Tax task force slams LCT

None other than the Treasury – the government department that oversees taxation – has recommended the federal government do away with the luxury car tax.

And car retailers, state motoring associations and car importers would welcome the change. In a report published by Fairfax Media yesterday, James Goodwin, acting chief executive of the Australian Automobile Association, offered the view that with the impending demise of the local automotive manufacturing industry, the luxury car tax in its current form makes little sense.

"If we don't have a local manufacturing industry then why do we need a luxury car tax?" he said.

Goodwin also lambasted the tax for standing in the way of technological progress.

"They're actually punishing the early adopters," he explained.

The LCT, as it's also known, has long been a thorn in the side of prestige importers in Australia, but the controversy reached new heights after the Rudd government raised the percentage of tax applicable from 25 to 33 per cent in 2008.

Appearing in a Tax Discussion Paper introduced two days ago by Treasurer Joe Hockey, the section outlining everything wrong with the LCT appears in the 'Indirect Taxes' chapter. It's couched in carefully phrased wording, but the LCT is described as "a narrow tax base" that's complex and "the Australian Government's only luxury tax on a specific good or service".

While a range of different luxury items were subject to higher rates of wholesale taxation prior to the introduction of the GST by the Howard Government in 2000, only cars priced above an indexed threshold were taxed as luxury goods after the GST was implemented. At the time, the LCT was intended to keep luxury car prices where they were, rather than leading to a dramatic fall that would place those – mostly imported – luxury cars in direct competition with higher-specified cars built locally.

Since the change to the rate of taxation in 2008, the LCT has become more complex, with two thresholds now applying. Fuel efficient vehicles – those with an official combined-cycle fuel consumption figure of 7.0L/100km or less – do not incur the LCT until their purchase price exceeds $75,375, but other cars are taxed 33 per cent higher as soon as the price hits the current threshold of $61,884. Both thresholds are indexed in accordance with "different price indices" and are "no longer aligned with the 'car (depreciation) limit', the discussion paper notes.

There's further complexity too, in the exemption for the tourism and primary industries, added as a quid pro quo to get former Family First senator, Steve Fielding to support the Rudd government's bill to increase the tax to 33 per cent.

The discussion paper's authors acknowledge that "the LCT's thresholds may not be an accurate representation of luxury in the car market — for example, a seven-seater family vehicle and a small sports car may both attract similar amounts of LCT."

By implication, a bare-bones sports car – like a Lotus Elise (pictured) – or a people mover like a Toyota Tarago does not necessarily pass the public perception test to be considered luxury cars, per se.

Frequent criticism from the automotive industry that the LCT represents a trade barrier for certain nations – mostly based in Europe, and Germany in particular – was noted in the discussion paper, but the task force preparing the paper argues that the LCT does actually apply to all cars sold in Australia; it's just that the German prestige brands are those most likely to sell products subject to the tax, as a bloc.

And Toyota would also argue that its cumulative LCT impost makes a nonsense of that argument anyway.

The task force does admit that more LCT has been received from sales of imported vehicles than locally-manufactured cars. It's a sign of the times that imported vehicles, which accounted for 89 per cent of LCT-affected cars back in 2005, now account for 94 per cent of vehicles incurring the LCT – and that's despite the large-scale migration of the prestige brands to fuel efficient vehicles in their respective model ranges.