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— Bridie Schmidt
The Luxury Car Tax, known in short as the LCT, was first introduced by the Federal Government in 2000 to encourage drivers to buy locally made cars over imported ones.
However, it has been a contentious topic since Toyota, Ford and Holden stopped making cars locally in Australia. Nine years since the last Australian-made car rolled off the line in 2017, the LCT still applies to certain vehicles.
The LCT is set to undergo the biggest shake-up since its inception with the recent sign-off on a Free Trade Agreement between Australia and the European Union. The agreement will see a 5 per cent tariff currently placed on European passenger cars scrapped, as well as a higher LCT threshold for European EVs.
Here’s what the Luxury Car Tax is, how it works, how it affects car buyers, and perhaps most importantly, whether it will ever come to an end.
The Luxury Car Tax is applied to vehicles that have a GST-inclusive price that is more than the LCT threshold. The rate currently lists at 33 per cent. This means that for every GST-exclusive dollar above the cutoff, an additional 33 cents is added to the final sales price. It applies to new vehicles, so long as they were imported less than two years ago.
As part of a series of tax reforms introduced on July 1 2000, the LCT was intended to protect the local car manufacturing industry. Before that, there were wholesale taxes on all expensive cars, regardless of where they were made. By repealing these taxes and introducing the LCT aimed only at cars made overseas, the Federal Government encouraged drivers to opt for cars made in Australia, helping to protect Australian jobs.
While the name suggests this tax only applies to “luxury cars”, in fact it applies to any applicable vehicle that is priced over the LCT threshold. Many vehicles such as large SUVs and electric vehicles are also subject to the LCT, whether they are marketed at the luxury end of the market or not.
The LCT doesn’t apply to commercial vehicles not specifically to carry people (for example, trucks), or those designed to carry nine passengers or more, emergency vehicles, vehicles fitted out to transport those with disabilities, or motor homes or campervans.
The LCT threshold is the price above which the LCT kicks in. There are two thresholds: one for traditional internal combustion engine vehicles, and another for more fuel-efficient vehicles. The threshold is reviewed regularly by the Australian Taxation Office (ATO) and raised according to the Reserve Bank of Australia's economic index. In the 2025-2026 financial year, the threshold for fuel-efficient vehicles (which consume less than 3.5L/100km) is $91,387 and the threshold for all other vehicles is $80,567.
Under Australia's freshly signed Free Trade Agreement with Europe, a third category has been established for zero-emissions vehicles with a tax threshold set at $120,000.
The LCT threshold for the current financial year has not been increased. However, the definition of what a fuel-efficient vehicle is has changed. Whereas any vehicle rated to use 7 litres of fuel or less per 100 kilometres (according to Section 12 of the federal Road Vehicle Standards Act 2018 ) used to be eligible for the fuel-efficient threshold, this figure has been halved to 3.5 litres per 100 kilometres.
This is a significant shift to ensure only vehicles that have low emissions are eligible for the lower threshold. For more info, see the 2025 Luxury Car Tax amendments here.
To work out how much LCT you would have to pay on a vehicle, first work out if it is eligible for the fuel-efficient or the standard threshold. Then, subtract the threshold from the vehicle’s GST-inclusive price. After that you must calculate the GST-exclusive amount (divide by 11 and multiply by 10) and then multiply that by the LCT rate (currently 33 per cent), as a fraction.
For example, for a fuel-efficient vehicle with a GST-inclusive value of $88,000 the LCT would be calculated like so:
($88,000 – $80,567) x 10/11 x 0.33 = $2229.90
Want to buy a vehicle priced over the LCT and avoid paying the extra tax? There are a couple of provisions that could be considered “LCT loopholes”.
Notwithstanding the viewpoints above, the LCT seems to have been given a stay of execution under the newly established Free Trade Agreement with Europe.
It is understood European Union negotiators were pushing for the LCT to be scrapped entirely under the new FTA with Australia. However, details of a new zero-emissions threshold, and the scrapping of the former European tariff suggest the Luxury Car Tax will continue to live on perpetuity.
The European Union has long pushed for Australia to scrap the tax, which it sees as discriminatory against European-made vehicles — particularly premium marques like Audi, BMW, Mercedes-Benz and Volvo. Removing the LCT was one of the EU’s key demands in trade negotiations, alongside greater access for EU agricultural exports.
However, scrapping the LCT remains politically sensitive. It brings in well over $1 billion a year for the federal budget, and removing it without a replacement would leave a noticeable revenue hole. There's also the optics of axing a tax that disproportionately affects wealthier buyers — not exactly vote-winning territory.
With local car manufacturing gone and pressure mounting from trade partners and the EV industry, momentum for reform is growing. Whether it’s phased out entirely or replaced with a more emissions-focused scheme (such as a CO₂-based vehicle tax, common in Europe), the LCT’s relevance in Australia is questionable.
If the Luxury Car Tax was to end, it would mean less dollars in the ATO's pocket but would free up household and business budgets (for those opting for new vehicles above the threshold, at least.)
It would also impact how the incentives to buy new cars are structured — particularly for novated leasing arrangements, where LCT can significantly bump up lease costs for mid-to-high tier models. Removing LCT could make novated leases more attractive for EVs and hybrids that currently straddle the threshold, giving salary-packaging drivers more bang for their buck.
It might also accelerate EV adoption. While many EVs are already priced under the LCT threshold, those that aren’t — think longer-range or premium electric models — would become more financially appealing. Scrapping LCT could flatten the playing field between efficient, low-emission vehicles and big luxury utes that currently dodge the tax under commercial exemptions. For consumers and fleet buyers alike, it could remove a pricing barrier that nudges them away from low-emission options.
That said, any move to phase out LCT would likely spark debate over how to replace the revenue it generates — and whether exemptions for heavy “lifestyle” utes should be re-examined as part of broader tax reform.
