House of Representatives

Explanatory Memorandum

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

Chapter 5 - Regulation Impact Statement (RIS)

Policy objective

5.1 The Government announced the proposal in Tax Reform: not a new tax, a new tax system: The Howard Governments Plan for a New Tax System on13 August 1998.

5.2 Under the present wholesale sales tax (WST) system, if the wholesale value of a car exceeds the luxury threshold ($55,720 tax inclusive retail price), tax is applied at the general rate of sales tax (22%) up to the threshold, with a special 45% rate applying to the excess.

5.3 The policy objective of this measure is to maintain existing Government policy with respect to the taxation of luxury cars relative to non-luxury cars by ensuring that after the introduction of the goods and services tax (GST), luxury cars fall in price only by about the same amount as a car just below the luxury threshold.

5.4 The policy objective will be achieved by introducing a retail tax of 25% on luxury cars (above a GST-inclusive threshold) after the introduction of the GST. Luxury car tax will be levied on taxable supplies and importations of luxury cars at the retail level. To exclude wholesale transactions, a registered entity will be able to quote if the car is to be used for certain purposes (eg. held for trading stock). A key component of this measure is that businesses subject to GST will not be able to obtain an input tax credit for the luxury car tax on luxury cars.

5.5 This RIS will deal with:

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A New Tax System (Luxury Car Tax) Bill 1999;

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A New Tax System (Luxury Car Tax Imposition - General) Act1999.

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A New Tax System (Luxury Car Tax Imposition - Customs) Act1999;

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A New Tax System (Luxury Car Tax Imposition - Excise) Act1999;

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A New Tax System (Indirect Tax Administration) Act 1999;

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A New Tax System (Wine Equalisation Tax and Luxury Car Tax Transition) Act 1999;

5.6 The purpose of a taxation RIS is to examine implementation options arising from the Governments policy decision. Accordingly, the RIS is based on the policy design of the luxury car tax, outlined below, and focuses on the best ways to implement the policy within the policy objectives set.

5.7 The implementation of the luxury car tax will occur against the background of the removal of the WST and the implementation of the GST.

Implementation of policy

5.8 To achieve the effect of replacing the WST luxury car rate, the luxury car tax will generally be levied at the point of retail sale.

Quotation

5.9 To ensure that tax is paid at the retail level a system of quotation will be implemented. For example, luxury car tax is not payable if the registered recipient intends to use the car as trading stock unless it is held for hire or lease. Unregistered persons unable to quote will pay luxury car tax to customs when they import luxury cars.

Assessment of impacts (costs and benefits)

Impact groups

Business

5.10 There will be approximately 800 regular annual payers of luxury car tax. However, the imposition of this measure will be largely offset by the benefits to business from the Governments abolition of the WST system. In addition, because all of the businesses affected by the luxury car tax will also be required to comply with the GST the net impact of this measure on businesses will be small.

5.11 Businesses will be able to claim a credit for WST embedded in stock on hand on 1 July 2000. The credit will be included in the net amount in their GST return. Effectively, this is the difference between the luxury car tax and the WST already paid. Many businesses already undertake an annual stocktake and will not incur any additional cost.

5.12 Businesses should not incur any additional recurrent compliance costs for the luxury car tax.

Government Agencies

5.13 The Government will also be affected by this measure, in particular, the Australian Taxation Office (ATO) and the Australian Customs Service. However, because the luxury car tax will utilise the same administration framework as the GST, the net impact of this measure is expected to be small.

Consumers

5.14 Given the abolition of the WST, and the introduction of the GST and a lower luxury car tax rate of 25%, the impact of this measure on consumers will be positive. The price of luxury cars will fall under the new arrangements by about the same amount as non-luxury cars. Overall non-luxury car prices for consumers are expected to fall by around 8.3%.

Analysis of costs and benefits

Compliance costs

5.15 It is very difficult to quantitatively assess the compliance costs for business of this measure (net of the GST) because it is linked so closely to the operation of the GST. To the extent that businesses face start-up and ongoing costs related to the GST, the additional impact of this measure will be marginal because it will utilise the same remittance framework as the GST.

5.16 Moreover, taxpayers that remit luxury car tax are likely to receive more in benefits (due to cash flow benefits) than costs incurred.

Transitional issues

5.17 WST on cars is actually calculated by applying a statutory formula to the recommended retail price. Payment of WST is usually deferred until the sale of the car to the final consumer. In order to avoid double taxation (luxury WST and luxury car tax) during the transition, businesses will be able to claim WST paid on stock held on 1 July 2000 as an input tax credit, under Part 4 of the A New Tax System (Goods and Services Tax Transition) Act 1999 .

5.18 Without transitional arrangements in place, there is a risk that some retailers would face double taxation.

Administration costs

5.19 All LCT taxpayers are GST payers and will be included in the field coverage for GST. The LCT will cover an estimated 1550 motor vehicle dealers, with an estimated 800 being liable for regular payment of

LCT. The costs that the ATO expects to incur in administering the LCT are set out in the following table.

Impact on Government revenue

5.20 The revenue from the luxury car tax is expected to raise approximately $175 million in 2000-01; $205 million in 2001-02; and $210 million in 2002-03.

Consultation

5.21 Consultation has been undertaken with relevant Government departments in the development of this measure. Representations were also received from industry groups.

Conclusion

5.22 The above measure implements a luxury car tax in a way consistent with the Governments policy position in Tax Reform: not a new tax, a new tax system: The Howard Governments Plan for a New Tax System . 5.23 The Treasury and the ATO will monitor this measure, as part of the whole taxation system, on an ongoing basis. In addition, the ATO has consultative arrangements in place to obtain feedback from professional and business associations through other taxpayer forums.