Luxury Car Tax and determining the principal purpose of a vehicle

The ATO has issued a final determination dealing with the luxury car tax (LCT) system that explains how to determine the principal purpose of a vehicle.

LCT can apply to the sale or importation of a car if its LCT value exceeds the relevant LCT threshold. For the purpose of the LCT rules a motor vehicle is treated as a car if it is designed to carry a load of less than 2 tonnes and fewer than 9 passengers or it is a limousine.

However, LCT does not apply if the vehicle:

  • Is a commercial vehicle, and
  • Is designed for the principal purpose of carrying passengers.

Whether a car is a ‘commercial vehicle’ or is designed for the principal purpose of carrying passengers is determined objectively based on the car’s design, rather than how a particular operator intends to use the car in practice.

The ATO indicates that the following factors should be considered in determining the principal purpose of a vehicle, although this is not an exhaustive list:

  • The appearance and presentation of the vehicle;
  • Any relevant promotional literature;
  • The emphasis evident in marketing;
  • The vehicle’s specifications;
  • The Australian Design Rules (ADRs) applicable to the vehicle, according to Vehicle Standard (Australian Design Rule – Definitions and Vehicle Categories) 2005 (ADR) vehicle category classification;
  • The load carrying capacity; and
  • The passenger carrying capacity.

When assessing a vehicle’s principal purpose it is necessary to consider the original design of the vehicle and any modifications to the vehicle which are incapable of being readily reversed. The ATO provides a series of examples looking at vehicles that have been subject to modifications and whether those modifications would lead to the conclusion that the principal purpose of the vehicle is not to carry passengers.

The determination also explains how the ATO will apply compliance resources in this area. In broad terms, the ATO expects that commercial vehicles are unlikely to have the following body types:

  • Station wagons;
  • Off-road passenger wagons;
  • Passenger sedans;
  • People movers;
  • Sports utility vehicles.

If vehicles with these body types are supplied for an amount above the LCT threshold but without LCT being paid then the ATO would regard the arrangement as high-risk.

On the other hand, the supply of trucks and cargo or delivery vans without LCT would be treated as low-risk arrangements.

When it comes to utility vehicles (including single cab, dual cab and extra can utility vehicles) the ATO won’t apply compliance resources if the passenger carrying capacity is less than 50% of the load carrying capacity. The passenger carrying capacity is determined by multiplying the number of seating positions by 68kg.

While the determination makes brief reference to the fact that this concept is used in other statutory contexts (e.g., in the FBT rules for exempt motor vehicles), the ATO doesn’t specifically comment on whether the approach taken in LCTD 2023/1 will be applied in the context of the FBT rules, depreciation rules or GST rules.