With Holden gone, should the luxury car tax hit the road?

author-avatar By on February 20, 2020
With Holden gone, should the luxury car tax hit the road?

Photo by Harrison Broadbent on Unsplash

With the ridgy-didge car brand turning cactus in 2021, perhaps it's time for the divisive luxury car tax to go walkabout.

At least that's according to several Liberal MPs as well as multiple automotive bodies, who have urged the Federal Government to scrap what has been called, among other things, a "bad tax". 

What is the luxury car tax? 

The luxury car tax, LCT for short, is a tax paid on some cars above a certain value. It's paid for by businesses who sell or import cars, such as dealerships, but the cost is often passed onto individual customers who buy the cars. 

According to the Australian Taxation Office, the luxury car tax is 33% on the dollar amount of the car's value over certain thresholds, which are as follows: 

Financial yearFuel-efficient vehiclesOther vehicles
2019–20 $75,526 $67,525
2018–19 $75,526 $66,331
2017–18 $75,526 $65,094
2016–17 $75,526 $64,132
2015–16 $75,375 $63,184

As an example of how much extra it can add to the purchase price of the car, a car with a retail value of $80,000 would cost the average buyer nearly $84,000, while a $500,000 super car would cost an extra $130,000. 

In the past 10 years, the LCT has added more than $5 billion to the government's coffers, and is expected to add another $670 million in 2019-20. 

The table below highlights a selection of low-rate car loans (fixed) for a new vehicle. 

So why are there arguments to be rid of it? 

The luxury car tax was first introduced by the Howard Government in the year 2000 in order to protect local manufacturing industry and prevent imported cars from dominating car sales. 

However, since Holden officially ceased local manufacturing in Australia, the  local manufacturing industry in Australia is all but non-existent, and this is where the argument for scrapping the LCT primarily comes from. 

After all, a 'luxury' car is just a car that costs in excess of $67,500 (or $75,500 for energy-efficient cars), which can be any number of popular vehicles. 

Nationals Senator Matt Canavan, for example, says there should be an exemption for farmers. 

“Many farmers have to buy vehicles that are above that threshold to operate their business,” Senator Canavan told the Nine Network.

“That sort of cost on our farms particularly when facing a drought, that’s something that should be looked at first in my view.”

An exclusive report by Car Advice back in 2019 found Toyota customers paid the most LCT compared to customers of other brands, as popular models like the Toyota LandCruiser, the Kluger and other four-wheel drives can often be above the threshold. 

Liberal MP and chair of the standing committee on economics Tim Wilson also said that removing the LCT could "play a simple but important part" of tax reform, while MPs Craig Kelly, Jason Falinski and James Paterson have also said they would like to abolish it. 

“It’s a bad tax,” Mr Kelly said. “Once we get that budget back to surplus, it should be one of the first things we should be looking to get rid of.”

And the removal of the LCT isn't just a partisan opinion among Liberal MPs: there are several automotive bodies and representatives and bodies that also support its removal. 

Federal Chamber of Automotive Industries (FCAI) Chief Executive Tony Weber has previously said the luxury car tax is "money grabbing at its worst". 

“The LCT actually penalises Australian consumers as it imposes unnecessary additional taxes on many vehicles which can in no way be described as luxury. The majority of people who pay the tax are average Australians who buy vehicles well under $100,000 to transport their families,” he said in May 2019. 

“The FCAI fully supports a considered withdrawal from the Luxury Car Tax.  A graduated reduction of the tax over an agreed period, such as five years, could see the government end this inequitable taxation in a structured and responsible manner.”

In the time since Mr Weber hasn't changed his tune, again saying the LCT's removal should be part of broader tax review. 

“It’s nothing more than a tax on technology. It’s a tax on safer vehicles and more environmentally friendly engines," he told The Australian. 

“We would have more affordable and safer cars. The cost of the health system would go as there would be less accidents. New technology now can stop an accident before it even happens."

Other key spokespeople to come out and oppose the tax recently include: 

Australian Automobile Association chief executive Michael Bradley

Speaking to The Australian Financial Review:

"Holden’s demise leaves Australians in the ridiculous situation of having to pay taxes which were designed to protect an industry that no longer exists."

“At a time when governments are supposedly encouraging the uptake of safer, cleaner cars, redundant taxes will only hurt new vehicle sales.”

Motor Trades Association of Australia chief executive Richard Dudley

Speaking to The Australian:

“We have been calling for the abolition of this tax ever since it was introduced. IT should have happened when Holden Toyota and Ford closed their doors."

“We get that the government is reluctant to lose $700m in tax revenue but we need to at least sit down now and talk about it. The LCT is an unconscionable tax.”

Electric Vehicle Council chief executive Behyad Jafari has also previously opposed the LCT, saying electric cars shouldn't be taxed extra in the same way solar panels shouldn't be taxed. 

Treasurer not budging on removing the LCT

Treasurer Josh Frydenberg is so far refusing to eliminate the LCT, telling The AFR "The government has no plans to phase out the luxury car tax". 

Given the LCT provides around $600-800 billion per year to the Government's coffers, it seems unlikely he'll budge on this position, given his adherence to providing a budget surplus: something that looks less likely given the devastation of the recent bushfires and ongoing fears surrounding coronavirus. 

Interestingly, the Treasurer seems to have more support from the Opposition, with Labor MP Peter Khalil saying they are not considering removing the LCT any time soon. 

“As far as I know we’re not considering removing the luxury car tax. We’ll go through our processes on our tax policy as we head to the next election,” Mr Khalil told Sky News.

There is of course the argument that the LCT is legitimate source of revenue, as those who can afford to buy a 'luxury car' could maybe afford to spend a little bit more. 

The main issue with the LCT, it seems, is that a luxury car as defined by the tax itself isn't always luxury, and is often a car bought by families, farmers and other everyday people. 

While sales of luxury vehicles in January were up, overall car sales fell by 7.8% throughout 2019, according to FCAI, reaching the lowest number of new sales since 2011. 

With car sales declining but demand for electric and hybrid vehicles accelerating, there could be more and more calls to either scrap or change the LCT soon. 


Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.

Some providers' products may not be available in all states.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*The Comparison rate is based on a $30,000 loan over 5 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

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author-avatar
William Jolly joined Savings.com.au as a Financial Journalist in 2018, after spending two years at financial research firm Canstar. In William's articles, you're likely to find complex financial topics and products broken down into everyday language. He is deeply passionate about improving the financial literacy of Australians and providing them with resources on how to save money in their everyday lives.

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