Luxury tax hike could trap itself

THE Rudd government’s expectations for raising extra revenue from rich car buyers may miss Canberra’s expectations if the market for luxury cars falls only marginally.

In fact, according to figures generated by JATO Dynamics, a leading provider of automotive data and analysis, sales of luxury cars need fall by only 12,000 units for the gains expected to be wiped out.

The problem for the Rudd government is that its calculations are made by simply allowing for the extra tax based on the same number of cars sold in 2006-2007 being sold in 2008-2009 attracting the additional luxury car tax (LCT) rate of 33 per cent.

It has assumed that sales will not be affected by the tax. But it appears to have ignored that if sales fall, it will have such a negative effect on GST takings that the hoped-for gains will be wiped out.

The government’s total revenue expectations for LCT are $555 million over a four-year period. Broken down annually, the budget papers suggest Canberra is expecting an increase in LCT revenues of $130 million in the first year, $140 million in the second, $140 million in the third and $145 million in the fourth year.

Using JATO Dynamics data for 2006-2007 as the basis for calculations confirms the government expectations on LCT revenues. JATO calculated the tax revenue based on recommended retail prices of passenger cars and SUVs that qualify for the tax combined with the sales of those models during 2006-2007.

JATO also calculated the GST generated on cars qualifying for the LCT taking into account that private buyers must pay all GST and businesses must pay all GST above about $5200.

But JATO shows that if the tax puts off buyers above the LCT threshold, especially those in high-priced cars, the tax move will not only fail to attract the revenue expected on LCT, but Canberra starts losing GST revenue as well.

The combined effect means that there will be no gain at all for the Government if sales fall by little more than 12,000 units.

The government has also put an incentive before the car-makers to drop cars below the threshold. In fact, BMW, prior to the LCT announcement, dropped the price of its volume-selling 320i Executive sedan from $58,500 to $55,900, thus denying the government of about 2900 sales attracting LCT.

The government’s move may also have an unintended side effect of increasing the high human and financial cost of road trauma and the cost of hospitalisation and rehabilitation by inhibiting the sales of safer cars.

JATO data shows that one of the most effective preventions of road accidents, electronic stability control, was fitted as standard to 84 per cent of all vehicles purchases last year that were subject to the LCT. This compares to stability control being standard in just 33 per cent of cars sold last year that were below the LCT.

Life-saving airbags are also more extensive in vehicles that attract the tax. JATO showed that of vehicles sold last year that were under the LCT threshold had an average of 3.658 airbags whereas cars and SUVs over the LCT limit contained and average of 5.541 airbags.

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Luxury tax backlash