In a move that could shake up Australia’s new car market, the Federal Government looks set to increase the Luxury Car Tax (LCT) threshold as part of a larger European Union free trade deal.

According to a report in Guardian Australia, negotiations with the EU on a new free trade agreement, including around Australia’s luxury car tax, are well advanced, with treasurer Jim Chalmers confirming increasing the LCT threshold was on the negotiating table. Guardian Australia reports that rather than scrapping the LCT altogether, the government is looking to increase the threshold from $80,000 to “at least” $100,000.

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The LCT is currently set at 33 per cent for every dollar above a certain price threshold in two distinct categories, based on fuel consumption. Vehicles that use less than 3.5L/100km (such as EVs, some hybrids and plug-in hybrids) only attract the LCT once over the $91,387 threshold. For vehicles that consume more than 3.5L/100km (most traditional internal combustion engine cars, in other words), the LCT threshold is lower at $80,567.

The LCT was introduced by the federal government in 2000 as a measure to protect Australia’s local manufacturing industry. Since the demise of local manufacturing in 2017, there have been repeated calls to scrap the LCT, its function no longer fit-for-purpose. However, successive governments have been reluctant to abolish the luxury tax which contributes around $1.2 billion annually to the government’s coffers, around 40 per cent of which, according to several reports, is generated from the sale of cars imported from Europe.