Purchases of luxury vehicles are increasing. Buyers should understand specific tax system features affecting real costs. Tax rules often deliver worse outcomes for business or income-producing use compared to non-luxury cars. However, this depends on individual circumstances.

Below, we explore key tax system features for luxury cars and their practical tax implications.

Depreciation Deductions and GST Credits

Typically, buying a motor vehicle for business or income activities allows depreciation deductions over its lifetime. You don’t claim the full cost immediately. Instead, deductions occur gradually over several years.

Similarly, GST-registered taxpayers may claim GST credits on business-use vehicle purchases.

But for luxury cars, tax rules sometimes limit depreciation claims and GST credits. This increases the after-tax acquisition cost.

How the Rules Apply

The ATO sets an annual luxury car limit. For 2025-26, this is $69,674. Claim limits apply if the car’s total cost exceeds this amount.

Consider Alice buying a new $88,000 car (including GST) in July 2025. Assume she uses it solely for business and is GST-registered.

First, Alice’s GST credit isn’t $8,000. It’s capped at $6,334 (1/11th of $69,674).

After subtracting GST credits, $81,666 remains. This still exceeds the luxury limit. Consequently, Alice’s depreciation deductions face capping too.

Although she paid $88,000, depreciation deductions are based on a deemed cost of $69,674 only. Alice thus loses GST credits and depreciation benefits by choosing a luxury car.

Key Exceptions to the Rule

Not all vehicles face these rules. The “car” classification matters critically.

The limit doesn’t apply if a vehicle carries ≥1 tonne or ≥9 passengers. Crucially, rules only target passenger-designed vehicles. Classification depends on the vehicle type, especially dual cab utes.

For example, Steve buys a ute designed for ≥1-tonne loads. This isn’t a “car” under tax rules. Steve claims full GST credits and depreciation.

Conversely, Jenny buys a dual cab ute with <1-tonne capacity and <9-passenger design. This is classified as a car unless proven not principally designed for passengers. For dual cab utes, multiply seating capacity (including driver) by 68kg. If passenger weight doesn’t exceed the remaining load capacity, you can argue the ute wasn’t mainly for passengers. Jenny could then claim full depreciation.

Note: Four-wheel drives follow different assessment rules.

Luxury Car Lease Arrangements

Leasing a business-use car normally allows deductions for lease payments (adjusted for private use).

Different rules apply if the car’s value exceeds the luxury limit. Here, the taxpayer is deemed to have bought the car with borrowed money. Instead of lease payment deductions, you claim notional interest and depreciation. Importantly, the luxury car limit still caps depreciation claims.

Luxury Car Tax (LCT)

Cars exceeding the LCT threshold incur LCT. This equals 33% of the value above the threshold.

2025-26 LCT thresholds are:

• $91,387 for fuel-efficient vehicles
• $80,567 for other LCT-applicable vehicles

From 1 July 2025, “fuel-efficient” now requires ≤3.5L/100km fuel consumption (previously ≤7L/100km).

Final Considerations

Buying any vehicle involves complexity and tax implications. Talk to your tax advisors before making any decisions.