Research Note Index 2003-04

Research Note no.17 2003-04

The 5 Per Cent Tariff on Four-Wheel-Drive Vehicles

Michael Priestley
Economics, Commerce and Industrial Relations Group
24 November 2003

Introduction

A Customs duty anomaly that has periodically attracted interest is the 5 per cent tariff on imported four- wheel-drive vehicles (4WDs) as compared to a 15 per cent tariff on imported passenger motor vehicles (PMVs). The tariff rate differential exists because there is no tariff classification that deals specifically with 4WDs. This Research Note examines the rationale for the lower tariff rate on 4WDs and its impact on passenger car sales.

Tariffs

A tariff (import duty) of 15 per cent currently applies to imported PMVs and 10 per cent will apply from 1 January 2005. The tariff on light commercial vehicles (LCVs) and 4WDs is 5 per cent, the same as the general tariff rate. From 1 January 2010 the tariff on PMVs will be at 5 per cent (see Table 1 below).

A review of PMV tariffs by the Productivity Commission in 2002 endorsed these reductions and the extension of the current industry support program beyond 2005.⁽¹⁾

Table 1: Tariffs on PMVs, 4WDs and LCVs

Rationale for tariff rate differential

The Customs rule which sets the criteria for applying a lower tariff to 4WDs is the result of a policy decision made by the Government more than twenty years ago.

The criteria were initially designed to separate off-road work vehicles for use in mining, agriculture and the movement of goods, from other types of vehicles. They focus on features such as a four-wheel-drive system, ground clearance, approach and departure angles. Vehicles are classified by Customs as either people or goods transporters. PMVs therefore attract a 15 per cent duty, while virtually all 4WDs are subject to a 5 per cent tariff. But for all intents and purposes, most 4WDs, particularly the more compact all-terrain-wagons, are simply used as passenger car substitutes.

Moreover, sales of these vehicles are almost entirely for private use primarily in urban centres.⁽²⁾ It would be difficult to argue that a Toyota Rav 4, the most popular all-terrain-wagon, or a Mitsubishi Pajero are designed primarily or exclusively for the movement of goods.

Substitution effect

The Australian passenger motor vehicle market comprises eight segments (see Table 2). In recent years, the segment make up has changed dramatically. The major segments of the passenger vehicle market (small, medium and large segments) have all lost market share.⁽³⁾ Together, their combined share of total vehicle sales has now fallen below 50 per cent for the first time. While the market for large passenger cars has been flat, luxury vehicle sales and sales of all-terrain-wagons (sports utility vehicles) have been exceptionally strong.

With the release of new compact and medium models, sales of all-terrain-wagons have almost doubled since 1997. As smaller 4WDs and all-terrain-wagons have become available, consumers have switched from traditional passenger cars to 4WDs of broadly comparable size and price.

The significant growth in sales of 4WDs has forced all four local producers to announce plans to release new models and variants with an emphasis on all-wheel-drive (AWD). Ford will release a locally made 4WD vehicle in 2004, while Mitsubishi has already released an AWD Magna. Holden plans to release a range of crossover AWD variants of the Commodore and Toyota is considering a Camry based crossover for 2006.

The lower tariff rate on 4WDs has also meant a hefty loss in Customs revenue. Based on 2002 sales of all-terrain-wagons, Customs collected an estimated $360 million less in customs duties in 2002. While the tariff anomaly will be resolved by 2010 when all tariffs will be at the general rate, equalising tariffs on PMVs and 4WDs (with passenger car application) would reinstate the policy intent of the lower tariff on 4WDs and allow greater variety with the production of crossover vehicles.

1.     See Productivity Commission, Review of Automotive Assistance, Report No. 25, 30 August 2002.

2.     See Ford Submission to the Review.

3.     The light and small segments are supplied entirely by imports.

Table 2: Sales volumes and market shares by segment

Source: VFacts, Vehicle Retail Sales

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