The federal government's proposed increase in the luxury car tax (LCT) from 25 per cent to 33 per cent was to take effect from July 1. That plan is now in doubt, following moves by the federal opposition to ensure the relevant bills are referred to the Senate economics committee, which is not required to report on either prior to August 26.

The economics committee will hold public hearings, which effectively allow interested parties to voice their opinions. You can be sure that three or four importers of German motor cars will have a lot to say about the legislation -- and none of it positive.

At least one of the importers has recommended to the inquiry into the local automotive industry -- headed by former Victorian premier, Steve Bracks -- that the luxury car tax should be abolished altogether.

Audi, BMW, Mercedes-Benz and Porsche have all criticised the proposed increase, citing various reasons (more here). All regard the tax increase -- and the tax generally -- as a punitive 'non-tariff' barrier to trade; one that has also reportedly drawn the ire of the European Union.

"The importers -- and the many thousands of people who rely on the importers for their livelihood -- will have their views heard," says David McCarthy, Senior Manager Corporate Communications at Mercedes-Benz, welcoming the new development.

The Senate's report, when it's released, will be back-dated to August 26, but before then, the Bracks inquiry will submit its findings to the government and those findings will likely influence the Senate committee one way or the other.

Adding to the confusion, scrutiny of the luxury car tax by the Senate economics committee pre-empts the Henry inquiry, chaired by Ken Henry, the head of the Treasury. This inquiry is assessing the state of the broader taxation system, including secondary measures like the LCT. Henry will report his findings in about 18 months.

Along with all the other considerations, the LCT increase will roughly coincide with a tariff freeze, if it goes ahead.

"We don't support a freeze in the import duty," says McCarthy.

"We plan ahead, like all businesses. And [from] the 1st of January, 2010, cars that we know are coming [are subject to] business decisions based on five per cent import duty and a 25 per cent luxury tax.

"Now what's happened in the last couple of months is that the government want to increase [the luxury car tax] to 33 per cent and the soundings coming out of the government -- now they haven't made a call on this yet -- but indications were that the tariff was not going to drop.

"So you had a position of five per cent duty and 25 per cent luxury tax perhaps being 33 per cent luxury tax and 10 per cent duty. How that reflects in a retail price; you've got a variation of around 10 per cent -- depending on the price of the car.

"So far, we haven't been consulted. And that's why the Senate inquiry is very welcome -- and why the Brack's inquiry is very important."

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