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A New Tax System (Luxury Car Tax Imposition - General) Bill 1999



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Bills Digest No. 156  1998-99

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A New Tax System (Luxury Car Tax Imposition-General) Bill 1999

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Contents

 

 

Passage History

A New Tax System (Luxury Car Tax Imposition-General) Bill 1999

Date Introduced:  24 March 1999

House:  House of Representatives

Portfolio:  Treasury

Commencement:  1 July 2000

Purpose

This Bill will impose the tax that is payable under the A New Tax System (Luxury Car Tax) Act 1999, but only in so far as it is neither a duty of customs nor a duty of excise.

Background

1.0  Recent History

On 13 August 1998 the Government released details of its long awaited tax reform plan, embodied in the publication entitled Tax Reform: not a new tax, a new tax system (Tax Reform Plan).

A key aspect of the Tax Reform Plan is the introduction of a Goods and Services Tax (GST) to replace the current Wholesale Sales Tax (WST), as well as a number of State indirect taxes. The Tax Reform Plan as a whole formed a major component of the Government’s policy platform leading up to the Federal election held on 3 October 1998.

Following the Governments re-election, a package of 16 Bills were introduced on 2 December 1998 to implement a GST as well as some of the other tax reform measures contained in its Tax Reform Plan. Six of those Bills introduce the GST, namely:

  • A New Tax System (Goods and Services Tax) Bill 1998
  • A New Tax System (Goods and Services Tax Administration) Bill 1998
  • A New Tax System (Goods and Services Tax Transition) Bill 1998
  • A New Tax System (Goods and Services Tax Imposition-General) Bill 1998
  • A New Tax System (Goods and Services Tax Imposition-Customs) Bill 1998, and
  • A New Tax System (Goods and Services Tax Imposition-Excise) Bill 1998.

In addition to introducing the GST, the Tax Reform Plan also proposed to introduce a Luxury Car Tax (LCT). On 24 March 1999 a package of six Bills introduced the LCT, namely:

  • A New Tax System (Luxury Car Tax) Bill 1999
  • A New Tax System (Indirect Tax Administration) Bill 1999
  • A New Tax System (Wine Equalisation Tax and Luxury Car Tax Transition) Bill 1999
  • A New Tax System (Luxury Car Tax Imposition-General) Bill 1999
  • A New Tax System (Luxury Car Tax Imposition-Customs) Bill 1999, and
  • A New Tax System (Luxury Car Tax Imposition-Excise) Bill 1999.

2.0  GST Overview

The GST proposed is a broad-based indirect tax on final private consumption in Australia. It will tax the consumption of most goods, services and any other things, including things imported into Australia, but not to consumption outside Australia. The GST rate proposed is 10%.

The GST is based on the Value Added Tax (VAT) system, which has been adopted by nearly all OECD countries and more than 80 others around the world. The GST concept of taxing final private consumption is achieved by:

  • imposing tax on supplies made by entities registered for GST purposes, and
  • allowing those entities to claim a full credit for any GST they have paid on business purchases (or inputs). Such credits will be known as input tax credits.

Consistent with other GST and VAT regimes, there will be two types of non-taxable supplie s, 'GST-free' and 'input taxed', known in most other countries with a GST or VAT as 'zero rated' and 'exempt' respectively.

GST-free supplies will not be taxed and input tax credits will be allowed on things acquired to make the supply. The main activities that will be GST-free include exports, certain expenditure by tourists, health and medical care, education, childcare, charitable activities and religious services.

Input taxed supplies will similarly not be taxed, however no input tax credits will be allowed on things acquired to make the supply. The main activities that will be input taxed are financial services and residential rents.

The main Bill implementing the GST is the A New Tax System (Goods and Services Tax) Bill 1998 (GST Bill).

3.0  Luxury Car Tax Overview

As a result of the introduction of the GST together with the abolition of WST, motor cars in general would fall in price.

Luxury cars, however, would fa ll in price even more dramatically as they are currently subject to 45% WST on the value above a 'luxury' threshold, as opposed to 22% WST which applies generally. The luxury threshold is specified in Schedule 6 of the Sales Tax (Exemptions and Classifications) Act 1992 as being a taxable value more than 67.1% of the motor vehicle depreciation limit, currently $55,134.

WST is assessed on a taxable value known as the uniform taxable value (UTV), which is a set percentage approved by the Commissioner of Taxation for use in the motor vehicle industry. The UTV is 77.75% of the tax-exclusive recommended retail selling price. The UTV is also relevant for the purposes of the luxury threshold test specified in Schedule 6 of the Sales Tax (Exemptions and Classifications) Act 1992 .

