How to avoid the luxury car tax in Australia

No one wants to pay more for their new car than they have to, so the luxury car tax can be a frustrating addition when it comes to treating yourself to a shiny new car.

RELATED: Does the luxury car tax apply to utes?

The luxury car tax (LCT) was introduced by the Howard government in 1999. It aimed to protect Australian-made cars and encourage Australian residents to purchase something locally built. It also sought to encourage manufacturers like Toyota to begin constructing their cars here and stimulate the economy by creating Australian jobs.

In 2024, cars are no longer being produced in Australia and the price of a new car is rising. With this, the luxury car tax has been criticised and described as a complex and costly "remnant" of the bygone era of Australian manufacturing by professional accounting body Certified Practising Accountants (CPA) Australia.

So, what can you do to dodge this annoying tax? We find out.

As described above, the luxury car tax is a tax paid on vehicles over a certain threshold that is indexed each year. It was supposed to help the local manufacturing economy, but since no cars have been made in Australia for over half a decade, it's become somewhat useless.

As of 2024, the tax – which adds a 33 per cent tariff to each dollar above the threshold – now applies to vehicles above $76,950, or $89,332 for fuel-efficient vehicles.

That means a luxury SUV like a 2024 Toyota LandCruiser 300 Series priced at $98,076 would attract an LCT amount of $6971, bringing the total to $105,047.

"Fuel-efficient vehicles" are defined as those claimed to consume less than 7.0L/100km, including electric and hybrid cars, with this fuel consumption threshold to increase by 5.2 per cent in the 2024/25 financial year.

The Australian Tax Office (ATO) also says that the LCT is only applied to vehicles under two years old.

"LCT applies to sales of cars that are two years old or less. A car is more than two years old at the time of supply if it was manufactured locally or imported more than two years previously."

"You also have to pay LCT if you're an individual (private buyer) who imports a luxury car."

The ATO have also made note of the fact that even if a car or an individual is GST-exempt, you will still have to pay the LCT.

While the luxury car tax is mostly a one-off payment on a vehicle, you will have to pay it again if the car you purchased has increased in value.

"If you sell a car that is two years old or less and the car has already been subject to LCT, you may still have to pay LCT on the latest sale if the car has increased in value. The LCT payable on this latest sale is reduced by all the LCT paid (or due to be paid) on any previous sale or importation. In calculating this, you must take into account any previous LCT adjustments, except bad debts," the ATO states.

The LCT can be tricky since the price of the vehicle is calculated using several factors. For starters, you have the base cost of the vehicle, which includes the dealer delivery charges.

Where a lot of people get caught out are optional extras. These are included in the threshold for the luxury car tax.

Let's say you buy a car with a base cost of $70,000. You apply a paint option that adds $4000, wheels worth $3000, and other small bits that add up to an additional $5000. Suddenly, the $70,000 car costs you $79,000. You now have to pay luxury car tax.

Luckily, the LCT does not add the cost of registration, insurance or on road costs on top of the cost of the vehicle.

It's not all grim for new car buyers; there are some ways to get that flash new car without paying the luxury car tax.

An ATO spokesperson told Drive that you can't simply skirt around paying the LCT as they will catch you out with it.

"The ATO is committed to ensuring all taxpayers comply with their obligations to ensure there is a level playing field. We have sophisticated systems in place, including data matching against car registrations and imports, to identify non-compliance."

One of the most common ways Australians skirt the LCT is by buying a ute. Under a clause in the LCT guidelines, a dual-cab ute is classified as a "goods-carrying vehicle". This is because every ute over the threshold in Australia has double or more payload capacity than passenger capacity.

The official passenger-carrying capacity is set at 68kg per person times the number of seats. Every dual-cab ute on the market tops out at five seats, meaning they have a maximum passenger-carrying capacity of 340kg. This means that your ute only has to be rated for a payload of 680kg or more to be exempt.

For more detail on why the LCT doesn't apply to utes, read this piece.

Buying a vehicle that is over two years old will mean you don't have to fork over the extra for the luxury car tax. It could also mean that you get a cheaper option than one off the showroom floor.

It may be tempting to import an older car that is over the luxury car tax threshold. But if it has been imported in the past two years, you will have to pay luxury car tax on it regardless of its age.

You can also buy a car that is two years or newer if the LCT has already been paid or is due to be paid by the previous owner. This rule only applies if you buy the vehicle for the same price or less than the previous owner paid. Otherwise, you will have to pay LCT if it has increased in value. You will also need proof that it has been paid previously.

