Luxury cars: the impact of the modified tax rules
With the purchasing of luxury vehicles on the rise it’s important to be aware of some specific features of the tax system that can impact on the real cost of purchase. Often the tax rules provide taxpayers with a worse tax outcome if the car will be used for business or other income producing purposes compared with a non-luxury car, but this depends on the situation.
Let’s take a look at the key features of the tax system dealing with luxury cars and the practical impact they can have on your tax position.
Depreciation deductions and GST credits
Normally when someone purchases a motor vehicle which will be used in their business or other income producing activities there will be an opportunity to claim depreciation deductions over the effective life of the vehicle. Rather than claiming an immediate deduction for the cost of the vehicle, you will typically be claiming a deduction for the cost of the vehicle gradually over a number of years.
Likewise, a taxpayer who is registered for GST might be able to claim back GST credits on the cost of purchasing a motor vehicle that will be used in their business activities.
However, when you are dealing with a luxury car the tax rules will sometimes limit your ability to claim depreciation deductions and GST credits, impacting on the after-tax cost of acquiring the car.
How does it work?
Each year the ATO publishes a luxury car limit which is $69,674 for the 2025-26 income year. If the total cost of the car exceeds this limit, then this can impact the GST credits or depreciation deductions that can be claimed.
Let’s assume that Alice buys a new car for $88,000 (including GST) in July 2025. To keep things simple, let’s say Alice uses the car solely in her business activities and is registered for GST.
The first issue for Alice is that rather than claiming GST credits of $8,000, her GST credit claim will be limited to $6,334 (ie, 11th x $69,674).
We then subtract the GST credits that can be claimed from the total cost, leaving $81,666. As this still exceeds the luxury car limit, Alice’s depreciation deductions will be capped as well.
While she actually spent $89,000 on the car, she can only claim depreciation deductions based on a deemed cost of $69,674.
The end result is that Alice has missed out on some GST credits and depreciation deductions because she bought a luxury car.
Exceptions to the rules
There are some important exceptions to these rules.
The rules only apply to vehicles which are classified as ‘cars’ under the tax system. That is, the car limit doesn’t apply if the vehicle is designed to carry a load of at least one tonne or it is designed to carry at least 9 passengers.
The rules only apply if the vehicle was designed mainly for carrying passengers. The way we determine this depends on the nature of the vehicle and whether we are dealing with a dual cab ute or not.
For example, let’s assume Steve buys a ute which is designed to carry a load of at least one tonne. This isn’t classified as a car for tax purposes so Steve won’t miss out on GST credits or depreciation deductions.
However, let’s assume Jenny has bought a dual cab ute which is designed to carry a load of less than one tonne and fewer than 9 passengers. This is classified as a car and the luxury car limit will apply unless we can show that it wasn’t designed mainly to carry passengers. As we are dealing with a dual cab ute, we multiply the vehicle’s designed seating capacity (including the driver's) by 68kg. If the total passenger weight determined using this formula doesn’t exceed the remaining 'load' capacity, we should be able to argue that the ute wasn’t designed mainly for the principal purpose of carrying passengers, which means that Jenny should be able to claim depreciation deductions based on the full cost of the vehicle.
The approach would be different if we were dealing with something other than a dual cab ute, such as a four-wheel drive vehicle.
Luxury car lease arrangements
Normally when someone enters into a lease arrangement for a car and they use the car in their business or employment duties there’s an opportunity to claim deductions for the lease payments, adjusted for any private usage.
However, if the value of the car exceeds the luxury car limit then the tax rules apply differently. Basically, what happens is that the taxpayer is deemed to have purchased the car using borrowed money. Rather than claiming a deduction for the actual lease payments, instead we will be claiming deductions for notional interest charges and depreciation, subject to the luxury car limit referred to above.
Luxury car tax
Cars with a luxury car tax (LCT) value which is over the LCT threshold for that year are subject to LCT, which is calculated as 33% of the amount above the LCT threshold.
The LCT thresholds for the 2025-26 income year are:
$91,387 for fuel-efficient vehicles
$80,567 for all other vehicles that fall within the scope of the LCT rules
From 1 July 2025 the definition of a fuel-efficient vehicle has changed, meaning that a car will only qualify for the higher LCT threshold if it has a fuel consumption that does not exceed 3.5 litres per 100km (this was 7 litres per 100km before 1 July 2025).
Buying a car or other motor vehicle can be a complex process and there will be a range of factors to consider. If you need assistance with the tax side of things please let us know before you jump in and sign any agreements.