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The Impact of the Latest Tax Rules on Luxury Cars


Latest Tax Rules of Luxury Cars
Latest Tax Rules of Luxury Cars

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With the increasing number of luxury car purchases, it is particularly important to understand how Australia’s tax system impacts the actual cost of acquisition. The rules on depreciation deductions, GST credits, and Luxury Car Tax (LCT) often result in luxury vehicles bearing a higher tax burden.


Depreciation and GST Credits

Ordinarily, when a business acquires a motor vehicle for income-producing purposes, it may claim depreciation deductions over the vehicle’s effective life and recover input tax credits for the GST paid on the purchase. However, when the vehicle is classified as a luxury car, these tax benefits are capped.


For the 2025–26 income year, the Australian Taxation Office (ATO) has set the luxury car limit at $69,674. Where the cost of a vehicle exceeds this threshold, both GST credits and depreciation deductions are restricted.


For instance, if a business acquires a new vehicle for $88,000 (including GST), the GST input tax credit claimable is capped at $6,334 (i.e., $69,674 × 1/11), rather than the full $8,000. In addition, despite the actual purchase cost being $88,000, the depreciation deduction must be based on a deemed cost of $69,674.

ASIC Chair Joe Longo stated:


Exceptions to the Rules

The luxury car limit only applies to vehicles classified as “cars” for tax purposes, i.e.:


  • Not designed to carry at least one tonne of load, and

  • Not designed to carry nine or more passengers.


For example:


  • A ute designed to carry over one tonne is not subject to the limit.

  • A dual cab ute with less than one tonne capacity and under nine passengers may still be considered a car, unless it can be shown that it was not mainly designed for carrying passengers.


Lease Arrangements

When leasing a car, taxpayers normally deduct lease payments (adjusted for private use). But if the vehicle exceeds the luxury car limit, the rules treat it as if the taxpayer had bought the car with borrowed money. Deductions are then limited to notional interest and depreciation, subject to the same car limit.


Luxury Car Tax (LCT)

If a car’s LCT value exceeds the threshold, a 33% tax applies to the excess amount.


For 2025–26:


  • $91,387 threshold for fuel-efficient cars

  • $80,567 threshold for all other cars


From 1 July 2025, a car is only considered fuel-efficient if its fuel consumption does not exceed 3.5L/100km (previously 7L/100km).


Conclusion

For those planning to purchase or lease high-value vehicles, understanding the applicable limits and exceptions can help in making more informed financial decisions and avoiding additional tax pressures. It is advisable to seek professional advice before entering into a purchase or lease agreement.


Source:

  • Luxury cars: the impact of the modified tax rules, Knowledge Shop website. 

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