In a pre-Budget submission to the Federal Government, AADA has argued that the Luxury Car Tax (LCT) is no longer relevant and asked for consideration for the retail automotive sector’s significant contribution to the Australian economy.

The Minister for Small Business, the Hon Michael McCormack MP, invited us to make a submission prior to the 2017-18 Budget. In the submission, lodged on 19 January, AADA acknowledged the government’s commitment to increasing jobs, investment and growth in regional Australia. We asked that the government, in turn, recognised the important contribution of the Australian retail automotive sector.

The AADA submission, which can be found on our website (http://aada.asn.au/wp-content/uploads/2014/08/AADA-Submission-Pre-budget-submission-2017-18.pdf), pointed out that the economic impact of the automotive retail sector in Australia is not insignificant. Our industry provided a direct contribution to Australian GDP of $7.8 billion in 2015 and a total economic contribution of $17.5 billion, which makes up two per cent of the Australian total economy.

With automotive manufacturing in Australia due to cease before the end of the year, AADA asked the government to consider the structural changes this will cause in the retail automotive chain. Together with the financial imposition of regulatory intervention, this has the potential to significantly impact the bottom line and budgetary planning of franchised auto Dealers.

Some of the factors influencing the current disruption to our industry include:

• cessation of motor vehicle manufacturing in Australia in 2017
• technological disruption, including ubiquitous connectivity and digitalisation
• information and communication technology companies entering the market
• online dealership models
• customer data/big data
• automated electric/hybrid vehicles and downsizing of internal combustion engines
• car concierge services
• customer purchase journey, and
• regulatory intervention affecting revenue streams.

Small businesses, big impact

Our industry is predominantly comprised of small to medium business owners – family companies or individual operators – not large multinationals or virtual monopolies that are as prevalent in other industries such as banking or groceries.

The Australian retail automotive industry might be made up of smaller businesses, but it is a big player when the sum contribution to the economy is added up. Together we generate over $66 billion in revenue, employ more than 66,000 people and pay $4 billion in annual wages. We have invested $17 billion in facilities and abide by the Franchising Code of Conduct.

Competitive market

Ours is the most competitive retail automotive industry in the world. With 67 brands and in excess of 350 models making up our 1.1 million annual sales, Australia’s market size per brand is 16,597 units – half that of Canada’s; 40 per cent of the UK’s and just 6.5 per cent of the USA’s.

The Australian market is almost saturated, with 17.2 million registered road vehicles (excluding trailers) making an estimated vehicle density of 685 vehicles per 1,000 vehicles.

Studies by Deloitte and others show that a modern, well-run Australian franchised new car dealership will generally achieve a net profit of around two per cent to revenue – $2 of profit for every $100 of sales revenue.

Our submission pointed out that “Coles and Woolworths by comparison generally achieve five to seven per cent. These studies also show that in 2015 about 19 per cent of all franchised new car Dealers failed to make a profit”.
Pressure to perform

Automotive manufacturing is a globalised competition. In what is essentially a free trade market, the pressure to turn huge investments in plant and equipment into sales is immense. Car makers pass this pressure on to franchisees.

Cessation of motor vehicle manufacturing

“The cessation of motor vehicle manufacturing in Australia at the end of 2017 will have significant unemployment consequences in the automotive value chain. It will increase the importance of a vital and profitable franchised new retail industry for regional employment and economic growth,” the AADA submission reads.

“Proposed amendments to the Motor Vehicle Standards Act 1989 will mean that, from 2018, Australian citizens (individuals) will be able to personally import a new passenger car from a country that has comparable standards to Australia (limited to one vehicle in any 24-month period). The Department of Infrastructure and Regional Development (DIRD) has estimated that around 30,000 vehicles per year will be imported under this scheme.

“If adopted in its present form, the proposed amendments have the potential to affect new vehicle sales in our members’ businesses, reducing overall revenue and impacting the goodwill of their businesses. Reduced vehicle throughput will also produce a negative knock-on effect on revenue streams on other revenue centres in a dealership operation.”

