The Luxury Car Tax is one of the most misunderstood costs in Australian car buying, and in 2026, it’s changing more than it has in years. New thresholds, a third category for zero-emissions vehicles, and a landmark Free Trade Agreement with the European Union have made the LCT conversation more complicated (and more important) than ever.
Whether you’re buying a new SUV, shopping for an EV, or just trying to understand your dealer’s pricing sheet, here’s everything you need to know about the Luxury Car Tax in 2026.
What is the Luxury Car Tax?
The Luxury Car Tax (LCT) is a federal tax applied to new vehicles whose GST-inclusive price exceeds a set threshold. It’s charged at 33 per cent of the GST-exclusive value above that threshold, meaning for every dollar over the cutoff, an extra 33 cents is added to the final price.
Despite its name, the LCT isn’t limited to prestige marques. Large SUVs, electric vehicles and even some family cars can fall above the threshold, making it a surprisingly broad tax.
The LCT applies to new vehicles imported within the past two years. Used cars are exempt.
Read more: Luxury Car Tax thresholds increase for Australia in FY2026-27
Why does Australia have a Luxury Car Tax?
The LCT was introduced on 1 July 2000 as part of a broader tax reform. Its original purpose was to protect Australia’s local car manufacturing industry by making imported vehicles more expensive relative to locally made ones.
Nine years after the last Australian-made car rolled off the line in 2017, the tax remains, despite the manufacturing base it was designed to protect no longer existing. That tension has made the LCT a growing point of political debate, with trade partners, carmakers and consumer advocates all pushing for reform.
Read more: Luxury Car Tax reform back in focus as trade deal nears
LCT Thresholds for 2026–27
There are now three LCT thresholds, not two. Here’s what applies from 1 July 2026:
| Vehicle Type | 2025–26 Threshold | 2026–27 Threshold |
| Fuel-efficient vehicles (under 3.5L/100km) | $91,387 | $91,661 |
| All other vehicles | $80,567 | $80,809 |
| Zero-emissions vehicles (new for 2026) | – | $120,000 |
The increase for the standard and fuel-efficient categories is modest, indexed to the motor vehicles Consumer Price Index (CPI), with a 2026–27 indexation factor of 1.003.
The zero-emissions vehicle threshold is the headline change, introduced under Australia’s new Free Trade Agreement with the European Union (see below).
Read more: Top 5 luxury EVs in Australia for 2026
What counts as a fuel-efficient vehicle in 2026?
This is where a significant change came in for the 2025–26 financial year, and it carries into 2026–27.
The fuel consumption threshold for eligibility has been halved from 7L/100km to 3.5L/100km. Previously, many hybrids and mild hybrids qualified for the higher fuel-efficient threshold. Under the new definition, only vehicles with genuinely low fuel consumption make the cut.
This is a deliberate policy shift to ensure that only low-emissions vehicles benefit from the more generous threshold. If your intended vehicle sits between 3.5L and 7L per 100km, it now falls under the standard (lower) threshold, which could meaningfully increase the LCT payable.
The Australia–EU free Trade Agreement and the New ZEV Threshold
The biggest structural change to the LCT in its 26-year history comes from Australia’s newly signed Free Trade Agreement with the European Union.
Under the deal:
- The 5 per cent tariff currently applied to European passenger car imports has been scrapped
- A new $120,000 LCT threshold for zero-emissions vehicles (ZEVs) has been established
- The EU’s longstanding push to have the LCT scrapped entirely was not successful
The new ZEV threshold is particularly significant for buyers considering premium electric vehicles. Models from brands like BMW, Mercedes-Benz, Audi and Volvo, which frequently sit above the standard threshold but below $120,000, now benefit from the ZEV category, provided they are fully electric.
For context, the EU had long argued the LCT was discriminatory against European-made vehicles, particularly luxury marques. The compromise outcome gives European EVs a meaningful pricing advantage, without removing the tax altogether.
Read more: Top 10 best-selling luxury car brands in Australia in 2025
How to calculate your Luxury Car Tax?
The LCT calculation has a few steps, but it’s not complicated once you know the formula.
Step 1: Identify which threshold applies to your vehicle (fuel-efficient, standard or zero-emissions).
