singaporeans, we decided it is time for us to look at the COE system and share our thoughts on why we think the current system isn’t the best.

Is The COE A Form Of Tax?

The first question people need to ask is whether or not the COE system is a form of tax. This is an important question that has some significance towards how we view the value of a COE.

For example, if COE is a form of tax, then people should not be allowed to add the price of their COE towards their car price and then subsequently take a loan based on both the COE and the actual price of the car. By being able to borrow money to pay for your COE, prices of COE become higher than what they should be.

A parallel to this would be the buyer stamp duty tax imposed on properties purchased in Singapore. For buyers who have to pay a buyer stamp duty tax, this additional tax have to be paid upfront. You cannot add the tax to the total price of the property and then take a loan subsequently on it.

Should The Government Be Refunding Car Owners The Unused Portion Of Their COE?

Currently, the government refunds the unused portion of the COE if car owners decide to deregister their car before the 10-year COE is up. For example, a car owner who has paid $100,000 for his COE but decides to deregister his car after 3 years would be entitled to a $70,000 rebate for his COE.

So it is possible for a car owner who had paid sky-high price for his COE (e.g. $100,000) to be able to get back $70,000 for his existing COE after 3 years even if the current price of a fresh 10-year COE is way lower than $70,000.

When you take into consideration the fact that COE prices is almost as volatile as oil prices, such a system actually provides incentive to not cause us any worries when they pay high COE prices.

Getting A New Car At A Lower Price?

With COE prices being almost as volatile as oil prices, we wondered how realistic it is for someone who has bought a car at a high COE price to deregister his car before 5 years (when PARF rebate starts going down), and get a brand new car at a low COE price without paying much more.

Mercedes Benz C180 – Example 1

For our first example, we use an entry level Mercedes Benz C180 Avantgarde.

Based on the information that we found on SGCarMart, the car costs $196,888 if you bought it in June 2015. The value of the COE that accompanied the car was $71,509.

If you have bought the car then and deregister it just before it turned 5 years old (i.e. before June 2020), you would be entitled to a 75% PARF rebate. That equates to $26,596 based on the Additional Registration Fee (ARF) of $36,647. The COE rebate would be about $35,754. In total, you would expect to receive about $62,323. Not a lot in our opinion.

If we assume that Category B COE price would to hit the $10,000 level mark again in the future (and we probably need a bad recession for that to happen), the basic price of the car may become $92,320. However once you add in the dealer premium of 35% based on current figures, the cost becomes $124,632. In this case, deregistration does not really make sense.

Mazda 3 – Example 2

We wondered if the calculation might make sense for a more affordable vehicle such as the Mazda 3.

If you bought a Mazda 3 in November 2015, it would have cost you $101,888. The value of the COE that accompanied the car was $56,001.

If you deregister it just before 5 years, you would receive a PARF rebate of $8,925. Your COE rebate would be $28,000. In total, you expect to receive $36,925.

If a Category A COE price would to hit the $5,000 mark in the future, the basic price of the Mazda 3 may become $38,740. Add in a dealer premium of 20% and you are looking at a selling price of $46,488. In other words, a car buyer may be able to reregister his almost 5-year old Mazda and get a brand new one by toping up another $10,000. In this instance, deregistering your car makes sense.

In case you think such prices and scenario are unrealistic, they are not. Back when COE prices were low during the financial crisis of 2008 and 2009, getting a Japanese or Korean sedan for $40,000 to $50,000 was the norm, rather than the exception.

Does The COE System Require Adjustments?

It takes just a little common sense to figure out that being able to deregister a 5-year old vehicle that has an expensive COE and then buying the same vehicle brand new with a fresh 10-year old COE at almost the same price should be economically illogical. Yet, this is all possible given the extreme volatility of COE prices in the recent years.

The truth of the matter is that the COE system goes out of logic when the COE prices become more than the actual value of the cars. And due to the cyclical nature of COE supply, the volatility of COE prices will never go away until a change is made to the current system.

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