FCAI warns Senate on LCT

THE first of three Senate inquiry hearings into the federal government’s proposed luxury car tax (LCT) hike took place in Adelaide today (July 22), when the Federal Chamber of Automotive Industries (FCAI) became the first lobby group to state its case against what it describes as a “complex, confusing and unjust” new tax burden.

Two further Senate economics committee hearings, on July 31 in Sydney and August 6 in Melbourne, will give car companies and other affected stakeholders the opportunity to submit their positions on the Rudd government’s new LCT regime, which proposes a tax increase from 25 to 33 per cent for vehicles priced over $57,180, to be charged retrospectively by the Australian Tax Office (ATO) from July 1.

“I want to start with a warning to all motorists: In the year 2030, if current trends continue, half of all new cars sold in Australia will be taxed as luxury cars,” FCAI chief executive Andrew McKellar told the Senate inquiry, adding that the LCT threshold covered just 2.5 per cent of all new vehicles when introduced in 1979 but last year affected more than 11 per cent or four times as many.

“The tax is now applied to many vehicles which are popular with families or vehicles which are predominantly relied upon by people living in rural and regional areas of Australia. It is of concern that the incidence of the LCT is higher on four-wheel drives than any other type of vehicle.

“If current trends continue all LandCruiser wagon, Mitsubishi Pajero five-door and Nissan Patrol wagon models will exceed the LCT threshold within the next five years… Australia’s top-selling ‘luxury’ vehicle is a Toyota – the LandCruiser Wagon. Even its Work Mate model incurs the LCT. It comes standard without carpet or air-conditioning,” he said.

Mr McKellar argued the LCT rise represents a 33 per cent tax on safety features and low-emission technologies, with 84 per cent of vehicles priced above the LCT threshold featuring electronic stability control (ESC) as standard, compared to just 33 per cent of those below it.

He added that according to Australia’s tax system no other goods and services are defined as luxury items. “Passenger cars underpin our way of life. They are a vital mode of transport and in many parts of Australia the only form of transport available to access essential services such as hospitals, schools and workplaces.

“Why are these goods considered a luxury when a private jet, a yacht, designer clothes and jewellery are not considered luxuries by the Australian taxation system? So what does a luxury car look like?” Mr McKellar said the application of the LCT has not been consistent and that it failed to keep pace with the price of vehicles. He said the tax threshold rose 3.6 per cent from $55,134 in 2000 to $57,180 in 2008, but in the same period the most expensive petrol Pajero had increased from $54,350 to $70,990 – a 23.4 per cent rise.

He added that in 1979 the Holden Caprice and Ford LTD were the only two Australian-made models that exceeded the LCT threshold, but now most locally-built model ranges comprise variants priced above the LCT threshold.

To illustrate how the tax has failed to keep pace with the cost of living, Mr McKellar said that in 1988 the LCT threshold ($39,331) was 1.5 times the average weekly earnings (AWE) in Australia ($25,194), while in 2008 the AWE ($58,396) actually exceeded the LCT threshold ($57,180).

He said this showed that over the past 20 years, AWE have more than doubled (up 232 per cent) while the LCT threshold has increased by only 45 per cent. In the same period, Ford’s entry-level 1998 Falcon cost $20,333, but now retails at $36,490 – an 80 per cent increase.



Mr McKellar (left) also highlighted widespread industry confusion over the LCT changes at retail level. “There remains considerable uncertainty within the industry as to the legal basis of a car dealer imposing a tax that has not, and may not, be passed by parliament,” he said.

“In the absence of passage of legislation, car dealers have been unsure of the legal basis for charging the increased LCT. The ATO advice to the Industry on LCT states: ‘Until the proposed law is enacted, luxury car suppliers must continue to apply the current law’.

“Therefore car dealers should be charging the 25 per cent rate of LCT but the ATO clearly identifies the dealer as being liable for the additional tax. The legislation places car dealers as underwriters of Government revenue.” He added that sales of so-called luxury vehicles had spiked by 23 per cent month-on-month in June as a direct result of the proposed tax regime, raising concerns of a slump in coming months.

“It is clear that many car buyers have brought forward their purchases in order to try to beat the proposed tax hike. Despite the increase in sales for June, the automotive industry is concerned about the impact the ongoing uncertainty about the proposed tax increase will have on the market.

“With many people moving to get in ahead of the tax increase, we are likely to see a distortion or slump in sales over coming months. This is likely to lead to changes in revenue expectations and could place many dealerships in difficult financial situations.” Mr McKellar said the ATO website provides no advice on how to manage the provisional amount if the bill is enacted, with amendments.

“If the legislation is enacted, dealers will be required to report and remit the additional LCT in full in the first tax period that commences after the law is enacted. How do they charge customers the extra tax many months after they have purchased the car? “The dealer has no enforcement power. Some customers may no longer own the car. It could have been crashed, written off or repossessed. Who is responsible for collecting the LCT when the purchaser is dead, disappeared or insolvent? “The purchase of a car is not like buying a can of soup. The purchase of a car frequently involves complex financing and leasing arrangements which require legal and accounting advice – which all comes at a cost.

“Changes in the price of a vehicle require adjustments to contracts and finance leases. There are subsequent impacts to stamp duty and other government charges that are applied on top of the LCT.

“It has been necessary to adapt IT and accounting systems, establish additional reporting and contractual arrangements, collect and hold the additional LCT in trust, make provisions for refunds pending variations to the Bill and to remit the LCT liability for customers that refuse to pay. Advertising campaigns have had to be adapted to ensure they comply with the Trade Practices Act,” he said.

The FCAI chief pointed out that some distributors are simply absorbing the tax increase because the implementation is too complicated to inflict on their dealers and customers, and that some customers who entered into agreement for the purchase of a vehicle before the federal budget announcement on May 14 were now facing an extra tax bill.

“We have heard many examples of customers who signed a contract in good faith, organised finance, insurance and stamp duty well before the increase was announced – first in the newspaper and then officially in the budget. Some now face the prospect of an additional charge, simply because their vehicle is delivered after July 1. I ask you all: is this fair?” In closing, Mr McKellar said the government could not have made these changes more “complex, confusing or unjust”, and called for the higher LCT rate not to be applied retrospectively.

“The tax change is retrospective – pre-empting this very Senate process. The treasurer is asking car dealers to charge a tax that has no legislative basis – Wayne Swan cannot guarantee that they will not bear the burden of this tax change.

“The situation is unfair and poorly implemented – it is a complete mess. The chamber urges the committee to ensure that these proposed changes, if they are passed, not be implemented retrospectively,” said Mr McKellar.

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