The ATO has issued an alert warning taxpayers that it is investigating certain arrangements where entities on-sell luxury cars without remitting the requisite luxury car tax amount. This applies to those selling luxury cars in the ordinary course of business in any structure (ie company or sole trader), as well as those that sell a luxury car to an employee, an associate, or an employee of an associate as a one off transaction. Remember, for the 2021-22 financial year, all non-fuel efficient vehicles over $69,152 are considered to be luxury cars.
Businesses and individuals that sell cars in the course of their business over a certain threshold (the luxury tax threshold) is subject to luxury car tax (LCT). This is a requirement if your business is registered or required to be registered for GST. LCT doesn’t just apply to instances where a dealer is selling a car to an individual or a business, it also applies in instances where a business sells or trades in a car that is a capital asset.
For the 2021-22 financial year, the luxury car threshold is $79,659 for fuel efficient vehicles and $69,152 for all other vehicles. This means that if your business buys a car with a GST-inclusive value above these thresholds, you are liable to pay LCT except in certain circumstances.
If you’re the seller of a luxury car, whether or not it is within your usual course of business, you’re required to charge LCT to the recipient and report the associated LCT amount in your BAS and remit the requisite amount to the ATO by the due date for BAS payment. You cannot avoid LCT by selling a luxury car to an employee, associate, or an employee of your associate for less than the market value, or by giving it away for no consideration. The LCT value of the car in that instance will always be the GST-inclusive market value.
The ATO is currently investigating arrangements where a chain of entities that progressively on-sell luxury cars improperly obtains LCT refunds and evades remitting LCT to the ATO. Usually, in this arrangement, one of the entities will claim a refund of LCT while creating a consequential liability to another entity in the supply chain. Following on from that, one or more of the participating entities down the chain, referred to as a “missing trader” will not correctly report and pay their purported LCT liabilities to the ATO. These entities will then be liquidated to thwart ATO compliance or recovery action.
While the primary concern is the evasion of LCT, these arrangement also concern the ATO as it has the potential to result in luxury cars being sold without income tax and GST obligations being met. For example, luxury cars could be sold to end users at more competitive prices, with generally higher profit margins due to the intentional avoidance of tax obligations and false refund claims. This would in turn economically affect legitimate businesses that are meeting all their tax obligations
Being aware of these potential illegal practices, the ATO notes that it is engaging with taxpayers to ensure that all parties have correctly met their LCT, GST, and income tax obligations. It warns that it has sophisticated systems in place to identify high risk LCT refunds which will be withheld pending adequate reviews. Further, in high risk cases, the ATO said it will scrutinise contractual obligations that arise under each sale in the supply chain to ensure compliance. Transactions will not be viewed in isolation, and all sales of cars, including the ultimate sale to end users, will be examined to ascertain the purpose of the entities involved in the arrangements.
Make sure you don’t fall afoul of the ATO, if you run a business and have disposed of cars to your employees or associates for below the market value, we can help you determine whether luxury car tax was applicable in those cases. For this and other expert guidance on tax issues, contact us today.