Automotive update: New car buyers are all revved up about the potential abolishment of LCT

The potential abolishment of the Luxury Car Tax (LCT) has new car buyers and industry experts buzzing with anticipation. Introduced alongside the Goods and Services Tax (GST), the LCT has long been a point of contention, particularly since the closure of Australian manufacturing operations by Holden and Ford. As discussions at the federal government level gain momentum, the automotive industry is poised for significant changes. This article breaks down the evolving narrative, exploring the implications for dealers, consumers, and the broader market.

A quick recap on LCT

LCT is a tax on cars that have a value above the LCT threshold, which for the 2024-25 financial year is set at $91,387 for fuel efficient vehicles and $80,567 for all other vehicles (fuel efficient vehicles are defined as having a fuel consumption that does not exceed 3.5 litres per 100 kilometres as a combined rating).

In working out the LCT value, items such as GST, dealer delivery charges, accessories or modifications, costs of statutory warranty, as well as rebates from Original Equipment Manufacturers (OEMs) to dealers that are ‘third-party consideration’ (rebates, run-out model support payments and the like) are also captured. It’s no wonder then that the average consumer appears puzzled when their family vehicle - for example, a higher-grade Mazda CX-90 or Toyota Kluger - have a substantial on-road cost that sits well above the dealer recommended retail price.

Industry bodies have long lobbied for the abolishment of LCT, brought in to protect Australian manufacturing of high-end Holden and Ford vehicles from the competition with imported (mostly) European OEMs, such as BMW and Mercedes-Benz. However, since Ford closed their Australian operations in October 2016 and Holden followed suit in October 2017, the tax no longer operates as a protection.

What has changed?

To the surprise of many, a compelling narrative has recently arisen at the Australian Federal Government level that - at face value at least - sets out a pathway for the removal of LCT. So, based on what we know today, how has this happened and what do dealers need to do to react?

In short, over the past decade, European OEMs had built substantial market share in the Chinese new-vehicle market by either exporting to or building their vehicles in China. That market share has drastically reduced over the past couple of years as a wave of increasingly sophisticated and well-built Chinese vehicles manufactured by the likes of BYD, Chery, XPENG and Geely (to name only a few) have taken a substantial slice of that share. This was driven by state-backed ownership and manufacturing incentives, heavy discounting, and a general drive of government support for Chinese citizens to buy Chinese-made vehicles. The decline in Chinese market share of luxury brands such as Porsche has been well publicised over the past 12 months.

Faced with this challenge, and intensified by the current economic climate, these same European OEMs are looking to other export markets to recover market share; similar to how the Australian wine market reacted to Chinese-imposed tariffs greater than 100 per cent between 2021 and 2024. As part of this, the Australian Federal Government is hoping to strike a deal with the EU whereby Australia would remove or adjust the LCT imposed on imported vehicles, making them more cost-competitive against the same Chinese vehicles entering our market. In return, a wider free trade agreement would incentivise greater Australian exports into the EU.

Is this likely to occur, and how long will it take?

These present national discussions on the LCT are the most sincere they have been since its inception, and certainly since discussion of its removal began when Holden closed shop eight years ago. Whilst an exciting progression that would make expensive vehicles cheaper in the long-term and presumably give dealers selling cars caught under LCT thresholds a volume boost, this reform must be met with an appropriate degree of trepidation. Perhaps most importantly, expectations of new-car buyers must also be managed appropriately.

Certainly, discourse cautioning consumers from buying new cars on the basis they should wait for the LCT to be abolished are ambitious and unhelpful for dealers that are already facing challenging market conditions.

Put short, on the basis of probabilities, this change will take time. The New Vehicle Efficiency Standard (NVES) for comparison was hastily passed through government, yet that process still took over a year from its announcement in April 2024 to its proper (i.e. the start of a yet-to-be determined penalty and credit system) commencement in July 2025. The NVES will also likely increase federal tax collection, and ties into the federal government narrative of increasing the fuel efficiency of Australian vehicles (refer our previous article for a deeper dive on the NVES). The fact an adjustment or removal of LCT goes the other way on both points leads us to believe a longer lead time to actionable change is inevitable.

