Stimulus package conflict for luxury car sales

The hard-fought battle by the Greens to exempt '7.0-litre' cars from the Luxury Car Tax last year will be diminished by new legislation before the federal parliament.

In September last year, when the government was struggling to have its Luxury Car Tax raised from 25 per cent to 33 per cent, it was forced to make deals with those holding the balance of power in the Senate (more here), in exchange for their support.

At the time, the Greens arm-twisted the federal government to amend the Luxury Car Tax (LCT) legislation to provide buyers of luxury cars up to $75,000 with a dispensation from paying the LCT -- as long as the car's city-cycle fuel consumption is 7.0L/100km or less.

Now, bundled with tax law amendments connected to the federal government's stimulus package, the 30 per cent investment allowance introduced to Parliament only applies to 'luxury cars' -- those priced above the LCT threshold of $57,180.

The upper limit for the investment allowance on cars is calculated using the same formula as the LCT threshold, which is how and why the government appears to have been able to side-step its commitment to the Greens that future taxation of cars would favour those that are more sensitive to the environment. Technically, the ceiling price for the investment allowance applicability being the same as the LCT threshold is coincidental.

That the investment allowance, the depreciation allowance and GST input tax credits don't factor in that component of a new car's price between $57,180 and $75,000, even if it's subject to the '7.0-litre' exemption, is a disincentive to buy that car, argues Mercedes-Benz's Senior Manager Corporate Communications, David McCarthy.

"Someone who is going to buy one of those cars -- in a business situation -- is going to be six grand worse off," he told the Carsales Network.

"Not only does it not meet the spirit of the [Greens] amendment to the Luxury Car Tax, in terms of reducing greenhouse [gases] and fuel usage, it will do the opposite. It's beyond unfortunate."

When buyers lease new cars -- and particularly those above the LCT threshold -- they expect to be able to claim benefits for the vehicle's commercial use. Three items that can be claimed (depreciation, investment allowance and input tax credit) are restricted by the legislation to that ceiling of $57,180 -- the same amount as the LCT threshold.

Buyers of cars that are, at once, better for the environment ('7.0-litre' cars) and priced up to $75,000 don't provide their buyers with any more tax benefits than a car using profligate amounts of fuel, but priced at or below $57,180. There's no incentive to buy a '7.0-litre' car and take full advantage of the Greens' amendment to the LCT legislation, in other words.

"Again the government has discriminated against luxury car buyers by not allowing the 10 pc deduction for fuel efficient vehicles in either the investment allowance or depreciation limit despite a commitment to the greens that the 75k limit would apply in future tax matters," says McCarthy.

"This disadvantages those buyers who are buying fuel efficient vehicles in line with government desire to reduce greenhouse gasses. This is a hypocritical stance and again demonstrates that the government is dealing cards from the bottom of the pack

"This is a triple whammy for fuel efficient vehicle buyers with the depreciation limit, investment allowance and input tax credit being calculated at the lower rate of 57180 instead of 75000. This costs buyers many thousands of dollars and is hardly an incentive to buy."

Benz cites an optioned-up C 220 CDI as one such car affected -- one that returns a fuel consumption figure of 6.7L/100km (therefore under the Greens exemption threshold) and could reach or even exceed $75,000.

Based on this example, the $75,000 C-Class would incur $7148 for depreciation over eight years, $17,154 investment allowance (assuming a 30 per cent claim) and a $5198 input tax credit. If the depreciation limit were increased to $75,000 instead of the nominal LCT tax threshold of $57,180, as in the current draft legislation, the respective figures would be $8523 depreciation, $20,455 investment allowance and $6818 input tax credit.

Total the first three figures and subtract them from the sum of the second set of figures, and you're left with a balance of $6296 reduced benefit to the buyer, says Benz.

This imbalance is galling to McCarthy, who points out that the roughly $5000 saved by buyers purchasing a fuel efficient car up to $75,000 -- with thanks to the Greens' intervention -- lose that and more in tax entitlements, as per the figure of $6296.

McCarthy posits that the LCT has traditionally supported local manufacturing, but he asks how the government can justify turning its back on those workers employed by the importers. Prestige importers alone would employ at least 5000 Australians, he estimates.

"Now what the government is doing there," he says, "is saying 'Actually, we don't care what your contribution is, all you are is simply a group of cows to be pushed into the shed and milked. And we're going to milk you with the investment allowance -- and we're going to milk you with GST input tax credits and we're going to milk you with depreciation."

The investment allowance is yet to be debated and will have to wait for the Winter session of parliament, due to commence May 25.