Australia's Future Tax System

Final Report: Detailed Analysis

Chapter E: Enhancing social and market outcomes

E8. Rationalising other taxes

E8–2 Luxury car tax

Taxes on luxury goods can act as an instrument of redistribution by imposing high rates of tax on goods and services that are exclusively or at least predominantly consumed by the wealthy. However, they are a relatively unattractive means of redistributing income. They may have had a role when the administration of a more comprehensive income tax was not feasible, but today's personal tax system, combined with a sophisticated system of transfer payments, is a far superior instrument for the redistribution of income.

In particular, taxes on luxury goods violate the principle of horizontal equity. People with the same economic means will pay different amounts of tax depending on their tastes. Wealthy people with modest tastes pay less than wealthy people with a preference for luxury goods. Australia's current luxury tax, the luxury car tax (LCT), is particularly arbitrary in its impact. It falls on people with a preference for relatively expensive cars, but not on those with a preference for diamonds, fur coats or yachts.

Luxury taxes are also flawed in their impact on vertical equity. Very few luxury goods are the exclusive preserve of the wealthy. Some of the burden of the LCT falls on people of average means with a preference for relatively expensive cars. In some cases, this reflects the fact that price is an arbitrary proxy for luxury within a given product category. Many people would feel that a small sports car is luxurious at $60,000 but a 7-seater minivan is not luxurious at the same price.


Luxury taxes should not be used to raise revenue. They are inefficient because of their narrow base. Taxing luxury goods is also an ineffective and arbitrary means of redistributing economic resources.

How the LCT works

The LCT is the only Australian government tax currently imposed specifically on luxury goods or services. It commenced on 1 July 2000, when the GST was introduced and wholesale sales tax was abolished. Luxury cars were taxed at a high rate under the wholesale sales tax, along with a range of other goods such as furs, jewellery and electronics. These other goods became subject only to the GST. Luxury cars, however, became subject to the LCT as well as the GST.

The LCT applies to the sale or importation of cars whose GST-inclusive value exceeds a threshold ($57,180 for 2008–09). The current tax rate of 33 per cent applies to the GST-exclusive value of a car that exceeds the threshold. The threshold is also used to set the maximum amount of depreciation deductions allowed on a car in a particular financial year. In certain circumstances primary producers and tourism operators can claim a refund of 8 per cent of the GST-inclusive value of some 4 wheel drive or all wheel drive vehicles (up to a limit of $3,000).

LCT does not apply to fuel-efficient cars with a GST-inclusive value of less than $75,000 (for 2008–09). LCT at the rate of 33 per cent applies to vehicles above this threshold. Some cars are exempt from the tax, regardless of value, including non-passenger commercial vehicles, most second-hand cars, motor homes, campervans and emergency vehicles.

In 2007–08, the LCT raised $464 million in revenue, or 0.1 per cent of total taxation revenue.

LCT should be abolished

Recommendation 80:

The luxury car tax should be abolished.

In the current Australian context, a tax on luxury cars is not a desirable means of raising revenue. It discriminates against a particular group of people because of their tastes. It is not an effective way of redistributing income from rich to poor. Its design is complex and becoming more complex over time.

In particular, the current $75,000 threshold for fuel-efficient luxury cars is a costly and ineffective way of limiting greenhouse gas emissions. If an emissions trading scheme, along the lines of the proposed Carbon Pollution Reduction Scheme, is introduced, governments should not implement additional measures that seek to reduce emissions in sectors already covered by the scheme (see Recommendation 58 in Section E2 Taxes to improve the environment).