• Luxury car tax

    Luxury car tax (LCT) is a tax levied on the value of certain luxury cars sold in or imported to Australia. LCT is paid by businesses (principally dealers) that sell new or imported luxury cars, and also in some cases by private individual importers. Most LCT is collected by the ATO while some, mostly from private importers, is collected by the Department of Immigration and Border Protection.

    LCT only applies to the amount above the luxury car threshold. The current LCT rate is 33% of the value of any car where the value of that car (usually the sale price) exceeds the luxury car threshold. The threshold for 2014–15 was $75,375 for fuel-efficient cars, and $61,844 for other vehicles. The main exemption from LCT is for commercial vehicles.

    We only estimate the LCT payable gap. We do not estimate a gap for refundable LCT amounts.

    Methodology

    The LCT gap is the difference between the LCT theoretical total liability and actual LCT payable liabilities.

    To estimate the LCT gap, we use a bottom-up approach using data held by the ATO and external sources:

    • sales data sourced from VFACTS reports, published by the Federal Chamber of Automotive Industries
    • sales data from small manufacturers, not included in VFACTS reports
    • motor vehicle registration, including pricing data from the roads authority in each state or territory
    • recommended retail price data, published by Automotive Data Service Pty Ltd’s RedBook and Bauer Media Pty Ltd’s Wheels magazine
    • fuel-efficient vehicle and small volume importer data from the Department of Infrastructure and Regional Development.

    We assume that:

    • VFACTS data is accurate and complete – where gaps are identified, manufacturers are contacted directly for information
    • state and territory registration data is accurate, in particular vehicle identification numbers and price data
    • vehicle sales prices recorded at registration are correct.

    By using a combination of the available data, we are able to estimate a theoretical LCT payable. We then compare the theoretical liability with actual LCT payable (as reported on the BAS in a financial year) to calculate the LCT gap.

    For the 2015–16 analysis, we tested a modified approach. While the methodology remains the same in principle, we further decoded vehicle identification numbers contained in registration data, and tested changes to how we derive and apply average LCT amounts. At the time of publication, the model required further development to better understand the differences in quantum estimates.

    As a result, we have taken the growth rate of the new model between 2013–14 and 2014–15 and applied this to the previously calculated total theoretical tax liability for 2013–14 to obtain the theoretical tax liability for 2014–15. When tested against the results generated by projecting the average of the gap for 2010–11 to 2013–14, the results are similar.

    Vehicles manufactured after December 2012 are included in gap estimates for the 2013–14 income year. Vehicles manufactured after December 2013 are included in gap estimates for the 2014–15 income year.

    To calculate theoretical total LCT liability:

    1. We use VFACTS and small manufacturer sales data for details on all new motor vehicle sales in Australia.
    2. We then compare the results with sale price data on all vehicle registrations to determine the average sale price of each marque and model. The average price may be above or below the recommended retail price due to various factors, including:
      • the level of customisation added to the car
      • dealer discounts on the recommended retail price.
       
    3. The average price obtained from vehicle registration data includes GST, LCT, dealer delivery, fitted options and dealer discount for each vehicle. To cross-check for data errors and ensure the sold price is reasonable, we compare the recommended retail price with the sold price obtained from vehicle registration data.
    4. We also use the recommended retail price data to determine the fuel consumption for each vehicle type and which vehicles are subject to the fuel-efficiency threshold.
    5. We then calculate the average amount of LCT and the fraction of cars above the applicable LCT threshold for each model. This fraction is then applied to actual sales recorded and the result multiplied by the average LCT payable for each model. The total of these amounts across all models provides the theoretical total LCT liability.

    To estimate the gross gap, we subtract the actual LCT payable reported prior to ATO compliance activities and LCT liabilities that are irrecoverable at law or not economical to pursue from the theoretical total LCT liability.

    The net tax gap is obtained by subtracting the LCT payable amounts raised from ATO compliance activities from the gross gap figure.

    Limitations

    The LCT gap methodology can only be used to estimate the LCT payable amount. The analysis excludes LCT refunds as we currently do not have a suitable benchmark for estimating the correct amount of LCT refund claims.

    Timing differences occur between the data sets used to estimate the gap:

    • Sales data typically reflects the point at which the dealer forwards the retail dealer advice (RDA) to the car maker when invoicing for the sale. The recorded sale, as reported by VFACTS, can occur either at the point of ordering or at the point of registration.
    • Roads authority registration data from the states and territories is based on the date of registration.
    • LCT is payable on the BAS when the taxable sale of a luxury car occurs.

    Sales data does not provide prices of the cars sold and must be compared to other data sets. In some instances, there is not enough detail on the model description to enable the calculation of a highly reliable average price. To counter this problem, we use the VIN chassis number to determine an exact make and model of the car, but it is not comprehensive.

    The methodology does not allow for cash economy or serious evasion transactions. In these transactions, the value of the vehicle registered would be lower than the true value of the vehicle. These transactions include instances where vehicles are:

    • sold at a discount or the sale is processed at a discount in exchange for cash, or
    • inappropriately 'optioned-up' after the sale so as to avoid paying LCT on the options.

    We have not produced a confidence interval for the estimate of the LCT payable gap. Each of the assumptions used in the top-down model has its own errors, many of which are unquantifiable.

    Reliability assessment

    The reliability of this estimate is assessed as medium, in particular due to the detailed data available. The data-matching approach uses the known sale prices of all vehicles to find average sale prices which are then scaled to industry-published information on new car sales by model. Coding has been done by vehicle identification number, the most accurate identifier of car make and model.

    The value and percentage of the estimate can be affected where small changes in value or assumptions have a cumulative effect on the estimate, which is magnified by the small tax base.

    Future direction

    We will continue to develop the parameters of the modified approach and refine the results in conjunction with internal experts. The estimates from this new model are expected to be published in 2016–17.

    We will build on our relationships with existing data suppliers to improve data quality and expand the range and scope of our data gathering.

      Last modified: 27 Oct 2016QC 50394