Australia’s controversial Luxury Car Tax (LCT) is once again under consideration for removal as part of ongoing free-trade agreement (FTA) negotiations with the European Union. The potential change could lead to lower prices for European-made vehicles in the Australian market.
The Trade-Off: LCT vs. Agricultural Access
The government currently collects approximately $1.21 billion annually from the LCT, slated for the 2025-26 financial year. However, this revenue stream may be sacrificed to secure greater access for EU agricultural exports into Australia. The EU has been pushing for the LCT’s abolition since 2018, tying its removal to broader trade concessions. Roughly 40% of LCT revenue comes from European car sales, making it a significant bargaining chip.
A Tax Rooted in Protectionism, Now Outdated
The LCT was originally introduced in the mid-2000s, replacing an older wholesale tax on luxury vehicles. Its initial purpose was to protect Australia’s now-defunct local vehicle manufacturing industry. With Holden, Toyota, and Ford having ceased domestic production by 2017, the tax’s original justification has evaporated. Critics argue it is now discriminatory, applying only to goods deemed “luxury” without broader parallels in the Australian tax system.
Currently, the LCT applies to vehicles costing over $80,567 (or $91,387 for fuel-efficient models with consumption below 3.5L/100km), adding a 33% surcharge on the amount exceeding the threshold. This is on top of existing stamp duty and registration fees.
Industry Pushback and Unintended Consequences
The Federal Chamber of Automotive Industries (FCAI) has long advocated for the LCT’s removal, calling it an outdated “handbrake” that hinders access to advanced fuel efficiency and safety technologies. The tax disproportionately affects certain models, such as all variants of the Toyota LandCruiser 300 Series.
Interestingly, the LCT’s existence may also be driving demand for dual-cab utes like the Toyota HiLux and Ford Ranger. These vehicles are exempt from the tax, contributing to their dominance in sales charts since 2015. Experts at The Australia Institute suggest that this incentivizes the purchase of larger, less fuel-efficient vehicles.
Strategic Implications and Broader Context
The FTA with the EU is also strategically important for securing access to Australia’s rare earth minerals. Recent supply chain disruptions with China, which forced production halts at Volkswagen plants, underscore the need for diversified sources. Australia already has FTAs with Japan, Thailand, China, and Korea, and negotiations with India are underway.
The LCT’s fate is now closely linked to broader trade dynamics. Its removal could lower vehicle costs for consumers but would require concessions on agricultural exports. The debate highlights the tension between protecting domestic revenue and fostering international trade.
