Luxury car tax gap 2018-19

This information is for historical purposes only. If you require previously published content for past estimates, please email taxgap@ato.gov.au.

This estimate for the luxury car tax (LCT) gap relates to the 2018-19 financial year

This gap forms a part of our overall tax performance program.

The LCT gap population comprises:

• entities (businesses) which are required to register and lodge returns for LCT and goods and services tax (GST)
• a small number of private importers of luxury cars, who are typically individuals purchasing cars for private usage.

For the 2018–19 financial year, we estimate a net LCT gap of 9.0% or $66 million. In other words, around 91% of the total theoretical tax was paid for that year.

See more about:

• the concept of tax gaps, including why and how we measure them and a summary of the latest available tax gap data in Australian tax gaps – overview
• our research methodology, data sources and analysis used for our tax gap estimates in Principles and approaches to measuring gaps
• the luxury car tax.

Trends and latest findings

The net LCT gap estimate has ranged between 3.4% and 10.1% over the six-year period from 2013–14 to 2018–19 and the current net gap estimate is again within this range. Small changes (increases and decreases) in the gap estimate are more likely the statistical noise that is a feature of any statistical estimation process, rather than signalling any real underlying change in compliance.

Table 1: Luxury car tax gap, 2013–14 to 2018–19

Element	2013–14	2014–15	2015–16	2016–17	2017–18	2018–19
Population	2,039	2,049	2,095	2,096	2,068	2,155
Gross gap ($m)	49	26	74	50	80	78
Amendments ($m)	9.6	7.6	5.4	8.2	21.0	12.4
Net gap ($m)	40	18	69	42	58	66
Tax paid ($m)	453	523	610	675	688	666
Theoretical liability ($m)	493	541	678	716	746	732
Gross gap (%)	10.0	4.8	10.9	6.9	10.7	10.7
Net gap (%)	8.1	3.4	10.1	5.8	7.8	9.0

Figure 1 shows the trend in the gross and net tax gap estimate over the same period.

Figure 1: Gross and net luxury car tax gap (percentage), 2013–14 to 2018–19

We see significant changes in this gap from year-to-year. Our analysis suggests that the size of the gap is sensitive to movements in macroeconomic factors, such as the exchange rate. The majority of vehicles subjected to LCT between 2013–14 and 2018–19 were imported. When the Australian dollar was weaker and luxury cars became more expensive, there appeared to be more estimated non-compliance in relative terms.

ATO action to reduce the gap

LCT is paid by:

• businesses that sell or import luxury cars
• individuals who directly import luxury cars.

The LCT is imposed only if both the:

• value of the car exceeds the LCT threshold
• sale of the car occurs within two years of manufacture or importation.

Our data and experience show most people try to comply with their LCT obligations. We aim to make it as easy as possible to help them meet their obligations by providing up-to-date guidance and information on our website. We also provide advice where the law is unclear.

We have observed small amounts of non-compliance, as well as tax avoidance schemes and arrangements directed at avoiding LCT. We have systems in place to identify these behaviours. We take firm action to ensure legislation is complied with and enforce a level playing field for businesses.

We focus on the activities of those who actively try to avoid their LCT obligations. Some of the behaviours we are most concerned about that contribute to the tax gap include:

• resellers who undercut legitimate dealers on price by evading LCT and GST on luxury car sales
• entities who attempt to pass off private luxury car purchases as a trading enterprise to fraudulently access LCT and GST benefits
• dealers or resellers falsely asserting that luxury cars are being held solely as trading stock when the cars are being used frequently for 'extended' test drives, personal use or informally leased or sold.

Our compliance work targets these behaviours by:

• letting taxpayers know we are targeting arrangements designed to avoid LCT and highlighting the risks of participating in them
• stopping, retaining and reviewing LCT refunds
• applying anti-avoidance provisions to artificial and contrived arrangements to avoid payment of LCT
• prosecuting people who undertake fraudulent or criminal activity.

See more about the luxury car tax.

Methodology

The 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
• Step 2: Remove LCT-exempt vehicles and LCT from registered vehicle price
• Step 3: Develop vehicle clusters and price intervals
• Step 4: Determine LCT payable for each cluster
• Step 5: Calculate total theoretical liability
• Step 6: Calculate gross gap and net gap
• Summary of the estimation process
• Limitations
• Updates and revisions to previous estimates

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.

Find more information regarding the populations used in the tax gap program in Principles and Approaches.

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

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

Reliability

We seek feedback and advice about the methods we use to estimate the gap from our external and internal subject matter experts. Based on the advice and assessment, the reliability for this estimate is medium (with a score of 17).

Figure 3: Reliability rating scale from very low to very high – luxury car tax gap

This estimate for the luxury car tax (LCT) gap relates to the 2018-19 financial year.