Luxury Car Tax back under the microscope

Pressure mounts to scrap contentious tax as advocates push for more uptake of cleaner, safer vehicles.

Australia's controversial Luxury Car Tax is one step closer to being abolished following constructive talks between Australia and Europe on a long-awaited Free Trade Agreement.

Abolishing the Luxury Car Tax has been a key hurdle in Australia securing a Free Trade Agreement with Europe, in exchange for granting Australian beef and dairy products enhanced access to the EU.

The divisive Luxury Car Tax imposes a 33 per cent tax on the value of a new vehicle over a set threshold ($91,387 for fuel-efficient vehicles which consume less than 3.5L/100km, or $80,567 for others in FY25-26).

Talk of the LCT being scrapped was thrust into the headlines last year, amid heightened trade tensions globally. However, as the year went on, and a Free Trade Agreement between the two continents fell flat, the chatter went silent.

Now, the ABC reports that fresh talks between Australian Federal Minister for Trade, Senator Don Farrell, European Union trade commissioner Maroš Šefčovič and EU Agriculture Commissioner Christophe Hansen in Belgium last week have renewed optimism about a deal being done.

"Good progress was achieved in narrowing gaps on a small number of outstanding matters," said a joint statement from the politicians. The leaders will go back to their respective governments in the coming days before the deal can progress.

New proposed policy explained

Under the proposed policy, a 5 per cent import tariff on most European cars sold in Australia would also be removed, ensuring those exports align with equivalent vehicles produced in Japan, Thailand, South Korea and China.

It comes after the Australian car industry renewing calls to scrap the contentious Luxury Car Tax last year, arguing that doing so would increase the uptake of electric vehicles and reduce new car prices.

In a fresh drive supported by the NRMA, some of Australia’s most prominent car importers and industry bodies mounted pressure on the Federal Government to revisit scrapping the controversial tax, first introduced in 2000 to encourage drivers to buy locally made cars over imported ones.

Australia’s last remaining local car manufacturers – Holden, Toyota and Ford – shuttered their respective operations more than eight years ago. Despite that, the LCT remains; the Federal Government pocketed $1.08 billion in revenue from the LCT in the 2024-2025 Financial Year alone, according to final budget outcome documents.

NRMA's policy position

“We want to support Australians in choosing the safest vehicles possible – those equipped with the latest safety features and technologies. As vehicle prices rise, the LCT can unintentionally limit options,” said NRMA director of Policy and Public Affairs, Robert Giltinan.

“The LCT was introduced in a very different automotive environment – one where we actively supported Australian vehicle manufacturing, including luxury cars such as the Ford Fairlane/LTD and Holden Statesman, Caprice and Calais.”

The abolition of the LCT appeared likely earlier in 2025, as it was considered a major hurdle preventing Australia from securing a long-awaited Free Trade Agreement with Europe. With global trade tensions easing in the latter months of the year, the matter was invariably put on ice.

Toyota is currently the largest contributor of LCT in Australia, despite the fact it is not strictly defined as a luxury marque. On a $146,910 (plus on-road costs) Toyota LandCruiser Sahara ZX, for example, a customer pays $18,323 in Luxury Car Tax alone.

“We believe that the LCT is an unfair impost on motorists and the automotive industry,” said Toyota Australia Sales and Marketing vice president, Sean Hanley. “Our customers already contribute significantly through GST, stamp duty and registration fees when they purchase a new car, as well as taxes on fuel.”

Australia’s most popular luxury brand, BMW, argues that removing Luxury Car Tax and the trade tariff currently imposed on vehicles from Europe would improve access to safer, more advanced cars in Australia. Roughly 40 per cent of the revenue collected annually from the LCT comes from European vehicle sales.

“The BMW Group supports any proposal that removes trade barriers and taxes to enhance customer choice,” said BMW Group Australia chief executive, Vikram Pawah. “With no local automotive manufacturing industry, abolishing the Luxury Car Tax (LCT) and import tariffs creates a level playing field and lowers the cost of entry for customers.

“This then broadens choice, reduces complexity, and provides greater access to the latest technology.”

Mr Pawah said removing LCT would promote the uptake of greener technology in particular among fleets and commercial operators.

“We believe removal of the LCT and import tariffs would also accelerate the adoption of electric vehicles (EVs) by a broader customer set and incentivise a larger number of fleet operators to consider green mobility solutions,” he said. “This all aligns with the government’s emissions reduction targets over the next decade. It’s a win for the environment, a win for customers, and helps grow the industry.”

The NRMA’s Robert Giltinan added: “Making EVs more accessible is a shared priority across government, industry and community. As more Australians look to make the switch, we need to ensure that policies like the LCT don’t stand in the way, including for larger EVs that suit family and regional needs.”

Separately, Mercedes-Benz Australia and Mazda Australia have both expressed a desire for changes to be applied to the LCT in Australia.

Where does the government stand?

However, sources warn the industry should be careful what it wishes for: there are fears the government would simply replace the LCT with a similarly punitive road-user tax, together with harsher penalties from the New Vehicle Efficiency Standard (NVES).

The Australian Automotive Dealer Association agreed that removing the LCT would promote the uptake of greener and more advanced cars. But AADA chief executive James Voortman said the government would need to remove the tax in stages.

“I think the reality is that if and when the tax is removed, the important thing is we don’t create a buyers strike,” he said. “Say that point in time was two years away, you’d get a lot of buyers waiting for the tax to be abolished before purchasing – that’s not good for retailers or customers. The consensus is that if you’re going to remove this tax, you do it in a staged way.

“The government needs to work with industry, dealers, manufacturers, finance and insurance companies because there are a lot of people who have an interest in seeing this succeed.”

The Federal Government remains tight-lipped about whether changes to the LCT are on the horizon. Treasury said it could not respond to the NRMA’s enquiries because the government had not announced any changes to the LCT.

Meanwhile, Federal Treasurer Jim Chalmer’s office pointed to the recent tightening of the definition of a fuel-efficient vehicle within the LCT, and the alignment of indexation rates for LCT thresholds, while also stressing no other changes had been made.

A spokesperson said negotiations with Europe on a Free Trade Agreement were continuing and would not be conducted “in public”; a deal would only be secured if it is in Australia’s national interest.

If the LCT is indeed deemed too lucrative for government coffers, Voortman called for important reforms which would make things fairer for consumers.

“We’ve been calling for the abolition of the tax. If the government isn’t willing to abolish it, it should be reformed,” he argued.

“We have asked for three things. First, the threshold should be increased – let’s say to a minimum of $100,000 or $120,000. Secondly, don’t apply it to accessories: if someone wants to put a bullbar or a safety feature on their car, let’s not include that in the calculation of the total value of a car.

“And thirdly, the government should remove it completely for low-emissions vehicles, to benefit the manufacturers who have made the investment to transition to greener technology and made it available to Australian consumers.”