Luxury car tax under pressure following Holden collapse

19 February 2020 5 min. read
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General Motors has decided to axe its Holden brand by 2021, and as a result 600 of the company’s remaining 800-person workforce in Australia and New Zealand will lose their jobs by the end of the year. “With the global consolidation of the automotive industry, it’s becoming increasingly challenging for us to support a brand that operates in just two markets,” said Julian Blissett from General Motors.

The US car giant said in a statement that the difficult decision was made after considering numerous options to turn the iconic car brand's operations around. “We implemented a number of alternative strategies to try to sustain and improve the business, together with the local team,” said Blissett, but “unfortunately these were enough to overcome our challenges.”

The move will see the iconic 160-year-old brand leave the arena next year, and all design, engineering and production operations to cease by 2021. According to Innes Willox, chief executive of the Australian Industry Group, the news is sad but also inevitable. “The loss of full scale auto assembly in Australia meant it was only a matter of time before the local Holden marque became history.”

He added that for those affected, there are new opportunities in the industry, especially in the booming electrical vehicle ecosystem. The industry group estimates that there are currently 80,000 Australians employed in the sector, up from 70,400 three years ago. The transport equipment manufacturing sector was one of the drivers of this growth.

Luxury car tax under pressure following Holden collapse

According to John Gavljak, a Partner at professional services firm Pitcher Partners, the cessation of Holden’s production lines is a sure sign that the luxury car tax (LCT) has got to go. Over the years, the Australian government provided more than $2 billion in tax benefits and subsidies to General Motors for the Holden operations, in a bid to salvage the stuttering car brand.

Luxury car tax

One of the measures used to fund this was the luxury car tax, which was introduced in 1999 as part of then Prime Minister John Howard’s broader tax reform package. Gavljak: “The LCT was not controversial at the time of introduction. Many people don’t realise that by the late 90s, the wholesale service tax (WST), which was a variable tax from the 1930s, had already imposed a 45% tariff on luxury cars.”

“Howard’s reform was a more moderate 25% tax on imported vehicles, which crept up to 33% under Labor in 2008.” But fast forward to 2020, and the tax is now no longer relevant. “For the better part of the noughties, the political rationale for the luxury car tax was obvious. The government could not allow the prices of luxury imports to fall so far that they were suddenly price-competitive with local models like the Holden Caprice or Ford Falcon.”

Gavljak said that the luxury car tax in its current form is regressive and unfair, as other luxury items like yachts, boats and foreign art are not taxed in a similar way. For example, the luxury car tax can add as much as $144,000 to the price of a Ferrari – more than four times the amount of stamp duty.

“It is not just the Ferraris and Rolls Royces of the world at stake,” said Gavljak. “The tax also affects the government’s ‘quiet Australians’ as vehicles like the Toyota Land Cruiser – a favourite of farmers, families and retirees – adds over $30,000 per sale to the tax office.”

According to the Federal Budget, luxury car tax earnings are forecast to grow from $640 million in 2019-20 to $720 million in 2022-23, while passenger vehicle customs duties will raise $420 million in 2019-20.

In addition, the luxury car tax also has as an effect that it prices Australians out of accessing safer and more energy-efficient cars, particularly electric and automated vehicles. In light of the need for climate change, commentators across the automobile and sustainability industry are calling the tax a brake on the much-needed green transition.

In comparison, in countries such as Norway or the Netherlands, tax incentives are provided to consumers in order to stimulate the purchase of electric vehicles. Not surprisingly, with 1 electric car to every 30 Norwegians, Norway has more electric cars per capita than any other IEA country, with the Netherlands third. In comparison, there’s only one electric car to every 3,351 Australians.

Meanwhile, the European Union claims that the luxury car tax should no longer be upheld in the next round of trade deal negotiations as it represents a “false tariff” on its vehicles – a large share of luxury cars originate from Europe, in particular Germany (Audi, BMW, Mercedes, Porsche) and Italy (Ferrari, Maserati).

Jason Falinski, Liberal MP described the tax as “not efficient, fair or equitable and it costs more to administer than it collects.” Together with a number of other Liberal MPs he is calling for the complete removal of the tax. Auto industry bodies the Federal Chamber of Automotive Industries (FCAI), the Australian Automotive Association (AAA) and the Australian Automotive Dealer Association (AADA) are also lobbying for the removal of the tax.

Gavljak concluded: “It is clear that the time for automobile trade and tax reform is now.”