Understanding the luxury car tax
Did you know that the Australian Government levies a tax upon cars over a certain value that are imported into the country? The Luxury Car Tax (LCT) can add a significant amount to the cost of a car.
Car enthusiasts who consider purchasing an expensive vehicle may be surprised to know that the Government imposes a Luxury Car Tax (LCT) upon imported cars over a certain value.
How does it work?
Cars with a value over the current LCT threshold are subject to a tax of 33 per cent. The tax is applicable to the portion of the car's value that is above the threshold, and not the total value of the cari. The tax is levied against the seller - the car retailer, wholesaler or manufacturer - not the buyerii. The seller will then often pass this substantial cost on to consumers by adding the amount of LCT paid on top of the car's retail price.
Importers and buyers of high-value cars often question why they are liable for an additional tax, while those who purchase other expensive commodities such as jewellery, yachts and art do notiii. The answer dates back to 1930, when the Australian Government introduced the Wholesale Sales Tax (WST). At the time, the local car manufacturing industry was under threat due to the depression. The Government concluded that taxing imported goods including cars through the WST could protect the local car manufacturing industry and help the country through the depressioniii. The introduction of the Goods and Services Tax (GST) in 2001 saw the scrapping of the WST, and the introduction of the LCT.
Fast forward to 2014, and with the recent announcements of the departure of Toyota, Ford and Holden, economists and businesses have been calling for the Government to axe the LCT . A recent review of the LCT conducted by the Productivity Commission concluded that the tax is a "higher cost and less efficient method of raising revenue than more broadly based taxesii", and recommended that the tax be reformed.
Despite opposition from car manufacturers and other affected businesses, the tax is still in place and the Government has forecast that it will create $1.38 billion in tax revenue over the next four yearsv.
LCT cost calculations
Calculating the amount of LCT for a luxury vehicle is quite simple and comes down to a handful of determining factors. Many dealers will include the cost of LCT in the car's sale price, although some may absorb the cost to keep their prices competitivevi.
Firstly, there are two different thresholds applicable to the LCT. If the car in question has a fuel consumption of no more than 7L/100km, it is considered to be a fuel-efficient car and the threshold of $75,375 (2013-14 financial year) is applicable. All other vehicles are subject to the threshold of $60,316 (2013-14 financial year)vii.
Secondly, LCT is only payable on cars with a total value, or 'LCT value', that exceeds the applicable threshold. The LCT value of the car is the retail value of the car, minus any LCT included in the sale and any other Australian tax, fee or charge. However, the retail value of the car is considered to include GST, any customs duty paid by the importer, dealer delivery charges, standard and statutory warranties and any fleet rebates or other incentive payments applicable to the carvii.
To calculate the amount of LCT that you might be paying through the purchase of a new luxury car, the following formula should be usedviii,ix:
(LCT value - LCT threshold) x 10 ÷ 11 x 33 ÷ 100viii
It's important to note that although you must factor GST into the car's retail value when determining the car's 'LCT value', LCT is payable upon the value of the car above the LCT threshold, less GST.
An example adapted from the ATO website is shown belowviii:
XYZ Motor Group sells Christine a car worth $88,000. The value of the car is more than the LCT threshold ($60,316 for the 2013-14 financial year) so XYZ Motor Group must pay LCT to the ATO on the sale of the car.
To work out the amount of LCT payable to the ATO, the car retailer does the following:
- Works out the total value of the car that is about the LCT threshold:
$88,000 (total car value, including GST) - $60,316 (current LCT threshold) = $27,684
- Works out the GST included in the amount above the LCT threshold:
$27,684 x 1/11 = $2,516.72
- Subtracts the GST included in the amount above the GST threshold:
$27,684 - $2,516.72 = $25,167.72
- Works out 33% of this amount (the amount above the LCT threshold less GST)
$25,167.27 x 33 ÷ 100 = $8,305.20 LCT payable
XYZ motors then charges $96,305.20 for the car - or, $88,000 including GST plus $8.305.20 LCT.
For more information or advice on the LCT, contact the Australian Taxation Office on 13 28 61 or visit the ATO website.