Chapter 3

Luxury Cars

Summary of Legislation

3.1 The government stated in the ANTS document that a separate tax on luxury cars would continue to apply following the introduction of the Goods and Service Tax. To prevent the price of luxury cars falling dramatically. Currently the WST on luxury cars is 45 percent of the margin above the luxury car threshold while the rate on non-luxury cars is 22 per cent.

3.2 The government introduced four Bills relating to luxury car tax (LCT) on 31 March 1999. The Bills are designed to apply a (LCT) at the rate of 25 per cent from 1 July 2000. This decision will mean that the retail price of luxury cars will only fall by the same amount as a car just below the luxury threshold.

3.3 The tax will apply to the portion of the price of a luxury vehicle above the income tax depreciation limit. The current limit is $55,134. The (LCT) will be payable in addition to the GST but on a GST exclusive base.

3.4 Businesses that are subject to the GST will not be able to claim an input tax credit in respect of the LCT. In addition, a GST credit will not be available for that part of the price which exceeds the depreciation limit. [1]

Evidence from the Luxury Motor Vehicle Lobby Group

3.5 Only one submission was received by the inquiry in relation to the luxury car tax. That A submission was from Deloitte Touche Tohmatsu on behalf of the Luxury Motor Vehicle Lobby group. The participants of the group are DaimlerChrysler Australia/Pacific Pty Limited, BMW Australia Pty Limited, Saab Automobile Australia Pty Limited, Volvo Car Australia Pty Limited, and Porsche Australia.

3.6 Their submission addressed six key issues. They are:-

• Clarification of the scope of Section 69.10 of the “A New Tax System (Goods and Services Tax) Bill 1998”.
• The limitation of input credit entitlement for luxury vehicles
• The cascade effect of the proposed luxury tax under certain financing arrangements
• The profit margin erosion of the second hand goods credit scheme
• The impact of the transitional proposal to phase-in GST input credit entitlements
• The anomalous treatment of second hand trading stock on hand at 30 June 2000 [2]

3.7 A brief summary of their concerns is detailed below.

Clarification of Section 69.10 to Trading Stock

3.8 Section 69.10 of the “A New Tax System (Goods and Services Tax) Bill 1998”, sets a restriction on the amount of GST that may be claimed as an input tax credit in respect of the acquisition of a luxury motor vehicle. The maximum input credit entitlement is 1/11 of the depreciation cost limit for the financial year in which the vehicle is first used for any purpose. The current income tax depreciation limit is $55134. The maximum input credit entitlement for this cost limit is $5012.

3.9 Deloitte Touche Tohmatsu are concerned that the legislation as it is currently drafted has the potential to apply to every acquisition or importation of a luxury motor vehicle, irrespective of whether the acquisition or importation is for the purpose of trade or use. Accordingly, they seek clarification of subsection (1) (b) and an amendment to Section 69.10 to ensure that the limitation on input credit entitlement does not apply to an acquisition or importation of a motor vehicle held as trading stock. [3]

Limitation of input tax credit entitlement for luxury motor vehicles

3.10 According to Deloitte Touche Tohmatsu, Division 69 of the GST Bill is designed to place limitations on input tax credit entitlements where the expenditure is not deductible under the Income Tax Assessment Act. They stated that the linking of income tax deductibility to the entitlement to an input tax credit is inappropriate in the case of luxury cars. Deloitte see the result as “taxes on tax” whenever a motor vehicle is acquired were the market value exceeds the depreciation cost limit.

3.11 Deloitte Touche Tohmatsu provided two examples to illustrate their point. Appendix 2 to their supplementary submission [4], see below, shows that there is no flow on effect of the GST for a vehicle priced below the luxury threshold. The total GST collected is $2250:

Appendix 2 : Trading History of Non-Luxury Vehicle

3.12 However Appendix 3 of their supplementary submission [5], see below, clearly demonstrates that there is a flow on effect for a vehicle priced above the luxury threshold, with the GST collected totalling $15677:

Appendix 3 : Trading History of Luxury Vehicle

3.13 Deloitte Touche Tohmatsu submitted that the alignment between the GST and the Section 57AH of the Income Tax Assessment created by Section 69.10 is inappropriate for the following reasons:-