Step 2: Subtract the threshold from the GST-inclusive price of the vehicle.
Step 3: Multiply by 10/11 to get the GST-exclusive amount above the threshold.
Step 4: Multiply by 0.33 (the LCT rate).
Example: A fuel-efficient vehicle with a GST-inclusive price of $88,000, but note this example uses the old standard threshold of $80,567 for illustrative purposes:
($88,000 – $80,567) × 10/11 × 0.33 = $2,229.90 in LCT
For a ZEV priced at $115,000 GST-inclusive, the calculation using the new $120,000 threshold would result in zero LCT payable, a meaningful saving compared to the standard threshold.
Vehicles Exempt from the Luxury Car Tax
Not all high-value vehicles attract the LCT. The following are exempt regardless of price:
- Utes and commercial vehicles, most are classified as commercial vehicles if payload exceeds twice the passenger weight capacity
- Vehicles designed to carry nine or more passengers
- Emergency vehicles
- Vehicles fitted out for people with disabilities
- Motorhomes and campervans
- Vehicles imported more than two years ago (even if new and unsold)
- Used cars, the LCT only applies at the point of first retail sale on a new vehicle
LCT Loopholes: Legal ways to reduce what you pay
There are several legitimate strategies Australian car buyers use to reduce or avoid LCT exposure.
1. Add optional extras after purchase
If a vehicle’s drive-away price sits just above the LCT threshold and the difference comes from optional extras, think premium sound systems, tow bars or roof racks, ask whether those extras can be purchased separately after delivery. Extras installed post-sale don’t count toward the LCT-applicable price.
2. Buy a demonstrator or unsold new car that’s over two years old
If a vehicle was imported more than two years ago, the LCT no longer applies, even if it has never been registered. Demonstrators and slow-selling models occasionally fall into this category. It’s worth asking your dealer.
3. Buy a ute
Most dual-cab utes are classified as commercial vehicles under the LCT exemption, provided the payload is more than twice the passenger weight. This exemption covers some of Australia’s most popular nameplates, including the HiLux, Ranger and BT-50, regardless of how they’re spec’d or used. Bear in mind that running costs over the life of the vehicle may offset any upfront tax saving.
4. Buy secondhand
The LCT is only applied once, at the point of first retail sale. A near-new car with low kilometres will have the LCT already factored into its original purchase price, but you won’t pay it again as the second buyer.
5. Buy a ZEV priced under $120,000
Under the new threshold, a fully electric vehicle priced below $120,000 (GST-inclusive) is now LCT-free. This covers a growing number of mainstream and near-premium electric vehicles that would previously have attracted LCT under the standard $80,809 threshold.
Car limit for business buyers in 2026–27
The LCT threshold is separate from the car limit, which applies to tax deductions and GST credits for business vehicles. For 2026–27, the car limit is $69,883.
This means:
- Depreciation claims are capped at $69,883 regardless of what you paid
- The maximum GST input tax credit you can claim is $6,353 (one-eleventh of the car limit)
- You cannot claim a GST credit for any LCT paid on a luxury vehicle, even if it’s used entirely for business
For businesses running novated leases or fleet vehicles, the interaction between the car limit and LCT threshold can meaningfully affect the cost of operating higher-value vehicles.
Will the Luxury Car Tax Ever End?
The short answer: not anytime soon, but its future is increasingly uncertain.
The LCT generates well over $1 billion annually for the federal budget. Scrapping it without a replacement revenue measure is politically difficult, particularly given the perception that it primarily benefits wealthier buyers.
That said, the policy rationale has almost entirely evaporated. With no Australian-made cars to protect, the LCT’s original purpose is moot. Trade partners, particularly the EU, continue to press for its removal, and the EV industry has long argued it creates a perverse incentive by applying a higher tax to efficient, lower-emissions vehicles than it does to exempt large utes.
The most likely outcome, if reform does come, is a move toward a CO₂-based vehicle emissions tax, a model already used across much of Europe. This would align automotive taxation with environmental goals, rather than the historical logic of protecting manufacturing jobs.
For now, the LCT lives on. But buyers, fleet managers and dealers should watch this space.
This article is general in nature and does not constitute financial or taxation advice. For advice specific to your situation, consult a qualified tax professional or visit ato.gov.au.
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