Those shiny new wheels look super promising. How about those roof racks? You may as well throw the sporty lip kit on it too. These are all things that will raise the delivery cost of your new vehicle.

One thing that you might be better off doing is booking in to have these parts put on later.

You will have to do the calculations, as there are some parts that may be cheaper to just pay the luxury car tax on. But if you're planning on putting some new wheels on, roof racks or even a different sound system, then it could be cheaper to just go down the aftermarket route.

The ATO website states "If you're registered for GST, you may be able to defer paying LCT by quoting your ABN".

Don't get too excited, though, as this rule is mostly to save dealerships and importers from paying LCT, and you can only do this if you are holding it for trading stock (AKA you're a car dealership), you're carrying out research and development for the car's manufacturer, or you are planning to export the car GST free.

You cannot use this loophole if you intend to have the car for personal use, staff salary packaging, promotional or sponsorship vehicles or as a capital asset.

"These restrictions apply even if you intend to sell the car at a later date. If you've quoted your ABN and then use the luxury car for such a purpose, you must pay the LCT," says the ATO.

"If you are a retail car dealer who purchases a car as trading stock, and that car will only be used as a demonstrator vehicle for potential customers to see or test drive, it is accepted that you are able to quote on the purchase of the car. If you're a business and import a luxury car to restore and sell, you're holding it as trading stock. Provided you don't intend to use the car for any other purpose, you can quote your ABN."

Thankfully, the ATO has added an exemption on the LCT for people needing to modify cars for their disability.

The ATO states: "While luxury car tax (LCT) applies to a car purchased by a person with a disability where its value exceeds the LCT threshold, LCT is not payable on modifications to a car that are solely to adapt it to be driven by a person with a disability or adapt it for transporting a person with a disability, such as a wheelchair modification".

Still, you cannot buy a Ferrari with hand controls or wheelchair access added and not pay the LCT; you'd only be retracting the cost of the modifications.

It's no secret that a new motorhome or a very well-equipped caravan can cost hundreds of thousands; the LCT on these would be outrageous. 

The ATO has outlined that motorhomes and caravans are exempt from the luxury car tax. As is the case with a ute, the vehicle's primary purpose is not to carry passengers but to live in or use as a temporary home. 

As is the case with many taxes in Australia, there aren't many legal ways around the luxury car tax. Any idea of marking down the cost of the vehicle as less, paying cash or just not paying the tax has already been considered by the ATO.

An ATO spokesperson said the Tax Office began cracking down on businesses using dodgy dealings to skirt the LCT in 2021 and 2022. These companies and dealerships were selling cars above the LCT threshold and then applying for a refund of the LCT paid, creating a chain of owners that would make the paper trail hard to trace.

"In 2021 we published a taxpayer alert warning taxpayers about participating in tax avoidance schemes and sham arrangements directed at avoiding LCT. We identified entities claiming to be a car dealer and purchasing cars, without LCT, from legitimate dealers and then not paying LCT when they resell the car. We continue to observe small levels of non-compliance and maintain our focus on those who actively try to avoid their LCT obligations."

"To ensure they are not inadvertently involved in a LCT avoidance scheme, many major car dealers now ordinarily impose LCT on all of their sales, leaving it up to re-sellers to claim any LCT refunds they may be entitled to. Where we identify high-risk refunds, we may withhold the refund pending our review of the claim," said the ATO spokesperson.

Explaining further what was going on with this arrangement, RGA Accounting wrote in a blog post: "Usually, in this arrangement, one of the entities will claim a refund of LCT while creating a consequential liability to another entity in the supply chain. Following on from that, one or more of the participating entities down the chain, referred to as a 'missing trader' will not correctly report and pay their purported LCT liabilities to the ATO. These entities will then be liquidated to thwart ATO compliance or recovery action".

The best way to avoid the luxury car tax is to simply buy a car priced under the threshold and the best way to avoid getting in strife is to pay the tax where necessary.

"Purchasers of luxury cars can reduce their risk of being involved in an LCT avoidance scheme by dealing directly with reputable dealers and being cautious if approached by an intermediary offering to purchase a luxury car from a dealer on your behalf at a significant discount. Not only may you be participating in a tax avoidance scheme, you may be at risk if the car is damaged or defective, the intermediary doesn’t have the right insurance or requests more money than initially agreed, or you don’t receive the car you believe you have purchased," said the ATO spokesperson.