Why Does Australia Still Have a Luxury Car Tax in 2025?

As the global automotive market buzzes with news of new tariffs — particularly in the United States — attention has turned closer to home in Australia. Among the various vehicle-related taxes we impose, the Luxury Car Tax (LCT) stands out as one that continues to spark debate. Despite the demise of Australian car manufacturing, evolving fuel efficiency standards, and growing pressure from motoring bodies, the LCT still holds strong. But why?

A Quick Recap: What is the Luxury Car Tax?

Introduced by the Howard Government in 2000, the LCT was originally part of a broader tax reform aimed at simplifying the Australian tax system. The intention was never officially to favour Australian-made vehicles, but the initial LCT threshold was conveniently just above the most expensive locally-built car at the time — the Holden Calais.

Fast forward to 2025, and the LCT adds 33% to every dollar spent over $80,567, or $91,387 for fuel-efficient vehicles. The kicker? That threshold includes optional extras and dealer delivery charges but excludes on-road costs like GST and registration. It means that a relatively mainstream vehicle like a Toyota LandCruiser 300 can attract thousands in LCT, even though it’s not exactly a Bentley.

Who Pays the Most?

Believe it or not, mainstream buyers are often the ones caught in the LCT net. A 2019 investigation found that Toyota customers paid more in luxury car tax than buyers of brands like BMW, Jaguar, and Audi. The data showed that only Mercedes-Benz customers paid more in total LCT.

This tax, once levied on just 2.9% of new car sales, now impacts around 8.5% of all vehicles sold in Australia. And with vehicle prices rising across the board, that number is likely to grow.

But Didn’t We Stop Making Cars in Australia?

Yes, we did. Ford shut down local production in 2016, and Holden followed in 2017. One could argue the original (if unofficial) purpose of the tax is now obsolete. Yet the tax persists.

And it's not just a legacy issue. It's become a big revenue earner. In the 2022–2023 financial year alone, the LCT brought in $1.2 billion for the government — a massive jump from $570 million just two years prior. Sure, it’s only 0.15% of the government's total taxation revenue, but it’s still a nice chunk of change.

Calls for Reform (or Removal)

Industry voices are getting louder. The Australian Automotive Dealer Association (AADA) has called the tax outdated and counterproductive. In a late-2024 submission to the Federal Government, the AADA stated:

“The LCT is a poorly structured tax and acts as a barrier to the renewal of the passenger vehicle fleet at a time when technological improvements continue to make new car models safer, more energy-efficient and more environmentally friendly.”

The LCT also applies to optional safety features, potentially discouraging consumers from adding them due to cost concerns — a move that seems at odds with public safety interests.

What About Fuel-Efficient Vehicles?

There’s more bad news on that front. As of the 2025–2026 financial year, the definition of a “fuel-efficient” vehicle is changing. The threshold will tighten from 7.0L/100km to 3.5L/100km, effectively excluding many hybrid and efficient petrol vehicles from LCT exemption. Only electric vehicles and plug-in hybrids are expected to qualify under the new definition.

Will the LCT Be Scrapped?

Unlikely — at least for now. In the most recent federal budget, the government projected another $1.2 billion in LCT revenue for the 2025–2026 financial year. Public comments on the tax from politicians have been few and far between. The last known comment came in 2020 when former Treasurer Josh Frydenberg admitted there were “no plans to remove” the tax, though he left the door open slightly with a “never say never.”

Can You Avoid the Luxury Car Tax?

Legally? Yes. Here are a few ways:

• Buy a ute – Most utes are exempt from LCT.
• Register for GST – Business use can help avoid the tax, though there are strict eligibility requirements.
• Choose lower-spec models – Optional extras can push a car over the threshold.

But beware — the rules are complex, and skirting the line could land you in hot water.

So, What’s Next?

Unless there's a significant shift in political will or a major public push, the LCT looks set to stay — at least for the near future. While it may have outlived its original purpose, it’s simply too lucrative for the government to walk away from.

That said, growing pressure from the automotive industry, international trade bodies (like the EU), and consumer advocates means the LCT debate is far from over. And as electric and fuel-efficient vehicles become the norm, expect the conversation around fairness and relevance to get even louder.

Ensure you search the Tynan stock through our link here.

Credit: Drive.com.au