Momentum is building for the abolition of the Luxury Car Tax – an unfair, regressive tax that impacts negatively on car affordability and, some argue, is hindering the adoption of electric vehicles.
The tax, which is the only luxury tax on any product in Australia, is applied to every passenger vehicle over $64,132, or $75,526 if the vehicle uses less than seven litres of fuel per 100km. Every dollar over that amount is then taxed at 33.33 percent.
Federal Budget estimates last year predicted LCT revenue would increase 7.9 percent to $650 million.
The government could be forced to remove the tax as part of negotiations for a free trade agreement with the European Union (EU) where most luxury cars come from.
German manufacturers are leading the charge, pushing for LCT discussions to be part of a Free Trade Agreement, which could also result in European vehicles join those from Japan, Thailand, South Korea, the US, Canada and Mexico in being exempt from the five per cent import duty.
A massive imposition
A true luxury vehicle, the Ferrari 812, has a price tag of $610,000 before on-road coats. The LCT on such a car works out to around $144,000.
GST is applied prior to the LCT but acts as a multiplier on stamp duty, adding a further $50,000 to the cost. Stamp duty takes another $35,000 or so and import duty another five per cent of the price the importer pays.
Almost $250,000 of the purchase price ends up in the pockets of various governments.
In Australia, a luxury tax is unique to cars. No other luxury good receives a luxury tax simply for being luxurious.
Buy a boat, plane, helicopter, diamonds, or that Picasso you’ve had your eye on, and you pay not one cent of LCT, despite all being arguably more deserving of the ‘luxury’ moniker than any car.
In Canada, the government of British Columbia has doubled its luxury car tax rate to 20 percent, which is still only 60 percent of Australia’s.
Spare a thought for Thailand, where luxury car tax is 80 percent of cost, insurance and freight. The combined rate reaches 328 percent when other taxes such as vehicle excise tax, value-added tax (VAT) and local tax are added. The high levy has encouraged some importers to evade or understate their tax payments, which creates another problem and has resulted in the impounding of vehicles while governments ascertain whether their true value equals their reported value.
Gone by 2020?
Mercedes-Benz Australia/Pacific Public Relations, Product and Corporate Communications Senior Manager, David McCarthy, told journalists last year he believed the LCT would be gone within a few years.
“I feel confident (by) 2019/2020 there won’t be an LCT,” he said. “And that will have been an 11-year battle.
“LCT will be a casualty in an EU free trade agreement. Anyone who tells you otherwise is believing in alternative facts – that’s the reality.
“Whilst I’m not a betting man, knowing the view of the EU on luxury car tax and import duty, I can’t see how the EU would agree to a free trade agreement that allowed LCT and vehicle import duty to continue,”
Brought in around 18 years ago, the LCT was designed to encourage new car buyers to purchase Australian-made vehicles at the time, such as the Holden Commodore, Ford Falcon and Toyota Camry.
However, that incentive became redundant last year when Australian car manufacturing ended.
Mr McCarthy said how the government phased in the changes was the challenge, but he was adamant the LCT will go.
“It’s currently 33 percent. My personal view is that you want to implement it over a three-year period, so 33, 22, 11, zero,” he said.
“Otherwise you’re going to have a lot of dislocation in the market and no-one is going to shed a tear over OEMs suffering, but the government would potentially lose a lot of revenue.
“The interest is for it to be a smooth, gradual transition. No free trade agreement implements all its parts from day one; it’s staggered, so the economy can adjust and supplies can adjust.”
Mr McCarthy said the government could base the removal of the LCT on the recent parallel import proposal, replacing lost revenue with increased employment and spending.
“They know one of the big factors in the parallel import decision was the ability for that to have a very bad effect on employment, schools and training in the network,” he said.
“They didn’t believe it originally, but they did their research – they spoke to the industry – and they’ll do the same with this. And the automotive sector is a big sector, it’s a big employer, it’s a big contributor of tax. Whether that’s GST or whether that’s income tax, you don’t want to dislocate that.
“They’re always prepared to trade off, as they have in other free trade agreements, a reduction in revenue in some areas for an increase in economic activity in others.”
Mr McCarthy said the government should also remove import duty in order to maintain fair car pricing, irrespective of where vehicles are built and sourced.
“I think import duty on cars will also have to go, because otherwise you will be left with a couple of places where cars are sourced from that will still pay import duty because that country is not in the EU or that country might be a Commonwealth country,” he said.
Mr McCarthy said LCT changes will happen regardless of which party is in government.
“Both the major parties are committed to an EU free trade agreement in the framework that’s been discussed,” he said.
“There’s always a bit of finessing around some of it, but they are both parties that support low trade barriers and free trade.”
Discouraging electric uptake
A sale of the Tesla Model X generates $76,292 in revenue to the government. Even the Toyota Land Cruiser – less a luxury car than one used by farmers, families and retirees – adds $30,000 or so to government funds.
Through the Federal Chamber of Automotive Industries, car manufacturers have been lobbying the government for years to remove the LCT. Electric Vehicle Council Chief Executive, Behyad Jafari, has called for a package of measures to reduce electric vehicle prices by up to $7,000, including fringe benefits and luxury car tax exemptions, and the axing of stamp duty and registration charges by the states.
Mr McCarthy said he was disappointed the issue wasn’t raised in last year’s Federal Budget.
“The government had an opportunity to make some small changes that really would have been less than a rounding error to send a very clear signal and a commitment to lowering vehicle emissions,” he said.
Mr McCarthy argued the price premium meant there was little incentive for Australians to buy electric and hybrid vehicles.
“Electric cars over the luxury car tax limit still attract luxury car tax. This can hardly be seen as encouraging electric vehicles,” he said.
According to Porsche Australia Director of Public Relations and Motorsport, Paul Ellis, the government makes a lot more money on a 911 sports car than the retailer and distributor combined.
“The premium automotive segment is an easy cow for the government to milk because it keeps producing cream to top up the coffers,” Mr Ellis said.
In an opinion piece published in January, Federal Energy Minister, Josh Frydenberg, said the federal government already provided a discount on the luxury car tax threshold for low emission vehicles, offered carbon credit units to encourage fleets to transition to electric vehicles, and funded programs for the purchase of electric vehicles.
Tesla Australia’s Head of Communications, Heath Walker, has argued that Australia is “the only first world country to have a tax and no incentives on electric vehicles, and despite there being some subsidies on Luxury Car Tax, it truly does hamper the cross-shopping when it comes to a choice between internal combustion engine and an electric vehicle”.
In the article, Mr Frydenberg hinted there could soon be greater support for the electric vehicle industry, predicting the number of electric vehicles would grow from 4,000 to 230,000 within seven years, and to one million by 2030.
However, several Coalition backbenchers warned against new tax breaks for electric cars, arguing that they were no greener than equivalent petrol or diesel vehicles. Governments can be reluctant to promote something that reduces their bottom line. Motorists pay fuel excise every time they fill up, which helps pay for new roads and other infrastructure, while electric car owners avoid this because they buy very little to no petrol.
A study for the Department of Infrastructure and Regional Development more than a year ago found the high reliance on coal-fired power in Victoria, NSW and Queensland meant electric vehicles charged on the grid in those states “have a higher CO2 output than those emitted from the tailpipes of comparative petrol cars”. However, with the cost of renewable energy on a downward trend, this is not expected to remain the status quo for very long.