Owing a luxury car is the dream of many, but did you know there’s more to the price you have to pay than just the actual cost or expensive (yet necessary) repair work?
Depending upon how much the vehicle costs you, you may get stung with a luxury car tax.
Different from stamp duty, luxury car tax is the threshold limit set by the federal government for different vehicle types every financial year. The aim of this is to calculate how much extra cost one has to pay on their expensive car.
So here is a guide explaining how it works and what the things you need to be aware of are.
What is the luxury car tax?
Luxury car tax (LCT) is the tax collected by the ATO (Australian Taxation Office) for a vehicle that exceeds the LCT threshold. It does not matter if the vehicle is new or used, but LCT will apply if it was imported or manufactured less than two years ago.
The LCT amount to be paid depends not only on the retail price but also on the fuel efficiency rating. Generally, a car with a higher fuel efficiency rating has a higher LCT threshold than another car with lower ratings.
Facts about Luxury car tax (LCT):
- It is calculated including GST (goods and services tax) on the vehicle (or car), but other fees or charges are not included.
- It only requires the person to pay a percentage of the amount above the luxury car tax threshold (LCT threshold).
- It is not the same for fuel-efficient vehicles and other vehicles.
- It is set and collected by the ATO.
There might arise some other situations when the LCT threshold amounts may apply.
The LCT is majorly paid by the businesses that import or sell luxury cars, such as car dealerships. However, an individual who imports luxury cars can pay this tax directly.
The LCT is 33% of the dollar amount of the vehicle’s value which is over the LCT thresholds. The LCT thresholds change in some capacity every (financial) year.
Luxury car tax threshold by the years
The LCT threshold has not been the same every year for fuel-efficient vehicles as well as other vehicles.
The vehicles deemed as fuel-efficient, or those with fuel consumption of fewer than 7 litres per 100 kilometres, have higher LCT threshold values to encourage individuals to purchase more environmentally-friendly cars.
LCT threshold increased
The Australian Taxation Office has increased the LCT threshold for the 2023-24 financial year. For fuel-efficient vehicles, the luxury car tax will apply to models priced beyond $89,332. When comparing this amount to the previous financial year, there has been an increase of 4.9 per cent ($4416).
For the vehicles that are outside of this fuel consumption criterion, i.e., for other vehicles, the LCT threshold will go up to $76,950. The increase of $5101, which is a 6.6 % increase from the value of last year.
These changes are applicable from 1 July, i.e., the beginning of the financial year.
Who pays luxury car tax?
As stated earlier, it is usually the businesses that pay luxury car tax. So, the most frequently asked question about LCT is, “What does it have to do with an average car buyer?”
Since businesses are responsible for paying, you might assume you do not need to know about it. However, it is far from the truth.
Whether you realise it or not, you do pay LCT. How? After being taxed 33% on the extra value of the car, the seller will pass on that extra cost to you. Sellers generally add this substantial extra cost to the purchase price of the car. As a result, you are paying for it.
In case anyone has imported luxury cars on their own, they will pay the luxury car tax directly to the government. Paying it on your own is both expensive and time-consuming.
Calculate your luxury car tax
Now that you know that you have to pay LCT, it is time to learn how you can calculate it. Calculating LCT is simpler than it sounds. A person has to pay 33 per cent of the amount that exceeds the LCT threshold. You can calculate it within a few minutes by following these steps:
- Take your car’s total purchase price. The GST is included in this, but other things like insurance, registration or stamp duty aren’t.
- Subtract the luxury car tax threshold amount, after which you will find the difference.
- Divide the resulting figure by 1.1, which will take out the GST portion from the threshold payment.
- Finally, multiply the result by 33% to find how much luxury car tax you must pay.
When will you pay LCT?
Luxury car tax is included in the quoted price of the car (or vehicle) when you purchase it from a dealership most of the time. The dealership is responsible for paying the luxury car tax (as part of the sale process) to the ATO on your behalf.
On top of this, the individual or business can claim refunds through the ATO. Importing the vehicle on your own will also subject you to LCT.
LCT exemptions – Are there any?
Since the luxury car tax is a type of tax nonetheless, it is obvious for people to look for some exemptions to avoid paying it. Fortunately, there exist a couple of exemptions to paying the LCT. First of all, it does not apply to some specific used vehicles or private sales, as the LCT has already been paid when the car was purchased or imported.
Here are a couple of more exemptions to LCT:
Commercial vehicles
Commercial vehicles designed to carry goods, not passengers, are not subject to luxury car tax. The vehicle’s payload over the passenger carrying capacity makes it exempt from LCT.
Modifications for disability
Suppose you have purchased a car. The car, when you bought it, was under the LCT threshold. However, it was modified for a person with a disability, bringing the price over the threshold. Would you be subject to LCT?
A simple answer is no because such a vehicle is exempt from this tax. But if the price of the car ( not modifications) is over the threshold, LCT is applicable.
Disability exemptions
An eligible veteran or a person with a disability may e exempt from luxury car tax, given that the car in question is specifically fitted to transport the said person seated in a wheelchair. But, if this car is GST-free under GST (goods and services tax) law, then this tax will apply.
Keep in mind that LCT is not waived for vehicles that were imported two years (or more) ago. So, if you decide to purchase a vehicle that was imported within two years, you will be subject to luxury car tax.
Among so many familiar and popular Australian taxes, the luxury car tax is the one often overlooked. However, you will be surprised to know that the majority of cars in Australia are imported from other countries. So, the time when this tax becomes unavoidable is not too far away.
Overall, whenever you think about purchasing a luxury car, consider the added cost (thanks to LCT) that you will have to pay. This tax has made a lot of people consider buying a used car instead since they can save some money with it. Along with this, used cars are cheaper, so you could save thousands of dollars.
Still, LCT is an essential part of the Australian taxation system, ensuring that luxury car owners pay their shares of taxes. Knowing about this tax will help you plan out a budget and decide which car will be the right one for you. If you are having difficulties understanding your tax obligations, contact Clear Tax Accountants, a team of professionals specialising in not only business accounting but also Individual accounting. We can help you make taxes easy and save tons of money. Reach out to us today!
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