Luxury Car Tax Explained

As the allure of sleek, high-end vehicles beckons many Australians, there's one aspect of purchasing a luxury car that often eludes the spotlight: the Luxury Car Tax (LCT). This tax, unique to Australia, can have a significant impact on the final price tag of your dream car.

This guide, brought to you by the novated leasing specialists at Easi, dives deep into the intricacies of LCT, helping you navigate its waters with ease. If you’re considering getting one of the many luxury, fuel-efficient cars on the market, read on!

What is luxury car tax (LCT)?

Luxury Car Tax, often abbreviated as LCT, is a goods and services tax levied on cars with a GST-inclusive value above a certain threshold, which is aptly termed the "luxury car tax threshold." Implemented by the Australian Taxation Office (ATO), LCT aims to provide a level playing field, ensuring that luxury cars, many of which are imported, are not unfairly priced lower than domestically manufactured vehicles.

Initially introduced as a means to protect Australia's car manufacturing industry, the LCT has since remained even after the cessation of local car manufacturing. The underlying intent is to collect revenue while promoting consumer interest in more affordable and often more environmentally friendly vehicles.

Luxury car tax threshold: understanding the basics

When diving into the world of luxury cars in Australia, understanding the luxury car tax thresholds is pivotal. These thresholds serve as benchmarks, set by the Australian government, which determine if your vehicle purchase will attract the luxury car tax (LCT). Essentially, any car with a value above this threshold is subjected to LCT. So, how exactly are these luxury car tax thresholds determined?

The government updates the luxury car tax thresholds every financial year, taking into consideration factors such as inflation and market changes. Once the price of your car, excluding any GST, exceeds this threshold, the luxury car tax rate kicks in. This rate, often a percentage of the car's value above the threshold, signifies the additional amount you'll be paying on top of the car's price.

So, on what basis is the luxury car tax calculated? The LCT is applied to the amount by which the car's value surpasses the threshold, and not the entire car's value. For instance, if a car costs $10,000 above the set threshold and the LCT rate is 33%, the additional tax paid would be $3,300.

It's always wise for potential luxury car buyers to keep a close eye on these thresholds and the corresponding luxury car tax rate when planning their purchase. By being informed, you can make better financial decisions and understand the true cost of owning a luxury car in Australia.

Luxury car tax thresholds

If you import or sell a car with a GST-inclusive value above the LCT thresholds, you must pay luxury car tax except in certain circumstances. In general, the LCT value of a car includes the value of any parts, accessories, or attachments you supplied, or imported, at the same time as the car.

The LCT is also used to determine whether an electric vehicle is eligible for the Fringe Benefits Tax (FBT) exemption. The following table lists the LCT thresholds for the financial year the car was imported, acquired or sold as per the Australian Taxation Office (ATO).

Car limits for calculating depreciation

There is a limit on the cost you can use to work out the depreciation of passenger vehicles (except motorcycles or similar vehicles) designed to carry a load of less than one tonne and fewer than 9 passengers.

The maximum value you can use for calculating your claim is the car limit (irrespective of any amount you were paid for a trade-in) in the year in which you first used or leased the car. 

Which cars are subject to luxury car tax?

Not every high-priced car is subject to LCT. The tax applies primarily to passenger vehicles, which means certain types of vehicles, like trucks or vans, are typically exempt. Additionally, cars that are over two years old when imported to Australia are LCT-free.

Many high-end brands, from Audi to Mercedes-Benz, often have models that breach the LCT threshold. However, there are specific scenarios, conditions, and exemptions, like cars used primarily for tourism, which can influence whether LCT applies.

A major bonus for those willing to go green is that owners of electric vehicles (EVs) are currently able to avoid having to pay fringe benefits tax (FBT) on their cars if the luxury car tax has never been payable on the importation or sale of the car, among other criteria.

Ways to minimise luxury car tax

Acquiring a luxury vehicle in Australia comes with the undeniable allure of prestige and enhanced driving experience. However, the added expense of luxury car tax (LCT) can often dampen the excitement of a new purchase. But worry not! There are strategies you can employ to potentially minimise the impact of this tax.

• Opt for fuel-efficient luxury cars: The Australian government, in an effort to encourage greener choices, has set a higher LCT threshold for fuel-efficient vehicles. This means if you opt for a luxury vehicle that falls within this category, you can benefit from a higher tax-free threshold, potentially reducing the overall tax you need to pay.

• Import luxury cars: While the idea of importing luxury cars might sound like an additional expense, in some cases, it could work in your favour. There are instances where luxury vehicles, even with the added costs of importation, come out cheaper than their counterparts sold locally. By carefully selecting and importing a luxury car, you might find that the combined cost, even with LCT, is less than purchasing the same or similar model domestically.

• Commercial vehicles exemption: The LCT doesn't apply uniformly across all vehicle types. Certain commercial vehicles, even if luxurious, are exempt from this tax. If you’re in the market for a luxury vehicle that will be used predominantly for business purposes, such as high-end utes or vans, you might be in a position to bypass the LCT.

• Know the thresholds: It sounds simple, but being acutely aware of the luxury car tax thresholds can help. Sometimes, negotiating a price that's just below the LCT threshold can save you a significant amount.

• Trade-ins and discounts: When calculating LCT, trade-ins and manufacturer discounts can reduce the total taxable value of your luxury vehicle. If you're trading in an old car or can secure a significant discount, the reduced value might bring the car's price below the LCT threshold.

While the luxury car tax is a reality for Australian luxury vehicle enthusiasts, with careful planning and informed choices, there are ways to navigate this additional cost. Whether you opt for fuel-efficient luxury cars, explore the world of imported luxury cars, or consider luxury commercial vehicles, there are avenues to minimise the financial burden of LCT.

Handle all car costs effectively with easi

While navigating the LCT landscape might seem daunting, Easi is here to simplify the journey. With a reputation for providing quality novated leases, Easi can guide you through the financial aspects of acquiring your dream car, ensuring you get the best bang for your buck.

To get started with getting your next luxury car, contact us today and learn more about how you can save.