AADA believes the DIRD has failed to conduct adequate modelling of the financial impact on franchised dealership operations, and the subsequent reduction in revenue.

“Government taxes and charges comprise approximately 20 per cent of the price of any new vehicle, are cumulative and include:

• Import duty
• GST – 10 per cent
• LCT (if applicable)
• Stamp duty – ranging from two per cent to four per cent depending on state
• Registration – approximately two per cent, and
• CTP – approximately two per cent.

“While the DIRD has estimated that 30,000 vehicles per year are likely to be imported it has failed to acknowledge licence syndication risk, which is readily susceptible to manipulation by import consolidators and opportunistic rent seekers. This suggests that the actual annual impact on franchised new car Dealers would exceed the estimated 30,000 units. This could trigger the creation of a theoretical pool of at least several hundred thousand individual import licences, will be difficult to monitor, affect the sustainability of dealership operations and will be open to price manipulation to reduce Government charges and taxes.”

LCT and taxation reform

The AADA submission argued that once local manufacturing of motor vehicles ceases, the LCT, as a thinly disguised tariff, will have no further role. The ‘luxury’ tax paid by a consumer on an imported motor vehicle is at odds with Australia’s trade liberalisation policies.

“With the cessation of motor vehicle manufacturing in Australia at the end of 2017 we cannot see any logical justification for the retention of the tax.” the AADA submission said.
We also pointed out that the government’s decision to allow personal imports did not appear to address the possibility of price manipulation to reduce or avoid the LCT.

“Australia’s LCT is unique in the global tax landscape, penalises a consumer on a discretionary conspicuous purchase of a motor vehicle, does not apply to other ‘luxury’ goods and continues to exist on the statute books and Budget line as a major source of Commonwealth revenue despite the Henry Tax Review recommendation that it be abolished,” the submission reads.

“With the impending cessation of motor vehicle manufacturing in Australia by the end of 2017 the LCT is an enigma and is completely at odds with Australia’s trade liberalisation policies including Free Trade Agreements to remove barriers to trade for imports.”

AADA argued that the policy objective the Government sought to achieve with the introduction of the LCT has well and truly passed its use by date. The Henry tax review stated that “luxury taxes should not be used to raise revenue. They are inefficient because of their narrow tax base. Taxing luxury goods is also an ineffective and arbitrary means of redistributing economic resources”.

AADA submits the Government could consider transition arrangements to abolish the LCT to coincide with the cessation of manufacturing in 2017. This could include raising the LCT thresholds to a figure in excess of $100,000 where the price inelasticity of demand is close to zero.

In our earlier submission to the Treasury on the tax reform discussion paper Better Tax, we outlined the need for tax reform against accepted principles of tax evaluation and design:

• Equity
• Efficiency
• Simplicity
• Sustainability, and
• Policy Consistency.

In MYEFO 2016-17 we note the estimates of taxation revenue from the automotive industry directly attributable to passenger motor vehicles as follows:

• Luxury car tax – $630 million, and
• Customs duty – $500 million.

Financial impact of regulatory intervention

Several regulatory matters the government is considering could have a significant effect on franchised dealership revenue streams, potentially reducing the viability of franchised new car businesses.

“ASIC is presently considering the introduction of a regulation to mandate reductions in commissions to dealerships from the sale of finance contracts to customers. Economic modelling by accounting firm BDO shows that, depending on the final cap imposed, the regulation has the potential to reduce franchise dealership incomes by between $750 million and $1,000 million annually,” the submission says.

“The latter figure is about equal to the entire new car retail’s industry’s profits last year.

“The ACCC is presently considering an application from the Insurance Council of Australia to engage in cartel behaviour to limit new car Dealer commissions on the sale of add-on insurance products to 20 per cent of the premium, without a guaranteed concomitant reduction in the premium paid by consumers. Independent modelling by BDO indicates that there could a reduction in dealership income in the order of $200 million.”
AADA has offered to meet with the Minister to discuss the submission and the issues raised within it.