New Luxury Car Tax to Force Australians to Adopt EVs

Electric vehicles (EV) line up outside a Tesla dealership in Melbourne, Australia, on April 19, 2023. William West/AFP via Getty Images

Australians will soon need to switch to an electric vehicle (EV) or a hybrid car if they want to avoid the luxury car tax in 2025.

In the newly released 2023-24 Mid-Year Economic and Fiscal Outlook (pdf), the federal Labor government introduced a major change to Australia’s luxury car tax (LCT) in an effort to “modernise” it.

Under the current tax system, the government imposes a 33 percent tax rate on vehicles with prices above $76,950 (US$51,600).

The price threshold is higher for fuel-efficient vehicles (consuming seven litres of fuel for every 100 kilometres) at $89,332.

However, from July 2025, the government will change the definition of “fuel-efficient vehicles” by halving the fuel consumption rate from seven to 3.5 litres per 100 kilometres.

This means Australian motorists planning to buy high-end petrol or diesel car models will have to switch to a hybrid one or an EV to avoid paying higher taxes.

In addition, the government will update the indexation rate of the LCT thresholds for all luxury vehicles to reflect the rise in inflation.

“These changes will encourage greater take-up of fuel-efficient vehicles, consistent with the Australian government’s National Electric Vehicle Strategy,” the outlook paper said.

“This measure is part of the Australian government’s commitment to reduce greenhouse gas emissions by 43 percent by 2030 and to achieve net zero emissions by 2050.”

The government is expected to raise an additional $155 million in tax revenue over the next five years, from 2022–23 with the new LCT.

Strong Objection from the Automotive Industry

Following the announcement, Federal Chamber of Automotive Industries CEO Tony Weber criticised the new LCT, saying it was an “ill-conceived money grab” at a time when Australians were encouraged to buy low-emission vehicles.

“The LCT penalises Australian consumers, as it imposes unnecessary additional taxes on many low-emission technology vehicles,” he said in a statement.

“The changes... slug Australians with more taxes and make vehicles less affordable. The change to indexation is just another cynical revenue-grabbing exercise.”

The Chamber stated that the LCT was originally created to protect Australia’s local vehicle manufacturing industry.

With local automobile manufacturing having ended in 2017, the Chamber said the LCT was obsolete and thus should be abolished.

“If the Australian Government wants to modernise the LCT, they should remove it as part of true tax reform for the transport sector, including consideration of a road user charge,” Mr. Weber said.

“Australians need real tax reform, rather than tinkering at the edges.”

The Australian Automotive Dealer Association also criticised the government for not consulting with the industry before introducing the new tax.

“So many independent reviews and inquiries have called for the LCT to be abolished, but instead, it continues to raise over a billion dollars a year at the expense of motorists and local industry,” association CEO Tim Voortman said.

“For years, the automotive industry and motorists have been calling for a root and branch review of the automotive taxation regime, but instead, we see damaging tinkering and absolutely no consultation with industry.”

The new Nissan LEAF vehicle is seen in Melbourne, Australia, on July 11, 2019. Michael Dodge/Getty Images

Treasurer Downplays New Changes

In an interview with ABC Radio, Treasurer Jim Chalmers said there was an overreaction about the new LCT while downplaying the changes as “very modest.”

“This is a very, very modest change, and what it reflects is the fact that the definition of a low-emissions vehicle hasn’t changed since 2008 despite all the technological progress that has been made in that 15 years,” he said.

“And so what we’ve done here is we’ve modernised the definition of fuel-efficient vehicles. Fuel efficient vehicles get the higher threshold when it comes to the luxury car tax.”

The treasurer also believed the changes would make a very minor difference to the budget and the proportion of people who own luxury cars.

New data from the Federal Chamber of Automotive Industries showed that Australians bought around 1.1 million new vehicles in the year to December 2023, with 92.8 percent running on petrol and diesel.