Scrapping the luxury car tax in its 25th year should be the first step for the Albanese government to begin substantial tax reform with the states.
Dropping the luxury car tax (LCT) federally was a key recommendation of the Henry Tax Review. However, there is a risk the states will seek to introduce or escalate their own luxury car taxes through higher motor vehicle registration duty.
Jim Chalmers could resist this, not only helping to keep the EU on side in any free-trade negotiation, but by offering the states support for a national road user charge in exchange for the states capping their motor vehicle registration duty rates at agreed levels.
Chalmers has already nominated a road user charge for electric vehicles as a reform priority that would help abate falling fuel excise as share of tax revenue. It could also help persuade the heavily indebted Queensland and Victoria governments to drop their own LCTs, which are seen by tax experts as being unconstitutional anyway. Both Victoria and Queensland have their own LCT, though it’s called a higher rate of motor vehicle duty for car sales of more than $100,000.
But section 90 of the Constitution prohibits the states from imposing “duties of customs and of excise”. Only the federal government can impose customs duty or excise. Victoria has tried to impose a road user charge on owners of electric vehicles, but that was struck down by the High Court as unconstitutional in October 2023.
K&L Gates tax expert Matthew Cridland says: “If road user charges are an excise, it is not a giant leap to also confirm that motor vehicle registration duty is an excise.”
If Victoria and Queensland scrap their LCTs (or higher rates of motor vehicle registration duty for luxury cars) it would not only remove the risk to revenue from a constitutional challenge from automobile groups, but it would also allow Chalmers to come up with a national road user charge that would be efficient and help address the problem of falling fuel excise revenue as more people take up electric vehicles.
Fuel excise is expected to bring in $26bn this financial year, or 3.9 per cent of total tax revenue, down from 5.7 per cent in 2006.
The federal LCT, which raises about $1.2bn a year, adds 33 per cent to the price of a car above $91,387 for fuel-efficient vehicles, and above $80,567 for other cars. If Labor can get the states on board to ditch their LCTs and agree with a broader road user charge then the Treasurer has a reform trophy for the cabinet.
Politically, dumping the federal LCT after the recent election is smart as it avoids having Labor being seen as pandering to “wealthy people” who buy cars worth more than $80,000.
For the Coalition not to have proposed this was another example of its policy ineptitude. It could have easily saved $3bn by scrapping the electric vehicle fringe benefit tax concession.
It then could have scrapped LCT and replaced everything with a road user charge on electric vehicles. Just how much the states want to keep to their own taxes will remain the sticking point for Chalmers.
Queensland introduced its LCT in June 2018 and euphemistically called it a “premium motor vehicle duty” at the time.
It has a complex rate system, with the premium rate applying to vehicles above $100,000 set at 5 per cent, 5.5 per cent or 6 per cents (depending on the number of cylinders).
In 2019, the Andrews Labor government announced a LCT in Victoria. The current Victorian duty on cars under $80,567 is 4.2 per cent, while for cars between $80,567 and $100,000 its 5.2 per cent. For cars between $100,000 and $150,000 it’s 7 per cent.
For cars costing more than $150,000 it is 9 per cent. Scrapping the LCTs would not only make political sense, it would also make economic sense. The LCT was introduced together with GST almost 25 years ago, on July 1, 2000.
John Howard and Peter Costello were sensitive to media criticism that the GST reform favoured the wealthy as the 10 per cent GST rate was lower than other sales taxes it replaced. The LCT was introduced as an additional tax to keep the price of luxury cars consistent with pre-GST prices.
Former Treasury secretary Ken Henry was clear in his 80th recommendation on tax reform: “The LCT should be abolished.”
Voice loss ‘silenced big ambitions’
Former Daniel Andrews chief of staff Lissie Ratcliff says the ‘big miss’ of the voice referendum contributed to federal Labor going to the last election without a ‘big vision’.
Greens vow to use power for the ‘better’
Sarah Hanson-Young has left the door open to the Greens using its numbers in the Senate to block Labor’s agenda to push for stronger action, declaring voters handed the minor party the sole balance of power to act as a ‘backstop’.