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Managing Over Allowance

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Here be Dragons!!!

Understanding and Managing Over Allowances in Vehicle Sales #

Purpose of this Module: This module aims to equip you with a thorough understanding of Over Allowances in vehicle dealerships. By the end of this session, you will be able to define Over Allowance, explain its purpose, identify its sources, apply the core principles for its correct handling, and understand its implications for accounting and VAT.

What is Over Allowance and Why Does It Exist? #

Over Allowance is a practical administrative tool used in dealerships to facilitate vehicle sales by assisting clients with the financial aspects of their trade-in or new vehicle purchase. Specifically, it serves to:

  • Settle outstanding trade-in balances: When the value of a client’s trade-in is less than the amount they still owe the bank, Over Allowance can bridge this gap.
  • Provide a deposit for a new vehicle: Over Allowance can contribute towards the deposit required by the bank for financing a new vehicle.
  • Address both needs simultaneously: In some cases, Over Allowance can be used for both settling a trade-in balance and contributing to a new vehicle deposit.

Where Does Over Allowance Originate? #

It’s crucial to understand that Over Allowance is directly linked to the profitability of the vehicle being sold to the client. It is drawn from the gross profit margin of that specific transaction. If the profit margin is insufficient, the dealership cannot offer Over Allowance unless they are prepared to sell the vehicle at a loss. This is why, for accounting purposes, the Over Allowance amount is treated as a cost associated with the sold vehicle, effectively reducing its profit.

Understanding Related Terminology: Deposit Assist #

You may encounter the term “Deposit Assist or Cash Back.” From an administrative standpoint within our Vehicle Management System (VMG), a Deposit Assist or Cash Back functions identically to an Over Allowance. It is simply a specific application of Over Allowance where the primary goal is to increase the client’s deposit to meet financing requirements.

Key Principles: The 3 Golden Rules of Over Allowance #

To ensure accurate record-keeping and financial integrity, always adhere to these three fundamental rules when dealing with Over Allowances involving a trade-in:

  1. Trade-In Valuation: When a trade-in is involved, it must be recorded in our stock system at its stand-in value. The stand-in value is calculated as the full purchase price of the trade-in minus the Over Allowance amount.
  2. Cost Allocation: The full Over Allowance amount must always be recorded as a cost directly against the vehicle that is being sold to the client.
  3. Supplier Consistency: The supplier assigned to the Over Allowance cost must always be the same supplier as the trade-in vehicle. This ensures proper tracking and reconciliation.

Step-by-Step Process: How Over Allowance is Managed in VMG #

Let’s walk through the standard procedure for processing Over Allowances within our VMG system:

  1. Create the Offer to Purchase (OTP): Begin by generating an OTP for the vehicle being sold to the client.
  2. Input Trade-In Details: If a trade-in is involved, meticulously complete the relevant Trade-In fields within the VMG OTP. This is where you’ll structure the deal, including the agreed-upon trade-in value and any Over Allowance.
  3. Generate the VAT 264 Form: Utilize the VAT 264 form accessible on the OTP screen to produce a document reflecting the full purchase price of the trade-in vehicle.
  4. Finalize the Deal and Transfer to Invoice: Once the deal is finalized, transfer the OTP to the Invoice module.
  5. Bring the Trade-In into Stock: Navigate to the “Trade In” tab, typically found within the menu options of the sold vehicle record.
  6. Load Trade-In Details: Select “Add New” and then “Load from OTP.” Input the trade-in details from the previously created OTP.
  7. Allocate Over Allowance Cost: When saving the trade-in information, the system will prompt you to add the Over Allowance amount as a cost against the sold vehicle. Ensure you do this accurately.
  8. VMG DMS Accounting (If Applicable): If our dealership utilizes VMG DMS Accounting, the system will automatically:
    • Transfer the trade-in to the ledger at its stand-in value, crediting the creditor account and debiting the vehicle purchases account.
    • Transfer the Over Allowance cost to the ledger, crediting the same creditor account and debiting the Cost of Sales (COS) – Over Allowance Account.
    • Where a tarde in was used towards the deposit of the sold vehicle, a supplier and customer journal will be required in order to offest the balances on the supplier and customer.

Identifying Potential Errors: When to Suspect Incorrect Over Allowance Processing #

Be vigilant for the following indicators that an Over Allowance might not have been processed correctly:

  • Unusually Low Trade-In Profit: If the estimated profit margin on a trade-in vehicle brought into stock appears significantly lower than expected, it could indicate a missing or incorrectly applied Over Allowance.
  • Unusually High Sold Vehicle Profit: Conversely, an unexpectedly high profit margin on a sold vehicle might suggest that an Over Allowance intended to reduce the profit was not correctly recorded as a cost.

Troubleshooting: When investigating potential Over Allowance errors reported by dealership staff, your initial step should be to confirm with the client whether any Over Allowance or Deposit Assist was part of the transaction. This crucial piece of information will guide your subsequent investigation.

If no Over Allowance or Deposit Assist was involved, the discrepancy in profit likely stems from other factors, including:

  • Incorrect purchase prices recorded for the vehicle.
  • Missing or inaccurate costs associated with the vehicle.
  • Errors in the selling or sold prices.
  • Omission or incorrect entry of invoice extras on the sold vehicle.
  • Inaccuracies in supplementary income.
  • Sundry invoices not correctly linked to the sold vehicle.

