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The collapse of Holden calls for a scrapping of the luxury car tax

The collapse of Holden calls for a scrapping of the luxury car tax

Monday’s announcement of Holden shuttering its Australia-New Zealand lines is a sure sign that the luxury car tax (LCT) has got to go.

In 1948, Prime Minister Ben Chifley famously remarked “she’s a beauty!” of the first Australian designed Holden FX.

50 years on, Prime Minister John Howard echoed the sentiment in an attempt to encourage sales of the Holden Caprice, but the local car industry was already sounding the alarms.

The end of Holden in Australia also marks the end of billions of dollars of government subsidies and measures designed to salvage the stuttering car industry.

The luxury car tax was one such measure, introduced in 1999 as part of Howard’s broader tax reform package. This was the legislation that gave us the goods and services tax (GST) to replace the wholesale sales tax (WST) of the 1930s.

The LCT was hardly controversial at the time, as the WST had risen to impose a steeper 45% tariff on luxury cars. Howard’s reform was a more moderate 25% tax on imported vehicles, which quietly crept up to 33% under Labor in 2008.

For the better part of the noughties, the political rationale for the tax was obvious. The government couldn’t allow the prices of luxury imports to fall so far that they were suddenly price-competitive with local models like the Holden Caprice or Ford Falcon.

Yet despite the efforts of both state and federal governments, which injected about $10 billion to the sector between 2005 and 2011, our home-grown car industry just couldn’t keep up.

This was hardly a failure of consumer appetite. Australia, like many developed nations, is experiencing an unprecedented transition from a resource- and manufacturing-based to a service-based economy. Due to globalisation, off-shore manufacturing has simply become too cheap to deny.

The LCT has since weathered more than a decade of lobbying by industry experts and car enthusiasts, who call the tax regressive and unfair.

A third tax piled on top of stamp duty and GST, luxury car sales are extremely lucrative for the government, with an expected $760 million cheque worked in to the 2019-20 budget.

A common complaint across the car industry is that the tax is unique to cars and does not apply to other luxury items such as yachts, boats or foreign art.

The LCT can add as much as $144,000 to the price of a Ferrari – more than four times the amount of stamp duty.

It’s not just the Ferraris and Rolls Royces of the world at stake. The tax also affects the government’s cherished ‘quiet Australians’ as vehicles like the Toyota Land Cruiser – a favourite of farmers, families and retirees – adds over $30,000 per sale to government coffers.

The LCT threshold is just $67,525 for the 2019-20 financial year. An increased threshold of $75,526 applies to fuel efficient cars, but this exception has remained close to its 2009 price point despite significant hikes in the general category.

Commentators across the automobile industry and infrastructure bodies rightly point out that the LCT prices Australians out of accessing safer and more energy-efficient cars, particularly electric and automated vehicles.

With the last gasp of Australian vehicle manufacturing, politicians can no longer justify the tax as a way to protect the domestic car industry.

General Motors’ announcement, while heartbreaking for many Australians, could have come at a potentially opportune time. Negotiations with the European Union delegates for a long-awaited free trade agreement are scheduled to continue in 2020. The EU, of course, boasts some of the world’s most famous high-end car brands.

Many who oppose the tax have been clinging to the words of Senior EU trade negotiator Cornelis Keijzer last September, which were that the removal of the luxury car tax would be “one of the key demands on our side.” Australia also maintains a 5% tariff on all European car imports.

If these two taxes are disposed of, it could shake up a sector currently dominated by a consumer preference for Japanese vehicles. Last year, the top two car brands by sales were Toyota and Mazda, but Volkswagen had jumped up to eighth place, closely tailing Nissan with 4.7% and 4.8% of market share, respectively.

EU negotiators are also expected to push us to reform our petrol standards, which has been another roadblock to the sale of some European cars. Higher standard vehicles are often in-built with a technical incompatibility to low quality fuel. Australia’s petrol, while increasingly expensive for consumers, is currently allowed to be dirtier than fuel in India and China.

It’s clear that the time for automobile trade and tax reform is now. However, with the promised surplus at stake, it’s unclear whether policymakers are in the mood for compromise.

This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.

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