Luxury tax backlash

THE Federal Chamber of Automotive Industries (FCAI) has vowed to fight a proposed increase in the luxury car tax as part of tonight’s federal budget, which it described as “illogical” and “a lowest common denominator approach to public policy”.

Australia’s key luxury car companies have reacted angrily to the plan to increase the tax on vehicles priced above $57,000 from 25 per cent to 33 per cent, which will affect about 105,000 car purchases a year as part of budget cuts aimed at the wealthy.

The pre-budget announcement was “leaked” over the weekend by federal treasurer Wayne Swan, who was to hand down his first budget tonight.

FCAI chief executive Andrew McKellar told GoAuto this week that the industry body will lobby the independent senators who hold the balance of power within the Senate, which must approve it and other budget measures, and that the FCAI will also call for the luxury car tax (LCT) to be abolished altogether.

Mr McKellar said the timing of the LCT announcement, as well as that of revelations last week that the LPG vehicle subsidy may be abolished – less than three months before former Victorian premier Steve Bracks is due to hand down his widely anticipated automotive industry review on July 31 – showed the Rudd government has made wide-ranging policy decisions on the run.

“They are piecemeal, they are ad hoc, they are not thought through, they don’t make any sense, they are illogical and they will be opposed,” he told GoAuto.

“There has not been any level of consultation with industry or other stakeholders in relation to these measures, and just because they’re in the budget process that doesn’t give them a free pass to just wade in and make changes without any consideration as to what the impact will be.

“We think it is very bad policy. We’re in the middle of an inquiry in relation to the automotive industry.

“I would point out that in the first instance it seems to be completely at odds with the government’s stated strategy to try and control inflation. Any tax increase is inflationary and our concern is that an increase like this will feed through into car prices directly, but will also inflate costs in the supply chain for the industry and that in itself will tend to feed through into underlying inflation.

“So we can’t see how it makes any sense from the point of view of the strategy the government says it’s trying to pursue. We think it is unfair, it is divisive and if anything it will tend to exacerbate inflation risks rather than counter them.” Mr McKellar echoed concerns by shadow treasurer Malcolm Turnbull, who said the tax would hit all motorists.

“It adds to the cost of one part of the motor vehicle universe and inevitably the price of other vehicles will move up, because that will give them a bit of headroom. So all cars in Australia will be more expensive as a result of this,” Mr Turnbull told ABC television last weekend.

Mr McKellar also reiterated car-makers’ claims that the increased LCT rate would effectively be a “tax on technology”, as Audi Australia has labelled it.

“I think it will have an impact on safety features, in terms of environmental technologies – all of those things,” Mr McKellar said.

“When you’re seeking to encourage technological innovation in the industry, we see that occurring in the first instance through those premium and luxury brands in particular and tending to flow more broadly across the market, ultimately becoming standard features over time.

“But this is an attack on the first point of innovation in the industry and my concern is that you’ll have consumer demand for those sorts of technologies and features – whether it be from an environmental, performance or safety standpoint – being discouraged from taking up those features.

“It’s a further manifestation of the lowest common denominator approach to public policy. It’s very much a dumbing down – it is bad policy.” Mr McKellar said motorists already paid enough tax in GST, stamp duty, registration and fuel excise, and that any changes to the LCT or LPG subsidy should be part of the Bracks industry review.

“What we need to ensure is that in the bigger picture when the government responds to the Bracks review that we have a comprehensive approach to all the policy arrangements for the industry and that Australia remains an attractive and competitive location for future investment.

“What we don’t need are piecemeal policy measures being taken like this, which impact on individual sectors in an adverse way when they seem to be taken for largely symbolic or tokenistic reasons. There is absolutely no rationale for tax increases such as they’ve proposed here.

Left: Lexus GS300, Mercedes S500 and Porsche Boxster.



“I think they should (be part of the review) and indeed these issues are within the terms of reference that Bracks is looking at, so it really does seem to be completely jumping the gun to be undertaking measures like that.

“We will be making submissions to Steve Bracks, as will others, that the luxury car tax should be abolished.

“Now, if Steve Bracks or his review were to agree to that, you would have a situation where they would be bringing forward a recommendation to the government that would cut right across what they’re trying to do in this budget context.

“So it seems to me there is confusion and a lack of coordination on this issue within government that on the one hand it is initiating a review to look into these things and on the other hand other ministers acting in isolation are taking decisions which cut right across that.

“Steve Bracks has very broad-ranging terms of reference and any issue that has a competitive impact on the industry, including taxation issues and other things, should be within the scope of his inquiry,” said Mr McKellar.