The Australian Federal Government will need to balance the narrative of introducing a tax on Australia’s most popular vehicles (higher-carbon emitting light commercials, such as the Ford Ranger and Toyota Hilux) whilst simultaneously removing a tax that by sales volume figures of the Federal Chamber of Automotive Industries (FCAI) alone (assuming 9.6 per cent of vehicles sold are electric, per 2024 levels) is heavily weighted to vehicles targeted under the NVES. Whilst this can be achieved by positioning the NVES as a type of replacement tax on vehicles, no modelling has yet been released to show how an expanded free-trade agreement with the EU will replace the approximately $1.2bn of income the LCT generates for the federal government annually.

This then begs the question, will the LCT be abolished altogether, or will the federal government simply reset the threshold to capture a more specific set of vehicles?

What could the unintended consequences be?

To illustrate the point, should LCT be abolished overnight, the immediate winners are clearly those in the market to buy a new luxury vehicle. The unintended consequences then apply to anyone that currently owns a car that when new, attracted LCT, affecting near-new cars heavily and tapering down the older and less valuable a car is. This is of course due to the impact lower new vehicle pricing will have on the residual value of these used vehicles.

This issue then also extends to finance companies who have provided finance on new vehicles. The residual values calculated under the terms of a lease (other than those that wind down to zero over the life of the loan) will now be out of alignment compared to the data used when the lease was entered into. At scale, this could cause a significant headache for the balance sheets of finance companies across both the retail and fleet sectors, as well as for consumers who wish to trade-in vehicles and find themselves in a position of having negative equity, a loan payout greater than the value of their vehicle.

Dealers, too, will need to tread carefully in the coming months as this discussion continues. Even on announcement (prior to implementation) the effects on the used vehicle market will be immediate. For a dealer selling 50 used vehicles a month, holding an inventory of say 100 vehicles with a cost of say $4,500,000, a ten per cent price correction would have significant consequences.

What do BDO recommend dealers do in the meantime?

There are three main things we recommend dealers focus on:

  1. Manage used vehicle inventory tightly: Keeping supply as tight as possible whilst holding adequate volume to support budgeted gross profit will be strategic imperative number one. Some impact to used vehicle margin is inevitable for stock held at the time a removal or adjustment of LCT is announced and implemented, given it is impractical to assume a dealer will hold no used stock at that point in time. Maintaining strict discipline on aged stock and purchasing practices will ensure this impact is minimal and more easily managed.
  1. Keep close to OEMs and dealer councils to understand how they are managing any potential change and what they are doing to forecast it: The NVES taught us that every OEM reacts to policy change differently, with any change on LCT being the same. A removal or adjustment of LCT will affect OEMs in separate ways. Of course, the bias toward luxury brands means those marques will be impacted more heavily and are already staring into cancelled contracts and buyer uncertainty.
  1. Educate your sales teams on how to handle customer uncertainty and retain deals: Additionally, it is critical that every sales facing role has an appropriate level of understanding that this change is not yet a sure thing and will take time if it is implemented. Any information available from OEMs on what they are doing to anticipate a change must be filtered through. For those OEMs with vehicles that fall just over the LCT limit, an advertising campaign akin to ‘savings equivalent to GST’ is ready made. For those with a far higher LCT amount, educating customers on available products such as guaranteed future value (available through most white-label financiers) is a good place to start.

What happens next?

Keep close to your OEMs, make sure sales teams are talking to each other, and speak to your local BDO automotive contact for any specific queries on how this potential change will impact your dealership.

To reiterate, this current discussion on removal or adjustment of LCT is a hugely welcome, positive step forward for the Australian retail dealership industry, however one where media commentators should consider the impact on franchised dealer groups before getting new-car buyers too revved up that they will be getting a 33 per cent discount when they go new car shopping on Saturday.

Should you wish to discuss the impacts of the LCT and NVES in greater detail, including what it would mean for your own dealer group, our automotive experts can help. Contact us today.