Accounting Flow: How Over Allowance Impacts the Financial System

Understanding the accounting implications is essential for accurate financial reporting:

  1. Trade-In Inventory: The trade-in is recorded in our inventory system at its stand-in value (Full Trade-In Price – Over Allowance). This purchase is then transferred to the general ledger, resulting in a credit to the creditor account (the party we owe for the trade-in) and a debit to the vehicle purchases account (an asset account representing our inventory).
  2. Over Allowance as a Cost: The Over Allowance amount is recorded as a cost against the specific vehicle that was sold. This transaction is also transferred to the ledger, resulting in a credit to the same creditor account (maintaining consistency with the trade-in supplier) and a debit to the Cost of Sales (COS) – Over Allowance Account (an expense account reducing our gross profit).
  3. Reconciliation: Upon completion of all related cashbook entries, you will observe that the same supplier (for the trade-in) and a corresponding debtor (the client) will have equal outstanding amounts. These balances are then offset against each other using customer and supplier journals, effectively clearing the Over Allowance transaction within our accounting system.

Important Considerations: SARS and VAT on Over Allowances #

As highlighted in the communication from Alan Green, the South African Revenue Service (SARS) has specific regulations regarding VAT claims on Over Allowance amounts. It’s crucial to be aware of the current stance and the potential implications for our dealership.

Key Takeaways from the SARS Discussion: #

  • Current SARS Position: As of late 2021, SARS no longer permits dealerships to claim input VAT on Over Allowance amounts. This decision impacts the financial viability of offering Over Allowances and necessitates careful consideration of our processes.
  • Historical Practice (Simplified): Previously, if a trade-in had a settlement value of R100 and we offered an R20 Over Allowance, we would record the trade-in at R80 and the R20 as a cost against the sold car. We could still claim input VAT on the full R100 purchase price.
  • The New Reality: SARS now argues that even though our cash outflow for the trade-in was R100, the inventory value is only R80, and therefore, we can only claim input VAT on the R80. The VAT on the R20 Over Allowance is no longer claimable.
  • The Ideal, Risk-Free Process: To minimize SARS audit risks, the most conservative approach is to ensure all documentation (VAT264 form, purchase price, inventory value, VAT reports) reflects the full cash paid for the trade-in. However, this approach may not always align with the practicalities of facilitating vehicle sales.

Observed Alternative Approaches (Disclaimer: Seek Professional Advice) #

The following are methods some dealerships have explored to address the VAT on Over Allowance issue. Please note that VMG does not endorse any specific approach, and it is crucial to consult with our financial advisors and auditors to determine the most suitable and compliant strategy for our dealership.

  1. Negative Cost on Trade-In & Positive Cost on Sold Vehicle: Record the trade-in at the full purchase price. Then, add a negative “Inventory Adjustment” equal to the Over Allowance on the trade-in and a positive “Inventory Adjustment” of the same amount on the sold vehicle.
    • Potential Benefits: Accurate purchase and sold prices, simplified reconciliation.
    • Potential Costs: Timing issues with profit reporting, difficulty in calculating recon costs, potential discrepancies between profit reports and income statements.
  2. Relabeling Over Allowance as “Discount Allowed”: Continue the historical process but rename “Over Allowance” to “Discount Allowed,” assuming input VAT can be claimed on discounts.
    • Potential Benefit: Minimal disruption to existing processes.
    • Significant Risks: High risk of SARS challenging the relabeling during an audit.
  3. Adding Discount to Sales Invoices: Include the Over Allowance value as a discount on the sales invoice, reducing the sales total, VAT output, and gross profit. Bring the trade-in into stock at the stand-in value.
    • Potential Benefit: Simple to administer.
    • Potential Cost: Requires changes to debtor and creditor reconciliation processes.
  4. Ignoring Over Allowance: Record the trade-in at the full purchase price and do not account for the Over Allowance separately.
    • Potential Benefits: Very user-friendly, eliminates debtor/creditor reconciliations related to Over Allowance.
    • Significant Costs: Can lead to inaccurate profit reporting on individual deals, potentially impacting sales commissions based on gross profit.
  5. Absorbing the VAT Loss on Over Allowances: Continue to add the Over Allowance cost to the sold car but without claiming VAT input.
    • Potential Benefit: Simple to implement.
    • Significant Cost: Direct financial loss due to unclaimed VAT.
  6. Maintaining Current Practices Without Change: Continue processing Over Allowances as before, despite the change in SARS regulations.
    • Potential Benefit: Short-term ease of maintaining familiar processes.
    • Extreme Risk: High risk of significant penalties and financial repercussions during a SARS audit.

Conclusion for Training Purposes: #

Understanding Over Allowances is a critical aspect of vehicle sales administration. By mastering the definition, purpose, principles, and processing steps outlined in this module, you will contribute to accurate financial record-keeping and compliant practices within our dealership.

Remember that the VAT implications surrounding Over Allowances are complex and subject to change. Always stay informed about the latest regulations and seek guidance from management and our financial advisors when in doubt.

Your commitment to accurate and ethical handling of Over Allowances is vital to the continued success and integrity of our training centre and the wider dealership.

Actionable Steps: #

  • Review this module thoroughly and ensure you understand each section.
  • Practice processing Over Allowance scenarios in your demo database using the VMG system.
  • Ask your trainer any questions you may have to clarify your understanding.
  • Familiarize yourself with the dealership’s specific policies and procedures regarding Over Allowances and VAT.
  • Understand who to contact within the dealership for guidance on complex Over Allowance situations.