REFORM, THEN ABOLISH

AADA has proposed three options to reform the Luxury Car Tax (LCT) before its eventual abolition, in its Budget Submission to the Federal Government.

“The LCT is a poorly structured tax and acts as a barrier to the renewal of the passenger vehicle fleet at a time when technological improvements continue to make new car models safer, more energy-efficient and more environmentally friendly,” AADA reasoned.

The submission pointed out that the threshold for the tax currently applies to vehicles such as the Toyota Landcruiser, when it was intended for the truly luxury vehicles. It also asked why luxury new vehicles attract a tax when other luxury products such as yachts, private jets and jewellery attract no such charge.

In addition, individuals purchasing expensive vehicles are already paying more by virtue of the GST contribution they make on the final sale price.
“Furthermore, it is disappointing that the LCT applies to optional features which discourages consumer uptake of safety features due to concerns it will push their new vehicle over the threshold,” the submission stated.

AADA also argued that the LCT potentially hinders good relations with Australia’s trading partners. In particular, the EU and the UK are disproportionately affected and have repeatedly criticised the Australian Government’s application of the tax at various trade forums and negotiations.

If the total abolition of the LCT cannot be contemplated within the next budget cycle, AADA proposed the adoption of one or more of the following options:

Option 1: Raise the threshold to target truly luxury vehicles and stage a sunset period for LCT

As it stands, the LCT is set ata level above that of the premium models of cars that were once manufactured in Australia, such as the Holden Statesman and the Ford Fairlane. A slightly higher threshold exists for cars that claim a fuel consumption of less than seven litres per 100km.

“As car manufacturing no longer takes place in Australia, it is unclear why the thresholds remain at current levels, particularly when they capture vehicles such as the Toyota Landcruiser or even some variants of the Mazda CX-9 SUV,” AADA said.

“The Government should consider escalating the threshold upon which the LCT is payable until only cars that truly meet the definition of luxurious are left in the market.

“Our review of car prices and models indicates that a nominal threshold of $100,000 would meet the above definition. Interestingly, this is the level at which the Queensland and Victorian Governments’ state luxury car taxes also apply.”

While the AADA was strongly opposed to the Queensland and Victorian Governments’ recent introduction of a state tax on luxury cars, it acknowledged that the threshold had been set at a level that more accurately reflected the luxury status of the motor vehicles at, and above, that price point.

“Increasing the threshold of the LCT to target true luxury vehicles should in our view, be the prelude to the eventual abolition of the LCT,” AADA said.
“The AADA understands that forgoing the revenue raised by the LCT is challenging, so our proposal is for a staged abolition, where the rate at which the tax is paid is progressively diminished over a period of five years until it is no longer collected. This approach would show the Government’s good faith while allowing a progressive adaptation to the loss of revenue and preventing a consumer boycott to avoid the LCT until it was removed.

“Adopting Option 1 would both restrict the tax to cars that are more appropriately labelled as luxury vehicles and lead to the eventual abolition of the tax in a staged and controlled fashion.”

Option 2: Exempt low-emissions vehicles

AADA submitted that the LCT had been structured in a way that discouraged the purchase of fuel-efficient vehicles.

In 2008 a higher LCT threshold was introduced for fuel-efficient vehicles that consumed less than seven litres of fuel per 100km driven. The threshold was set at $75,000 for fuel-efficient vehicles, significantly higher than the threshold of $57,180 for all other vehicles. Both thresholds were indexed, but differing methodologies were applied, which resulted in the threshold for fuel-efficient cars increasing less than one per cent over the past decade – it is now $75,526. The threshold for non-fuel-efficient vehicles meanwhile has gone up almost 20 per cent to $67,525.

If the fuel-efficient cars were indexed at the same level as other vehicles, the threshold today would be over $88,000.

“This is one example of how the LCT has in effect disincentivised the uptake of fuel-efficient vehicles. Without a doubt the biggest factor constraining demand for low emission vehicles (that is those with fuel economies better than 3 litres/100 Kilometres) particularly Electric Vehicles (EVs) in Australia is the high up-front cost of purchase,” AADA said.

“Despite the significant savings in running costs and the relief from taxation, many motorists are put off by the fact that EVs are nowhere near price parity with Internal Combustion Engine (ICE) vehicles.”

The reason for the price disparity is the high cost of the lithium-ion battery, which is expected to decline over time. In the meantime, some countries have sought to bring down the cost of EVs by offering financial incentives. “The question of incentives is, in essence, a philosophical one, and it distracts from the real factors distorting the price of EVs namely the Federal Government’s taxes on new cars, which falls disproportionately on EVs,” AADA said.

Many of the EVs sold in Australia attract a tariff due to the fact that they have been manufactured in non-FTA countries, mainly within the EU. Even more EVs also incur the LCT as they cost more than the fuel-efficient threshold of $75,526.

EVs manufactured in Europe are more likely to be priced above the LCT threshold and as such are more likely to be subject to additional Federal Government taxation.

“While the policy intent of these taxes is not to target low emissions vehicles, the unintended consequence of these legacy taxes is that EVs are more expensive than they should be,” AADA said.

“Adopting Option 2 would make electric vehicles and potentially other low emissions vehicles more affordable and encourage their broader acceptance into the Australian fleet. Given the very small numbers of vehicles involved, this option would not significantly affect the revenue raised annually by the LCT.”

Option 3: Exclude accessories from the calculation of whether a vehicle hits the threshold for paying the LCT

“Adopting this option would modify the calculation of the LCT to ensure that it is calculated solely on the price of the base level variant of a vehicle, rather than include all accessories present in other variants. This is of particular importance for vehicles that are marginally below the LCT threshold, that mostly only cross it because their new owners have chosen a variant with greater safety features. One example of this being the Mazda CX-9, where only the variant with the highest level of safety features falls within the LCT purview,” AADA said.

“This situation is particularly problematic for many 4WD vehicles, where aftermarket safety or work-related accessories (winches, lights, bull bars, etc.) are added to the price of the vehicle and thus take it above the LCT threshold. The result is that consumers will still get their accessories but source them after they have purchased their vehicle, and potentially not use genuine parts, with associated effects on the safety of the vehicle’s driver and passengers.

“Alternatively, we would offer the suggestion that, if the base version of a vehicle does not breach the LCT threshold, then none of the versions featuring more extensive options, would breach the threshold either.”

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