There is a misconception amongst some Dealers that Luxury Car Tax (LCT) is not payable in relation to sales of cars that have been traded in. Whilst the circumstances in which a Dealer is required to account for LCT on sales of trade-ins may be limited in practice, Dealers should still be aware of the scenarios in which they may be required to account for LCT on these sales.
This is particularly important for Dealers for two key reasons. Firstly, any LCT liability is likely to impact the Dealer’s margin (particularly if not factored into the total price agreed with customers). Secondly, the ATO has identified this as a risk area and, accordingly, Dealers should expect questions concerning trade-in vehicles if subject to an LCT review.
Dealers who sell a trade-in that meets the definition of a luxury car, i.e. a car with a value above the LCT threshold, are likely to be required to account for LCT on the sale unless any of the below scenarios apply:
a) The car is more than two years old (meaning when sold, more than two years have passed since the car was imported into Australia)
b) LCT that would be payable on the sale is equal to or less than the total LCT previously payable in respect of any previous sale or importation of the car, or
c) The car is sold to another Dealer who quotes in relation to the sale. (See our article on page 11 of the December 2018 edition of Automotive Dealer.)
Alternatively, in some cases where the scenarios above do not apply, Dealers may be entitled to account for a reduced LCT liability compared to that which would otherwise be payable. For example, if the LCT that would be payable on the sale is greater than the total LCT previously payable in respect of any previous sale or importation of the car, the selling Dealer should be entitled to reduce the amount of LCT it accounts for by the total amount of LCT previously payable. This is typically relevant for cars that appreciate in value.
If a Dealer does not account for LCT, or accounts for a reduced LCT amount, in relation to the sale of a trade-in luxury car, the Dealer should keep records to substantiate why that position was taken. Dealers can often readily produce evidence to support a view that scenario a) or c) above applies (where applicable). It can, however, be more difficult for the selling Dealer to substantiate the amount of LCT previously payable (particularly as LCT payable under the LCT Act may not match the LCT that importers and/or Dealers have accounted for earlier in the supply chain). This is a consequence of the selling Dealer having no direct involvement in the earlier importation or sale/s of the car.
The question then becomes what level of investigation should selling Dealers undertake to determine the LCT previously payable and what evidence should selling Dealers hold to support their conclusion? The ATO has not specifically addressed this issue, however we suggest selling Dealers should conduct reasonable inquiries to determine the LCT previously payable. These may include:
asking the person who traded in the vehicle whether they have any information to show the LCT that was payable and from whom they bought the car, and/or
asking the Dealer who previously sold the vehicle how much LCT was payable when they sold the car.
Conducting these inquiries can be challenging. Often the person trading in the vehicle has no knowledge of whether any LCT was payable, and if so, how much was payable. Similarly, identifying the Dealer who previously sold the vehicle can be reliant on details included on the car, e.g. stickers or plates, or obtaining a copy of the service logbook.
Selling Dealers should consider the information gathered from their inquiries in light of LCT principles. Call, email or other correspondence records should be kept to demonstrate the inquiries undertaken. If the LCT previously payable cannot reasonably be determined and the other scenarios above do not apply, Dealers should consider taking a conservative position and accounting for the full amount of LCT payable.
Partner, Indirect Tax,
Deloitte Tax Services Pty Ltd