Mr Swan refuted claims the higher LCT will hurt families already struggling with higher fuel costs and could lead to the dropping of safety features in some new vehicles.

“We don't think it's unreasonable that people who've done well in recent years, particularly from government decisions in terms of top-end tax cuts, just pay a little more for a luxury car,” he said.

Industry analysts say the LCT increase could lift the price of Australia’s most expensive cars by up to $18,000.

The on-road cost of buying a Mercedes-Benz C200 Kompressor Avantgarde sedan in NSW (including a dealer delivery charge of $1850) would rise from $68,369.40 to $68,874.52 – an increase of $505.12.

Lexus, which opposes the rate hike but maintains its “value advantage” will not change, says the price of its popular GS300 Sports Luxury sedan would rise from $105,900 to $108,790 – an increase of $2890.

In short-wheelbase S500 guise with no options, Australia’s most popular large luxury sedan, the Mercedes-Benz S-class, currently costs $278,805.65 on the road in NSW and would rise to $289,662.17 – an increase of $12,241.52.

Not mincing words, Mercedes-Benz passenger car boss in Australia Horst von Sanden branded the tax changes as “environmentally irresponsible and a body blow to occupant and vehicle safety”. “The community expectation to reduce vehicle carbon emissions and increase fuel economy has been marginalised and corrupted by a tax that not just lacks equity but that actually discourages the use of technology,” Mr von Sanden said.

“The LCT penalises those working families who purchase vehicles over $57,123 that are classified as luxury vehicles. There needs to be a genuine effort by the government to reduce vehicle greenhouse gases and lower fossil fuel usage by reducing fleet average fuel economy. This increase in the LCT actively discourages the purchase of demonstrably lower-emission vehicles and is far from being a green initiative. It is in fact a yellow initiative.” Audi Australia was also vocal in its criticism of the proposed LCT, and said that speculation of changes to the new-car import tariff and to company car taxes could provide further pain for luxury car sellers and buyers.

“I hope Mr Rudd will honour the original agreement, reducing import tariffs in 2010,” said Audi chief Joerg Hofmann.

“The federal government’s surprise tax increase could see the price of premium cars rise unnecessarily, affecting families and individuals who are prepared to invest in motor vehicles with the latest technological innovations – from advanced safety and driver assistance systems, to cleaner, greener engine technology.

“The government has a direct interest in making cars safer and cleaner, yet has effectively put this kind of technology at risk for Australian buyers, a move that seems directly at odds with its green agenda.

“The decision may also put Australia’s competitiveness into question. At a time when free trade agreements are being made globally, Australia risks isolating itself as the only country with a luxury car tax.

“If this tax increase is truly intended to help reduce inflationary spending, then where is the tax hike on expensive jewellery, luxury powerboats or private jets?” asked Mr Hofmann.

Porsche Cars Australia (PCA) said the LCT rise would be counter-productive and puts at risk the jobs of thousands of Australians employed in the premium automotive sector because gains from higher taxes would be offset by an expected reduction in car sales.

“To place at risk the jobs of employees in premium car dealerships across the country selling and servicing predominantly European cars for a potentially ‘zero’ gain in revenue is naive and unnecessary,” said PCA managing director Michael Winkler.

“The underlying assumption that raising prices does not have an effect on people spending money is a fallacy. The high end of the market has as much elasticity as the low end. In fact, you could argue that the high-end has more elasticity as most purchases of premium and luxury goods are deferrable.

“For the Rudd government to therefore suggest that an increase in tax would lead to an increase in revenue is overly simplistic and incorrect. We expect fewer expensive cars would be purchased and it would be middle-class Australia – the very people the Rudd Government claims to represent – that would be most likely to feel the pinch.

“Fewer car sales means less sales staff required in showrooms, and fewer cars booked in for servicing means less technicians required in workshops,” said Mr Winkler.

PCA estimates its most affordable sportscar, the Boxster, would increase by $3100, from $109,300 to $112,400, while the price of Porsche’s most popular sportscar – the 911 Carrera S – would rise from $227,600 to $237,700, up $10,100.

BMW Group Australia managing director Guenther Seemann echoed the criticism, and added that a tax system based on CO2 emissions would be more in line with the government’s position on the environment.

“Over the years luxury brands pioneered new safety technologies such as airbags, ABS brakes, and electronic stability control. Today, mass market brands and their customers reap the rewards.

