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University of Adelaide Week 3 to 6 The fate of luxury cars in Australia Questions

Course Learning Outcomes: 1, 3& 4Topic/s of Primary Focus: Government Intervention -The Cost of Interfering with Market Forces(May also include content from previous topics.)

Read the following excerpts from the Carsguide webpage ‘Luxury car tax Australia: What is the LCT?’(2 March2021) is luxury car tax? Luxury Car Tax (LCT) is a tariff on new cars (those less than two years old) sold at a price that’s above a value threshold set by the Australian Tax Office (ATO), and it’s called aLuxury tax because theoretically it only applies to expensive cars at the luxurious end of the market. The tax is paid by dealers who import or sell luxury cars and also by individuals who import luxury cars, with dealers generally passing on the cost of the tax to the buyer as part of a vehicle’s total price. Introduced by the Federal Government on 1 July 2001, the LCT was implemented as a means to dissuade and limit Australians from buying imported prestige and exotic cars, encouraging them instead to purchase Australian-built cars from Holden, Ford and Toyota (back when such cars existed). With Holden, the last domestic car manufacturer, closing in 2017, luxury car tax in Australia has become a hot topic of debate with a growing wave of support from industry peak bodies such as the Federal Chamber of Automotive Industries (FCAI), the Australian Automotive Association (AAA) and the Australian Automotive Dealer Association (AADA) to abolish the tax for being a redundant and unnecessary form of government charges. When does luxury car tax apply? LCT is charged at the rate of 33 percent on the amount above the LCT threshold, which for the 2020-2021 financial year was $77,565 for fuel-efficient vehicles (classified as cars that have a combined fuel-consumption rating not exceeding 7 litres per 100 kilometres) and $68,740 for other vehicles.So, for example, if your car cost $100,000 and used 10 litres per 100km, you would pay the 33 percent tax on $31,260, meaning it would take the price of the vehicleto $110,0315.80.The rate was increased to 33 percent from 25 percent back in 2008, despite no Senate approval for the sizeable increase.

[…]While the death of local car manufacturers is key in the argument against luxury car tax in Australia, there’s also the question as to why such a tax doesn’t apply to other luxury vehicles such as boats, helicopters and private jets. And although there have been hopes that the Australian Government would cut luxury car tax on EVs to encourage consumers to buy them, this has yet to occur.[…]Task:Utilise a tax within ademand and supply model for luxury cars, to analyse the Luxury Car Tax described on this webpage. Although in reality it is a percentage-based tax with even other complexities such as a threshold, as a simplification you can consider it as a basic per-unit tax of a fixed amount (and do not need to follow the correct numbers), to make itmore similar to examples studies in our course.The article says that the “tax is paid by dealers”. Explain why then it is not just the dealers (sellers) who are impacted by the tax. Detail the impacts caused by this tax on not just the dealers, but alsoon consumers, the government, and overall economic efficiency.Ensure that you use diagrams where relevant to support your answer, and make sure to use key terminology and course concepts where appropriate.


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