If you’re a small business owner, investor, or looking to import luxury cars, understanding how the Luxury Car Tax (LCT) works is essential. This tax can significantly impact your purchase decision, especially when buying high-value vehicles that might not traditionally be considered luxury, but still fall under the tax due to their price.

In this article, we’ll explain why the Luxury Car Tax was introduced, how it’s applied to non-luxury vehicles, and the role of fuel efficiency in determining the tax threshold. We’ll also cover how to calculate LCT, potential exemptions for disability-related modifications, and the consequences of not complying with the ATO’s LCT regulations. By the end, you should have a clear understanding of how LCT impacts vehicle purchases and whether it applies to your situation.

Need assistance understanding how the Luxury Car Tax affects your next vehicle purchase or its impact on your business? Schedule a complimentary consultation with Causbrooks today.

What is the Luxury Car Tax and why does it exist?

The Luxury Car Tax (LCT) applies to vehicles that exceed a certain price threshold in Australia. Currently set at 33%, the tax is calculated on the value above the luxury car tax threshold. The tax was initially introduced to protect the Australian car manufacturing industry and to limit the import of high-end luxury cars. Over the years, however, the automotive landscape has changed, with Australians demanding more fuel-efficient cars and larger vehicles like SUVs. This shift, coupled with the end of Australian car manufacturing, has raised questions about the relevance of LCT in its current form.

The main issue with the LCT is that it applies to cars that many people would not consider "luxury" by traditional standards. For instance, even fuel-efficient vehicles like the Toyota Landcruiser or Nissan Patrol often surpass the luxury car tax threshold, meaning buyers have to pay additional taxes on vehicles primarily purchased for practical use, such as carrying goods or towing. Meanwhile, some entry-level models from luxury brands like Mercedes-Benz or Audi may avoid the LCT altogether, despite being marketed as luxury cars. This inconsistency has led to criticisms about the fairness of how LCT is applied.

Why are some non-luxury cars taxed as luxury?

In Australia, the Luxury Car Tax (LCT) can apply to vehicles that are not typically considered luxury cars, simply because their prices exceed the established thresholds. For the 2023-24 financial year, the LCT threshold for non-fuel-efficient vehicles is set at $76,950. This means that some midsize SUVs and high-end family sedans, which are not traditionally classified as luxury cars, may still incur the LCT if their price crosses this limit. As a result, buyers of standard vehicles may face unexpected additional costs.

The LCT framework has evolved in response to consumer demand, especially for fuel-efficient and environmentally-friendly vehicles. To encourage the adoption of greener options, the threshold for fuel-efficient vehicles has been set higher, at $89,332 for the current financial year. This allows these vehicles to avoid LCT more easily than standard cars, which do not benefit from the higher exemption. This strategic adjustment reflects the government’s focus on promoting eco-friendly vehicles while making fuel-inefficient cars more expensive to own.

Examples of non-luxury vehicles subject to LCT

Several popular models, marketed as family or practical vehicles, often exceed the LCT threshold despite not being regarded as luxury cars. Examples include the Toyota RAV4, Ford Territory, and various models from brands like Honda and Nissan. Even though these vehicles are designed for everyday use, their pricing can push them above the LCT limit, leading to additional costs for consumers. This illustrates how the LCT affects regular buyers who may not expect to pay a tax intended for luxury cars.

How is the Luxury Car Tax calculated?

The amount of Luxury Car Tax (LCT) owed is based on the value of a vehicle above the LCT threshold, excluding certain costs.

The calculation uses the following formula:

The LCT value includes the car’s retail price, as well as applicable Goods and Services Tax (GST), customs duty, dealer delivery charges, warranties, and any additional items like accessories or modifications. These combined factors contribute to the overall taxable value.

However, certain costs are not included in the LCT calculation. These excluded costs consist of the LCT itself, other Australian taxes, stamp duty, transfer fees, registration, compulsory third-party insurance, extended warranties, financing fees, and service plans. These expenses must be calculated separately when determining the full cost of purchasing a luxury vehicle.

Which cars are affected by luxury car tax?

The Luxury Car Tax (LCT) applies to cars, including station wagons, four-wheel drives, and limousines that carry fewer than nine passengers and weigh less than two tonnes. This tax affects vehicles exceeding a set value, but there are exceptions for certain types of vehicles, such as motorcycles and commercial vehicles designed for carrying goods.

To encourage the adoption of more fuel-efficient vehicles, the Australian Taxation Office (ATO) has introduced a higher LCT threshold for these cars. For the 2024-25 financial year, vehicles that consume 7 litres or less per 100 km have a higher threshold of $91,387. This means that only the value exceeding this amount is subject to LCT for fuel-efficient cars.

Starting July 1, 2025, the criteria for fuel-efficient vehicles will become stricter. To qualify for the higher threshold, vehicles will need to have a combined fuel consumption of less than 3.5 litres per 100 km. This change is part of ongoing efforts to promote greener vehicles and reduce environmental impact.

LCT thresholds and rates

The Luxury Car Tax rate is set at 33% for vehicles with a value exceeding the LCT threshold. This tax applies to cars that have an LCT value above the threshold set for the financial year in which the vehicle is imported, acquired, or sold. The LCT rate has been fixed at 33% since 3 October 2008, following amendments to the original LCT legislation from the A New Tax System (Luxury Car Tax Imposition - General) Act 1999.

The luxury car threshold is adjusted annually, and the applicable threshold determines when the tax is payable. If the GST-inclusive value of the car exceeds the threshold for that financial year, LCT must be paid, unless specific exemptions apply. The LCT value of the vehicle includes the cost of any parts, accessories, or attachments that are supplied or imported at the same time as the car, adding to the taxable value of the vehicle.

Avoid penalties: how to stay compliant with LCT

Failure to pay the required Luxury Car Tax (LCT) can result in significant penalties. These penalties may include fines and interest charges on the unpaid amount, which can accumulate over time, increasing the total cost owed. The Australian Taxation Office (ATO) enforces strict rules to ensure that LCT is properly paid on applicable vehicles.

To avoid these costly penalties, it's essential to promptly meet all LCT obligations. This means accurately calculating the tax owed and paying it within the required timeframe.

Exemptions for disability-modified vehicles

The Australian Taxation Office (ATO) provides an exemption from Luxury Car Tax (LCT) for modifications made to vehicles to accommodate people with disabilities. While LCT still applies if the car's value exceeds the LCT threshold, the tax does not extend to the cost of modifications specifically made to adapt the vehicle for a person with a disability. This can include alterations such as installing wheelchair access or hand controls to enable a person with a disability to drive or be transported in the vehicle.

It's important to note this exemption only applies to the cost of the modifications themselves. If the base value of a luxury vehicle like a Ferrari exceeds the LCT threshold, you would still be required to pay LCT on the vehicle’s original price. The exemption would only reduce the cost by deducting the value of the disability-related modifications, not the entire LCT amount.