The High Price of Luxury Cars in Australia

It’s a burning question many consumers ask; when you can get the same car overseas for a fraction of the price, it’s easy to see why buyers are frustrated.

Of course, Australians don’t just pay too much for luxury cars – from Levi jeans to iTunes, Aussies generally do pay a premium compared to our overseas counterparts. In a recent Mapping the World’s Prices report by Deutsche Bank, Australia was named the most expensive country to live in.

So just how much more do Australians pay for luxury cars compared to other countries? Well, according to an article on News.com.au, the United States pays around AUD $105,000 for a Porsche 911 Carrera. In comparison, Australians must fork out close to AUD $180,000. This price hike doesn’t merely extend to overseas manufacturers; when Holden exported its Commodore SS to the US (sold as the Pontiac G8 GT) in 2013, it sold for around $45,000. In Australia at the same time, the Commodore SS was selling for around $55,290. That’s $10,000 more – for a car that is made here!

So why are luxury cars so expensive in Australia? Read on to find out!

Shouldn’t a strong Aussie dollar lower prices?

While the current Australian dollar is relatively low at around 0.52 GBP and 0.76 USD, over the past five to six years it has been rather strong at times (for example, in 2011/12). With this being the case, many people have wondered why the cost of luxury vehicles has remained so consistently high.

It turns out that when it comes to luxury car imports, currency rates are established up to a year in advance in order to keep prices stable. This means that luxury car manufacturers essentially hedge to protect themselves from currency movements in either direction.

Ultimately, this means that luxury car prices don’t rise and fall with the fluctuating Australian dollar. Aside from being able to maintain consistent prices, consumers are also protected from the possibility of buying an imported luxury car at a high price – only to see the value of their car plummet in months to come.

Luxury car tax

One of the primary reasons why luxury cars are so expensive in Australia is the government’s luxury car tax (LCT).

When was it introduced?

According to Drive.com.au, this tax was put in place by the Howard government in 2000 alongside the controversial goods and services tax (GST). The LCT replaced the wholesale tax that was in place during the 1980s.

At the time when the LCT was introduced, the government had only just begun to dismantle protectionist barriers surrounding the local car industry; these barriers were created due to excessive import tariffs. High import duties prior to the LCT meant that Australians have always had to pay more for luxury vehicles; the LCT really just changed the way this premium price tag was calculated.

While it was good to see the end of high import tariffs, car buyers unfortunately had little to celebrate – the GST and LCT ensured car prices (in particular luxury car prices) remained relatively high compared to other developed countries such as the US and UK.

While the introduced rate of tax for luxury vehicles was 25% on vehicles over $55,134, this rate was increased by the Rudd government in 2008 to 33%. Although the threshold has risen virtually every year since 2008, the tax rate has remained steady.

Many people feel that the LCT is unfair; many car buyers have been left questioning why luxury cars are subject to such a high tax rate here in Australia.

How does the LCT work?

According to the Australian Taxation Office, the LCT threshold for the 2015/16 financial year is $63,184 – which some would say is not all that much considering how many cars sell for more than this price. If the vehicle is fuel efficient (i.e. if the car uses 7 litres or less per 100km) then the threshold is slightly higher at $75,375.

LCT is set at 33% and this is taxed on the amount above the LCT threshold. This tax is paid by businesses (i.e. dealerships) that sell luxury cars and therefore the cost is passed on to consumers. LCT also applies to individuals who choose to import luxury vehicles – you can read more about do-it-yourself imports later on in the article.

LCT is calculated via this formula: (LCV-LCT threshold) x 10/11 x 0.33

LCV stands for luxury car value; this is the retail price of the car. Therefore, a vehicle that has a retail price of $88,000 must pay a LCT of $7,444 ((88,000-63,184) x 10/11 x 0.33). This means that the car would be sold to a customer for $95,444.

It’s easy to see how the LCT can really bump up the price of luxury vehicles in Australia!

Market tolerance

As mentioned earlier, prior to the LCT Australians still paid a lot more for imported vehicles – especially luxury cars.

