Luxury Car Leases
Australians purchased approximately 1.1 million new cars in 2015 with over 95% of them imported from overseas. Australian manufactured car sales are falling as the Australian car industry winds down to its eventual close in 2017.
The ATO defines a ‘luxury car’ as motor vehicles that have a purchase price exceeding the luxury car limit. The luxury car limit is indexed yearly but is $63,184 for 2015/16. This means the ATO defined luxury cars includes a lot of standard four wheel drives and SUVS, and not just the BMWs, Mercedes, Porsches, and Ferraris that we automatically think of.
Luxury cars are subject to a luxury car tax (LCT) when sold or imported into Australia. The LCT is set at 33% and applies to the value of the motor vehicle that exceeds the luxury car threshold. For example, a $100,000 BMW imported into Australia exceeds the $63,184 luxury car limit, so $36,816 will be subject to the LCT. At the 33% LCT rate, $12,149 LCT will be payable to the ATO by the importer.
Luxury car leases are leases of motor vehicles where the purchase cost of the motor vehicle exceeds the luxury car limit (which is indexed yearly but was $63,184 for 2015/16).
For tax purposes luxury car leases are not treated as leases, but as a sale by the lessor to the lessee with finance provided (a loan). The lessee is treated as the owner of the vehicle until the lease ends.
The lessee will be entitled to depreciate the value of the car over its effective life, but only up to $57,466. So for example, if the car has a value of $150,000, only $57,466 will be subject to depreciation over its effective life. The lessee will also be entitled to deduct the interest expense on the motor vehicle financed through the lease. The total interest expense will be deductible even if financing a $500,000 motor vehicle (i.e. the luxury car limit doesn’t apply).