Bills Digest No. 159  1998-99 A New Tax System (Luxury Car Tax) Bill 1999


Numerical Index | Alphabetical Index

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer and Copyright Details

Passage History

A New Tax System (Luxury Car Tax) Bill 1999

Date Introduced: 24 March 1999

House: House of Representatives

Portfolio: Treasury

Commencement: 1 July 2000

Purpose

This Bill provides for the determination of liability for, and payment of, Luxury Car Tax (LCT). In particular, the Bill:

  • Establishes liability for LCT in respect of the supply or importation of luxury cars
  • Provides for a system of quoting, designed to avoid LCT becoming payable until such time as the car is sold or imported at the retail level
  • Provides for the payment of LCT by way of incorporation into the net amount payable under the Goods and Services Tax (GST) system, or, paid with customs duty in the case of imported luxury cars
  • Makes provision for appropriate adjustments to the net amount payable under the GST system arising out of circumstances that occur after the supply or importation of a luxury car, and
  • Provides a credit for overpaid LCT in circumstances where there is no entitlement to an adjustment.

Background

1.0 Recent History

On 13 August 1998 the Government released details of its long awaited tax reform plan, embodied in the publication entitled Tax Reform: not a new tax, a new tax system (Tax Reform Plan).

A key aspect of the Tax Reform Plan is the introduction of a GST to replace the current Wholesale Sales Tax (WST), as well as a number of State indirect taxes. The Tax Reform Plan as a whole formed a major component of the Government's policy platform leading up to the Federal election held on 3 October 1998.

Following the Governments re-election, a package of 16 Bills were introduced on 2 December 1998 to implement a GST as well as some of the other tax reform measures contained in its Tax Reform Plan. Six of those Bills introduce the GST, namely:

  • A New Tax System (Goods and Services Tax) Bill 1998
  • A New Tax System (Goods and Services Tax Administration) Bill 1998
  • A New Tax System (Goods and Services Tax Transition) Bill 1998
  • A New Tax System (Goods and Services Tax Imposition-General) Bill 1998
  • A New Tax System (Goods and Services Tax Imposition-Customs) Bill 1998, and
  • A New Tax System (Goods and Services Tax Imposition-Excise) Bill 1998.

In addition to introducing the GST, the Tax Reform Plan also proposed to introduce a Luxury Car Tax (LCT). On 24 March 1999 a package of six Bills introduced the LCT, namely:

  • A New Tax System (Luxury Car Tax) Bill 1999
  • A New Tax System (Indirect Tax Administration) Bill 1999
  • A New Tax System (Wine Equalisation Tax and Luxury Car Tax Transition) Bill 1999
  • A New Tax System (Luxury Car Tax Imposition-General) Bill 1999
  • A New Tax System (Luxury Car Tax Imposition-Customs) Bill 1999, and
  • A New Tax System (Luxury Car Tax Imposition-Excise) Bill 1999.

2.0 GST Overview

The GST proposed is a broad-based indirect tax on final private consumption in Australia. It will tax the consumption of most goods, services and any other things, including things imported into Australia, but not to consumption outside Australia. The GST rate proposed is 10%.

The GST is based on the Value Added Tax (VAT) system, which has been adopted by nearly all OECD countries and more than 80 others around the world. The GST concept of taxing final private consumption is achieved by:

  • imposing tax on supplies made by entities registered for GST purposes, and
  • allowing those entities to claim a full credit for any GST they have paid on business purchases (or inputs). Such credits will be known as input tax credits.

Consistent with other GST and VAT regimes, there will be two types of non-taxable supplies, 'GST-free' and 'input taxed', known in most other countries with a GST or VAT as 'zero rated' and 'exempt' respectively.

GST-free supplies will not be taxed and input tax credits will be allowed on things acquired to make the supply. The main activities that will be GST-free include exports, certain expenditure by tourists, health and medical care, education, childcare, charitable activities and religious services.

Input taxed supplies will similarly not be taxed, however no input tax credits will be allowed on things acquired to make the supply. The main activities that will be input taxed are financial services and residential rents.

