Luxury vehicles and the tax system: what the rules actually cost you
Corinne Kirk · Aug 08, 2025 · Accounting and Taxation
The purchase of a luxury vehicle for business or income-producing purposes is one of the more common situations in which the tax outcome diverges materially from what the buyer expects. The rules that apply are specific, the thresholds are updated annually, and the cost of misunderstanding them is quantifiable. What follows sets out how the system works in 2025–26.
The luxury car limit and its effect on deductions
The ATO publishes an annual luxury car limit — for 2025–26, that figure is $69,674. Where the total cost of a vehicle exceeds this limit, two separate consequences follow for buyers using the vehicle in business or income-producing activities.
The first is a cap on GST credits. Ordinarily, a GST-registered business can recover the full GST component of a business vehicle purchase. Where the vehicle exceeds the luxury car limit, the recoverable GST credit is capped at one-eleventh of $69,674 — being $6,334 — regardless of the actual GST paid.
The second is a cap on depreciation deductions. The depreciable cost of the vehicle is limited to the luxury car limit, irrespective of what was actually paid. A vehicle purchased for $88,000 is depreciated as though it cost $69,674. The excess is simply not deductible.
To illustrate: Alice purchases a vehicle for $88,000 (GST inclusive) in July 2025, used solely for business. Her GST credit is capped at $6,334 rather than the $8,000 she paid. After subtracting the claimable GST, the net cost is $81,666 — still above the luxury car limit — so her depreciation deductions are also capped at $69,674. The gap between what she spent and what she can claim is a permanent cost.
Vehicles that fall outside these rules
The luxury car limit applies only to vehicles classified as cars under the tax legislation — that is, vehicles designed principally to carry passengers. Two exceptions are worth understanding clearly.
A vehicle designed to carry a load of at least one tonne, or designed to carry nine or more passengers, is not a car for tax purposes and the luxury car limit does not apply. A ute meeting the one-tonne threshold falls outside the rules entirely.
A dual cab ute designed to carry less than one tonne is classified as a car. It may still escape the passenger-carrying classification if it can be demonstrated that carrying passengers is not its principal purpose. The test applied is a formula: the vehicle's designed seating capacity multiplied by 68 kilograms. If the resulting passenger weight does not exceed the remaining load capacity, the vehicle is not treated as designed principally for passenger carrying. The calculation and the documentation supporting it are worth confirming before purchase.
The position for four-wheel drive vehicles that are not dual cab utes is assessed differently and should be examined on the specific facts.
Luxury car lease arrangements
Where a vehicle exceeding the luxury car limit is acquired under a lease and used in business or employment duties, the tax treatment departs from the standard lease deduction rules. Rather than claiming a deduction for the actual lease payments, the taxpayer is deemed to have purchased the vehicle using borrowed funds. Deductions are then available for notional interest and depreciation — both subject to the luxury car limit. The practical effect is that the deduction available under a luxury lease arrangement is no different from that available on an outright purchase of the same vehicle.
Luxury car tax
Luxury car tax is 33 per cent of the GST-exclusive amount by which a vehicle's LCT value exceeds the relevant threshold — the excess, multiplied by 10/11, then by 33 per cent. For 2025–26 the thresholds are $91,387 for fuel-efficient vehicles and $80,567 for all others.
From 1 July 2025, the definition of a fuel-efficient vehicle has tightened considerably. A vehicle now qualifies for the higher threshold only if its fuel consumption does not exceed 3.5 litres per 100 kilometres. The previous threshold was 7 litres per 100 kilometres. Many vehicles that previously attracted the higher threshold no longer do so, and buyers who have not confirmed the fuel efficiency classification of a vehicle under consideration may be working from an outdated assumption.
In practice
The after-tax cost of a luxury vehicle purchase depends on the interaction of several rules that do not always operate intuitively. The calculation is worth completing before a purchase agreement is signed — not after. If you are considering a vehicle purchase and would like to work through the tax implications specific to your circumstances before you commit, we welcome the conversation.
Corinne Kirk
Partner, Accountant
1300 102 542 | 0405 106 401
corinne@egu.au
This is general advice. It does not take account of your objectives, financial situation, or needs, and is not a substitute for advice that does. Before acting on anything in it, consider whether it suits your circumstances, and consider the relevant Product Disclosure Statement.