Luxury car tax: What is it and what is the threshold?

A luxury car tax (LCT) applies to some new and almost-new car purchases in Australia. Depending on what you spend and when the car was made or imported from, you could be liable to pay. We explain who pays the LCT and how it is calculated by the Australian Taxation 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 set by the ATO. It applies to the sales of cars that are two years old or less. This means that they were either imported into Australia or manufactured here less than two years ago. A car’s value is determined by its retail price, which includes GST, any customs duty, dealer delivery charges, standard and statutory warranties, and the costs of extra items (such as modifications) 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 2023/24 financial year, the thresholds will be $89,332 for fuel-efficient vehicles and $76,950 for other vehicles. These changes are based on a rise in the consumer price index (CPI), a key measure of inflation. The ATO defines a fuel-efficient car as one with a fuel consumption that does not exceed seven litres per 100km. To illustrate how the LCT is calculated, we’ve included a hypothetical example later in this article.

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How has the luxury car tax threshold changed over time?

The luxury car tax (LCT) threshold has changed over time, with the thresholds for both fuel-efficient vehicles and other vehicles increasing. The fuel-efficient threshold is due to rise by more than $5,000 for the 2023/24 financial year, which Drive has said could “save new-car buyers…thousands”. However, “at least eight ‘fuel-efficient’ new cars appear to no longer be above the new LCT threshold”.

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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 (CTP) insurance
• extended warranties
• costs of financing the purchase of the car (i.e a car loan)
• service plan costs.

Who pays the luxury car tax?

The luxury car tax is paid by car dealerships that sell or import luxury cars, and also by individuals who import luxury cars. Dealers will generally pass on the cost of the tax to the buyer and include it in the total purchase price of the vehicle. A ‘luxury car’ is one that meets the ATO’s definition discussed above, so it isn’t just sports cars or high-performance vehicles that are affected.

According to the Financial Review the cars “most likely to be hit the hardest by the new luxury car tax threshold include models such as the Kluger, which Toyota says has a combined cycle fuel consumption rate of 5.6 litres per 100 kilometres”.

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 2023/24 financial year from the ATO that explains how these calculations could work in practice:

Jimmy imports a 1977 Ford Mustang in the 2023–24 income year. The customs value of the car is $90,000 before GST. It costs him an additional $2,500 (inclusive of GST) to have the vehicle imported into Australia.

GST is added to the customs value of the car at the time of import.

To work out the amount of LCT:

Step 1: work out the LCT value:

1. Customs value of the car is $90,000
2. Add GST applied at import is $9,000 (10% of $90,000)
3. Add import costs (GST inclusive) of $2,500
4. $101,500 (LCT value).

Step 2: calculate the LCT (LCT value − LCT threshold) × 10 ÷ 11 × 33%:

1. ($101,500 − $76,950) × 10 ÷ 11 × 33%
2. $24,550× 10 ÷ 11 × 33%
3. $7,365 (LCT amount payable to Department of Home Affairs

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 ($69,152 for the 2021/22 financial year) so MBM must pay LCT on the sale of the car.

To work out the amount of LCT:
($88,000 – $69,152) × 10 ÷ 11 × 33%
= $18,848 × 10 ÷ 11 × 33%
= $5,654.40.

MBM charges the customer $93,654.40 ($88,000 including GST plus $5,654.40 LCT) for the car, excluding stamp duty, CTPI, registration and other charges. MBM reports and pays $5,654.40 LCT on their next activity statement.

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Why is there a luxury car tax?

The luxury car tax was introduced 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. 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 into Australia’s Automotive Manufacturing Industry, found that 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 the demise of the Australian car manufacturing industry there have been renewed calls from industry for the tax to be scrapped.

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 or the car is:

• manufactured in Australia more than two years before the sale
• imported to Australia more than two years before the sale
• exported as a GST-free export
• 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)
• a motor home or campervan
• 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
• 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 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 a possible but 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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