Luxury car tax antics

German prestige importers are up in arms that the 33 per cent Luxury Car Tax (LCT) is back on the agenda. Worst affected by this increase -- although not alone, as Alfa Romeo and Volvo will attest -- Audi, BMW, Mercedes-Benz and Porsche have all campaigned vigorously against the proposed increase and for a time it appeared that they might have succeeded.

As we reported previously (more here), the original bill to increase the LCT from 25 per cent to 33 per cent was defeated in the Senate, when Victorian independent, Steve Fielding voted with the opposition.

The Greens voted with the government the first time the bill was submitted to the Senate, squeezing a promise from the government that vehicles under $75,000 and using as little as 7.0L/100km of fuel would be exempt from the tax altogether -- not just the increase, but the current 25 per cent as well.

For his part, independent Senator Nick Xenophon put the touch on the government for a dispensation from paying the LCT increase for those who ordered cars before the Budget night announcement on May 13, but didn't take delivery of the vehicles until after July 1, the nominal starting date for the 33 per cent LCT increase. 

Now, the government has secured support for the bill from Senator Fielding, following a concession offered to the Senator, in which tourism and primary producers are allowed a rebate up to $3000 for purchasing an SUV above the LCT threshold, provided the SUV is for work purposes. That rebate, particularly for SUVs just above the tax threshold, effectively compensates for the LCT increase. 

The Senator's late-won concession from the government conflicts with the amendment proposed by the Greens -- and accepted by the government -- that fuel-efficient vehicles would be exempt from the tax.

So, at one end of the argument, Senator Fielding has scored a goal on behalf of a sector of the community purchasing fuel-guzzling SUVs, after the Greens had negotiated a dispensation for fuel-efficient cars.

As a motor industry spokesperson asked rhetorically: "Is it a luxury tax or a green tax?"

The truth is, it's neither, if you accept that Senator Fielding's amendment doesn't help the green cause and the Greens' amendment does seem to distinguish cars the like of BMW's 320d (now tax-exempt) from the 320i, when both are optioned up beyond the LCT threshold and yet, in basic form are trimmed to the same level.

Senator Xenophon's Chief Media Adviser, Rowan Wenn, told us: "Our amendment is apparently the least contentious".

Wenn believes that the Xenophon amendment will cost the government about $5 million in revenue, which is about one per cent of the expected windfall from the tax increase. Wenn also relayed an interesting observation from the Senator concerning the government's agenda.

"Nick obviously expressed the concern that if you really want to tax the rich -- if that's what this is all about -- you could increase the top tax rate by 0.4 per cent over four years for virtually the same revenue," he said.

"At least that would be more honest than having a tax that is a hit-and-miss approach."

When contacted by the Carsales Network, Greens Senator Christine Milne immediately expressed concern over the Liberal Senators' "filibuster" (a stalling tactic to delay the passing of legislation) that has cost two days' parliamentary sitting time.

But Senator Milne also observes that the government has little to no experience in a Senate where the government doesn't hold the balance of power.

"Most of them have never been in government, let alone in government where they've had to deal with a Senate in balance of power. As a result, I don't think they've thought through how to negotiate with a number of different stakeholders sharing balance of power...

Getting down to the nitty-gritty of how Senator Fielding's amendment impacts the Greens amendment, Senator Milne notes that it does contribute to a conflicting flaw within the legislation.

"In terms of Fielding's amendments, the government understood that clearly, you don't set up amendments which are internally contradictory," she said, "and so went away to try and negotiate with Senator Fielding along those lines".

"Some of the four-wheel drives that are going to be exempted -- as a result of his negotiations -- clearly will be large emitters, but the priority that the government has identified there is people who are earning their living from tourism operations and/or farming enterprises, with a reasonably strict tax law judgement about who gets to benefit from it.

"So whilst it has a different priority from emissions -- and essentially in a balance of power scenario, it's a matter of the government justifying what it will and will not accept -- it's a question of us negotiating the best outcome that we can, in the circumstances.

Senator Milne hints that the LCT is a revenue raiser to compensate for the loss of revenue from the 'Holdback' case, which the government lost. In that case (the judgement for which was handed down a matter of days prior to the Budget night on May 13), the court found that the government was required to refund GST collected by car dealers through a complex business case whereby the dealer orders the car from the distributor, but pays the wholesale purchase price (including GST) to a third party financier.

The motor trade argued (successfully) that the GST paid on the wholesale price should be refunded after the vehicle was sold to a retail buyer and the retail GST was remitted to the government. Senator Milne believes that the judgement against the government was the $500 million hole in the budget the government had to fill by whatever means -- and an increase in the LCT was the most expedient means available.

"Some people would say it was an increase in order to offset a court decision which cost the government $500 million in forgone revenue.

"So on that basis the government has its own agenda and was treating this tax purely as a revenue raiser, without using it to change behaviour.

"From the Greens' point of view, we would prefer taxation, when it comes to motor vehicles, driving a change of behaviour -- and that is drive less, and drive more efficiently when you do."

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