Introduction

1. Australians purchase approximately one million new motor vehicles each year, including both imported and domestically manufactured vehicles. Around 100 000 of these vehicles are luxury cars.[1]

2. The Luxury Car Tax (LCT) is the only Australian Government tax imposed on the taxable supply or importation of goods or services designated as luxury. For LCT purposes, a ‘luxury car’ is a car with a Goods and Services Tax (GST) inclusive value above a specific threshold that is designed to carry fewer than nine passengers and a load of less than two tonnes. For 2010–11, the applicable threshold for a luxury car is $57 466, and $75 375 for those vehicles meeting defined fuel efficiency standards. The portion of the value of a luxury car above the LCT threshold is currently taxed at 33 per cent.

3. The LCT was introduced from 1 July 2000 under the framework of A New Tax System, which also introduced the GST. Entities registered or required to be registered for GST purposes are typically liable to pay the LCT, and this is recorded and paid via a taxpayer’s Business Activity Statement (BAS).

4. A rebate scheme for primary producers and tourism operators was introduced on 1 July 2008. The rebate entitles eligible taxpayers to claim refunds of a portion of the LCT to a maximum of $3000 per car. Primary producers may claim for one car per year and tourism operators for all eligible vehicles.

Context for the luxury car tax administration

5. The LCT was introduced at the time of the introduction of the GST and abolition of the Wholesale Sales Tax in 2000 to maintain the substantially higher rate of taxation applied to luxury cars. The LCT threshold is indexed annually using the motor vehicle purchase component of the Consumer Price Index (CPI). Compared to overall CPI changes, the increase in the price of motor vehicles has been relatively small. The proportion of vehicles now subject to the LCT has quadrupled from around 2.5 per cent in 1979 to more than 11 per cent in 2010.

6. While the volume of motor vehicle sales subject to LCT has increased, the number of taxpayers liable to pay the tax on vehicle sales has remained relatively stable. At September 2010, 1692 taxpayers had registered an LCT account with the Tax Office since the implementation of the tax. However, total annual LCT revenue is typically paid by less than 1000 taxpayers, (approximately 59 per cent of those taxpayers with an LCT account). The tax is also relatively concentrated, with almost 84 per cent of the total LCT revenue collected being paid by the top 100 LCT taxpayers in 2009–10.

7. Since its introduction in 2000, the LCT has raised almost $3.2 billion in net revenue. This figure included $472 million for 2009–10, with further increases expected in subsequent years in line with the overall increases expected in motor vehicle sales.[2]

Administrative arrangements

8. The LCT is predominantly administered by the Australian Taxation Office (Tax Office) which collects LCT on assessable dealings in Australia, including for most imported luxury vehicles. Within the Tax Office, responsibility for administration of the LCT is centred in the Indirect Tax (ITX) business line. The Australian Customs and Border Protection Service (Customs) collects, on behalf of the Tax Office, LCT on some imported vehicles under a Memorandum of Understanding (MoU) between the two agencies.

Audit objective and scope

9. The objective of the audit was to assess the effectiveness of the Tax Office’s administration of the LCT, including aspects of the tax administered by Customs on behalf of the Tax Office. Particular emphasis was given to the Tax Office’s:

• governance arrangements for the LCT; and
• approach to managing taxpayers’ compliance with their LCT obligations.

Overall conclusion

10. The LCT has been in place for almost eleven years. It is a mature tax that is well understood across the motor vehicle industry; is relatively concentrated in a small number of taxpayers; and contributes less than one per cent of total taxation revenue each year. The tax is relatively simple to administer and both the Tax Office and Customs currently apply an overall low rating to the risk of taxpayers not complying with their LCT obligations.

11. The administrative arrangements for the LCT reflect its low risk rating and the low priority it is given against other administrative demands. There is scope to improve the co-ordination of governance arrangements for the LCT. No compliance strategy has been developed or implemented, rather, the Tax Office relies on compliance by the larger taxpayers, and identification of actual or emerging issues associated with the LCT through the compliance activities undertaken for other taxes. It also relies on specific intelligence about individual entities being reported to it. Revenue analysis provides an indicator that actual amounts of LCT revenue collected are within acceptable margins of budget forecasts and estimates. Overall, the tax has low visibility for planning, reporting and compliance purposes across all areas in the ITX business line, and other business lines that manage elements of the tax.

