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  • Methodology

    The luxury car tax (LCT) gap is derived through applying a top-down approach. To identify the theoretical amount of LCT that is payable in any year, our estimate draws on both the:

    • vehicle identification numbers (VINs)
    • vendor field analytical and characterization technologies system (VFACTS).

    We use six steps in applying the top-down methodology to estimate the LCT gap. These steps are expanded on below followed by a summary of the overall estimate:

    Step 1: Decode and standardise vehicle data

    The VIN numbers from vehicle registration data are decoded to obtain the correct vehicle information, such as make and model configurations and fuel consumption. This ensures that the naming conventions are consistent across vehicles, allowing us to compare elements of the sales data.

    Step 2: Remove LCT-exempt vehicles and LCT from registered vehicle price

    We remove registration and transaction data associated with vehicle types not subject to LCT, such as:

    • dealer registrations
    • emergency and commercial vehicles
    • registrations older than two years from the time of manufacture or import

    Step 3: Develop vehicle clusters and price intervals

    We determine vehicle clusters based on similarities in their nature. Our key assumption is that vehicle pricing is typically driven by vehicle performance and features. Fuel-efficient and non-fuel-efficient cars have different LCT thresholds beyond which LCT is payable, so we separate them into two clusters. This allows us to consistently determine the LCT payable of similar vehicle types.

    For each cluster, we need to derive the probability and representative price of vehicles exceeding the LCT thresholds. To address the issue that the representative price is likely to be skewed by high-value cars, the remaining LCT applicable cars are split into twenty intervals for each cluster. The probability for each price interval as a share of the total price distribution for each cluster is the same.

    The representative price is constructed from the midpoint between the mean and the maximum of the price spread in each interval. Here we are assuming that the actual mean lies between the reported mean and the maximum of the reported prices.

    Step 4: Determine LCT payable for each cluster

    Step 4 is about obtaining the LCT payable for each price interval within a cluster.

    To obtain the values of vehicles that are subject to LCT for each interval within a cluster we:

    • determine the price difference between the representative price in Step 3 and the LCT threshold
    • multiply this by its associated probability in the cluster price distribution
    • finally, multiply by the quantity sold.

    We then remove the GST component from this value and multiply it by the LCT rate of 33% to obtain the corresponding LCT payable for each price interval.

    Step 5: Calculate total theoretical liability

    The total theoretical liability is determined by aggregating the LCT payable for each price interval for all the clusters.

    Step 6: Calculate gross gap and net gap

    The gross gap is the difference between the theoretical LCT liability and accrued LCT revenue excluding the compliance amounts. The net gap is the residual gap amount after compliance amounts have been taken into account in the revenue base. The unreported amount is calculated by excluding non-pursuable debt from the net gap amount.

    Summary of the estimation process

    Table 2 provides a summary of each step of the estimation process and the results for each year.

    Table 2: Summary of estimation process for the luxury car tax gap, 2013–14 to 2018–19

    Step

    Description

    2013–14

    2014–15

    2015–16

    2016–17

    2017–18

    2018–19

    1-5

    Theoretical tax liability ($m)

    493

    541

    678

    716

    746

    732

    6.1

    Less final tax reported ($m)

    458

    526

    616

    683

    702

    674

    6.2

    Equals final LCT liability not reported ($m)

    35

    15

    62

    34

    45

    58

    6.3

    Add non-pursuable debt ($m)

    5

    4

    6

    8

    14

    7

    6.4

    Equals net gap ($m)

    40

    18

    69

    42

    58

    66

    6.5

    Add compliance outcomes and taxpayer adjustments ($m)

    10

    8

    5

    8

    21

    12

    6.6

    Equals gross gap ($m)

    49

    26

    74

    50

    80

    78

    6.7

    Gross gap (%)

    10.0

    4.8

    10.9

    6.9

    10.7

    10.7

    6.8

    Net gap (%)

    8.1

    3.4

    10.1

    5.8

    7.8

    9.0

    Limitations

    The following caveats and limitations apply when interpreting the LCT gap estimate:

    • All vehicle data is essentially linked by a unique VIN for each vehicle. We match VINs to the information on the specifications of the vehicles on eight or nine digits of the VINs rather than the entire 11 digits.
    • Resource-intensive data manipulation is required to
      • identify the LCT applicable population – we analyse and review over 1,000 models and makes of cars to determine an estimated purchase price (or range) for each new or imported vehicle
      • determine fuel-efficient LCT vehicles, that is combining the volume of sales data from VFACTS and registration data
      • link line-by-line registration data to the semi-aggregated VFACTS data.
       
    • Due to some data quality issues, some vehicles are categorised as fuel-efficient when in fact, they are not. This reduces the potential amount of LCT payable, since fuel-efficient vehicles are subject to a higher LCT threshold.
    • Overall, the estimates can be sensitive to the clustering method applied. It contains an element of judgment by the analysts while grouping the cars based on their likeness.
    • At this stage we are uncertain around the shadow economy impacts on this estimate. More work needs to be done to isolate these amounts, if any.

    See also:

    Updates and revisions to previous estimates

    Each year we refresh our estimates in line with the annual report. Changes from previously published estimates occur for a variety of reasons, including:

    • improvements in methodology
    • revisions to data
    • additional information becoming available

    Figure 2 displays the gross gap and net gap from our current model compared to the previous estimates.

    Figure 2: Comparison of previously reported estimates – luxury car tax gap

    Figure 2 shows the net gap estimates from previously published years, as outlined in Table 3.

    This data is presented in Table 3 below.

    Table 3: Current and previous luxury car tax gap estimates (percentage), 2009–10 to 2018–19

    Year published

    2009–10

    2010–11

    2011–12

    2012–13

    2013–14

    2014–15

    2015–16

    2016–17

    2017–18

    2018–19

    2011

    4.9

    5.2

    n/a

    n/a

    n/a

    n/a

    n/a

    n/a

    n/a

    n/a

    2015

    4.1

    4.3

    4.1

    4.3

    3.3

    n/a

    n/a

    n/a

    n/a

    n/a

    2016

    3.9

    5.8

    4.6

    5.1

    4.7

    5.2

    n/a

    n/a

    n/a

    n/a

    2020

    n/a

    n/a

    n/a

    n/a

    8.1

    3.4

    10.1

    5.8

    7.8

    n/a

    2021

    n/a

    n/a

    n/a

    n/a

    8.1

    3.4

    10.1

    5.8

    7.8

    9.0

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      Last modified: 19 Oct 2021QC 64036