The main Bill implementing the GST is the A New Tax System (Goods and Services Tax) Bill 1998 (GST Bill, or GST Act once enacted).

3.0 Luxury Car Tax Overview

As a result of the introduction of the GST together with the abolition of WST, motor cars in general would fall in price.

Luxury cars, however, would fall in price even more dramatically as they are currently subject to 45% WST on the value above a 'luxury' threshold, as opposed to 22% WST which applies generally. The luxury threshold is specified in Schedule 6 to the Sales Tax (Exemptions and Classifications) Act 1992 as being a taxable value more than 67.1% of the motor vehicle depreciation limit, currently $55,134.

WST is assessed on a taxable value known as the uniform taxable value (UTV), which is a set percentage approved by the Commissioner of Taxation for use in the motor vehicle industry. The UTV is 77.75% of the tax-exclusive recommended retail selling price. The UTV is also relevant for the purposes of the luxury threshold test specified in Schedule 6 to the Sales Tax (Exemptions and Classifications) Act 1992.

The resultant effect of the above WST rules is that luxury motor cars for WST purposes are, broadly, those cars with a recommended retail selling price in excess of $47,581 WST-exclusive, or $55,720 WST-inclusive.

The Government does not believe a dramatic price reduction for luxury cars 'is appropriate'. To ensure, therefore, that luxury cars only fall by about the same amount as a car just below the proposed luxury car tax threshold, the Government proposes to introduce the luxury car tax.(1)

The Rate of LCT is to be 25% calculated on the value of the car above a LCT threshold.

The LCT threshold proposed is a GST-inclusive value equal to the car depreciation limit that applies under Subdivision 42-B of the Income Tax Assessment Act 1997 for the year in which the supply of the car occurs. As mentioned earlier, the car depreciation limit for the 1998-99 financial year is $55,134. This is a departure from that proposed in the Tax Reform Plan, which stated that the LCT threshold would be equal to a GST-inclusive value of $60,000(2).

The LCT proposed is a single stage tax that will be imposed on taxable supplies and importations of luxury cars. It will be in addition to any GST that may be payable, but not levied on the GST-inclusive price. It will be levied on the value of the car after GST has been excluded.

The payment of LCT is to be incorporated into the net amount payable under the GST system, or in the case of importations, paid with customs duty. A system of quoting is designed to avoid LCT becoming payable until the luxury car is sold or imported at the retail level. Generally, a recipient will be entitled to quote if the car supplied to them is expected to be held solely as trading stock.

Unlike the GST, an entity that buys a luxury car in the course or furtherance of an enterprise will not be entitled to an input tax credit for any LCT payable.

Main Provisions

1.0 Liability for Luxury Car Tax

A luxury car is defined in clause 25-1 to mean a car whose LCT value exceeds the LCT threshold.

By virtue of the definitions of car and motor vehicle in clause 27-1, car would include all passenger cars including station wagons, all 4-wheel drives, light trucks, motor homes, campervans and hearses.

Emergency vehicles and certain vehicles used for transporting disabled people are specifically excluded from the definition of luxury car by sub-clause 25-1(2).

The luxury car tax threshold is defined in sub-clause 25-1(3) to mean the car depreciation limit that applies under Subdivision 42-B of the Income Tax Assessment Act 1997 for the year in which the supply of the car occurred. The car depreciation limit for the 1998-99 financial year is $55,134.

1.1 Taxable Supplies of Luxury Cars

Clause 5-5 provides that LCT will be payable on any taxable supply of a luxury car.

Sub-clause 5-10(1) provides that a taxable supply of a luxury car will be made when a luxury car is supplied in the course or furtherance of an enterprise, the supply is connected with Australia and the supplier is registered or required to be registered for GST purposes.

The concepts relating to the supply of a luxury car are based on similar concepts relating to a taxable supply contained in the GST Bill.

