This article covers tax related hot topics relevant for Dealers. Firstly, the strength of the market for second-hand cars is giving rise to luxury car tax (LCT) liabilities Dealers may not be aware of. Secondly, the Australian Tax Office (ATO) continues to roll out review products, with top 500 reviews and business systems reviews being seen in the industry. What this means for Dealers is considered further below.
Strength of the second-hand car market raising unique luxury car tax issue
Dealers have in the past assumed that luxury cars previously subject to a retail sale are not subject to luxury car tax (LCT) when subsequently sold. However, this assumption is not without risk, particularly in the present market.
For this assumption to hold true generally either:
- the total LCT payable in respect of the previous retail sale/s must equal or exceed the LCT that would be payable in respect of the sale the Dealer is considering making.
- the car is more than 2 years old as defined for LCT purposes (meaning broadly more than 2 years have passed since the point the car was imported and cleared through customs) by the time it is subject to a subsequent retail sale.
Dealers generally have a good sense of how old a car might be based on compliance date. However, determining the amount of LCT previously payable in respect of the car can present greater challenges.
Whilst it may ordinarily be the case that total LCT payable in respect of the previous retail sale/s equals or exceeds the LCT that would be payable in respect of the sale the Dealer is considering making given luxury cars typically decrease in value following the first retail sale, relatively strong demand for second-hand cars over the last 12 months has pushed the value of these cars up and second-hand cars are being sold at new car retail level prices for a second or third time within the 2 year window.
In this context Dealers are required to pay LCT top up amounts in relation to the subsequent sale of these cars – the top up representing LCT payable in respect of the sale of the car less LCT previously payable.
This illustrates the need for Dealers to consider the amount of LCT previously payable in respect of a particular car and how old the car is. Dealers should not assume LCT is not payable in relation to the sale of a second-hand car market merely because it has previously been the subject of a retail sale.
In addition, the ATO expects Dealers to have support for the view taken as to the amount of LCT previously payable in respect of a car. Accordingly, documentation evidencing the efforts of Dealers to reasonably determine the LCT previously payable in respect of the car should be held in accordance with tax record keeping requirements.
ATO review activity
In recent years the ATO has developed a number of review ‘products’ which vary in scope depending on the nature and size of taxpayers they are targeted at. The ATO’s ‘Top 500’ reviews, focused on Australia’s top 500 largest private groups, and ‘business systems’ reviews are being seen in the industry.
Whilst the scope of these reviews varies, they have in common a focus on tax governance, including systems and processes relevant for tax compliance. In broad terms the ATO is looking for objective evidence that these systems and processes are appropriate for the taxpayer and operating effectively. The ATO encourages taxpayers to adopt the mindset of: what would happen if the finance team left today? Would new team members be able to step in and continue to ensure tax obligations are met?
As Dealers trade in high value assets, they can breach thresholds set by the ATO for these programs. However, given Dealers generally operate with a relatively lean finance function, Dealers may not have rigorous tax control frameworks and supporting documentation the ATO expect to see. In the event of a review, this is an area where a practical discussion with the ATO case officer is required to balance the ATO’s prescriptive expectations against what is practical and value additive to the business.
In preparation for reviews of this kind, Dealers should review their tax compliance processes and consider what supporting documentation is available. For example, key tax governance documentation may include:
- tax control framework/policy;
- income tax, GST and FBT return procedure manuals;
- AP and AR procedures manuals;
- roles and responsibilities matrix; and
- tax controls testing plan.
In addition to summarising processes these documents should highlight controls such as layers of review, checks and reconciliations performed etc.
This article is written by André Spnovic, Partner, and Andrew Cheney
Senior Manager, of Indirect Tax at Deloitte Tax Services Pty Ltd.