12. While there are processes and mechanisms in place to administer this relatively small, low risk tax, there is still scope to better target and coordinate the Tax Office’s administrative arrangements for planning, operational, reporting and compliance purposes. This could be achieved through process review and without necessarily applying additional resources to administering the LCT.

13. To this end, in March 2011, the Tax Office advised it is currently planning several changes to its future administrative arrangements supporting the LCT. These include transferring responsibility for managing LCT risks within the ITX business line; enhanced documentation of LCT discussion at the GST Product Committee; additional analysis of LCT revenue performance and reviewing aspects of the arrangements with Customs.

14. These measures have the potential to better coordinate the Tax Office’s administration of the LCT and improve key compliance approaches. The ANAO has made one recommendation aimed at improving the planning and reporting of the LCT.

Key findings by chapter

Governance (Chapter 2)

15. The ITX business line has primary responsibility for the management of the LCT, although other business lines also have responsibility for some aspects of the tax. For governance and operating purposes, the GST and Excise business lines were amalgamated in July 2010, creating the Indirect Tax (ITX) business line. While there has been little immediate change as a result of this re-structure, the new business line aims to better align the Tax Office’s administration of indirect taxes over the longer term.

16. The Tax Office has adequate structural arrangements to undertake all aspects of LCT administration, but lacks a coordinated approach to the overall management of the end-to-end process. The LCT has low visibility for planning and operational purposes, and there is minimal or no reference to the tax in the majority of planning documents prepared by the various functions and segments in the ITX business line.

17. Similarly, the LCT has minimal profile for reporting purposes with only one aspect of the tax, revenue performance, reported on a regular basis. LCT revenue performance is reported on a monthly basis to the GST Product Committee, the ITX Executive; and was included in the GST 2009–10 HOTSA.[3] The amount of LCT revenue collected each year is included in the Tax Office’s annual report.

18. Responsibility for ensuring a co-ordinated end-to-end process for LCT administration rests with the GST Product Committee. While the committee may give appropriate attention to the administration of the tax, more explicit reference to and documentation of discussions relating to LCT matters at these meetings may be beneficial.

19. In relation to LCT, the risks associated with taxpayers’ non-compliance with their tax obligations was most recently assessed in November 2009, and resulted in a ‘low’ rating. The risk assessment considered LCT taxpayers’ profiles, revenue performance analysis, and audit results. While the assessment acknowledged that some taxpayers were engaging in behaviour to minimise or avoid their LCT obligations, the residual risk was not considered material to either loss of revenue or reputational risk to the Tax Office. It was considered appropriate for this residual risk to be managed by the then Complex Audit area as part of the serious evasion risk. This risk assessment has shaped the Tax Office’s current approach to LCT compliance. However, previous work undertaken by the motor vehicle industry teams suggested the risk may be higher.

Administrative arrangements between the Tax Office and Customs

20. Customs collects a small percentage of total LCT revenue, but plays an important role in monitoring the importation of luxury vehicles and identifying importers with an LCT liability. The MoU between the organisations sets out arrangements for the administration of indirect taxes, including the LCT. The MoU is due to expire in June 2011, and arrangements between the organisations are currently under review. This will give both agencies the opportunity to identify the most efficient use of the data and information available to each of them.

21. Customs assesses compliance risks associated with LCT revenue collection through quarterly monitoring reports prepared by the Compliance Data Monitoring Team. The data shows a consistency in LCT collections over time, and in line with broader economic trends that impact on the importation and purchase of luxury goods, including luxury cars. Combined with profiling individual importations through its Integrated Cargo System, Customs applies a ‘low’ rating to both revenue and compliance risk in relation to the LCT it collects.

Managing compliance (Chapter 3)

Interpretative assistance and advice

22. Since the implementation of the LCT in 2000, the overall nature and low volume of requests for interpretative assistance, including for private binding rulings, infers that taxpayers have a good understanding of the tax and its application, including during the period of LCT legislative amendments introduced in 2008. The majority of the requests relate to new vehicle design features, or where modifications to a car may affect its classification for LCT purposes.