Sub-clause 5-10(2) provides that a taxable supply of a luxury car will not be made if:

  • the recipient quotes (explained in paragraph 1.3 below) for the supply of the car; or
  • the car is more than 2 years old; or
  • the car is exported in circumstances where the export is GST-free under Subdivision 38-D of the GST Act.

1.1.1 Amount of Luxury Car Tax

The amount of LCT payable will be determined in accordance with clause 5-15, which provides a formula for calculating the difference between the LCT value and the LCT threshold.

The LCT value for the purposes of proposed Division 5 is essentially the price of the car including any GST and customs duty payable.

As the LCT value is GST inclusive, the formula operates to exclude the amount of GST before then applying the LCT rate of 25% to the difference that exceeds the LCT threshold.

Any amounts of LCT paid on any previous supply or importation of the car will be deducted and any LCT adjustments taken into account to arrive at the amount of LCT ultimately payable.

Special attention is drawn to the Important note in paragraph 2.50 of the Explanatory Memorandum (EM), which highlights a consequential amendment to clause 9-75 of the GST Act that will be necessary.

1.2 Taxable Importations of Luxury Cars

Clause 7-5 provides that LCT will be payable on any taxable importation of a luxury car.

Sub-clause 7-10(1) provides that a taxable importation of a luxury car will be made when a luxury car is imported into Australia. In contrast with the taxable supply of a luxury car considered in paragraph 1.1 above, there will be no registration requirement for a taxable importation, and the importer need not be carrying on an enterprise.

Sub-clause 7-10(3) provides that a taxable importation of a luxury car will not be made if:

  • the recipient quotes (explained in paragraph 1.3 below) for the importation of the car; or
  • LCT has already become payable in respect of the car; or
  • the car is covered by certain items in Schedule 4 to the Customs Tariff, a summary of which is provided in paragraph 2.79 of the EM.

1.2.1 Amount of Luxury Car Tax

The amount of LCT payable will be determined in accordance with clause 7-15, which provides for LCT to be calculated in a similar manner to that described in 1.1.1 above, but with some important differences with respect to determining LCT value.

The LCT value for the purposes of proposed Division 7 is essentially the customs value of the car together with the transport and insurance costs of importing the car, as well as any customs duty and GST payable.

A formula is again used to calculate the difference between the LCT value and the LCT threshold, the formula operating so as to exclude the amount of GST before then applying the LCT rate of 25% to the difference that exceeds the LCT threshold.

1.3 Quoting

Proposed Division 9 provides that in certain circumstances, the recipient of a supply or importation of a luxury car may quote their Australian Business Number (ABN)(3) and not pay LCT. This mechanism is designed to avoid LCT becoming payable unless the car is sold or imported at the retail level.

Clause 9-5 provides that a recipient will only be entitled to quote if registered for GST purposes and intends to use the car for one of the following purposes, and for no other purpose:

  • hold the car as trading stock;
  • carry out research and development for the manufacturer of the car; or
  • export the car in circumstances where the export is GST-free under Subdivision 38-D of the GST Act.

Proposed Division 9 also provides for periodic quoting, the manner and form in which a quote must be made and the consequences of incorrect and improper quoting.

2.0 Paying Luxury Car Tax

Proposed Subdivision 13-A provides that LCT on supplies of luxury cars will be added to net amounts under Division 17 of the GST Act. Adjustments in relation to supplies or importations will be possible, which may either increase or decrease net amounts.

Clause 27-1 provides that net amount has the same meaning given by section 195-1 of the GST Act, which will be the sum of GST attributable to a tax period, less the input tax credits attributable to that period. The amount of LCT payable will be included in the net amount.

Proposed Subdivision 13-B provides that LCT on importations of luxury cars will not be incorporated into net amounts but will generally be paid with customs duty.

2.1 Adjustments

Proposed Division 15 provides for adjustments to be made to increase or decrease the net amount in order to take into account circumstances that occur after the supply or importation of a car, which result in too much or too little LCT being imposed. Adjustments by the supplier, the recipient or the importer will be possible depending upon the circumstances.

