Luxury Car Tax: Australian Tax Office Closes ‘Loophole’, Discounts Targeted Photo:

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Trevor Collett | May, 03 2014 | 6 Comments

The Australian Tax Office’s new luxury car tax laws (LCTs) are now in force, following its successful bid to close a loophole in the controversial laws.

Previously, dealers were able to lighten the load on customers with factory-backed incentives and discounts, which indirectly lowered the car’s asking-price (or added value to it) and therefore, the amount of tax payable.

This week saw the introduction of new laws which follow a Federal Court ruling in December, effectively closing that loophole.

The changes now create a disincentive for carmakers and their respective dealers to sell their higher-priced models for anything other than the retail price, as generous factory add-ons could actually increase the amount of tax payable.

The tax threshold remains the same. The LCT of 33 percent is payable on every dollar above a purchase price of $60,316 - or, for cars with an official fuel consumption of 7.0 l/100km or less, the LCT applies on every dollar above $75,375.

In other words, the tax is payable on the margin between the tax threshold and the purchase price. Under the current LCT regime, a $90,000 purchase will attract LCT of around $10,000, being 33 percent of the $30,000 margin above the $60,316 LCT threshold.

However, prior to these announced changes, a car priced at (say) $64,000 (and with a fuel figure above 7.0 l/100km) would previously have avoided the tax altogether if the carmaker ‘discounted’ the car by $5000 as part of a sale or as a fleet discount.

Mercedes-Benz A 45 AMG: Currently priced from $74,900
Mercedes-Benz A 45 AMG: Currently priced from $74,900

Under the new laws, luxury car tax of $1216 is still payable on the $3684 above the threshold which would originally have been charged if the car was sold at full price. This would make the new price in this instance $60,216.

More to the issue, the current thresholds may only be in place for another two months, as the federal government can reset the threshold at which LCT applies at the start of each financial year.

So what can buyers expect from the changes?

This remains to be seen, but dealers may begin pushing hard for models priced close to the threshold to receive an ‘official’ price-cut to the recommended manufacturer retail price, to eliminate the need for discounting on the retail sale.

Jaguar's F-TYPE Convertible V6: Priced from $138,645
Jaguar's F-TYPE Convertible V6: Priced from $138,645

Under the new laws, a customer can still negotiate a cheaper price directly with the dealer, and dealers can still offer their own discounts on luxury cars; both of which will lower the tax payable. But at a cost to profitability of course.

A likely outcome will be that models in run-out mode could see official price-cuts in the future, rather than ‘factory cash-back’ sales.

But many in the industry argue (correctly we would aver) that a $65,000 or even $75,000 car is barely a 'luxury' purchase. Nearly any large 4WD, with even basic options for towing, is nudging or above that luxury threshold.

Of course, plenty will argue that buyers of luxury cars can afford to pay the LCT.

Will it thus be a case of ‘business as usual’? Unlikely, the distortion of the LCT may be small closer to the threshold, but is certainly significant at the upper end.

And this change to the way it's applied removes one of the basic principles of a competitive market where the vendor with sharpest pencil wins.

Watch this space…

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