“Likewise, luxury brands are today at the forefront of engineering cleaner cars which emit less CO2 emissions. For example, the BMW 530i emits nearly 20 per cent less CO2 than an equivalently sized and powered Holden Calais V.

“The logic of higher tax rates for cars with lower CO2 emissions is flawed. Increasing the tax burden on Australians who help fund innovation in cleaner and safer cars highlights a lack of appreciation for the role technology innovation plays in the market.

“The tax hike on cars will increase the price of cars adding to the country’s inflation burden. The price of cars has been falling in Australia since the market was opened up and tariffs slowly reduced. This tax hike signals a return to price increases,” said Mr Seemann.

Edward Rowe, spokesman for Ateco Automotive, which imports Ferrari and Maserati cars to Australia, said: “We are very disappointed that the government has, once again, singled out the car industry as means to target the so-called wealthy buyer with what can only be described as a discriminatory tax that harms one industry and leaves others unscathed.

“If the government's true motive is to tax the wealthy, then there should be a broad-based tax across a number of so-called luxury goods. We can only assume that the car industry has been singled out because the mechanism is already in place to raise tax, through the existing luxury car tax, and short-term expediency has come into play rather than organise a fair and balanced system.

“All the evidence from the past is that raising this tax will, at best, be revenue neutral and, more likely, be revenue negative, so therefore the assumption has to be that the real reason for lifting this tax is to score political points rather than actually raise more money or shift the tax burden.

“The tax point for this tax has been at $57,000 for a number of years and has not been lifted to reflect inflation, and therefore a number of family cars, such as the Toyota Tarago and Ford Territory, will be hit, again showing that this tax will not hit the super wealthy, as claimed.

“The problem for car-makers is that we order our model and model mix some six months to eight months out from delivery and we order based on price and, therefore, expected volume at those prices. A sudden tax change like this means that for six to eight months we will have cars arriving that no longer match the market requirements, further penalising our industry.

“We do not expect any change with Ferrari and Maserati orders, while with Alfa Romeo and Citroen we would expect to see a change in the model and variant mix to match people's changed ability to afford specific models and variants.

“The government has missed a significant opportunity to have brought in a tax regime that would encourage people to drive safer, more economical cars with lower emissions and to have phased in that tax regime over a period of time that would enable car-makers and importers to adjust their product ranges to meet their production and importation needs.

“This is a decision on transport taxation that leaves Australia out of step with the vast majority of world car markets and the current thinking on taxation, transport and the environment,” said Mr Rowe.

While some observers have suggested the relative LCT increases will be reluctantly but readily absorbed by buyers at that end of the market because it applies to all vehicles from all brands, others have suggested that higher new-car prices will increase resale values and therefore benefit luxury car sellers.

Germans Bear Tax Brunt

Buyers of German cars will bear the brunt of the increases in luxury car tax outlined in this year’s federal budget, according to figures generated by JATO Dynamics, a leading provided of automotive data and analysis.

Mercedes-Benz, BMW and Porsche buyers collectively generated more than half of all luxury car tax paid last year, according to JATO, with Mercedes-Benz buyers alone contributing almost a quarter of the luxury tax revenue.

JATO calculated the tax revenue based on recommended retail prices of passenger cars and SUVs that qualify for the tax combined with the sales of those models during 2007.

According to JATO, Mercedes-Benz buyers contributed nearly 24 per cent of luxury car tax dollars lest year followed by BMW at 20.5 per cent.

Lexus was third with a much lower 8.2 per cent tax contribution.

JATO also found that Toyota has the most models that are subject to the luxury car tax. However it sits down in fourth place at 7.3 per cent contribution because most of its qualifying models are priced much closer to the threshold.

Porsche rounds out the top five with a 7.1 per cent contribution – just short of Toyota.

While Porsche has relatively modest sales volumes it generates so much tax because of the much higher overall prices across its range. Ferrari, in ninth place, also generates large chunks of luxury tax per car sold.

JATO figures also showed that 11.4 per cent of passenger cars and SUVs sold during 2007 had a recommended retail price above the 2007 luxury car tax threshold of $57,123.

Note: The data does not take into account discounted final purchase prices or prices inflated by the addition of options or accessories.

Top 10 Tax Generators:
Make	Percentage of total Luxury Car Tax paid
Mercedes-Benz	23.9%
Bmw	20.5%
Lexus	8.2%
Toyota	7.3%
Porsche	7.1%
Audi	6.3%
Land Rover	4.2%
Holden	3.9%
Ferrari	2.6%
Volvo	1.9%
All other makes combined	14.0%