Advice

Luxury car tax: Four things you might not know

Here's the latest on the Luxury Car Tax.
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Every now and then, a figure from automotive industry pops up to decry the luxury car tax (LCT) and call for its abolition. If you’ve ever wondered what the LCT is, how it's calculated, if it’s avoidable or why we have it, this feature is for you.

This story was first published in 2015, and has now been revised with updated threshold amounts.


What is it?

Technically LCT is levied on the person selling the car, but the dealer will invariably passes this cost on to the buyer. The luxury car tax is specifically applied to imported vehicles over a certain price threshold. This threshold is assessed every year and is subject to change; at this latest update (21 December 2019) it is $67,525.

LCT is charged on any vehicle under two years old, although if the car is being sold a second time around, there’s a tax credit for the entire amount of LCT paid when it was first sold. So, unless the second-hand car that you’re buying has actually increased in value, there’s no LCT to be paid.

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How is it calculated?

At present the LCT rate is 33 per cent and it’s payable on any car that carries a sale price inclusive of GST, but exclusive of other government fees and charges, over the LCT threshold. LCT is only payable on the portion of the car’s sale price, less GST, that's over the threshold. If this paragraph has you’re head spinning, it’s probably best if we demonstrate via an example.

Let’s say a dealer is about to put car X onto the showroom floor and this vehicle has a price of $100,000 inclusive of GST, but excluding dealer charges and other government fees. First, we need to figure out how much of the car’s price is above the LCT threshold ($100,000 - $67,525 = $32,475)

Now we eliminate GST from the car’s price above the threshold by dividing $32,475 by 1.1. This number, $29,523, is the amount that's liable to the LCT, so we simply multiply it by the LCT rate of 33 per cent to get $9,742.50. This number is then added to the original price and scribbled on the windscreen.

Let’s say you walk into the dealership and fall in love with car X, but want to upsize the alloy wheels and these cost an extra $10,000, inclusive of GST. The dealer will have to recalculate the amount of LCT payable based on car X now being worth $110,000.

This also means that a vehicle which starts off without attracting LCT, can be pushed into luxury car tax land if options are purchased.

Can I get out of paying it?

Introduce a tax, and the first question many will ask is: can I get out of it? For the LCT, the short answer is no. The longer answer is that if you fit into a very small niche of people buying a very particular niche of vehicle, you may be able avoid it.

Commercial vehicles, such as some high-priced utes, that can carry more things than people by weight are exempt from LCT. Additionally, vans or trucks that can haul over two tonnes worth of gear on-board are LCT free, as are motorhomes, campervans and GST exempt vehicles, such as vehicles fitted out especially to carry disabled persons.

Business buyers in a primary industry can also claim back up to $3000 of the LCT for one all-wheel drive or four-wheel drive vehicle per year. Tourism operators can recoup this amount for every four- or all-wheel drive car they buy.

You can also pay less LCT if you opt for a fuel efficient vehicle. Cars that have a combined highway and city cycle fuel economy rating of 7.0L/100km or less are subject to a higher LCT threshold. At this article's latest update, this higher threshold is set at $75,526.

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Why on Earth does it exist?

The luxury car tax is in many ways a remnant of bygone age. The Howard government introduced the goods and services tax (GST) in 2000, and it was set a flat rate of 10 per cent on all items and services sold throughout Australia, although there were some exemptions put in for medicine, basic food stuffs, and government fees and services.

When the GST became the law of the land, it replaced the wholesale sales tax (WST), which began life in 1930s and was set at different rates for various items. Unlike the GST, which we know is applied to almost everything, and appears as a line item on invoices and sales receipts, the WST was an opaque little bugger.

Unbeknownst to many, by the end of its life, cars in Australia were slugged with a WST rate of 22 per cent. Although luxury vehicles, defined as any car over $36,995, attracted a WST rate of 45 per cent on the part of its price over that arbitrary threshold.

In order to minimise the shortfall in tax revenue when shifting from the higher WST rate to the lower GST rate, the government decided to introduce a luxury car tax of 25 per cent applicable to vehicles over a threshold of around $55,000.

We're more than sympathetic if all this tax talk is a bit much and has you grasping for a tipple. Although if you’re grasping for a bottle of wine, you might want to think again. Unlike other forms of alcohol, it's not only subject to 10 per cent GST, but also the 29 per cent wine equalisation tax (WET). WET, like the LCT, was introduced along with the GST.