Luxury Car Tax – To quote or not to quote: that is the question
Tax Telegraph, October 2013
Since its introduction in 2000, many higher-priced cars have been subject to Luxury Car Tax (LCT). But like many taxes, there are exceptions, and not all ‘luxury’ car transactions will give rise to an LCT liability.
For the 2013/14 year, LCT applies to the extent that the price of a car exceeds $60,316. In the case of a fuel efficient car (i.e. fuel consumption not exceeding 7 litres/100km), LCT applies to the extent that the car’s price exceeds $75,375.
Although LCT is only imposed on the portion of the price (excluding GST) that exceeds the applicable LCT threshold, a tax rate of 33% means that LCT can be a significant impost on luxury cars. For example, the LCT payable on a (non-fuel efficient) car worth $110,000 including GST, would be nearly $15,000, pushing its total purchase price to around $125,000.
In certain circumstances businesses can quote their ABN when acquiring or importing a luxury car, to ensure that no LCT applies to that particular transaction, effectively deferring payment of LCT on the car to a later stage (e.g. when the business subsequently sells it). Generally speaking, quoting is only permissible where the luxury car is not being supplied or imported at the retail level. Quoting in other circumstances is an offence under the LCT law and is subject to a penalty in each instance of up to $3,400 (in addition to the unpaid LCT plus any associated late payment interest and penalty).
Since 2012-13, the ATO has given increased attention to LCT compliance, and to improper quoting in particular. In its Compliance Program 2012-13, the ATO identified inappropriate quoting of ABNs by small-to-medium enterprises and micro businesses as a particular target for activity. In Compliance in Focus 2013-14, the ATO indicated that it will be performing a high number of LCT refund integrity checks this financial year. The ATO’s ongoing concern about the way some taxpayers are applying the LCT rules, and the inappropriate quoting of ABNs in particular, is also evident from recent ATO enquiries and correspondence received by some of our car dealer clients.
It can be anticipated that the ATO will continue to increase its scrutiny of LCT compliance and improper quoting for the foreseeable future, not least because of the increasing ease with which it can identify entities that have acquired a luxury car where no LCT has been paid, using data matching, and then to seek verification of the quoting entitlement.
For these reasons, it is vitally important that businesses understand when they can and cannot quote.
When can you quote your ABN for LCT purposes?
Under the LCT law, you can quote your ABN when acquiring or importing a luxury car if you are registered for GST and have the intention of using the car for one of the following three purposes, and for no other purpose:
- Holding the car as trading stock, other than holding it for hire or lease
- Carrying out research and development for the car’s manufacturer
- Exporting the car where the export is GST-free under the GST law.
The first of these – holding the car as trading stock – will be readily satisfied in the case of a car dealer buying a car to sell to a particular customer, but there are other circumstances in which the requisite intention could exist. According to the ATO, a luxury car would be regarded as ‘trading stock’ where, for example:
- The car has an incidental or ancillary use as a demonstrator vehicle for customers to view or test drive, but the dealer always intends that it will be sold thereafter
- The car is acquired or imported by a business with the intention that the business will restore and sell the car.
But what about a luxury car that has an incidental or ancillary use as a courtesy car? Should such a use prevent the car from being regarded as trading stock and rule out a quote by the dealer? Indications are that the ATO thinks so and is treating quotations for courtesy cars as improper. Some may question the ATO’s treatment, at least in circumstances such as the following:
A ‘Brand X’ new car dealer maintains a Brand X service centre, in a suburb adjacent to the location of its new car showroom. To ensure that past Brand X customers have the opportunity to drive and experience the latest model Brand X cars, the dealer allocates from trading stock several current model Brand X cars that will be temporarily made available at the service centre for past customers to use while their own Brand X car is being serviced. This enables the dealer to have its past customers effectively test-drive a latest model car, potentially encouraging those customers to upgrade their existing Brand X car with a new model or to do so sooner than they might otherwise. The dealer’s intention throughout is that each of the courtesy cars will be sold. They are available for sale while being used as a courtesy car (for example, where a service customer wants to buy the particular car they were given to drive at the service centre), and upon their return to the showroom once they cease being used as a courtesy car.
This is an issue that the ATO has recently begun giving much greater attention to, and many more luxury car dealers may be contacted by the ATO in the coming months about whether they have quoted or otherwise for cars put to such use. Normally the cars in question will still be under bailment and it is the finance company who has quoted. Whether under the bailment agreement there is a requirement to notify the finance company of a change of use is another question. Luxury car dealers should consider reviewing their past acquisitions of cars used as courtesy cars and determine the extent of any potential exposure.
Quotes treated as ineffective
Under the LCT law, a quote will be ineffective in circumstances where the entity selling a luxury car “has reasonable grounds for believing” that the person who quoted was not entitled to do so in the particular circumstances. This test does not require the formation of the relevant belief, merely that there are reasonable grounds for such a belief to be formed. We are aware that the ATO has recently challenged the effectiveness of quotes provided in the context of luxury car sales between dealers. In one instance, Dealer A (an authorised dealer of Manufacturer A) sold several A-branded luxury cars to Dealer B (an authorised dealer of Manufacturer B), for which Dealer B quoted. The dealership agreement between Dealer A and Manufacturer A contained a term stating that A-branded cars were only permitted to be sold by authorised dealers of Manufacturer A. The ATO regarded this term as giving Dealer A reasonable grounds for believing that Dealer B would not have been intending to on-sell the cars and therefore lacked an entitlement to quote to Dealer A for them – leaving Dealer A with an outstanding LCT liability in respect of each car.
Other potential LCT issues for luxury car dealers
Luxury car dealers may also face exposure by accommodating customer requests for arrangements that serve to lower the price for which a new car is sold, to bring the price as close as possible, or even below, the LCT threshold. For example, arrangements involving accessories being fitted to the car and paid for only after the car has been delivered to the customer, or arrangements involving a trade-in price agreed for the customer’s old car that is greatly under value, coupled with a corresponding reduction in the agreed price for the new car.
Know your LCT obligations and entitlements
Anyone buying, selling or importing luxury cars needs to be aware of the attendant LCT obligations and entitlements, and to be mindful also of how those obligations and entitlements can be affected over time as a result of altered circumstances or a change in a car’s use. Getting things wrong comes with a real risk of incurring penalties, especially so while the ATO continues to concentrate resources on reviewing and verifying LCT compliance, particularly among car dealers.
Would you be ready and comfortable if the ATO commenced an LCT review of your business today?
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