The resultant effect of the above WST rules is that luxury motor cars for WST purposes are, broadly, those cars with a recommended retail selling price in excess of $47,581 WST-exclusive, or $55,720 WST-inclusive.

The Government does not believe a dramatic price reduction for luxury cars 'is appropriate'. To ensure, therefore, that luxury cars only fall by about the same amount as a car just below the proposed luxury car tax threshold, the Government proposes to introduce the luxury car tax.(1)

The Rate of LCT is to be 25% calculated on the value of the car above a LCT threshold.

The LCT threshold proposed is a GST-inclusive value equal to the car depreciation limit that applies under Subdivision 42-B of the Income Tax Assessment Act 1997 for the year in which the supply of the car occurs. As mentioned earlier, the car depreciation limit for the 1998-99 financial year is $55,134. This is a departure from that proposed in the Tax Reform Plan, which stated that the LCT threshold would be equal to a GST-inclusive value of $60,000(2).

The LCT proposed is a single stage tax that will be imposed on taxable supplies and importations of luxury cars. It will be in addition to any GST that may be payable, but not levied on the GST-inclusive price. It will be levied on the value of the car after GST has been excluded.

The payment of LCT is to be incorporated into the net amount payable under the GST system, or in the case of importations, paid with customs duty. A system of quoting is designed to avoid LCT becoming payable until the luxury car is sold or imported at the retail level. Generally, a recipient will be entitled to quote if the car supplied to them is expected to be held solely as trading stock.

Unlike the GST, an entity that buys a luxury car in the course or furtherance of an enterprise will not be entitled to an input tax credit for any LCT payable.

4.0  Constitutional Restrictions with Respect to Laws Imposing Taxation

The Commonwealth Parliament derives its powers from the Commonwealth of Australia Constitution Act . Its power with respect to taxation is found in section 51, Placitum (ii), which states that the ‘Parliament shall, subject to this constitution, have power to make laws for the peace, order, and good government of the Commonwealth with respect to: - (ii) Taxation; but so as not to discriminate between States or parts of States.’

Other provisions in the Constitution affect the power to tax, including section 55. Section 55 reads ‘Laws imposing taxation shall deal only with the imposition of taxation, and any provision therein dealing with any other material shall be of no effect.’

Accordingly the convention of separate Acts for those dealing with the subject of tax, its assessment and collection and those imposing the tax, is actually a legislative requirement pursuant to section 55 of the Constitution .

Section 55 continues to state that ‘Laws imposing taxation, except laws imposing duties of customs or of excise, shall deal with the subject of taxation only; but laws imposing duties of customs shall deal with duties of customs only, and laws imposing dut ies of excise shall deal with duties of excise only.’

Thus it is necessary for laws imposing the LCT to be separated into three Acts. One Act imposing taxation, a second Act imposing duties of customs and a third Act imposing duties of excise.

The following bills will impose the LCT if enacted:

  • A New Tax System (Luxury Car Tax Imposition-General) Bill 1999
  • A New Tax System (Luxury Car Tax Imposition-Customs) Bill 1999, and
  • A New Tax System (Luxury Car Tax Imposition-Excise) Bill 1999.

Main Provisions

1.0  Imposition

Subclause 3(1) states that the tax that is payable under the A New Tax System (Luxury Car Tax) Act 1999 is imposed by this section under the name of luxury car tax.(3)

Subclause 3(2) will impose LCT only so far as it is neither a duty of customs nor a duty of excise within the meaning of section 55 of the Constitution . Please refer to the discussion in the Background section above at paragraph 4.0 for further information in relation to this issue.

2.0  Rate

Clause 4 will impose the rate of LCT payable under the A New Tax System (Luxury Car Tax) Bill 1999 at 25%.

3.0  State Property

Clause 5 will ensure that the legislation imposing the LCT does not apply to property of any kind belonging to a State.(4) The Territories are not included within the ambit of this section. Please refer to paragraph 1.0 in the Concluding Comments section below for further discussion on this topic.

