australian finance

Discussion – What is Luxury Car Tax?

Luxury Car Tax or simply LCT is a tax collected by the Australian Taxation Office (ATO) on cars with a GST-inclusive value above the LCT threshold.

The tax is paid by businesses that sell or import luxury cars (dealers), and also by individuals who import luxury cars, imposed at the rate of 33% on the amount above the luxury car threshold.

Last July 1, 2019, the ATO revised the Luxury Car Tax (LCT) threshold.

The new LCT threshold for the 2019-20 financial year is $67,525 (higher from $66,331 that applied for the 2018-19 financial year). For fuel-efficient vehicles, the LCT threshold for the 2019-20 financial year remains the same at $75,526.

See table below:

LCT threshold

Source: ATO

The indexation factor for the 2019–20 financial year for:

  • fuel-efficient vehicles is 0.987
  • other vehicles is 1.018.

LCT was first introduced by the Howard Administration in the year 2000 alongside the GST and has added more than $5 billion to the government’s coffers in the past 10 years.

The reason why the tax was introduced that’s because as the administration introduced GST in 2000, the broad-based consumption tax replaced a range of other taxes and levies, leading to price reductions for new cars right across the board.

Tl; dr;

cash and car

Source: Car sales Australia

With Luxury Car Tax (LCT), if you will a buy a car with a value that is above the threshold, you’ll pay an extra third on the amount that’s above the threshold. This tax isn’t listed anywhere, because it’s already built into the manufacturer’s retail price.

The threshold is indexed, going up a bit every financial year. For financial year 2019-20, it is now $67,525.

Interestingly, while the LCT threshold for gas guzzlers has risen by almost $10,000 since 2010, the threshold for fuel efficient vehicles has only gone up by $526 (about 0.7%) and the value for all others has gone up $10,345 (over 18%).

How LCT is deducted?

luxury cars

Source: 100 all’ora

Cars retailing at a price higher than $67,525 will incur the LCT, charged at a rate of 33% for the component of the price exceeding the threshold.

That means, a car costing at $70,000 retail would incur tax payable for the excess (the difference between the price and the threshold). That excess ($70,000-$67,525) is $2,475.

The big BUT there is that the Goods and Services Tax (GST) charged for that difference has to be deducted from the GST-inclusive price before calculating the LCT. Otherwise, the consumer will be paying tax on a tax.

Deducting the 10% GST from the excess leaves a taxable sum of $2,250. Dividing by three (or multiplying by 33 per cent – it’s the same thing) results in a charge of $742.50.

That takes the total price of the car to $70,742.50, which the buyer pays. The dealer receives the money from the customer in exchange for the car and forwards the tax amount payable on the car to the federal government.

Does it apply to every vehicle sold in Australia?

LCT doesn’t necessarily apply to all vehicles sold in Australia.

As stated by the ATO, cars manufactured or imported more than 2 years ago, for example, and emergency vehicles are exempted.

Motor homes, camper vans and other goods-carrying vehicles that carry more passengers than goods are exempted as well.

“Green” cars using fuel at a rate of 7.0L/100km or less are also free of LCT up to a ceiling figure.

Basically, any car consuming fuel at 7.0L/100km or lower and priced (currently) above $66,331 and below $75,526 will not incur the tax at all.

Summary

Australia is expected to call it quits for the LCT, having negotiations of a free-trade agreement with European Union (EU) to accommodate European prestigious brands such as those from Germany, who insist that the tax actively deters buyers from purchasing their products.

A possible effect to this reform would be the government’s loss of revenue from collecting LCT from each luxury car purchase. That’s why a proposed solution will be promulgated to phase the tax out gradually in order to minimize the impact of lost revenue.

By Tuan Nguyen

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