New CO2 levy could replace luxury car tax

Volkswagen Australia says it would welcome the introduction of a CO2 emissions-based levy in place of the much-maligned luxury car tax (LCT) if it meant getting a European free-trade agreement over the line.

The LCT is understood to be a major bone of contention in Australia’s ongoing FTA talks with the European Union. Currently enforced on vehicles priced over $67,525 at a rate of 33 cents in the dollar, the LCT is said to generate about $700 million annually for the federal government, in effect penalising some of the safest and greenest vehicles on the road.

Officials close to formal negotiations say the European FTA will not go ahead unless Australia abolishes the LCT altogether. However, the industry is collectively holding its breath to see what the LCT is inevitably replaced with.

In Australia, luxury market leader Mercedes-Benz is the brand most affected by the LCT, followed by Toyota – which despite being a mainstream brand generated about $100m in luxury car tax money last year – and then Porsche and BMW. However, Toyota would also be heavily impacted by a CO2 tax due to the large number of diesel vehicles it sells.

Volkswagen Australia managing director Michael Bartsch believes a CO2 levy that taxes purchasers of new cars based on their carbon output – thereby penalising the heaviest-polluters – could provide the answer.

“Why not? You pay to have your garbage picked up. You get that within your rates. No-one accepts you can throw it on the street. What’s the difference?” Bartsch told carsales this week.

“I think everyone agrees – particularly people under my age – that there’s a general social cost for CO2 and NOX output and somebody has to pay for it.”

Initially, the Australia-Europe FTA was set to be finalised this year, theoretically abolishing the five per cent tariff currently applied to European vehicles imported into Australia.

It’s understood that timeline has now been pushed back to 2021 due to the ongoing effects of the coronavirus.

Bartsch said the removal of the LCT would need to be done gradually, in order to allow the industry to adjust and to preserve depreciation rates for those who recently purchase a vehicle that was subject to the tax.

“The LCT is one that needs to go, that should go, but it should be done gradually. All these taxes are a drug for government. They see what they have and don’t like to give anything up,” Bartsch said.

“Some will say it was a tax to protect Ford and General Motors – the threshold was just above the price of a Fairlane or Statesman – but it was as much a political philosophy tax as well, a ‘let the bastards pay’ driven position and it has been for a long time. It still remains that.”

His comments about the LCT come as the car industry develops a landmark voluntary CO2 code that would encourage manufacturers to lower their fleet-average emissions, bringing Australia’s new-vehicle CO2 average closer to that of Europe.