Very high import duties (which were as much as 59% in the 1980s) meant that Australians expected to pay more for cars imported from countries such as Germany – where many luxury vehicles (such as BMW and Mercedes-Benz) come from. Due to Australia’s higher price tolerance for German vehicles, some would argue that German car manufacturers have always sold their vehicles for a higher rate here in comparison to other markets around the world.

Demand

While mid-range luxury vehicles are relatively popular here in Australia, top-end cars such as Ferraris and Lamborghinis are sold in far smaller numbers. The lower demand for these cars – as you might expect – equates to a much higher retail price. Australia has a relatively small population compared to countries such as the United States and United Kingdom; therefore, there are fewer people who can afford the sort of cars that cost hundreds of thousands of dollars.

A smaller demand equates to smaller shipment numbers and less competition at the top end of the market, meaning those who are selling these vehicles are able to do so at a premium. Demand also affects mid-range luxury cars such as Audi, Mercedes-Benz and BMW – just not to the same extent as top-end vehicles.

Tailor made for Australian conditions

The luxury cars sold here in Australia are more expensive than those sold overseas – however many of them aren’t exactly the same as their overseas counterparts.

According to Drive.com.au, many German made vehicles are designed to meet conditions specific to Australia; i.e. many are higher-specification vehicles. For example, Audi de-tunes some of its high performance vehicles to deal with Australia’s extreme summer heat, while Mercedes-Benz often fits unique cooling packages for the same reason. Mercedes-Benz also includes towing packages with some of its vehicles to cater to the Australian market, since more Australians use their vehicles to tow in comparison to overseas drivers.

There are also differences in terms of safety standards. According to the same Drive.com.au article, a Mercedes-Benz C-Class in Australia has nine airbags; in the United Kingdom it has seven. The car manufacturer also uses a different stability control (ESP) calibration for vehicles sold in Australia compared to other countries.

It becomes apparent that these Australian-only specifications impact upon the price of luxury cars. The manufactures have to implement unique specifications for a relatively small number of vehicles (since Australia has a smaller population than many developed nations) and therefore they need to be able to recoup this cost one way or another.

Can Australians self-import?

If luxury vehicles are so overpriced here in Australia compared to other countries such as the United States and United Kingdom, then why don’t more Aussies simply import cars themselves?

The truth is that do-it-yourself importation is a complicated, impractical affair at best. The Department of Infrastructure & Regional Development states that:

“The importation of vehicles to Australia is prohibited except in very specific circumstances. Most vehicles are imported by large manufacturers that invest substantially in research and development to ensure that every new vehicle meets minimum safety standards that maintain the safest possible environment for all road users and our community.”

In terms of DIY importation there are a number of restrictions faced by Australians – such as needing to have owned the vehicle while living overseas. In this case, the car needs to be continually kept within close proximity to your overseas address for at least a year, and this qualifying period must immediately precede your permanent return to Australia.

Some vehicle enthusiasts will be pleased to know that there are some exceptions to these rules. The Department of Infrastructure & Regional Development does have a Specialist & Enthusiast Vehicle Scheme; subject to approval, this scheme could mean that you are allowed to import certain cars that are not sold locally in an official capacity. You can find an up-to-date list of cars in this scheme here.

If you are a lover of older vintage models, then you might also find some respite. Australians are allowed to import any vehicle that has been manufactured prior to the 1^st of January, 1989. This means that those who are interested in rare or classic cars are generally able to import vehicles of interest.

There are also a number of other import options for Australians, the details of which can be found on the Department of Infrastructure & Regional Development website. If you are planning to import a vehicle from overseas yourself, the Department of Infrastructure & Regional Development also provides useful information that explains how to import an eligible vehicle in eight steps.

What are the actual costs of importing a luxury car?

While some cars may only cost a few thousand dollars to import, luxury cars are generally more expensive.

The government will still hit you with a luxury car tax (LCT) if your vehicle is worth more than $63,184 (figure for the 2015/16 financial year). If your vehicle isn’t brand new, you can ask to have this figure revised to better reflect the current value of your car, however if it’s still above the threshold then you will have to pay 33% tax, plus GST and customs duty. As you might expect, the cost of importing most luxury cars (if you are actually allowed to do it in the first place) equates to a substantial amount of money.