23. Industry associations and taxpayers contacted as part of the audit were satisfied with the volume and timeliness of guidance material and information available about the LCT, from both the Tax Office and Customs. They were also confident about the application of the tax, and commented that it was well understood across the industry.

LCT risk assessment

24. As previously noted, the Tax Office has assessed the overall level of compliance risk associated with the LCT as ‘low’, and has undertaken minimal compliance planning and compliance activities in relation to the tax across all market segments. Rather, the Tax Office relies on actual or emerging risks about taxpayers’ compliance with their LCT obligations being identified through intelligence gathering or anomalies in payment or refund patterns. Where appropriate, these issues are referred for follow-up by Active Compliance staff, or for consideration by the relevant risk committee. LCT revenue performance is reported monthly, and benchmarking is undertaken on a quarterly basis to monitor the higher level or ‘macro’ risk associated with the tax.[4]

25. During the course of the audit, the Serious Evasion team finalised an intelligence plan outlining a number of activities that would enable the Tax Office to better understand and determine the extent and nature of the residual risk of taxpayers’ non-compliance with the LCT. The plan details a number of measures to examine the extent of serious evasion behaviour exhibited by prestige[5] or luxury motor vehicle dealers, and where individual taxpayers may be operating outside of the system with regard to their tax affairs, including their LCT obligations. The plan also provides a review of some LCT administrative and data collection processes. The Serious Evasion team is scheduled to present its findings to the GST Risk Management sub committee by June 2011.

LCT revenue performance analysis

26. LCT accounts for approximately 0.15 to 0.19 per cent of the Tax Office’s total annual revenue collection, and the overall low level of specific compliance activity is justified primarily on the basis of revenue performance analysis. This analysis is based on an estimate of LCT revenue calculated from the Federal Chamber of Automotive Industries (FCAI) new vehicle sales data, VFACTS. Benchmarking VFACTS data against actual LCT collections enables an assessment of LCT revenue trends over time.

27. For the most recent LCT compliance risk assessment conducted in November 2009, the Tax Office also assessed the macro revenue risk associated with the tax by calculating a theoretical amount of LCT payable based on states’ and territories’ motor vehicle sales and registration data for the previous year. The estimates for 2007–08 were compared with accrued LCT liabilities, and indicated a two to three per cent variance between estimated and actual revenue collections for the year, which is well within the Tax Office’s margin of acceptable risk.

28. The Tax Office advised that combined estimates calculated from VFACTS and states’ and territories’ sales and registrations data can provide both trend and point-in-time estimates, and enable a more reliable assessment of LCT revenue performance. However, the more detailed assessment undertaken for 2007–08 was not applied in subsequent years. Consequently, monitoring of LCT revenue performance for the past two years had been based solely on revenue estimates calculated using the VFACTS data. The Tax Office has now extended its analysis for 2009–10, based on both FCAI and states’ and territories’ data, and advised that this additional analysis will be undertaken in future years.

Managing LCT registrations

29. Over the life of the LCT to September 2010, a total of 1692 clients[6] had an LCT account with the Tax Office, of which approximately 58 per cent, or 1000 taxpayers, report an LCT liability on their BAS in any one year. In 2008–09, 904 taxpayers paid LCT, and 922 taxpayers did so in 2009–10.

30. The Tax Office applies four indicators to LCT registrations: active, inactive, cancelled and not reporting. However, it does not actively manage taxpayers’ changing status, or undertake any analysis of why a taxpayer may register for LCT and then not make a payment.

31. Legislation pertaining to the LCT sets out no requirements for registering for the tax other than the taxpayer having a current ABN and GST registration. In administering the LCT, the Tax Office does not apply any additional measures to verify the registration. A business entity with no prior or current dealings in motor vehicle sales can register for LCT.

32. Potential risks associated with LCT[7] registrations have been identified in several Tax Office intelligence scans, including the December 2010 serious evasion intelligence plan. Potential risks primarily include: abuse of the quoting mechanism to avoid LCT obligations; entities registered for LCT but not reporting any transactions; and entities that should register for LCT but do not. The Tax Office acknowledged a ‘weakness’ in the system for the registering and managing of LCT accounts, and is investigating these matters in the process of implementing the December 2010 intelligence plan.

