What is luxury car tax?

Luxury car tax (LCT) is, well, the name says it all. It’s a tax that is put on ‘luxury’ cars that have a value - inclusive of GST (but excluding on-road costs such as third party insurance, stamp duty and registration) - that is above the LCT threshold. The rate of tax placed on these cars is 33% of the value that sits over the threshold.

The LCT is imposed on the business that sells the vehicle, provided they are registered for GST. However, it is usually passed on to the customer by being incorporated into the total purchase price of the vehicle. If you’re a private buyer, however, and import a luxury vehicle from overseas, you’ll be hit with the LCT as well.

LCT only applies to a car that is designed to carry less than two tonnes and 9 passengers. Limousines are also included in this, regardless of how many passengers it is designed to carry.

The Australian Government imposes a different LCT for ‘fuel-efficient and ‘other’ vehicles, so you’ll need to consider this when purchasing your car.

What does the government consider to be a ‘fuel-efficient’ vehicle? Good question. According to them, a fuel-efficient vehicle is one in which the combined fuel consumption does not go above 7 litres per 100 kilometres.

In the 2020-2021 financial year, the LCT threshold for fuel-efficient and ‘other’ vehicles are;

- Fuel-efficient: $77,565 
- Other: $68,740

So, if you were looking to purchase a new car with a value of $85,000 including GST but excluding government charges, and the car was not considered a fuel-efficient vehicle, you would pay LCT on the amount between $68,740 and $85,000. There’s a specific formula used to work out the total amount of LCT payable by the business that sells the car.

LCT Value ($85,000) - LCT threshold ($68,740) x 10 ÷ 11 x 33%.

$16,260 x 10 ÷ 11 x 33%

= $4,878

This would add $4,878 on top of the purchase price of your car, bringing the total amount to $89,878. Remember, this excludes those on-road costs I mentioned earlier, which also have to be added on for the final drive-away price.

If the car you were buying was considered a fuel-efficient vehicle, you would only be paying LCT on $7,435 ($85,000 - $77,565). This would end up adding $2,230.50 to your bill, before on-road costs.

The LCT, introduced in 2000, was targeted at luxury cars and was meant to protect Australia’s home-grown offerings such as the Ford Falcon, Ford Territory and Holden Commodore. Although the Fords and Holdens were already cheaper off the showroom floor than their European ‘luxury’ counterparts, it seems they weren’t cheap enough, hence the LCT was established to encourage consumers to ‘shop local’.

But in today’s automotive world, Australia no longer manufactures cars. Although the Ford and Holden brands still exist, every brand new car in their dealerships is imported from overseas. Although, in February 2020, it was announced that Holden would no longer sell cars at all.

You’ve also got cars being subjected to LCT that might not necessarily fall into the luxury category, but command a high price due to their usability. For instance, workhorses such as the 2019 Volkswagen Amarok Ultimate and Ford Ranger Raptor 4x4 utes can easily cost north of $68,000 before any on-road costs or government charges. I know I know, there are cheaper 4x4’s you can buy that won’t be subject to LCT, and these top of the range utes definitely aren’t short on creature comforts, but their base purpose is to be a utility vehicle, not a luxury car.

Then you’ve got the Toyota Landcruiser GXL range, with an interior stuck in the late 1990’s and nearly every ounce of luxury stripped away, selling for between $70,000 and $130,000 before on-road costs. The GXL is the definition of a workhorse and their reputation as being indestructible is what brings in the big bucks and, as a result, the LCT. Perhaps it’s time to revisit what cars the LCT should apply to, or if it should apply at all.

So the LCT is just one more thing that you need to consider when going out to purchase your brand new car. If something is advertised with a driveaway price, then the dealership has already applied all on-road costs and government charges, so you can negotiate that total amount down. If a car is being advertised excluding on-road costs and government charges, then that makes it a little trickier to negotiate a final price, so be wary.

We’ve listed out a few ways that dealerships might try to get you to spend more when buying a car. Be sure to check them out so that you’re prepared to take on any salesman!