New changes to the luxury car tax will take effect from 1 July 2025. Here’s what you need to know and consider for your fleet.
The luxury car tax (LCT) is an additional tax paid by owners of high-value cars purchased in Australia. Introduced by the Australian Government back in July 2000, it aims to encourage individuals and organisations to make more economical choices when buying vehicles. The Government is now modernising the LCT by tightening the definition of a fuel-efficient vehicle and updating the indexation rate for the LCT value threshold for all other luxury vehicles.
These changes, which take effect from 1 July 2025, could mean that more passenger vehicles in your fleet will be valued above the LCT thresholds, and your organisation will be paying more tax. To avoid being hit with excessive tax liabilities, fleet managers will need to prepare for the upcoming changes by reviewing policies, procedures and operations.
Here’s what you need to know and consider to be ready for the changes.
How is the luxury car tax calculated?
There are two thresholds used for the LCT: a higher threshold for fuel-efficient vehicles and a lower threshold for all other luxury vehicles. These thresholds change each year based on an indexation rate but are currently sitting at $89,332 for fuel-efficient vehicles and $76,950 for all other luxury vehicles for 2023-24.
The LCT is a one-time tax paid for vehicles with a final value (including GST) over the relevant LCT threshold. The tax is calculated at 33% to every dollar of the vehicle’s transaction price above the threshold at the time of purchase.
For example, let’s say you purchased a fuel-efficient luxury car for $100,000 including GST. On top of the purchase price, you’d also pay a luxury car tax of $3,520.44 – that’s $100,000 less $89,332 multiplied by 33%.
What are the new changes to the luxury car tax?
As an incentive for a higher take-up of more genuinely fuel-efficient vehicles to reduce greenhouse gas emissions the Government is modernising the LCT with two key changes:
- Tightening the definition of a fuel-efficient vehicle – the maximum fuel consumption will reduce from 7 litres to 3.5 litres per 100km, for a vehicle to classify as fuel-efficient.
- Updating the indexation rate that applies to the LCT value threshold for all other luxury vehicles – the rate will change from the headline Consumer Price Index (CPI) to the motor vehicle purchase sub-group of the CPI, to align with the indexation approach for fuel-efficient vehicles.
How will this impact my fleet?
The tighter fuel-efficient vehicle definition means the lower LCT threshold will apply to more luxury vehicles, including hybrid cars. Fleet vehicles at the time of purchase which previously sat under the threshold may now exceed it and attract the LCT if they were purchased as new post 1 July 2025.
Whilst most fleets don’t lease a lot of luxury cars because they’re not needed for key operations, the LCT changes may impact the vehicles driven by your senior management executives.
What do I need to consider to prepare for the changes?
Here are a few things you should consider in response to the LCT changes:
- Monitor changes to stay informed on the LCT changes via the ATO
- Evaluate your fleet vehicle purchase or lease plans to determine the LCT calculations and estimate the impact on your organisation’s tax liability - as a FMO, we can help run the numbers for you
- Review your Fringe Benefits Tax policy, update fleet policies and procedures relating to vehicle selection to factor in tax changes
With proactive planning and the right fleet composition strategy, fleet managers can continue to include fit-for-purpose vehicles in their fleets without significantly inflating tax liabilities. For more information about how we can help you optimise your fleet composition and manage your LCT exposure, get in touch today.
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