Concluding Comments

1.0  Taxing Property Belonging to a State

The Constitution will not protect the States from a LCT on transactions which affect its property unless the tax could truly be characterised as a tax on the ownership or holding of property

Section 114 of the Constitution(5) is one of the few sections in the Constitution defining the nature of intergovernmental immunities. It prevents the Commonwealth Parliament from legislating so as to tax property of any kind belonging to a State. The definition of a ‘State’ does not include a Territory.(6)

Judicial decisions appear to have adopted a narrow interpretation of section 114 so as only to protect the States against a tax imposed by reason of the ownership or holding of property. (7)

This approach has led the High Court to decide, for example, that section 114 did not prevent the Commonwealth from taxing car and housing fringe benefits provided by the State to its employees. This is because section 114 ‘protects the property of a State from a tax on the ownership or holding of property but it does not protect the State from a tax on transactions which affect its property, unless the tax can truly be characterised as a tax on the ownership or holding of property.’(8)

Thus section 114 will not afford the States protection from a LCT in relation to every form of transaction to which a State is a party. It is restricted to prohibiting the imposition of a luxury car tax where such a tax is characterised as one on the ownership or holding of property.

2.0  Rationale for Luxury Car Tax Questionable

One of the problems with the current WST system identified in the Tax Reform Plan was the multiple rate structure; exempt or one of six different tax rates.(9) The goal, with respect to indirect taxes, was stated to be a system that taxes a broad range of goods and services at a single low rate.(10) One of the advantages of the GST was that it would apply only one rate to taxable goods and services.(11)

The indirect tax system proposed includes the GST, the LCT and a Wine Equalisation Tax, introduced at the same time as the LCT. Together, there will be three different tax rates, GST-free supplies and input taxed supplies.

It could be argued that differential rates of tax have potentially distortionary effects, as well as compromise administrative simplicity leading to increased compliance costs.

Furthermore, it could be argued that it is wro ng to differentiate between persons on the basis of preferences, as results with multiple rates. In fact, Fact Sheet No: 201 implies that multiple rates are unfair.(12)

3.0  Naming of Luxury Car Tax Bills

Presumably, the titles of the LCT Bills have been used to make it easier for the Parliament to identify those which form part of the Tax Reform Plan package. From a practical perspective however, the titles appear to be unnecessarily lengthy and indeed cumbersome. The words 'A New Tax System' could be deleted from each title without affecting the relevance of the title to the particular piece of legislation.

Endnotes

1.  Costello, P., MP, 1998, Tax Reform: not a new tax, a new tax system , at p. 89; Explanatory Memorandum to the A New Tax System (Luxury Car Tax) Bill 1999, at paragraph 1.22 and 5.3.

2.  Costello, P., MP, 1998, Tax Reform: not a new tax, a new tax system , at p. 89.

3.   Luxury car tax is defined in the A New Tax System (Luxury Car Tax) Bill 1999 to mean tax that is payable under the luxury car tax law and imposed as luxury car tax by any of these:

  1. the A New Tax System (Luxury Car Tax Imposition-General) Act 1999 ; or
  2. the A New Tax System (Luxury Car Tax Imposition -Customs) Act 1999 ;or
  3. the A New Tax System (Luxury Car Tax Imposition-Excise) Act 1999 .

Luxury car tax law is defined in the A New Tax System (Luxury Car Tax) Bill 1999 to mean:

  1. this Act; and
  2. any Act that imposes luxury car tax; and
  3. the A New Tax System (W ine Equalisation Tax and Luxury Car Tax Transition) Act 1999 ; and
  4. the Taxation Administration Act 1953 , so far as it relates to any Act covered by paragraphs (a) to (c); and
  5. any other Act, so far as it relates to any Act covered by paragraphs (a) to (d) (or to so much of that Act as is covered); and
  6. regulations under any Act, so far as they relate to any Act covered by paragraphs (a) to (e) (or to so much of that Act as is covered).

4.   Property of any kind belonging to a State has the same meaning as attributed to it by judicial interpretation in respect of section 114 of the Constitution. It is not actually defined in section 114.

5.   Section 114 : A State shall not, without the consent of the Parliament of the Commonwealth, raise or maintain any naval or military force, or impose any tax on property of any kind belonging to the Commonwealth, nor shall the Commonwealth impose any tax on property of any kind belonging to a State.

6 . The Constitution , section 6

7 South Australia  v  Commonwealth (1992) 174 CLR 235, at p.248.

8 Queensland  v  Commonwealth (1987) 162 CLR 74, at p.98.

9 . Costello, P., MP, 1998, Tax Reform: not a new tax, a new tax system , at p. 72.

10 . Ibid., p.77.

11. Ibid., p.80.

12 . Costello, P., MP, 1998, Tax Reform: not a new tax, a new tax system , Fact Sheet No: 201.

Contact Officer

Simon Lang

16 April 1999

Bills Digest Service

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