House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 1 - Introducing the luxury car tax

Overview

1.1 The A New Tax System (Luxury Car Tax) Bill 1999 (LCT Bill) introduces a luxury car tax, from 1 July 2000. It is a single stage tax that is imposed on taxable supplies and importations of luxury cars and is in addition to any goods and services tax (GST) that may be payable, but is not levied on top of the GST.

1.2 In particular, the LCT Bill:

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imposes a liability for the luxury car tax on supplies and importations of luxury cars;

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allows a system of quoting which is designed to avoid the tax becoming payable until the car is sold or imported at the retail level;

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incorporates the payment of the luxury car tax into the net amount under the GST system;

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requires that for importations of luxury cars, luxury car tax is paid with customs duty (unless the importer quotes for the car);

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provides for adjustments to the net amount that arise out of circumstances that occur after the supply or importation of the luxury car (for example, bad debts); and

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provides for credits for people who are not entitled to an adjustment but who may have paid too much tax.

Outline to this Explanatory Memorandum

1.3 Chapter 1 of this explanatory memorandum (this Chapter) introduces you to the general concepts of the luxury car tax. It explains:

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the background behind the luxury car tax and also provides some information about Part 1 to the LCT Bill, which is about how the legislation is structured; and

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some of the terms used and the effect of non-operative material. The Chapter deals with the provisions that are generally found in Part 1 to the LCT Bill.

1.4 Chapter 2 provides an explanation of the rules that establish liability for the luxury car tax. It explains when luxury car tax will apply and how it is calculated. It also provides information on the system of quoting in respect of a luxury car, to prevent the tax becoming payable until the car is sold or imported at the retail level. The Chapter deals with the provisions found in Part 2 to the LCT Bill.

1.5 Chapter 3 explains how amounts of luxury car tax are included in net amounts under the GST system, or when and how the tax will be paid if you import a luxury car. This Chapter also explains how adjustments to the net amount can arise out of circumstances that occur after the supply or importation of the car (for example, due to a bad debt). The Chapter deals with the provisions found in Part 3 to the LCT Bill.

1.6 Chapter 4 deals with some of the GST rules that will apply to you if you are liable to pay luxury car tax (for example registration, returns and anti-avoidance mechanisms). The Chapter also deals with several miscellaneous matters. For example, how the luxury car tax will be applied to the Commonwealth. The Chapter deals with the provisions generally found in Parts 4 and 5 to the LCT Bill.

1.7 Chapter 5 contains the Regulation Impact Statement which examines implementation options arising from the Government's policy decision.

Explanation of the legislation

1.8 The luxury car tax will apply at a rate of 25% of the value above the luxury car tax threshold. The luxury car tax threshold is a GST-inclusive value equal to the car depreciation limit (the car depreciation limit for the 1998-99 financial year is $55,134).

1.9 The luxury car tax applies to taxable supplies of luxury cars by a registered entity. In contrast, luxury car tax applies to taxable importations of luxury cars regardless of whether or not the entity importing is registered or required to be registered.

1.10 Registered entities may quote in relation to the supply or importation of a luxury car. The quoting system is designed to avoid the tax becoming payable until the car is sold or imported at the retail level. Generally, a recipient is entitled to quote if the car supplied to them is expected to be held solely as trading stock.

1.11 The luxury car tax is paid in addition to GST above the luxury car tax threshold and GST will continue to apply to the full price of the car regardless of the price. It is expected that the additional compliance cost impact of this measure will be marginal because it will utilise the same remittance framework as the GST, that is, remitted to the Australian Taxation Office with the GST return.

1.12 Unlike the GST, no input tax credit is available for luxury car tax regardless of whether the luxury car is used within the business enterprise or for private purposes.

1.13 As mentioned above, the luxury car tax is payable in addition to GST. However, the Government's clear intention is that luxury car tax is calculated on the value of the car after GST has been taken out. To ensure this treatment occurs, the Government will consequentially amend the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) - (refer to section 9-75 of the GST Act).

Preliminary Divisions

1.14 Division 1 contains preliminary information, including the title of the LCT Bill [section 1-1] and a provision which binds States and Territories to the luxury car tax [Section 1-3] .

1.15 Division 2 provides an overview of the luxury car tax legislation. Section 2-1 provides a brief explanation about what this legislation is about. Section 2-5 provides an overview of the luxury car tax and section 2-10 deals with paying the luxury car tax. Sections 2-15 to 2-25 deal with other miscellaneous matters.

1.16 Part 1, Division 3 tells you about identifying some defined terms that are used in the LCT Bill. Section 3-1 explains what it means when certain terms used in the LCT Bill are marked with an asterisk (*). Section 3-5 provides some common terms that are not defined in the Dictionary or use an asterisk (such as `luxury car tax', `supply' and `you') and section 3-10 explains about defined terms identified by bold italics .

1.17 Part 1, Division 4 deals with non-operative material. [Sections 4-1 to 4-10] The Dictionary is found in section 27-1 .

Purpose of the legislation

1.18 The purpose of the legislation is to ensure that, following the move to a GST, the price of luxury cars only falls by about the same amount as a car just below the luxury car threshold.

1.19 In a majority of cases, where new cars are sold through a dealership, liability to remit luxury car tax will rest with the registered entity supplying the car. Any luxury car tax would be remitted along with the GST return, avoiding the need for separate registration for luxury car tax purposes.

1.20 The payment, penalty, anti-avoidance and other administrative provisions in the GST Act are also linked so as to cover the luxury car tax.

Date of effect

1.21 The LCT Bill will commence on 1 July 2000. [Section 1-2]

Background

1.22 Cars in general will fall in price as a result of the change from the wholesale sales tax to the GST. If the Government took no specific action, then the price of luxury cars would fall dramatically as they are currently subject to the special wholesale sales tax rate of 45% to the value above the luxury car tax threshold. The Government does not believe that this price reduction is appropriate following the replacement of the wholesale sales tax with the GST. Therefore, the Government will impose a retail tax on luxury cars, at a rate of 25% of the value above the luxury car tax threshold. The luxury car tax threshold is a GST-inclusive value equal to the car depreciation limit (the car depreciation limit for the 1997-98 financial year is $55,134). The tax will ensure that luxury cars only fall in price by about the same amount as a car just below the luxury threshold.