The tax was introduced along with GST (goods and services tax) back in 2000, as a federal government initiative designed to protect the domestic Australian car manufacturing industry against imports.
However, critics – dealers and overseas manufacturers for the large part – say it has since become redundant due to the closure of Holden, the last domestic car manufacturer, in 2017. There is some speculation the luxury car tax may soon be abolished as part of free trade negotiations with the European Union.
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 Tax Office (ATO).
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.
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 2019/2020 financial year, the thresholds have been set at $75,526 for ‘fuel-efficient vehicles’ and $67,525 for all other vehicles. The ATO defines a fuel-efficient car as one with a fuel consumption that does not exceed seven litres per 100km.
Not all aspects of a car sale attract LCT, however. The ATO says the following are among the costs not factored into a vehicle’s value for LCT purposes when it is being sold:
- Other Australian taxes, fees or charges
- Compulsory third party insurance
- Extended warranties
- Costs of financing the purchase of the car and service plans
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 the vehicle.
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 a hypothetical example provided by the ATO of 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 ($67,525 for the 2019–20 financial year) so MBM must pay LCT on the sale of the car.
To work out the amount of LCT:
($88,000 – $67,525) × 10 ÷ 11 × 33%
$20,475 × 10 ÷ 11 × 33%
MBM charges the customer $94,142 ($88,000 including GST plus $6,142 LCT) for the car, excluding stamp duty, CTPI, registration and other charges. MBM reports and pays $6,142 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 Australian Financial Review recently reported calls from industry to scrap the tax given Australia no longer manufactures cars.
I thought the luxury car tax was there to protect our local car industry. Now that we don’t have one, the Government should remove the luxury car tax….. https://t.co/8hhiCsYJyp
— Rob Stobbe (@rob_stobbe) August 15, 2018
According to the Australian Automotive Dealer Association, the vehicle that most commonly attracts the luxury car tax is the Toyota LandCruiser, which it says shouldn’t be classed as a luxury vehicle given its popularity with families and farmers.
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 more than two years before the sale
- The car is registered for use as an emergency vehicle
- The car is a motor home or campervan
- It is a commercial vehicle designed mainly for carrying goods and not passengers
- To any modifications made for people with a disability
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. If the car is being sold for a second time, it will only attract LCT if it has increased in value. Given most cars depreciate over time, this is an unlikely scenario.
About Katie Rodwell
Katie Rodwell is a senior communications professional. She has worked both locally and internationally for almost 20 years with a particular interest in the personal finance, banking, professional services, government, not-for-profit and telecoms sectors.
Main image source: VanHart (Shutterstock)