Renewed calls to abolish Luxury Car Tax after it impacts more Toyotas than Porsches
There are renewed calls to abolish Luxury Car Tax following record price rises across the new-car market over the past 12 months.
Tax experts and the automotive industry have renewed calls to scrap Australia’s Luxury Car Tax, slamming it as a “tax on a tax” that inadvertently adds cost to high-end family cars, not just expensive prestige vehicles.
In a submission ahead of the May 2022-23 Federal Budget announcement, professional accounting body – Certified Practising Accountants (CPA) Australia – said Luxury Car Tax was a complex and costly “remnant” of the bygone era of Australian manufacturing.
Luxury Car Tax was introduced in 2000 during the tenure of Prime Minister John Howard.
It was designed to help protect Australian-manufactured cars, most of which at the time cost less than the Luxury Car Tax threshold.
When it was implemented, Luxury Car Tax targeted prestige cars, limousines and top-end sports-cars – by virtue of their high prices.
But since Luxury Car Tax was indexed to inflation – and the cost of new cars has risen – Luxury Car Tax has inadvertently hit more Toyotas than it has Porsches.
A 2019 investigation by Drive found Toyota customers paid more in LCT than buyers of Porsche, BMW, Audi and Jaguar/Land Rover – adding weight to the argument that luxury buyers are no longer the only shoppers affected.
The study showed buyers of supercars and limousines contributed a fraction of the LCT paid by Toyota customers in 2018, with Toyota shoppers paying $99.7 million in Luxury Car Tax compared to $97 million for Porsche, $84.5 million for BMW, $81 million for Jaguar/Land Rover and $45 million for Audi.
Industry experts believe Luxury Car Tax could become a negotiating point if Australia is to enter a free trade agreement with Europe, with negotiators on behalf of the European Union regarding Luxury Car Tax as a “non-tariff barrier”.
However, the removal of Luxury Car Tax would leave the Federal Government short of almost $1 billion each year, with the tax raking in roughly $900 million in the 2020-21 financial year – up from approximately $500 million per annum a decade ago.
Furthermore, the latest revenue figure is a marked increase on previous years, with Luxury Car Tax netting the government $664 million in 2016-17, $695 million in 2017-18 and $640 million in 2019-20.
How could a free trade deal with the UK could affect Luxury Car Tax?
Luxury Car Tax is back in the spotlight after Australia and the United Kingdom signed a Free Trade Agreement (FTA) in December 2021, with suggestions this agreement could lead to LCT being gradually phased out or dropped altogether.
The Free Trade Agreement with the UK has seen the removal of a 5.0 per cent tariff imposed on cars imported from the UK – a tariff that is still in place for cars imported to Australia from Europe.
In its submission to the Federal Budget, CPA Australia queried the remaining tariff on European cars: “Consideration should also be given as to whether the customs duty of five per cent on vehicle imports should also be retained.”
How Luxury Car Tax works
Luxury Car Tax is charged on motor vehicles less than two years old (excluding commercial vehicles such as utes) and is levied on the seller – but passed on to the buyer – as part of the car’s overall drive-away price.
It is “a tax on a tax”, because all new motor vehicles sold in Australia are subject to 10 per cent GST – and Luxury Car Tax is added to the
GST-inclusive amount above a certain threshold.For the 2022-23 financial year, Luxury Car Tax is 33 per cent for every dollar above the GST-inclusive amount of $69,152.
For fuel-efficient cars – defined as those that claim to consume less than seven litres of fuel per 100 kilometres on the combined cycle – Luxury Car Tax is 33 per cent for every dollar above the GST-inclusive amount of $79,650.
“LCT was [introduced] when Australia had a local manufacturing industry, to ensure there were benefits in pricing to support Australian cars, which tended to sit below the LCT threshold,” Elinor Kasapidis, Senior Manager of Tax Policy at CPA Australia, told Drive.
“It was a protectionist policy, but [with local manufacturing gone] it doesn’t have a purpose anymore. Now, middle-income families trying to buy SUVs are being slugged with it. We’re not talking about Ferraris and Maseratis. It’s inefficient.”
How are electric cars affected?
As well as burdening family SUV shoppers or buyers looking to buy larger cars for work purposes, the LCT can also affect would-be electric car shoppers.
“Although the LCT threshold is a little bit higher for fuel efficient cars and there are electric vehicles available below the threshold, when you’re talking about a family-sized Tesla, it starts to get above the threshold pretty quickly,” Ms Kasapidis explained.
“Again, it’s affecting middle-income families who want to do the right thing by the environment. It could affect whether or not people buy an electric vehicle.”
What do car dealers think about the luxury car tax?
The automotive industry has long been advocating for Luxury Car Tax to be abolished.
In its pre-Budget submission, the Australian Automotive Dealers Association (AADA) echoed the recent calls for Luxury Car Tax to be scrapped, arguing it would allow car prices to fall across the board.
“Prices of vehicles currently subject to Luxury Car Tax would certainly drop,” James Voortman, CEO of the AADA, told Drive.
“The cost of vehicles would reduce even further as there would be less stamp duty payable, as this is applied on the LCT-inclusive value of the car.
“The main beneficiary would be customers as they are the ones absorbing the LCT and, depending on the vehicle, they could save tens of thousands of dollars.”
How much government revenue does the luxury car tax actually generate?
At present, takings from Luxury Car Tax amount to roughly $0.9 billion a year – or 0.2 per cent of the government’s overall annual revenue figure of $452.7 billion.
“Almost a billion dollars sounds like a really big number, but when you consider that it’s less than half a per cent of the Government’s overall revenue base, it starts to put things into perspective,”Ms Kasapidis said.
“We don’t have a luxury tax on holiday homes or yachts or expensive wines, why cars? There’s no longer a good reason.”
Is the luxury car tax likely to be abolished?
Despite its relatively insignificant revenue when compared with other taxes, it’s unlikely the Federal Government is any closer to abolishing Luxury Car Tax in the 2022-23 Federal Budget.
The biggest driving factor in its removal looks to be negotiations over the newly-signed Free Trade Agreement with the United Kingdom, but details are not yet known.
Otherwise, “it’s not necessarily something that’s at the top of people’s minds all the time,” Ms Kasapidis explained.
“The Australian car market is competitive and people are tolerant of the final price they pay. It’s easy to collect, it’s already in place, it’s not something the government wants to give up.”
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