Cars will need to be twice as green to avoid luxury tax

Motorists will have to choose cars that use half as much fuel to avoid a vehicle tax in future after changes in a federal budget update. 

The Luxury Car Tax reforms, announced in the government's mid-year budget on Wednesday, will mean only vehicles that use 3.5 litres of fuel for every 100 kilometres will be eligible for a higher tax threshold.

The change, along with a new method of setting the tax threshold, will be introduced in July 2025 and is expected to generate $60 million in it first financial year. 

But automotive groups slammed the changes as making "a bad tax worse" and called on the federal government to scrap the tax entirely. 

Changes to the Luxury Car Tax were announced as part of the government's Mid-Year Economic and Fiscal Outlook, which noted the rules were designed to tighten "the definition of a fuel-efficient vehicle". 

The Luxury Car Tax applies to vehicles up to two years old with a purchase price above the threshold  set at $76,950. 

But vehicles that meet low-emission standards qualify for a higher threshold before the tax is applied, which is $89,332. 

The changes would halve the rate of fuel consumption for low-emission vehicles from seven to 3.5 litres per 100km, giving hybrid and electric vehicles an advantage.

Lexus UX300e
The Lexus UX300e sits under the higher Luxury Car Tax threshold.

"This change will encourage greater take-up of fuel-efficient vehicles, such as electric vehicles," the document noted.

Electric Vehicle Council chief executive Behyad Jafari called the change "a smarter, more considered approach" to vehicle taxes compared to taxing electric car owners. 

But the changes were criticised by others parts of the industry, including Federal Chamber of Automotive Industries chief executive Tony Weber who said some fuel-efficient vehicles would cost more as a result. 

"The Luxury Car Tax penalises Australian consumers as it imposes unnecessary additional taxes on many low-emission technology vehicles," he said.

"The changes... slug Australians with more taxes and make vehicles less affordable."

Australian Automotive Dealer Association chief executive Tim Voortman said the government should abolish the luxury tax because it no longer served its original purpose. 

The Luxury Car Tax was introduced to protect local vehicle manufacturing, he said, which had not existed since 2017.

"These changes to the Luxury Car Tax have made a bad tax even worse," he said.

"For years, the automotive industry and motorists have been calling for a root and branch review of the automotive tax regime but instead we see damaging tinkering and absolutely no consultation with industry."

Many high-end electric cars available in Australia sit under the higher Luxury Car Tax threshold, including long-range versions of the Tesla Model 3 and Model Y, Hyundai Ioniq 6, Volvo C40, and Lexus UX300e. 

Last week, Ford also lowered the launch price for the Premium version of its Mustang Mach-E electric car by $4675 to bring its price under the tax threshold.  

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