Introductory Info
Date of introduction: 2024-11-28
House introduced in: House of Representatives
Portfolio: Treasury
Commencement: Schedules 1 and 2 commence on the first 1 January, 1 April, 1 July or 1 October after Royal Assent. Schedule 3 commences on the first 1 July after Royal Assent.
Purpose of the Bill
The Treasury Laws Amendment (Tax Incentives and Integrity) Bill 2024 (the Bill) is an omnibus Bill which contains a range of measures relevant to the Treasury portfolio. This Bills Digest deals only with proposed amendments to the luxury car tax (LCT) (Schedule 1).
As explained in the Minister’s second reading speech, the purpose of the LCT provisions is to incentivise the transition to electric vehicles with targeted tax concessions.
Structure of the Bill
This Bills Digest deals only with the terms of Schedule 1 to the Bill.
Matters not discussed in this Bills Digest are set out in the Explanatory Memorandum (EM) to the Bill.
Background
History of the luxury car tax
Since 1979 successive Commonwealth governments have imposed a form of additional tax on ‘luxury’ cars. The tax is imposed on cars whose value exceeds a threshold.
The current luxury car tax (LCT) was introduced under A New Tax System (Luxury Car Tax) Act 1999 (LCT Act) and commenced on 1 July 2000. According to the EM for that Act (paragraph 1.18) the purpose of the legislation was to ensure that, following the move from the wholesale sales tax to a goods and services tax (GST), the price of luxury cars would only fall by about the same amount as a car just below the luxury car threshold.
In 2008, the LCT legislation was amended to increase the LCT rate from 25% to 33%. The LCT Act was also amended (by inserting subsections 25-1(4), (5) and (6)) to introduce a fuel‑efficient car limit into the LCT law and apply it to cars with a fuel consumption not exceeding 7 litres per 100 kilometres. While the Revised Supplementary EM for the 2008 amendments does not provide a rationale for the change, it can be inferred that the Parliament wanted to encourage the take-up of more fuel-efficient (including electric and hybrid) vehicles.
For the 2024-25 financial year, the threshold for fuel‑efficient cars is $91,387, whilst the threshold for all other luxury cars is $80,567.
As set out in section 2-1 of the LCT Act:
[The LCT] is a single stage tax that is imposed on supplies and importations of luxury cars and is in addition to any GST that may be payable. The tax is only calculated on the value of the car that exceeds the luxury car tax threshold.
According to the 2024 CCH Master Tax Guide (the Guide), the rate of LCT is applied to the amount of the excess above the threshold, excluding GST.[1] The Guide gives the following example:
In 2024–25, Tuan buys a car (not a fuel efficient car) for the GST inclusive price of $90,000. The luxury car tax is calculated as 33% × 10/11 × ($90,000 − $80,567) = $2,830. The total payable is therefore ($90,000 + $2,830) = $92,830.
According to the final report of the review of Australia’s future tax system (Henry Review) (at page 476) in 2010, the LCT could be regarded as discriminatory as it is the only Australian government tax that applies to the sale of goods or services designated as luxury.
The Henry Review recommended (Recommendation 80) that the LCT be abolished once an emissions trading scheme, along the lines of the Carbon Pollution Reduction Scheme, was implemented (which did not occur). The Review concluded (at page 58):
Australia has several other taxes that should be phased out over time, including insurance duties and the luxury car tax … The luxury car tax discriminates against a particular group of people because of their tastes. It is a complex and ineffective way of redistributing income from rich to poor.
In the 2023-24 Mid-Year Economic and Fiscal Outlook (MYEFO) (at page 196) the government announced that, from 1 July 2025, it would:
- tighten the definition of a fuel‑efficient vehicle and
- align the indexation rate for LCT thresholds.
MYEFO stated:
These changes will encourage greater take-up of fuel-efficient vehicles, consistent with the Australian Government’s National Electric Vehicle Strategy. This measure is part of the Australian Government’s commitment to reduce greenhouse gas emissions by 43 per cent by 2030, and to achieve net zero emissions by 2050.
According to Carsales.com.au, 72,214 luxury cars were sold in Australia in the first 6 months of 2024.
Policy position of non-government parties/independents
In the past the Australian Greens have proposed:
Some Coalition MPs and senators have advocated limiting or removing the LCT. For example, in 2020, Senator Matt Canavan raised the idea of an exemption to the LCT for farmers. Senator James Paterson advocated removing the LCT altogether.
Allegra Spender (independent) has stated (p. 6):
.. loopholes in the Luxury Car Tax Act (1999) currently provide significant subsidies to petrol vehicles. By revising the definition of ‘fuel efficient’ in the Act to cover only vehicles that can travel 100kms on four litres of fuel or less, the government would save $450 million over the next three years that could potentially be re-invested in incentives or charging infrastructure.[2]
In a submission to Treasury on the Exposure Draft legislation in October 2024, Dr Monique Ryan (independent) stated that she supported the Government’s proposed changes. She proposed a further change to the LCT Act to exclude ‘luxury’ utility vehicles from the commercial vehicle exemption.
