The tax was introduced along hot on the heels of the GST (goods and services tax) back in 2001, as a Federal Government initiative designed to protect the domestic Australian car manufacturing industry against imports. However, critics – dealers and overseas manufacturers in large part – say it has since become redundant due to the closure of Holden, the last domestic car manufacturer, in 2017.
However, for now at least, it remains, so we took some time to look at what it is, who it may impact and how it is calculated by the Australian Taxation Office (ATO). In this article, we cover:
- What is the luxury car tax?
- How much is the luxury car tax rate and what is the threshold?
- How has the luxury car tax threshold changed over time?
- What costs are not considered in calculating the luxury car tax?
- Who pays the luxury car tax?
- How is luxury car tax calculated in Australia?
- Why is there a luxury car tax?
- Are there any exemptions from the luxury car tax?
- Do you have to pay luxury car tax on a used car?
What is the luxury car tax?
The luxury car tax (LCT) is a tax on cars with a total value above a threshold which is set by the ATO. It applies to sales of cars that are two years old or less. A car’s value is determined by the retail price, including GST and any customs duty, dealer delivery and extra items applied to the car before delivery. The ATO defines a fuel-efficient car as one with a fuel consumption that does not exceed seven litres per 100km.
How much is the luxury car tax rate and what is the threshold?
According to the ATO, the luxury car tax is set at 33% of the value of the vehicle above the luxury car threshold. For the 2020/21 financial year, the thresholds are $77,565 for fuel-efficient vehicles, and $68,740 for all other vehicles. For the 2021/22 financial year, the thresholds will be $79,659 for fuel-efficient vehicles and $69,152 for other vehicles. These changes will take effect on 1 July, 2021 and are based on a rise in the consumer price index (CPI), a key measure of inflation.
How has the luxury car tax threshold changed over time?
The luxury car tax (LCT) threshold has changed over time, with the threshold for both fuel-efficient vehicles and other vehicles increasing slightly for both the 2020/21 and 2021/22 financial years. With the fuel-efficient threshold due to rise by more than $2,000 for the 2021/22 financial year, base pricing for the Tesla Model 3 Standard Range Plus, Nissan Leaf and Leaf e-Plus, Hyundai Kona Electric, Kia Niro, and Hyundai Ioniq has been reported at below the newer threshold limit (due to be introduced from 1 July) at the time of writing.
Luxury car tax thresholds
Source: ATO, 2021.
What costs are not considered in calculating the luxury car tax?
Not all aspects of a car’s sale price attract LCT. In addition to LCT itself, the ATO says the following are among the costs not factored into a vehicle’s value for LCT purposes when it is sold:
- Other Australian taxes, fees or charges (aside from GST and customs duty), such as stamp duty and registration costs
- Compulsory third party insurance (CTPI)
- Extended warranties
- Costs of financing the purchase of the car
- Service plan costs
Who pays the luxury car tax?
Luxury car tax is paid by dealerships that sell or import luxury cars, and also by individuals who import luxury cars, the ATO says. Dealers will generally pass on the cost of the tax to the buyer and include it in the total purchase price of any vehicle it applies to. According to the Australian Automotive Dealer Association, the vehicle that most commonly attracts the luxury car tax is the Toyota LandCruiser, which it argues shouldn’t be classed as a luxury vehicle given its popularity with families and farmers. Likewise, automotive website CarExpert says that along with cars from brands like Audi, BMW, Mercedes-Benz and Lexus, the LCT also applies to family vehicles such as the Toyota Prado, and top-end versions of the Nissan Pathfinder and Mazda CX-9.
How is luxury car tax calculated in Australia?
To work out the amount of luxury car tax payable, the ATO applies this formula:
(LCT value – LCT threshold) × 10 ÷ 11 × 33%
Here’s a hypothetical example for the 2020/21 financial year from the ATO that explains how these calculations could work in practice:
Matty Bee Motors (MBM) sells a car (not qualifying as fuel-efficient) worth $88,000 including GST. The LCT value of the car is more than the LCT threshold ($68,740 for the 2020–21 financial year) so MBM must pay LCT on the sale of the car.
To work out the amount of LCT:
($88,000 – $68,740) × 10 ÷ 11 × 33%
= $19,260 × 10 ÷ 11 × 33%
MBM charges the customer $93,778 ($88,000 including GST plus $5,778 LCT) for the car, excluding stamp duty, CTPI, registration and other charges. MBM reports and pays $5,778 LCT on their next activity statement.
The ATO offers a different example for how LCT is calculated if you import a car, as there are some other considerations for this type of scenario, although the formula itself is the same in both instances.
Why is there a luxury car tax?
The luxury car tax (LCT) was introduced by then-Australian Prime Minister John Howard in 2001 as part of a broader tax reform package, coming into effect on the back of the goods and services tax (GST). Prior to this, Australia had a long history of taxing expensive cars, dating back to the wholesale sales tax (WST), a precursor to the GST, which saw luxury cars taxed at a higher rate than non-luxury ones. In an inquiry report into Australia’s Automotive Manufacturing Industry, it’s explained the LCT was “designed to maintain this higher rate of taxation, so that the price of luxury cars did not fall dramatically”. While protecting Australia’s local manufacturing industry was a likely motivation behind this, since Holden’s demise in Australia there have been renewed calls from industry for the tax to be scrapped. According to the AADA, the LCT applies to some of Australia’s safest vehicles, so might discourage consumers from purchasing additional safety features.
Are there any exemptions from the luxury car tax?
According to the ATO, the luxury car tax doesn’t apply if:
- The buyer has an ABN and will use the car for specific purposes
- The car was manufactured in Australia more than two years before the sale
- The car was imported to Australia more than two years before the sale
- The car is exported as a GST-free export
- The car is registered for use as an emergency vehicle (or is intended to be one, such as an ambulance, firefighting vehicle, police car, or search and rescue vehicle)
- The car is a motor home or campervan
- The car is a commercial vehicle designed mainly for carrying goods and not passengers
The ATO notes the LCT also doesn’t apply to any modifications made for people with a disability, nor to when an endorsed public institution (such as a museum, gallery or library that is registered for GST and endorsed as a deductible gift recipient) either:
- imports a car as a work of art or collectors piece for the sole purpose of public display, or
- sells such a car to another endorsed public institution that also intends to use it solely for public display.
There may also be ways you can reduce the amount of LCT you have to pay, depending on your circumstances. For instance, the ATO says that from 1 January 2020, workers in certain industries like primary industries and tourism can claim LCT refunds on cars they use for work.
Do you have to pay luxury car tax on a used car?
The ATO states luxury car tax is only applied to eligible vehicles under two years old, starting from the date they were either imported into Australia or manufactured here. If the car is sold for a second time within those first two years, it will only attract LCT if it has increased in value. Given most cars depreciate over time, this is an unlikely scenario. This means that if your car hasn’t increased in value and you can prove the LCT was already paid on it, you may be able to avoid paying the LCT even if it is less than two years old.
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