Oz Auto Makers Weigh In on Government Plan to Hike Luxury-Car Tax

Australia’s auto makers tell the Senate Economics Committee in no uncertain terms why they oppose the Labor government’s proposed hike in the country’s luxury-car tax.

Their complaints range from the lack of definition of what constitutes a “luxury” vehicle to concern the tax will punish consumers looking for state-of-the-art safety and emissions-reduction technology.

For example, Mercedes-Benz Australia/Pacific Pty. Ltd. prefers to see the auto industry included in the country’s proposed carbon-dioxide reduction scheme and scrap the luxury-car tax (LCT) altogether.

The German auto maker comes up with the radical proposal in a submission to the committee, which is holding hearings into the Labor government’s plan to raise the tax on vehicles costing more than A$57,180 ($50,853) to a punitive 33%, from 25%.

“To meet the community expectation of lower-emissions vehicles, along with lower fuel consumption, Mercedes-Benz believes a carbon tax based on emissions will significantly reduce vehicle emissions and reward low-fuel consumption, whereas a luxury-car tax works against such outcomes,” the auto maker says.

Mercedes sees a sliding tax on CO2 emissions as an incentive to replace older vehicles with new, greener cars. It proposes a 5-year phase-in, with the LCT phased out over the same period.

The auto maker says the luxury tax is a tariff on safety, penalizing vehicles introducing low emissions and reduced fuel usage.

Australia’s top-selling ‘luxury’ vehicle by government’s new standard would be Toyota LandCruiser Wagon.

In its place, vehicles emitting less than 159 g/km of CO2 would be untaxed in the first year. The tax-free threshold gradually would fall to 119 g/km over five years, to end up close to the European target for average CO2 emissions of 120 g/km by 2012.

The carbon tax would be based on a new vehicle’s environmental credentials and levied as a percentage of the retail price. Eventually, the maximum carbon tax of 25% would apply to vehicles emitting 190 g/km or more. The German auto maker estimates the tax could raise as much as A$750 million ($667 million) annually.

Mercedes says depending on which consumer-price index measure is used, the new LCT would be somewhere between A$71,000 ($63,144) and A$95,000 ($84,489).

“At a minimum, the LCT threshold should be increased to remove distortions in the market and to ensure (the luxury tax) accurately reflects the policy intention.”

More than 80% of vehicles above the LCT threshold have electronic stability control fitted as standard equipment, as opposed to just over 30% for those vehicles below the luxury-tax threshold.

Mercedes says vehicle-safety technology is expensive, and increasing the luxury tax on such equipment will delay the introduction of further lifesaving technology to all vehicles.

“The road trauma implications of a continuing tax on safety equipment are at odds with government initiatives to reduce road trauma,” it says. “To tax the very items that save lives will increase road trauma, not reduce it. The LCT discriminates against low emissions and low fuel-consumption vehicles.

“The community expectation is that vehicle emissions must be reduced, and the LCT does not support this community expectation.”

GM Holden Ltd. tells the committee the original plan for the LCT was to protect the market pricing of locally produced vehicles.

However, the auto maker says, changes to the product features of vehicles, including regulatory, emissions, performance and safety enhancements, in addition to customer requirements, have boosted luxury vehicle pricing well above the tax threshold and well below the contemporary notion of what a luxury vehicle might constitute.

“GM Holden restates its earlier recommendation that if the tax is to be continued, the threshold (should) be lifted to, or just above, A$70,000 ($62,297) to restore the application of the tax to its original intent,” GM Holden Finance Executive Director Mark Bernhard says in the General Motor Corp. subsidiary’s submission.

Ford Motor Co. of Australia Ltd. tells the committee it does not, as a matter of principle, support a specific tax, such as the LCT.

“We do not believe it to be economically efficient or equitable to tax some motor vehicles in a way different to the taxation of other vehicles,” Ford Australia Government Affairs Manager Russell Scoular writes in the company’s submission.