Key issues and provisions
Key Issue: Definition of fuel-efficient cars
Item 2 in Schedule 1 of the Bill amends subsection 25-1(4) of the LCT Act to reduce the maximum fuel consumption for a car to be considered fuel-efficient for purposes of the LCT to 3.5 litres per 100 kilometres. The current limit is 7 litres per 100 kilometres. Treasury has said that the change ‘means only electric, or partially electric, vehicles can use the higher threshold.’
Subitem 4(1) of Schedule 1 provides that the change would only apply (subject to certain transitional arrangements discussed later) to supplies and importations of cars from 1 July 2025 onwards.
While the Australian Electric Vehicle Association supports the change, it seeks to ‘improve the legislation by making only zero emissions vehicles eligible for the higher luxury car tax threshold’ because:
- it would make the legislation consistent with the fringe benefits tax (FBT) exemption, which is only available to zero emissions vehicles after 1 April 2025
- many plug-in hybrid vehicle (PHEV) models on the market will meet the 3.5L/100km rating criterion but will not achieve the expected emissions abatement in operation
- it is important that incentives encourage the purchase today of zero emissions vehicles over hybrids to meet the 2050 net zero target.
The Federal Chamber of Automotive Industries (FCAI) argues (p. 2) that the change in the fuel‑efficient definition means that many hybrid electric vehicles that previously would have qualified for the higher LCT threshold will now be more expensive for consumers. It says that hybrid electric vehicles are widely accepted as a necessary transition mechanism to reduce transport related emissions. If the Government remains committed to the change, the FCAI recommends implementation progressively over a three-year period.
The Australian Automotive Dealer Association (AADA) commented in December 2023:
The AADA is disappointed to see this change to the fuel efficiency threshold which will increase the tax paid on a range of vehicles which are generally considered more fuel-efficient than average. The AADA considers this to be counterproductive to the Government’s own climate goals and will dissuade consumers from buying vehicles with the best safety and fuel-efficient technology.
Key Issue: Indexation for other luxury cars
Items 1 and 3 in Schedule 1 propose amending the index number used to index the LCT threshold from the all-groups consumer price index (CPI) to the motor vehicle purchase sub‑group of the CPI (CPI-MV).
According to the Minister’s second reading speech, the purpose of this amendment is to prevent the gap between the standard and fuel-efficient thresholds from shrinking. The EM advises (p. 6) that since 2008, there has been weaker growth in the motor vehicles sub-group of CPI compared to all groups CPI, which has caused the differential between these two thresholds to narrow. The Government’s intention is to ensure that the LCT thresholds grow at the same pace, ensuring the concessional LCT treatment for fuel-efficient vehicles is maintained.
The FCAI (p. 3) supports the notion that the two categories of vehicles should be subject to the same indexation methodology, however the FCAI believes that the All Groups CPI rather than the CPI-MV is the most appropriate indexation mechanism.
Key Issue: Transitional arrangements
Subitem 4(2) proposes transitional arrangements under which the current fuel‑efficient definition of 7 litres per 100 kilometres would continue to apply to a supply or importation of a car on or after 1 July 2025, where prior to this date the car was first supplied or imported, and the car was used in Australia for a purpose other than those listed in subsection 9-5(1) of the LCT Act (for example, holding the car as trading stock).
The FCIA argues (p. 3) that a further transitional arrangement should also allow for consumers who order a vehicle prior to 1 July 2025 in circumstances where the vehicle may not be supplied/imported before that date.
Key Issue: Limiting or abolishing the LCT
Although outside the scope of the Bill, the car industry peak bodies—the Federal Chamber of Automotive Industries (FCAI), the Australian Automotive Association (AAA) and the Australian Automotive Dealer Association (AADA)—have previously called for the abolition of the LCT.[3]
They claim the LCT was designed to protect the Australian automobile manufacturing industry, which no longer exists as the big 3 manufacturers Toyota, Ford and Holden ceased operations in the 2010s. For example, the AADA stated in October 2024 that the LCT thresholds should be raised well beyond $100,000, or the LCT scrapped entirely. The FCAI characterises the LCT as an obsolete, inefficient and inflationary tax ‘that adversely impacts consumers buying vehicles with the best safety and fuel efficient technology’ (p. 3).
On the other hand, the Tax Justice Network Australia and the Australia Institute support the LCT.
The Tax Justice Network Australia considers the LCT is a progressive tax that collects more revenue from people on higher incomes who purchase higher-value cars, and the amendment will encourage people to buy fuel-efficient vehicles. It ‘would encourage the Australian Government to require testing of vehicles in ‘real world’ conditions given the findings of research … that found that emissions of vehicles in actual use can differ significantly from laboratory testing’ (p. 1).
The Australia Institute criticises the exemption of large utility vehicles (utes) from the LCT. It argues that it is inappropriate that there is no requirement for the prospective owner to demonstrate that the car was being purchased or used for primarily commercial rather than personal use (p. 1).