Pre-refund integrity checks

33. Compliance risks associated with the LCT are managed to a limited extent by the Pre-refund Integrity team within the ITX business line’s Risk and Intelligence stream.

34. Pre-refund integrity checking for the LCT is ‘low’ on a hierarchy of general compliance tests applied in the pre-refund environment. A taxpayer’s LCT liabilities may be reviewed if there is an anomaly in other fields of the BAS, for example with the taxpayer’s GST amounts. Where no other issue with the BAS is identified, LCT refund checking is limited to a review of the two LCT fields in the BAS. Also, checking will only occur where a taxpayer has a net LCT credit, that is, when the LCT refund claim exceeds the LCT payable.

35. The Tax Office advised that accurate data on the number and value of LCT adjustments as a result of pre-refund checking and reviews on other fields of the BAS is not readily available, but estimated that those adjustments raised net LCT liabilities of $482 780 in 2008–09 and $83 367 in 2009–10.

36. While a low percentage of adjustments suggests few compliance problems, net refunds alone are not a meaningful indicator from a compliance perspective. Existing LCT refund checking focused on net LCT credits is therefore likely to overlook other instances of non-compliance, such as those that may be indicated by a substantial reduction in LCT paid compared to previous periods.

Active Compliance

37. Minimal compliance planning is undertaken for LCT, and the resulting compliance activity is relatively ad hoc in comparison to other taxes where specific compliance risks are identified and targeted. Limited data is available on the overall volume and type of compliance activity undertaken for the LCT across all market segments. However, the November 2009 risk assessment reported that 56 compliance audits undertaken across 17 industries resulted in $4.6 million in LCT liabilities.

38. The report also refers to compliance activities undertaken for the full year 2008–09 in relation to 75 taxpayers. During this period, 17 adjustments resulted in net LCT liabilities of $860 683 being raised. Figures published for 2009–10 report $7.2 million in adjustments was raised through active compliance activities.[8] However, this amount included one large transaction in excess of $5 million where a refund was calculated in error and re-assessed by the taxpayer to a net LCT payable amount.

Summary of Tax Office response

39. The Tax Office’s summary response to the report is reproduced below. The full response is at Appendix 1 of the report.

The Tax Office agrees with the ANAO recommendation to enhance planning and internal reporting processes for the LCT.

The Tax Office is pleased with the audit findings that industry associations and taxpayers understand the tax and that they are confident about its application.

The Tax Office’s overall assessment of compliance risk relating to LCT is generally low, but we continue to monitor and investigate instances of egregious behaviour, particularly in relation to prestige motor vehicles.

Footnotes

[1] Parliament of Australia, Department of Parliamentary Services, Bills Digest, 13 June 2008. Nos 131–134.

[2] New motor vehicle sales in 2009 fell by 7.4 per cent to 947 328, reflecting the general downturn in the overall car market during the global financial crisis (GFC). Sales for 2010 reached 1.04 million, an increase of 10.5 per cent from the previous year, indicating a recovery in the volume of sales to pre-GFC levels and only the third time the volume of sales in a calendar year has exceeded one million. Federal Chamber of Automotive Industries (FCAI), available from <www.fcai.com.au> [accessed 23 February 2011].

[3] Compliance Sub-plan Health of the system assessment (HOTSA).

[4] A Private Binding Ruling (PBR) issued in July 2010 dealt with a four-wheel drive vehicle that had been modified with a drop-side body to accommodate commercial goods carrying, prior to sale, delivery and registration.

[5] For the purposes of this Intelligence Plan, prestige motor vehicle dealers are dealing in motor vehicles with a minimum value of $100 000 and less than two years old.

[6] Tax Office statistics. Taxpayers engaging in a taxable supply of a luxury vehicle must register their liability for LCT.

[7] A New Tax System (Luxury Car Tax) Act 1999, sub-section 2-10.

[8] Tax Office, 2009–10 Commissioner of Taxation Annual Report, p. 88.