Taxing times ahead

The Federal Opposition may have delayed the enactment of legislation changing the rate of the Luxury Car Tax (LCT, more here), but new car buyers can expect to pay the increased rate from tomorrow.

That’s the news according to the Australian Tax Office (ATO) which has stated that, though the pollies may not pass the measures until August or later, the increase should be applied from July 1.

As reported already (more here), the federal government telegraphed its plans to raise the percentage of luxury car tax payable on the component of a vehicle's price above the $57,123 LCT threshold, only to see those plans obstructed in the Senate. Now, on instructions from Treasury, the ATO has recommended to dealers -- through the Federal Chamber of Automotive Industries (FCAI) and the dealers' respective distribution channels -- that the tax be calculated at the higher rate.

Thus Dealers and luxury-car buyers have various options ahead of them. The dealers can slug the buyers now and refund them the extra tax collected if the tax increase is not passed by the Senate. If the tax increase is passed, the dealers then remit the collected tax payable to the ATO.

If the dealer chooses not to charge for the prospective tax increase, the ATO recommends the dealer enter into a secondary contract with the buyer making the buyer legally obligated to pay the tax increase when -- and if -- the legislation successfully passes through the Senate.

According to the press release concerning this retrospective application of the tax increase (click here) the onus is on the selling dealer to inform the buyer of the additional tax payable and collect that amount -- either on receipt of the payment in full for the vehicle, or when the tax increase is made effective.

The Senate Economics Committee is due to report its findings on the proposed LCT increase on August 26, but the actual report is unlikely to be finalised by then, meaning that it will be back-dated to be effective from August 26. In other words, luxury car buyers may remain in limbo until September, October or later.

Thousands of buyers may be affected.

There's been a run on sales of luxury cars since the announcement in the federal budget that the LCT will be increased from 25 per cent to 33 per cent.

One BMW dealer, Brisbane BMW, reports that sales for June have more than doubled the usual rate, ahead of the prospective LCT increase.

"Up until tonight, I've got a big grin on my face... I'm not sure what I'm going to be looking like tomorrow," says Martin Roller, Managing Director of Brisbane BMW.

"We normally sell 95 new cars a month, we're currently at 185.

"There's a few people that are in the showroom now, who are saying they'll buy a car, if we can deliver it tonight... And we're already delivering 20-odd cars for the day.

"It's certainly captivated the marketplace... I've not seen buying like this -- ever!"

While the industry has broadly welcomed the referral of the LCT increase to Senate, it has cast luxury car retailers into a state of confusion and the massive sales spike for June is likely to be followed by a sales slump for at least the first two months of the new financial year.

"We've got a couple of challenging months [coming up]," admits Roller.

"One doesn't know how much 'pull-forward' there's been. I've doubled my sales this month. You would have to think those sales have got to come from somewhere, so I'm getting ready for a more challenging July and August, in terms of our order intake.

"But a lot of our cars are made to order -- so to speak -- so we've already got quite a few cars coming through in July and August that were ordered at a previous time.

"Some of those people only bought before the [federal] budget. They contracted at a price before the budget, which was at a different level of luxury car tax."

So how does a dealer best serve a customer who contracted to buy a car at one price, only to find subsequently that he may need to pay substantially more when a tax increase takes effect retrospectively?

"There was a bit of a wait-and-see," Roller explains.

"I'm told by the factory -- BMW in this case -- 'wait, we're lobbying, don't do anything...'

"So what am I telling my customers?" he asks rhetorically

"'Don't tell them anything' and then there was this feeling, 'don't worry, the Liberals are going to block it in the Senate' -- and then that came through.

"We've now got another hiatus period between July 1 and August 26, so everyone has been asking everyone, 'well, what do we do?'"

Roller's sales people are now working closely with those buyers who had ordered cars before the federal budget -- and had contracted to purchase to special order vehicles that may now cost more.

"Obviously some customers are not happy, but they do understand that it's not us and it's not BMW. It's 'Kevin07'...

"We're calling on his behalf to our clientele -- and they are less than impressed."

Another unforeseen consequence of the tax increase announcement relates to buying patterns at dealership level.

"The deals that we have done since budget night... Obviously, our sell-from-stock ratio has gone through the roof," Roller told the Carsales Network.

"Normally in a month -- when we deliver 95 cars -- usually half of those are coming from the factory as a special build.

"You say, 'no, I want this colour, I want these options, there are none in the country, I'm not prepared to take a different colour or a car with different specification levels. I want what I want...'

"Now that's usually about half our sales rate. This month -- since the budget -- people are compromising colour… So they've weighed up a commercial decision to say 'if I wait, I will pay an extra $2000 more, or I will take the car that's sitting on the floor I know I can get delivered before June 30'.

"There's been a lot of those..."

Commenting on the onus placed on the dealer to collect the balance of tax owing, assuming the increase goes ahead, Roller was adamant that his business would not be collecting the tax as a fait accompli -- meaning that the dealership must collect the increase in advance, irrespective of whether it's passed by the Senate.

"If I collect the lower level of tax -- and [the tax increase] still goes through -- then I've got to chase a customer, retrospectively, to pay a higher level of tax. That ain’t gonna happen.

"We have been including wording on our contracts to say that if there's any variation in an upwards or downwards direction, that we would come back to them."

Roller left no doubt about his view of the current situation and pointed out that the increase in the tax, allied to the retrospective application of that increase would not result in a nett gain for the government, necessarily.

"Having a retrospective tax is ludicrous, to say the best," he said.

"If I've doubled my car sales this month, I suspect most luxury car dealers in Australia have as well, which means that the government's desire to collect more tax will be futile, because there'll be more people that have got in before the tax, they're paying the lower rate. After the tax comes in, the sales rate will drop, so [the government] will collect less revenue after. "

Roller is "not an advocate for the tax at all" and questions whether a car costing $52,000 plus GST could be considered a luxury car. He describes the current state of play as "a really poor situation" for the luxury car market and luxury car consumers.

"They've treated luxury car buyers with absolute disdain," he says of the government.

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