Here is an example:

Assume the customs valuation (CV) of your vehicle is $56,000. First off, you will have to pay customs duty which is 5% of the CV (in this case, $2,800). Transport and insurance costs are then added, which generally equate to around $1,500.

The value of the taxable importation (VoTI) is then calculated by adding the CV, customs duty and transport and insurance costs. In this example, this equates to $60,300. A GST of 10% is then added ($6,030) which takes the total at this point to $66,330. This is considered to be the luxury car value (LCV).

Since this figure is above the LCT threshold, the importer will need to pay LCT. The amount of tax payable is calculated by this equation: (LCV-LCT threshold) x 10/11 x 0.33. In this example, the LCT equals $943.80.

In this scenario, the cost of importing the car (customs duty + GST + LCT) is $9,773.60 (plus the cost of transport and insurance). As you can see, importing a luxury car yourself (if you are even allowed to) can become very expensive – and this cost only increases with the value of the vehicle you’re looking to import.

You can find a complete breakdown of these costs on the Department of Immigration & Border Protection website.

Parallel imports

Recent changes to the legislation mean that in the future, importing new or near-new cars from overseas could become cheaper for individuals.

The government recently approved parallel imports from Japan and the UK, which basically means that from 2018 individuals will be able to import a car once every two years. The law will stipulate that these vehicles must be less than 12 months old and have less than 500km on the odometer.

Motoring.com.au notes that the introduction of this legislation could see a drop in the price of luxury vehicles:

“Industry groups say only buyers of luxury and sports cars will benefit from cheaper premium models…at the expense of dealership jobs.”

While this is perhaps bad news for luxury car dealerships, it’s certainly good news for Australians who are planning to buy a luxury car in a few years time!

Are luxury cars overpriced in Australia?

One must consider that in recent times cars in general have become more affordable in Australia. Today, the cost of an average car equates to a far smaller proportion of an average wage compared to what it would have a generation ago. For example, a 2015 Drive.com.au article states that according to Commsec:

“…someone earning the average wage has to work for only around 24.2 weeks to be able to purchase a new Ford Falcon 4.0 sedan – the best result since 1975.”

Many also cite figures that reveal the cost of owning a car has also dropped. Vehicles these days possess far better fuel economy, longer servicing intervals with capped price servicing, and also increased warranties. When it comes to standard vehicles these days, Australians are generally getting better cars for less.

This general increase in vehicle affordability does appear to extend to some luxury cars. For example, BMW’s senior manager of corporate communications told Drive.com.au in 2011 that:

“The prices of these [luxury] cars are [also] more competitive than they’ve ever been. If you compare the price of an E-Class, say the E200 CGI, to its equivalent 10 years ago, it is significantly better value now in terms of average weekly earnings and inflation.”

However as mentioned earlier, high end luxury cars seem to be more expensive than ever before.

Another Drive.com.au article from 2011 analysed the cost of high end luxury cars such as Ferraris and Lamborghinis and found that these luxury vehicles have increased in price by as much as 50% in a decade. While the price of a new BMW had also increased in this time, it was by a far smaller margin (approximately 10%). However, standard vehicles such as the Toyota Corolla actually saw a reduction in price between 2001 and 2011 – revealing just how much of a premium Australians really are paying for luxury cars.

Despite this, it seems as though Australians are buying more luxury cars than ever before.

Conclusion

There’s no doubt about it: Australians do pay more for luxury vehicles. Thanks to luxury car tax, perceived market tolerance, lower demand and the customisation of cars for Australian conditions, we are certainly charged a premium price that easily exceeds that imposed on countries such as the US and UK.

While private import is an option in some cases, it’s currently an incredibly expensive option when it comes to luxury vehicles. Thanks to endless restrictions at present, the vast majority of consumers are unable to head down the path of acquiring a private import.

However, there is some respite in site. Thanks to recent legislation changes that will see parallel imports become legal in 2018, it’s possible that luxury vehicles in Australia could become more affordable in the near future. Whether this actually comes to fruition remains to be seen – knowing the Australian government, things could change a lot in two years time!