Examples of circumstances where a LCT adjustment could arise include:

  • cancelling the supply of, or returning, a luxury car;
  • changing the consideration for the supply;
  • using a luxury car for a purpose other than that intended when the supply was made;
  • writing off as bad a debt representing the consideration for a supply upon which LCT was payable.

2.2 Credits

Proposed Division 17 provides for a credit of LCT paid in circumstances where there would be no entitlement to an adjustment. This may arise because LCT on the supply of a luxury car was overpaid, either because of an error in the calculation or because the recipient was unable to quote at the time of the supply or importation, as for example, where a recipient was not registered for GST purposes.

2.3 Anti-avoidance Measures

The anti-avoidance provisions of Division 165 of the GST Bill will cover avoidance schemes in relation to LCT so far as they affect net amounts, because such schemes would affect amounts payable under the GST Act.

With respect to LCT on importations, clause 13-30 deems Division 165 of the GST Act to apply to amounts payable under Subdivision 13-B as if they were amounts payable under the GST Act.

3.0 Application of Luxury Car Tax to the Commonwealth

As liability to LCT cannot extend to the Commonwealth or certain Commonwealth entities, provision is made in proposed Division 21 for the notional application of LCT and LCT adjustments.

Concluding Comments

1.0 Rationale for Luxury Car Tax Questionable

One of the problems with the current WST system identified in the Tax Reform Plan was the multiple rate structure; exempt or one of six different tax rates.(4) The goal, with respect to indirect taxes, was stated to be a system that taxes a broad range of goods and services at a single low rate.(5) One of the advantages of the GST was that it would apply only one rate to taxable goods and services.(6)

The indirect tax system proposed includes the GST, the LCT and a Wine Equalisation Tax, introduced at the same time as the LCT. Together, there will be three different tax rates, GST-free supplies and input taxed supplies.

It could be argued that differential rates of tax have potentially distortionary effects, as well as compromise administrative simplicity leading to increased compliance costs.

Furthermore, it could be argued that it is wrong to differentiate between persons on the basis of preferences, as results with multiple rates. In fact, Fact Sheet No: 201 implies that multiple rates are unfair.(7)

 

2.0 Minor Errors

2.1 Bill

The definition of 'luxury car tax threshold' in clause 27-1 is incomplete.

2.2 Explanatory Memorandum

2.2.1 The formula in each of paragraphs 2.47, 2.64 and 2.81 is incomplete.

2.2.2 The example in paragraph 2.64 has been superimposed over text.

3.0 Naming of Luxury Car Tax Bills

Presumably, the titles of the LCT Bills have been used to make it easier for the Parliament to identify those which form part of the Tax Reform Plan package. From a practical perspective however, the titles appear to be unnecessarily lengthy and indeed cumbersome. The words 'A New Tax System' could be deleted from each title without affecting the relevance of the title to the particular piece of legislation.

Endnotes

  1. Costello, P., MP, 1998, Tax Reform: not a new tax, a new tax system, at p. 89; Explanatory Memorandum to the A New Tax System (Luxury Car Tax) Bill 1999, at paragraph 1.22 and 5.3.

  2. Costello, P., MP, 1998, Tax Reform: not a new tax, a new tax system, at p. 89.

  3. Details of the proposed ABN are contained in the A New Tax System (Australian Business Number) Bill 1998, introduced in the House of Representatives on 2 December 1998 as part of the Tax Reform Plan. See Bills Digest No. 98 of 1998-99.

  4. Costello, P., MP, 1998, Tax Reform: not a new tax, a new tax system, at p.72.

  5. Ibid., p.77.

  6. Ibid., p.80.

  7. Costello, P., MP, 1998, Tax Reform: not a new tax, a new tax system, Fact Sheet No: 201.

Contact Officer and Copyright Details

Simon Lang
16 April 1999
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

IRS staff are available to discuss the paper's contents with Senators and Members
and their staff but not with members of the public.

ISSN 1328-8091
© Commonwealth of Australia 1999

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Published by the Department of the Parliamentary Library, 1999.

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