What car buyers and businesses need to know about Luxury Car Tax

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For car buyers, business owners, or those buying imported luxury cars, understanding the Luxury Car Tax (LCT) is crucial. The tax applies to vehicles exceeding the luxury car tax threshold, impacting both luxury and some high-priced non-luxury vehicles. LCT also takes into account fuel efficiency, with fuel-efficient vehicles receiving a higher LCT threshold, meaning a lower LCT is applied.

The Luxury Car Tax is calculated on the GST-inclusive value of the car, including dealer delivery charges and accessories. Buyers should also consider any potential exemptions, such as for emergency vehicles or vehicles modified for disability access. Failing to meet LCT obligations can lead to penalties enforced by the Australian Tax Office (ATO), so it’s important to understand the correct format for calculating and paying LCT.

If you’re unsure about how LCT affects your vehicle purchase or business, whether for personal use or trading stock, book a consultation with TMS Financials today.

What is the purpose of the Luxury Car Tax?

The Luxury Car Tax (LCT) is a tax applied to vehicles that exceed a set price threshold in Australia. It was originally introduced to protect the local car manufacturing industry and curb the importation of high-end luxury vehicles. However, with the shift towards fuel-efficient cars and larger SUVs, along with the end of domestic car production, the relevance of LCT has come into question.

One criticism of the LCT is its broad application to vehicles not typically viewed as luxury cars. For example, fuel-efficient vehicles like the Toyota Landcruiser and Nissan Patrol often exceed the LCT threshold, making buyers pay additional taxes for vehicles commonly used for practical purposes, such as towing or transporting goods. At the same time, some luxury brands, like entry-level Mercedes-Benz or Audi models, may avoid the tax, despite being marketed as luxury cars. This inconsistency has raised concerns about the fairness and effectiveness of the LCT in its current form.

Why are non-luxury cars subject to Luxury Car Tax?

In Australia, the Luxury Car Tax (LCT) can apply to vehicles that are not traditionally seen as luxury simply because their prices exceed the LCT threshold. For the 2023-24 financial year, the threshold for non-fuel-efficient vehicles is set at $76,950. As a result, midsize SUVs or family sedans, which are practical and not necessarily considered luxury, can incur the tax if their price crosses this limit, leading to unexpected costs for buyers.

To promote eco-friendly choices, the LCT threshold for fuel-efficient vehicles is higher, at $89,332, for the same period. This allows fuel-efficient cars to avoid the tax more easily, aligning with the government’s goal of encouraging greener vehicle options. Meanwhile, standard vehicles that do not meet fuel efficiency standards face a lower threshold, making them more likely to be subject to LCT, reflecting the government’s broader environmental strategy.

Examples of non-luxury vehicles that attract Luxury Car Tax

Many popular vehicles, typically seen as family or practical options, are often subject to the Luxury Car Tax (LCT) despite not being regarded as luxury cars. For example, models like the Toyota RAV4, Ford Territory, and various Honda and Nissan vehicles can exceed the LCT threshold due to their pricing. Though these vehicles are designed for everyday use, their cost surpasses the LCT limit, resulting in unexpected taxes for buyers.

This highlights how the LCT can affect consumers who purchase vehicles primarily for practicality, such as for family use or commuting, yet still face additional costs due to the price exceeding the LCT threshold. These cases raise concerns about how the LCT applies to vehicles not traditionally associated with luxury.

How the Luxury Car Tax is calculated

The Luxury Car Tax (LCT) is calculated based on the value of a vehicle that exceeds the LCT threshold, excluding certain costs.

To determine the LCT owed, the following formula is used:

The LCT value includes the vehicle’s retail price along with the Goods and Services Tax (GST), customs duty, dealer delivery charges, warranties, and any accessories or modifications. These factors together make up the taxable value that is subject to the LCT.

Certain costs are not included in the LCT calculation. These include the LCT itself, stamp duty, transfer fees, registration, compulsory third-party insurance, extended warranties, financing fees, and service plans. These costs must be calculated separately when determining the total price of purchasing a luxury vehicle.

Which cars are subject to the Luxury Car Tax?

The Luxury Car Tax (LCT) applies to cars such as sedans, station wagons, four-wheel drives, and limousines that carry fewer than nine passengers and weigh under two tonnes. Vehicles that exceed a set value threshold are affected, but there are exceptions for motorcycles and commercial vehicles primarily used for carrying goods, which are not subject to LCT.

To promote fuel efficiency, the Australian Taxation Office (ATO) has set a higher LCT threshold for fuel-efficient vehicles. For the 2024-25 financial year, cars that consume 7 litres or less per 100 km have a threshold of $91,387, meaning only the value above this amount is taxed. This incentivises buyers to choose environmentally friendly options.

From 1 July 2025, stricter standards will apply for fuel-efficient vehicles. To qualify for the higher threshold, cars will need to have a combined fuel consumption of less than 3.5 litres per 100 km. This adjustment reflects Australia’s increasing focus on encouraging greener, more sustainable vehicles.

TMS Financials provides you with a team of experienced professionals that help you achieve your financial goals through smart tax structures and strategic financial structuring. We’re a one-stop shop for all financial needs and pride ourselves on building strong partnerships with our clients.

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This outline is for general information only and not as legal, tax or accounting advice. It may not be accurate, complete or current. It is not official and not from a government institution. Always consult a qualified professional for specific advice tailored to your unique circumstances.