The ethical dilemma of continuing to impose a Luxury Car Tax in Australia’s post-manufacturing environment has been well aired in this magazine, and rightly so.
However, regardless of whether the industry thinks it is conceptually a ‘bad’ tax, whether the thresholds applied really define what is a luxury car, and as to the ever-circulating rumours that LCT may be scrapped at some always-unspecified time in the future, as it stands LCT is here and must be complied with.
Lucky are those Dealers that have little exposure to LCT compliance. The existence of the tax for them is worth noting but of little immediate impact. Mind you, should the tax be scrapped, and assuming the savings flow through, those Dealers may notice a pinch from increased competition from lower-priced luxury cars. In any event, those Dealers can stop reading because this article is to remind luxury car Dealers of that most dreaded of TLAs (three letter acronyms), the ATO.
As many luxury car Dealers will know, it is evident that the ATO has stepped up LCT compliance activity over the last 12 months. So, while we are confident that luxury car Dealers take their compliance obligations seriously, there is at least one area that the ATO appears to have identified as being high risk: quoting.
Under the Act, a Dealer can quote on an acquisition only in a very limited number of circumstances, being where there is an intention to use the car solely for one of the following purposes:
a) holding the car as trading stock, other than for hire or lease
b) research and development for the manufacturer, or
c) exporting the car in GST-free circumstances.
Clearly Dealers come into contact most frequently with the trading stock criteria, and it is that point that it attracts the ATO’s attention. The ATO is taking a very strict approach to the sole purpose test, questioning the usage of each vehicle, and has argued in some cases that where a vehicle is used for marketing or another identifiable activity, it is no longer being held solely as trading stock.
The consequence of a Dealer being held to use a vehicle for multiple purposes are dire, in that the quote will be invalid, exposing the Dealer to LCT as at the time of acquisition, as well as to interest and penalties. While ATO audits generally commence focusing on two or three months, identification of a risk factor, such as an incorrect quote, will result in the expansion of the audit to a period of up to four years. As Dealers are highly unlikely to be able to recover LCT imposed on their acquisition of a car after that car has been on-sold without LCT, any assessment will go straight to the bottom line.
Dealers should regularly review the usage pattern of their trading stock to determine whether a particular vehicle is no longer being held solely as trading stock. Where a change in usage means the car is no longer being held solely as trading stock, then an increasing adjustment will arise and the Dealer should account for LCT on the vehicle.
On the other side of the equation, a quote given to a Dealer will not be effective if they have reasonable grounds for believing that:
a) the person giving the quote was not entitled to do so
b) the quote wasn’t in the approved form, or
c) the quote was false or misleading in a material particular.
What that means is that Dealers need to exercise extreme care when dealing with a person who seeks to quote on a luxury vehicle, in respect of both individuals and other licenced motor Dealers. In both cases the Dealer to whom the quote is being given needs to take reasonable care to ensure the person giving the quote is bone fide. Be cautious of an individual who holds a licence and says the car will be held as trading stock. Equally, be cautious of a Dealer purporting to quote as trading stock for a high end luxury vehicle when that Dealer’s operations look to be solely at a much lower level.
As LCT is imposed on the supply of a luxury vehicle, accepting a quote without being comfortable that it is validly given will expose the Dealer to recovery action by the ATO should it challenge the quote’s validity.
If in doubt as to the validity of a quote being presented to you, take the steps necessary to satisfy yourself and record that process. If you remain in doubt, give serious thought to declining to accept the quote.
When reading this article, please understand that it is not an attempt to set out in detail all aspects of LCT compliance. Accept it for what it is, i.e. a cautionary note to make you think about the consequences of not taking seriously one aspect of your LCT compliance obligations: quoting.
Quoting is an area that can expose a Dealer to underpaid LCT and penalties very quickly. Given that each Dealer’s approach to LCT will tend to be consistent over time, poor compliance with quoting obligations could easily mean that many vehicles could be caught up in a full-scale ATO audit, with any amount assessed being an irrecoverable cost to the Dealer.
André Spnovic
Partner, Indirect Tax,
Deloitte Tax Services Pty Ltd