Introduced in 2000, the Luxury Car Tax (LCT) was imposed on imported vehicles partly to protect the domestic car making industry that existed at the time.
However, the LCT includes an exemption for “a commercial vehicle designed mainly for carrying goods and not passengers”.
The Australia Institute (TAI) contends that this exemption is essentially subsiding the purchase of luxury utes such as the Chevrolet Silverado, and that the loophole is costing Australian taxpayers more than $250 million a year in foregone revenue.
TAI analysed tax and sales data and found that most of the LCT exemption’s cost was related to the largest, most expensive utes, including those from US brands Ram and Chevrolet.
“The price of these vehicles magnifies the impact of their exemption from LCT”, TAI claims.
The analysis found that the LCT ute exemption led to more than $250 million in forgone tax revenue in 2023, “almost three-quarters of which was due to sales of Ram and Chevrolet vehicles”.
“Economics 101 says that governments should tax things they want less of, and subsidise things they want more of, and it is stunning that the Australian government seems to want more big, dumb utes”, said Rod Campbell, a research director at TAI.
I agree that the LCT exemption is distorting the market and encouraging the purchase of monster trucks. However, the same could be said of the LCT in general.
Moreover, where is the justification for maintaining automotive protection now that the domestic car industry is gone?
In my view, Australia should:
- Remove automotive tariffs.
- Allow the importation of high-quality used cars (so-called ‘grey imports’), such as occurs in New Zealand.
- Scrap the luxury car tax, which is set at 33% on the marginal cost of vehicles above $80,576, and serve as a defacto tariff initially designed to raise the cost of more expensive imports and make now defunct local models, such as the Fairmont Ghia, more attractive.
- Scrap Australia’s unique technical standards in favour of global rules, thereby opening the market to a wider array of foreign cars and reducing overall import costs. Indeed, the PC report also recommended accelerating “the harmonisation of Australian Design Rules with the United Nations Economic Commission for Europe (UNECE) Regulations and the mutual recognition of other appropriate vehicle standards”.
- Scrap the FBT subsidy, which gives large tax savings to expensive cars.
- Lower the maximum allowable sulphur in Australian fuels (currently ranked amongst the dirtiest in the world).
Australia has already abolished automotive tariffs with several FTA partners, resulting in inefficiencies through trade diversion (i.e. when trade is diverted from a more efficient exporter towards a less efficient one). Tariffs on automobiles should be removed for all trading partners, eliminating these distortions.
While the above changes, particularly the elimination of tariffs and the luxury car tax, would have a negative revenue impact, such concerns could be overcome by broadening the tax base through genuine tax reform.
This way, the tax burden would be distributed more evenly throughout the economy rather than concentrated on the automotive industry, resulting in a more efficient and competitively neutral system.
These changes would also encourage greater vehicle safety and efficiency by reducing the average age of Australia’s automotive fleet.
