New slug for luxury car buyers?

Court ruling highlights tax inequity; Productivity Commission backs abolition of luxury car tax

There's a new wrinkle in the process of buying a luxury car, following a recent court decision.

What started out as a case by a multi-franchise dealer group to absolve itself of paying GST on different wholesale rebates now hints at wider ramifications for luxury car buyers.

Experts in law and taxation have suggested that this decision leaves the path open for the ATO to charge more for the luxury car tax (LCT), where that is applicable and the car sold is directly the subject of a rebate or other price-discounting program from the factory or the distributor. And the ATO certainly concurs with that, announcing on 18 December 2013 that fleet rebates and model run-out support payments would need to be factored into the LCT calculation.

The ATO intends to enforce the new method of calculation, as determined by the Administrative Appeals Tribunal, with effect from 28 February 2014. In a letter from James O'Halloran, Deputy Commissioner of Taxation, dealers were officially informed of the period of grace and advised to make the necessary accounting changes to collect higher levels of LCT, whenever necessary.

It is likely to force a rethink by the car companies as to how they structure their incentive arrangements for cars in run-out or in fleet quantities.

Toyota has claimed in the past to sell more vehicles subject to the LCT than any other company in Australia. The LCT is payable on vehicles such as the company's LandCruiser (pictured) and Prado models, priced above $60,316. Naturally, that threshold also applies to vehicles from other companies. 'Green cars' with a fuel consumption rating of 7.0L/100km or less also incur the tax, if they're priced above $75,375.

"The provision of retail incentives is a normal part of every business, not just the motor industry, and to levy a tax on a commercial transaction that benefits the customer is an interesting decision when it only applies to one specific free-market activity," said Mercedes-Benz spokesman David McCarthy, in response to the ATO's announcement it will enforce the new LCT calculation model.

"The LCT is already an iniquitous and illogical tax that cannot be sustained. To increase the spread of the LCT in this way disadvantages the customer to the tune of 33 per cent. The decision basically says that the ATO now claims that a customer can only have 67 per cent of a discount that a manufacturer offers to stimulate the market."

Throughout the automotive industry the LCT is perceived to be convoluted enough already, but this ruling will exacerbate the challenge of calculating and collecting the tax. Indeed, the tax is already so 'narrow' in its base that the Productivity Commission is recommending government abolish it, in favour of a broader-based (and simpler) tax.

The Commission, in its position paper officially issued last week, has guardedly offered support for the view published in the Henry Tax Review that the LCT is an inefficient tax.

"The Henry Tax Review found that the LCT was one of the taxes that should, in time, ‘be abolished and their revenues replaced by taxes applying to the four robust and efficient tax bases’.

"However, given the effect on government revenue if the LCT were not replaced by another revenue source, it is important that its removal be considered as part of a broader package of taxation reform measures. The Australian Government has announced that a Taxation White Paper will be prepared (Hockey and Sinodinos 2013), and this may provide an appropriate opportunity to consider the removal of the LCT, alternative revenue sources and associated transition issues."

Unfortunately for consumers and the automotive industry though, a simpler tax measure may take a while to reach fruition if it rests on the preparation of a White Paper. In the short term it's likely the car companies will take matters into their own hands and build more margin into each car for their dealers. That way the dealers do all the 'discounting' from the retail price, so the transaction prices to buyers will be largely unaffected – and the government may actually accrue even lower levels of revenue from the LCT, which is payable on the car's wholesale price.

What the case was about

In four different scenarios, the dealer group was being paid a rebate by a car company. The dealer argued that GST should not be payable on any of the payments it received from the respective car companies, within the framework of those scenarios.

In one case Toyota was paying the dealer a fleet rebate for any vehicle sold to a fleet operator, but initially wholesaled to the dealer for sale to private buyers. The wholesale price charged to dealers by Toyota is lower for fleet vehicles than for private purchases. In such a situation, the dealer would have been paying more GST than for a car supplied at the fleet wholesale price.

In the second scenario, Toyota was paying the dealer run-out model rebates in line with the amount of superseded stock cleared by the dealer ahead of a new model release.

Scenario three related to retail target incentive payments made to the dealer by Ford, including the GST component, provided the dealer achieved the relevant monthly and quarterly sales targets.

Subaru's wholesale target incentive payments were the subject of scenario four, the dealer earning itself 1.5 per cent of each vehicle's invoice price for ordering a quantity of cars from the distributor between set minimum and maximum figures during a specific qualifying period.

The Administrative Appeals Tribunal that originally heard the case decided against the dealer group for the two Toyota scenarios, but sided with the dealer for the Ford and Subaru scenarios. It was the view of the Tribunal that the Toyota payments were directly connected to the retail sale of specific vehicles and therefore the dealer was liable to pay GST on each rebate. The case was further complicated by the dealer's floorplan, with a financier paying each car company for stock supplied, and being subsequently reimbursed by the dealer as each car was sold to a retail customer.

Both the ATO and the dealer appealed the Tribunal's decision in the Full Federal Court, but the Tribunal's decision was upheld.

Disclaimer: The content of this article has been prepared without taking account any person’s particular objectives, financial objectives or circumstances and it does not constitute legal, financial or taxation advice. The tax implications that are discussed in this article will differ for manufacturers, dealers and vehicle purchasers, depending on a range of circumstances. You should seek independent professional advice before acting in relation to any of the information set out in this article.

New slug for luxury car buyers?

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