Ford Australia says the threshold arrangements have not kept pace with the changing character of the new-car market, or with what could fairly be described as luxury vehicles.

“Ford Australia would strongly support a review of the present threshold levels with regard to the luxury-car tax and urges the economics committee to recommend this be undertaken,” Scoular says.

Toyota Motor Corp. Australia Ltd. says the tax should be abolished. But if it is retained, hybrid vehicles should be exempt on environmental grounds. The auto maker also tells the committee there is no rationale for taxing luxury cars at different rates to other cars.

“No other consumer product has an additional tax applied simply because the value of a product exceeds an arbitrary threshold,” Toyota says in its submission. “The tax distorts the market and may impact the adoption of safer or new environmental technologies.

The auto maker says the proportion of vehicles captured by the tax has risen from 2.5% in 1979 to 11% in 2007.

Toyota Australia specifically is concerned that many new safety and environmentally friendly technologies, such as hybrids, can add to the cost of a passenger vehicle and make them subject to the tax.

“Conversely, in seeking to avoid LCT, consumers may make a choice to not purchase safety extras or a new environmentally friendly vehicle,” Toyota says. “Therefore the impact of the LCT can be to penalize safer and environmentally conscious consumers. This is arguably contradictory to government objectives to improve road safety and increase the number of ‘greener’ cars in Australia.”

The Federal Chamber of Automotive Industries (FCAI) strongly opposes the proposed increase, saying it would compound the already significant “distortionary” impact the tax has on the vehicle market with adverse consequences for motorists, industry and the community.

“Analysis undertaken by the FCAI reveals the reach of the LCT has expanded significantly over time, and…now captures many more vehicles and model types than at the time of its introduction,” the manufacturers’ group says in its submission.

The FCAI is concerned the LCT now applies to an expanding range of family vehicles and to vehicles particularly prevalent in rural and regional areas.

“There are few international precedents for the taxation of ‘luxury’ items that come close to the Australian LCT,” it says. “By international standards the proposed LCT rate of 33% is punitive and the threshold for application of the tax is very low.

“Equally, the discriminatory nature of the LCT is reinforced by the fact the Australian government singles out the car industry and does not tax other ‘luxury’ items in a similar manner.”

The FCAI urges the Senate committee to oppose the proposed increase in the LCT rate, or consider amendments to moderate the adverse implications of the increase.

It says the arrangements for the indexation of the LCT threshold are deeply flawed and have contributed to the expanding incidence of the tax.

The LCT threshold has increased since 1966, from A$55,134 ($49,067) to A$57,180 ($49,805), or just 3.6%. In contrast, over the same period the all-groups consumer-price index has increased 35% and the average price of a “Family 6” sedan has risen almost 20%.

The FCAI wants the committee to consider alternative approaches for the indexation of the LCT threshold to overcome the serious deficiencies in the existing method and to ensure future adjustments more accurately reflect changes in the vehicle market.

The group also acknowledges concerns the LCT may be construed as an effective non-tariff barrier, due to its disproportionate impact on imported vehicles.

“As such, the tax undermines the policy of successive Australian governments to undertake progressive reform of the economy through the reduction and elimination of barriers to freer trade and investment,” the chamber says.

The FCAI is asking the committee to consider the scope to increase the LCT threshold to return the incidence of the tax to its original policy intent.

When the LCT threshold was first introduced in 1979, only two Australian-made models were priced above the threshold – the Holden Caprice and Ford LTD – despite the significantly higher market share local auto makers held at that time.

In 2007, all Australian-made vehicles had variants exceeding the LCT threshold.

“It would be surprising to many people to consider that Australia’s top-selling ‘luxury’ vehicle is not a Porsche, Ferrari, Maserati, Lamborghini, Rolls Royce, Bentley, or even an Aston Martin,” the FCAI says.

“Indeed, these brands are not represented in the top-20 model sales of ‘luxury’ cars using the LCT definition. Australia’s top-selling ‘luxury’ vehicle is a Toyota – the LandCruiser Wagon.”