Joerg Hofmann, Managing Director for Audi Australia delivered Audi’s presentation to the Senate Standing Committee on Economics today.
The committee is currently assessing the validity of changes to the Luxury Car Tax (LCT), as outlined in the federal budget handed down in May by Treasurer Wayne Swan.
Hoffmann’s presentation outlines the company’s direct opposition to not only the LCT changes (raising the applicable tax rate from 25 per cent to 33 per cent), but the very existence of the tax itself.
Audi is one of four German prestige brands protesting that the changes to the LCT will have far-reaching effects, including potential job losses in Australia, stalling the growth of ‘green’ and safe car sales, potentially adding fuel to the fire of inflation and placing the Australian government in conflict with the European Union on trade issues — and that’s just the big-picture agenda!
During the launch of the Audi A3 Cabriolet last week, the Carsales Network caught up with Audi’s General Manager Corporate Communications, Anna Burgdorf, who explained the current state of play.
“The way it works is there are three hearings: one in Adelaide on Monday [July 21], one in Sydney next Thursday [today] and one in Melbourne on the 6th of August.
“So effectively, anyone who wants to and is prepared — and is appropriate — to give evidence can certainly apply to do that… and we’ve definitely done that.”
One of the key planks of Hoffmann’s presentation concerns the investment Audi is making in Australia and the number of locals employed by the importer and dealer network — 100 working directly for Audi and 1000 employed by the dealers.
Furthermore, the company plans to generate 280 more jobs by 2010 and will invest $50 million in new corporate headquarters, $40 million annual expenditure for marketing and $15 million more per annum for salaries and administration within Audi’s Sydney office.
Contrast that with the potential erosion of sales following the introduction of the LCT revisions. According to Audi, 73 per cent of vehicles sold here are subject to the LCT and the changes are forecast to reduce sales by 20 per cent over the next four years.
And from the government’s own perspective it doesn’t appear to make sense, the importers say. Audi calculates the loss of government revenue through LCT, GST and stamp duty (the last actually a state government revenue stream) will amount to $123.8 million over the same four-year period.
Audi is recommending to the Senate through the committee five alternatives to the status quo:
1. Remove the LCT altogether,
2. Increase the LCT threshold from the current figure of $57,180 to an indexed figure of $95,500,
3. Maintain the LCT as it is, with a 25 per cent rate applicable,
4. Implement the LCT changes without charging taxpayers retrospectively (from July 1),
5. Price-protect customers who ordered cars prior to the May budget, but haven’t taken delivery of the vehicles prior to the July 1 implementation date.
2. Increase the LCT threshold from the current figure of $57,180 to an indexed figure of $95,500,
3. Maintain the LCT as it is, with a 25 per cent rate applicable,
4. Implement the LCT changes without charging taxpayers retrospectively (from July 1),
5. Price-protect customers who ordered cars prior to the May budget, but haven’t taken delivery of the vehicles prior to the July 1 implementation date.
Plainly, these five recommendations have been presented by Hoffmann (pictured) in order of the company’s best to worst case scenarios.
“We maintain that we don’t believe Australia should have a luxury car tax,” said Burgdorf.
“We certainly don’t believe it should be increased, but at the very least, certain things like raising the threshold to a fairer level, in keeping with the CPI increase, in keeping with average weekly earnings… this sort of thing, would be a fairer measure than the way it’s been going.
“And the other thing that we’re particularly passionate about is the retrospective introduction. If it passes at the end of August, why would it come into place from the 1st of July? It is so complicated and so difficult for customers and dealers to come to terms with, in terms of finance arrangements and contractual arrangements.
“If it passes, make it prospective, don’t make it retrospective.”
Doubtless some in the automotive industry will see the retrospective implementation of the new tax rate as a gambit by the government — something the government will negotiate away in exchange for acquiescence on the part of the car companies and the federal opposition.
However, the government may have miscalculated the depth of opposition to the tax and especially, to the mooted changes. The prestige importers are represented, as a collective, by the Federal Chamber of Automotive Industries (FCAI), which presented its views on behalf of the industry at the Adelaide hearing.
