Principal purpose of a commercial vehicle to determine application of Luxury car tax
The ATO has finalised the luxury car tax (LCT) determination LCTD 2023/1 which explains the Commissioner’s view to determine if a car is a commercial vehicle that is not designed for the principal purpose of carrying passengers.
As per s 25-1(2)(c) of the A New Tax System (Luxury Car Tax) Act 1999 (LCT Act) no single factor must be the sole determinant in assessing a vehicle’s principal purpose, an objective analysis must be conducted with no specific weighing applied to any individual factor.
Principal purpose test
A range of factors must be considered when determining the principal purpose of a commercial vehicle, these factors include but are not limited to:
• the appearance and presentation of the vehicle
• any relevant promotional literature
• the emphasis evident in marketing
• the vehicle's specifications
• the Australian Design Rules (ADRs) classifications applicable to the vehicle
• the load carrying capacity
• the passenger carrying capacity.
In situations where majority factors support the position that the principal purpose of a vehicle is to carry passengers, the vehicle will be considered a luxury car for the purposes of the LCT Act, regardless of whether it is classified as a goods carrying vehicle as per the ADRs.
Vehicle modifications
Consideration must also be given to the principal purpose of the vehicle as originally designed and any modifications later made that cannot be readily reversed. Modifications that can be readily reversed, so that the vehicle can be easily used for its original purpose, do not change its design.
Permanent alterations that may change a vehicle's original design but if they can be readily reversed, so that the vehicle can be easily used for its original purpose will not be considered a permanent modification, for example removal of seats without removing the associated anchorage points and mounting plate.
Arrangements flagged by the ATO
Body types
Commercial vehicles with body types of station wagons, off-road passenger wagons, passenger sedans, people movers or sports utility vehicles when supplied for an amount above the LCT threshold without LCT being paid will be treated as high-risk arrangements which may be scrutinised by the ATO.
Utility vehicles
A simplified method has been introduced for utility vehicles (including single cab, dual cab, and extra cab utility vehicles), wherein if the passenger capacity of the vehicle is less than 50% of the load carrying capacity, such commercial vehicles will not be scrutinised by the ATO as they will not be liable for GST. Guidance in para 55 sets out the parameters for calculating load carrying capacity for the purposes of the simplified method.
The simplified method does not affect the determination of the principal purpose of a utility vehicle having regard to the factors discussed above, it may be determined that a utility vehicle is not designed for the principal purpose of carrying passengers despite the vehicle not satisfying the simplified method.
Opportunities for car dealerships
In accordance with the simplified method, car dealerships may want to consider stocking utility vehicles that pass the principal purpose of utility vehicles test, and hence are exempt from LCT. The ATO will not scrutinise such vehicles as long as the requirements listed in para 55 of LCTD 2023/1 are met.
The calculation in para 55 includes seating capacity and goods carrying capacity, which is particularly relevant to dual-cab utes and modified vehicles. The load carrying capacity and number of seats to carry passengers are the most relevant factors. Modifications may also be considered where they alter the passenger capacity or increase the goods carrying capacity.
Refer to the worked example for further guidance.
As per s 25-1(2)(c) of the A New Tax System (Luxury Car Tax) Act 1999 (LCT Act) no single factor must be the sole determinant in assessing a vehicle’s principal purpose, an objective analysis must be conducted with no specific weighing applied to any individual factor.
Principal purpose test
A range of factors must be considered when determining the principal purpose of a commercial vehicle, these factors include but are not limited to:
• the appearance and presentation of the vehicle
• any relevant promotional literature
• the emphasis evident in marketing
• the vehicle's specifications
• the Australian Design Rules (ADRs) classifications applicable to the vehicle
• the load carrying capacity
• the passenger carrying capacity.
In situations where majority factors support the position that the principal purpose of a vehicle is to carry passengers, the vehicle will be considered a luxury car for the purposes of the LCT Act, regardless of whether it is classified as a goods carrying vehicle as per the ADRs.
Vehicle modifications
Consideration must also be given to the principal purpose of the vehicle as originally designed and any modifications later made that cannot be readily reversed. Modifications that can be readily reversed, so that the vehicle can be easily used for its original purpose, do not change its design.
Permanent alterations that may change a vehicle's original design but if they can be readily reversed, so that the vehicle can be easily used for its original purpose will not be considered a permanent modification, for example removal of seats without removing the associated anchorage points and mounting plate.
Arrangements flagged by the ATO
Body types
Commercial vehicles with body types of station wagons, off-road passenger wagons, passenger sedans, people movers or sports utility vehicles when supplied for an amount above the LCT threshold without LCT being paid will be treated as high-risk arrangements which may be scrutinised by the ATO.
Utility vehicles
A simplified method has been introduced for utility vehicles (including single cab, dual cab, and extra cab utility vehicles), wherein if the passenger capacity of the vehicle is less than 50% of the load carrying capacity, such commercial vehicles will not be scrutinised by the ATO as they will not be liable for GST. Guidance in para 55 sets out the parameters for calculating load carrying capacity for the purposes of the simplified method.
The simplified method does not affect the determination of the principal purpose of a utility vehicle having regard to the factors discussed above, it may be determined that a utility vehicle is not designed for the principal purpose of carrying passengers despite the vehicle not satisfying the simplified method.
Opportunities for car dealerships
In accordance with the simplified method, car dealerships may want to consider stocking utility vehicles that pass the principal purpose of utility vehicles test, and hence are exempt from LCT. The ATO will not scrutinise such vehicles as long as the requirements listed in para 55 of LCTD 2023/1 are met.
The calculation in para 55 includes seating capacity and goods carrying capacity, which is particularly relevant to dual-cab utes and modified vehicles. The load carrying capacity and number of seats to carry passengers are the most relevant factors. Modifications may also be considered where they alter the passenger capacity or increase the goods carrying capacity.
Refer to the worked example for further guidance.
[Worked example: Principal purpose test for a dual cab utility vehicle – simplified method ]
Next steps
We can assist you with assessing your situation and in determining if the primary purpose of a commercial vehicle is to carry passengers or carry goods, and therefore its subjection to LCT. All factors discussed above must be considered collectively.
When purchasing a light commercial vehicle over the LCT threshold ( $76,950 for 2023–24) that does not meet passenger car criteria, asset planning must be done with keeping in mind that the temporary full expensing rules ended on 30 June 2023, post this date, the full purchase price of the vehicle can no longer be written off as a tax deduction and you will also be liable to pay LCT passed on by the seller.
Note that LCT is not waived for vehicles that were imported two years (or more) ago, if you decide to purchase a vehicle that was imported within two years, your vehicle will not be subject to LCT.
Contact us
If you would like to know more about these developments, please feel free to contact us. We would be happy to help you through your necessary obligations.
Next steps
We can assist you with assessing your situation and in determining if the primary purpose of a commercial vehicle is to carry passengers or carry goods, and therefore its subjection to LCT. All factors discussed above must be considered collectively.
When purchasing a light commercial vehicle over the LCT threshold ( $76,950 for 2023–24) that does not meet passenger car criteria, asset planning must be done with keeping in mind that the temporary full expensing rules ended on 30 June 2023, post this date, the full purchase price of the vehicle can no longer be written off as a tax deduction and you will also be liable to pay LCT passed on by the seller.
Note that LCT is not waived for vehicles that were imported two years (or more) ago, if you decide to purchase a vehicle that was imported within two years, your vehicle will not be subject to LCT.
Contact us
If you would like to know more about these developments, please feel free to contact us. We would be happy to help you through your necessary obligations.
