With luxury car sales steadily increasing, understanding how Australia’s tax rules apply to high-end vehicles has never been more important. What many buyers don’t realise is that, in some cases, purchasing an expensive car for business use can actually lead to a less favourable tax outcome than buying a standard vehicle. This comes down to how the law defines “luxury cars” and the specific limits that apply to depreciation, GST credits, and even certain leasing arrangements.
If you are considering purchasing or leasing a high-value vehicle, here’s a detailed look at how these rules work in practice, the exceptions available, and the extra tax—known as Luxury Car Tax (LCT)—that might apply.
Depreciation and GST Credits
Under normal circumstances, when a motor vehicle is used for business or other income-producing purposes, the cost of that vehicle can be claimed over time as a depreciation deduction. Rather than deducting the full purchase price in the first year, you gradually claim the cost over the vehicle’s effective life.
For GST-registered businesses, there’s also the ability to claim GST credits on the purchase price of a vehicle used in commercial activities. This allows you to offset the GST paid at purchase against the GST you collect from your customers.
However, for vehicles classified as “luxury cars,” both these tax benefits are capped. For the 2025–26 income year, the Australian Taxation Office (ATO) has set the luxury car limit at $69,674.
If the car’s price exceeds this figure, two restrictions apply:
- GST credits are limited to one-eleventh of the luxury car limit, not the actual GST paid on the full purchase price.
- Depreciation deductions are calculated only on the capped value, rather than what you actually paid.
These caps can significantly increase the after-tax cost of acquiring a high-value vehicle.
How the Cap Works in Practice
Let’s say a business purchases a car worth more than the luxury car limit. Even though the GST component on the purchase may be much higher, the maximum GST credit that can be claimed is capped based on the ATO limit. After subtracting the eligible GST credit from the purchase price, the cost that can be depreciated is still subject to the same threshold. The result is that part of the car’s cost never attracts any tax deduction or GST credit.
For buyers, this means that the higher the price above the limit, the greater the portion that effectively receives no tax relief—something that should be factored into the real cost of ownership.
Exceptions to the Rules
Not all vehicles are affected. The luxury car limit only applies to vehicles classified as “cars” for tax purposes—generally, those designed mainly to carry passengers.
The cap does not apply to:
- Vehicles designed to carry a load of at least one tonne
- Vehicles designed to carry nine or more passengers
Special tests apply to certain vehicles like dual cab utes, where it’s not always clear whether the primary design is for carrying passengers or goods. For these, seating capacity and load capacity are compared to determine their classification. If the vehicle is deemed not primarily for passenger transport, the full GST credit and depreciation on the purchase price can be claimed without the cap.
Leasing a Luxury Car
Entering into a lease arrangement doesn’t avoid the luxury car limit. If the market value of the leased vehicle exceeds the threshold, the tax treatment changes. Instead of claiming the actual lease payments as a deduction (adjusted for private use), the arrangement is treated as if you had purchased the car with borrowed funds. In this case, deductions are calculated based on deemed interest and depreciation—again, restricted to the luxury car limit.
This approach can reduce the tax benefit of leasing a high-value vehicle, so it’s important to assess the real after-tax cost before signing a lease agreement.
Luxury Car Tax (LCT)
In addition to the GST and depreciation caps, you may also be liable for LCT if the car’s value exceeds the relevant threshold for the year. LCT is charged at 33% of the value above the threshold.
For the 2025–26 income year, the LCT thresholds are:
- $91,387 for fuel-efficient vehicles
- $80,567 for all other applicable vehicles
The definition of “fuel-efficient” changed from 1 July 2025, now requiring a fuel consumption rate of 3.5 litres per 100km or less (down from 7 litres previously). This means fewer vehicles qualify for the higher threshold.
Why This Matters for Buyers
These rules mean that the tax and financial impact of buying a luxury car extends far beyond the sticker price. Between capped GST credits, limited depreciation deductions, and potential LCT liabilities, the after-tax cost can be significantly higher than expected.
For business owners, this is particularly important, as the intended tax benefits of purchasing a vehicle for work purposes may be reduced. The decision to buy a luxury vehicle should take into account not only cash flow and image considerations but also the long-term tax consequences.
Pitt Martin Group is a firm of Chartered Accountants, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.
Pitt Martin Group qualifications include over fifteen years of professional experience in accounting industry, membership certification of the Chartered Accountants Australia and New Zealand (CA ANZ), membership certification of the Australian Society of Certified Practising Accountants (CPA), Registered Australia Tax Agents, certified External Examiner of the Law Societies of New South Wales, Victoria, and Western Australia Law Trust Accounts, membership certification of the Finance Brokers Association of Australia Limited (FBAA), Registered Agents of the Australian Securities and Investments Commission (ASIC), certified Advisor of accounting software such as XERO, QUICKBOOKS, MYOB, etc.
This content is for reference only and does not constitute advice on any individual or group’s specific situation. Any individual or group should take action only after consulting with professionals. Due to the timeliness of tax laws, we have endeavoured to provide timely and accurate information at the time of publication, but cannot guarantee that the content stated will remain applicable in the future. Please indicate the source when forwarding this content.
By Yvonne Shao @ Pitt Martin Tax