“There were three senators there,” said Burgdorf, “so it was a little hard to [gauge feeling] from the room, but there was a good discussion, a lot of questions asked about the points the FCAI raised on behalf of the industry.
“[The FCAI’s] presentation was very good. It covered a lot of areas.”
One of those areas was the sticking point of the tax threshold — the level beyond which the tax applies. Recently, the Australian Taxation Office raised the threshold from $57,134 to $57,180, an increase that, on the face of it, doesn’t reflect the underlying rate of inflation. As a consequence, more cars are being drawn into the pool of ‘luxury cars’ with each passing year.
Audi estimates that by 2030, as many as 50 per cent of all new cars sold will be subject to the LCT. Read that again, if the threshold doesn’t keep pace with inflation, that will lead to 50 per cent of new-car buyers being ‘caught in the net’.
“One of the deficiencies of the tax over many years,” says Andrew McKellar, Chief Executive of the FCAI (pictured), “has been the fact the threshold has not kept pace with changes in the market.”
“Because of the way that sub-index is calculated, it seeks to adjust for things like changes in vehicle spec and quality — so it hasn’t gone up as rapidly as the more general CPI.
“And what we’ve observed over many years is that the list of vehicles that are captured by the Luxury Car Tax, has increased significantly. Unless there’s a change, that trend will continue.”
It was this paradigm that led the FCAI to present a case in Adelaide for the threshold to be indexed to the CPI (Consumer Price Index, the annual rate of inflation expressed as a percentage).
“There’s a number of scenarios that have been offered by the FCAI — which we agree with,” Burgdorf observed, in regards to changes to the LCT that would be more beneficial for the industry.
“One is at least a CPI increase…
“There is another one that is [based] more on the price of an average six-cylinder model and there’s another one which correlates to average weekly earnings.
“On the other hand, when the LCT was first introduced, it just captured the top 2.5 per cent of the market, so there’s a fourth equation if you like. Any or all of those would be more reasonable than $57,180.”
There’s little doubt that ‘scenario number four’ is consonant with Audi’s second recommendation that the threshold be raised to $95,500.
“[The threshold] would be great around $100,000,” Burgdorf said.
“It certainly seems fair and it certainly seems more in the vicinity of a luxury car.
“I think the Luxury Car Tax — if it’s designed to do a specific thing, which originally it was — should stay at a [relatively] stable level, so if cars get more expensive under bracket creep, you need to readjust your luxury car tax and it gets adjusted with inflation every year…”
The implication seems to be that those buying cars priced above $100,000 are less likely to be deterred from buying, even if there’s $13,000 extra cost tacked on to the price of a BMW M6. Those buyers purchasing cars between the current threshold and the $100,000 mark are the ones who are deserting ‘luxury’ cars.
That’s apparent from Audi’s estimate of the drop in sales during July, compared with the first six months of 2008.
“We’ve had about a 15 to 20 per cent drop [in sales since July 1] and we are covering [the additional cost in the interim],” said Burgdorf. Asked whether the company could continue to absorb the extra cost of the proposed tax rate increase after the August 26 deadline for the Senate Economic Committee’s report, she admitted that Audi’s plans beyond that date were not fully formed.
“It’s step by step for us at the moment. We’ve said until around the 26th of August — and by that stage we’ll know and then we’ll make a judgement based on what the information is at the time.”
For those car companies negatively affected by the LCT and prospective legislative changes, now is arguably the time to ‘go red’, in negotiation terms — and every indication is there that the prestige and luxury car importers are doing just that.
One spokesperson for a different importer had left the door open to car companies adversely affected by the changes to the LCT pursuing remedies against the government through the legal system, citing a restraint of trade.
Although Burgdorf said nothing of that, she did refer to the tax changes bearing an “impact on investment that we had planned, based on sales projections that may now not come true”.
However, the overall picture is brightening for the importers since the Senate insisted that the Economics Committee study the proposed changes to the LCT.
“We remain optimistic,” Burgdorf said, “I don’t think [the battle’s] lost yet.”
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