• It creates a significant GST cascade effect
• It unfairly discriminates against the luxury segment of the motor vehicle market
• It will create market value distortions between luxury vehicles traded within the business sector and those vehicles traded in the private sector
• It will erode profit margins for distributors and dealers of luxury motor cars [6]

3.14 The solution proposed by Deloitte Touche Tohmatsu is to use the FBT legislation and Division 129 of the GST Bill:

A simple solution for ensuring neutrality between salary packaged cars and privately owned vehicles is to utilise the FBT legislation. The cost base of packaged cars should be adjusted to incorporate the input tax credit claimed by the employer. This will mean that the value of the fringe benefit will be equivalent to the GST inclusive price of the vehicle.

The above solution will not apply to vehicles owned and operated by self employed individuals. However, Division 129 of the GST Bill contains a mechanism that adjusts a purchaser's input credit entitlement to reflect the ratio of business use to non-business use over the period of ownership of an asset. In this way, no input tax credit is allowed for the private use of the vehicle by the owner. We submit that this provision is sufficient to achieve neutrality between the overall tax treatment of vehicles provided to employees and those used by the self employed. [7]

Retail Luxury Car Tax – Cascade Effect

3.15 Initially Deloitte Touche Tohamatsu were concerned with the cascade effect of the GST for purchasers of luxury cars under certain financing arrangements. A closer examination of the legislation introduced into Parliament on 31 March 1999 by Deloitte Touche Tohamatsu confirmed that this might not be the case. Consequently in their latest submission they have not drawn the matter to our attention. The Committee therefore feels that the issue is resolved and does not intend to take the matter further.

Second Hand Goods Credit

3.16 Deloitte Touche Tohmatsu believe the limitation imposed by Section 66.10 of the GST Bill for calculating the notional input tax credit will reduce the profit margins for motor traders of second hand vehicles. The problem arises when motor dealers trade at the wholesale level between each other. This creates a disparity between the valuation of vehicles sourced from the private consumer market and the business consumer market according to Deloitte Touche Tohmatsu. [8]

3.17 Another issue of concern for Deloitte Touche Tohmatsu is the timing of the entitlement to claim notional input tax credit for vehicles traded from the private market. Linking the timing of the claim for input tax credit with the sale of the goods would increase compliance costs and introduce additional complexity to the scheme.

3.18 Deloitte Touche Tohmatsu noted that in New Zealand, the second hand goods credit arrangements do not contain a limitation on the level of credit entitlement. It is 1/8 of the consideration for the acquisition. [9]

3.19 Deloitte Touche Tohmatsu submit that Section 66.10 and 66.15 should be amended to preclude the operation of these limitations to commercial dealings with motor traders. [10]

Transitional Provisions – Deferral of Input Credits for Motor Vehicles

3.20 Deloitte Touche Tohmatsu are very concerned that the transitional arrangements proposed by the government for the deferral of input tax credits for motor vehicles would not ease the potential market distortion that would occur when the GST is introduced on 1 July 2000.

3.21 A phase-in of input credit entitlement for motor vehicles is proposed for the years ended 30 June 2001 and 30 June 2002. Deloitte Touche Tohmatsu concur with the Government's view that the Industry could suffer adversely from a consumer demand drought in the lead up to the GST. However, they do not consider that the phase-in arrangements are an appropriate mechanism for resolving the problem as the phase-in scheme denies 100% of the input credit that would otherwise be claimable in respect of vehicles purchased in year 1. Input credit entitlement is 50% of the GST for vehicles purchased in year 2. [11]

3.22 In the example provided at Appendix 4 of their submission [12], see below, Deloitte Touche Tohmatsu have calculated that the GST collected over the trading period of the vehicle is $21375. This represents an increase of over 100 per cent of the GST charged at the initial sale of the vehicle:

Appendix 4 : Transitional Provisions

Business `A'

First Disposal

Business `A'

Business `B'

Second Disposal

Business `B'

Private Consumer

3.23 Deloitte Touche Tohmatsu have put forward the following proposal that they believe would ensure a fair arrangement for consumers:

We submit that a more appropriate transitional measure would be a phasing down of the sales tax rate on all vehicles, luxury or non-luxury, in the lead up to the 1 July 2000 introduction of GST. This could be used to counter consumer purchasing trends that may arise as a result of the 6% price reduction that will result upon introduction of a GST. This measure would only address the private consumer market. In order to counter purchasing deferral in the business community (a 15% price reduction) we recommend a capital allowance scheme be introduced for vehicles purchased in the lead up to the GST. This capital allowance would be linked to the rate of sales tax payable on the vehicle. A two or three phase rate reduction linked with a capital allowance will, we recognise, represent a cost to the Government in terms of taxation revenue. However, we submit that the potential harm that will be suffered by the motor industry during transition justifies such measures. [13]

Transitional Provisions – Stock on Hand at 30 June 2000

3.24 The government introduced provisions to ensure that there is no double taxation for businesses on trading stocks that were purchased before 1 July 2000. Section 15 of the A New Tax System (Goods and Services) Bill 1998 provides a special GST credit for the sale tax previously paid on goods held at 1 July 2000 for the purpose of sale or exchange. Section 17 of the same Bill provides an input tax credit equal to one eleventh of the purchase price of second hand goods which were acquired before 1 July 2000 and are held at the start of that day for the purposes of sale or exchange

3.25 Deloitte Touche Tohmatsu are concerned that the transitional provisions leave an element of uncertainty regarding the transitional treatment of the following categories of trading stock:

• Motor Vehicle spare parts held for sale, use or warranty replacement;
• Dealer demonstrator vehicles; and
• Distributor fleet vehicles [14]

Motor Vehicle Spare Parts

3.26 In respect to motor vehicle spare parts held by dealers in the course of servicing or repairing custom vehicles Deloitte Touche Tohmatsu believe the legislation is not clear enough. They are concerned that it could be interpreted that the goods referred to above are not held for the purposes of sale or exchange and could be excluded from the credit provisions.

Demonstrators and Distributor Fleet Vehicles

3.27 According to Deloitte Touche Tohmatsu demonstrators and distributor fleet vehicles are treated as trading stock for income tax and accounting purposes. In their opinion the transitional concessions provided by Division 15 and Division 17 of the GST Transition Bill do not appear to have application to these categories of trading stock. This is based upon the their analysis of the transitional provisions:

• Demonstrators and Distributor Fleet vehicles are second hand goods at the date of transition. Division 15 (2) (a) excludes second hand goods from the categories of trading stock eligible for the special GST credit.
• Demonstrators and Distributor Fleet vehicles are held for sale or exchange but are also held for use as test drive vehicles. Divisions 15 and 17 of the GST Transition Bill require that stock be held for sale or exchange and this condition would appear to exclude demonstrators and fleet vehicles.
• Demonstrators and Distributor Fleet vehicles are new goods at the time of acquisition by the dealer or distributor. The second hand goods credit entitlement under Division 17 of the GST Transition Bill would arguably not apply to goods that were not second hand at the time of acquisition. [15]

3.28 If the above interpretation of the GST Transition Bill is correct, motor vehicle dealers and distributors will be subject to double taxation. These items of trading stock have already been subject to WST of between 22% and 45% and will be subject to an additional 10% GST after transition. [16]

3.29 Deloitte Touche Tohmatsu submit that the draft legislation be amended to clarify that the special credit arrangements provided by Division 15 of the GST Transitional Bill do not differentiate between new parts held for sale and new parts held for the purposes of service or repair.

3.30 Deloitte Touche Tohmatsu also submit the Division 17 be amended to ensure that demonstrators and distributor fleet vehicles be eligible for a second hand goods credit equal to 1/11th of the post 1 July 2000 selling price. [17]

Senator Peter Cook

Chairman

Footnotes

[1] ANTS, p. 89.

[2] Submission No. 715A.

[3] Submission No. 715A.

[4] Submission No. 715B.

[5] Submission No. 715B.

[6] Submission No. 715.

[7] Submission No. 715.

[8] Submission No. 715.

[9] Submission No. 715.

[10] Submission No. 715.

[11] Submission No. 715A.

[12] Submission No. 715B.

[13] Submission No. 715A

[14] Submission No. 715A

[15] Submission No. 715A

[16] Submission No.715A

[17] Submission No. 715A