Labor mulls phase-out luxury car tax in European Union trade talks

The move comes as new figures reveal sales of electric vehicles fell to their lowest levels in two years.

Almost half of the vehicles levied with luxury car tax are European models. Picture: Getty Images

The Albanese government is considering progressively lowering the 33 per cent luxury car tax as part of its free trade negotiations with the European Union rather than axing it in one hit.

The plan comes amid representations from car dealers and automotive manufacturers who want the tax abolished without sparking a rapid collapse in luxury car resale values.

The talks with Trade Minister Don Farrell’s office follow anecdotal reports of a buyers’ strike by those considering purchasing vehicles that attract the tax, after The Australian revealed the government was considering scrapping the charge which adds more than $11,000 to the price of a new Toyota LandCruiser.

Anthony Albanese meeting with EU Commission President Ursula Vonderleyen earlier this week. Picture: Supplied

At the same time, new quarterly figures reveal sales of electric vehicles fell to their lowest levels in two years amid a decline in overall vehicle sales and a sharp increase in sales of conventional and plug-in hybrids.

Australians bought 17,914 new battery electric vehicles in the three months to March 31, or 6.3 per cent of all new car sales. The number was down from 21,331 sales in the December 2024 quarter, or 7.42 per cent of the market.

The government has put the LCT on the table as part of its negotiations with the EU, while making it clear it won’t scrap the duty without a significantly better deal for Australian farmers than that offered before trade talks collapsed two years ago.

It hopes the offer to cut the tax will also bolster its case for a carve-out from Donald Trump’s tariff hit on Australian exports.

About 40 per cent of the $1.2bn-a-year tax, or $480m a year, is raised from European vehicle sales, while less than 20 per cent of the LCT take flows from the sale of US-made vehicles.

Australian Automotive Dealer Association chief executive James Voortman said the LCT – designed to protect a domestic car industry which no longer exists – had become a tax on popular vehicles such as LandCruisers and Nissan Patrols.

“We fully support the government’s movements to remove the LCT,” he said.

“However, protecting consumers who have already purchased a vehicle and their resale value must be considered if this tax is removed.

“There is clearly more work needed on how the removal of the LCT would be implemented taking into account the effects on automotive businesses and their customers.”

Mr Voortman said the industry understood free trade negotiations with the EU could take time, and there was a risk a deal might not be done.

“In the interim, the AADA will continue to put forward to government the importance of protecting consumers if and when they remove LCT,” he said.

Trade Minister Don Farrell is leading a renewed push to ink a trade deal between Australia and the EU. Photo: The Australian/ luis Enrique Ascui

The Federal Chamber of Automotive Industries and the Australian Automobile Association have also lobbied the government seeking a phase-out of the tax.

Progressively reducing the tax, worth $5.2bn over four years, would preserve revenue during the transition period.

Treasurer Jim Chalmers may seek to offset the forgone revenue with a road user charge, which he has foreshadowed as his top tax reform priority.

Dr Chalmers has already established a taskforce within Treasury to design the measure while also referring the proposal to the states. However, progress on implementing the reform stalled during Labor’s first term.

The establishment of a road user charge was thrust onto the national agenda in 2023 after the High Court struck down a Victorian-based road user charge on the grounds the levy breached the Constitution.

A new road user charge would plug a decline in petrol excise receipts which have been sliced due to the growing popularity of EVs and working from home.

Fuel excise is estimated to account for just 3.9 per cent of overall federal tax collections this financial year, according to the budget papers, down from almost 6 per cent 15 years earlier.

The LCT adds 33 per cent to the price of a car above $91,387 for fuel-efficient vehicles, and above $80,567 for other cars.

The popular Toyota LandCruiser 300, which last year represented 62 per cent of Australia‘s large SUV market segment, attracts $10,053 in LCT and $11,218 GST, for a drive-away cost of $133,109.

Senator Farrell had talks on Tuesday evening with EU counterpart Maros Sefcovic, restarting negotiations that were shelved in 2023 after European countries refused to offer sufficient market access for Australian meat and dairy products.

The EU’s top diplomat in ­Australia recently urged a ­resumption of negotiations, ­saying the hoped-for FTA was a “no-brainer”.

Drawing a contrast with the US under Mr Trump, EU Ambassador to Australia, Gab­riele Visentin, said Europe was a ­reliable and predictable partner that respected the rule of law and knew how to keep a deal.

Car sales figures released on Wednesday reveal internal combustion engine vehicles continue to dominate overall sales, with 206,810 sold in the March quarter, or 72.68 per cent of the total market. This was a reduction from 215,789 sales in the December quarter, or 75.1 per cent of the market.

Hybrid sales rebounded after falling in the December quarter, and plug-in hybrid sales almost doubled from 7,556 vehicles in the fourth quarter last year to 13,698 in the first quarter of 2025.