Son of Holdback and Luxury Car Tax (LCT)


Son of Holdback & Luxury Car Tax (LCT)

Frequently Asked Questions

The 'Son of Holdback' case (AP Group Limited v Commissioner of Taxation [2013] FCAFC 105) concerned the GST treatment of various incentive payments in the motor industry that flow from motor vehicle distributors to motor vehicle dealers.

In a Decision Impact Statement published in mid-December 2013, the ATO briefly outlined their view about the consequential implications for luxury car tax (LCT) flowing from the Full Federal Court's decision in Son of Holdback.

With the pending changes to the calculation of LCT as a result of the Son of Holdback decision, dealers, distributors and dealer management systems suppliers are facing the need to understand the changes and take action in a short period of time. Set out below are a number of questions being posed by our clients in the motor dealer sector and our responses.

Dealers are encouraged to obtain their own professional advice about the LCT consequences of the Son of Holdback decision.

Why does the LCT calculation change?

The payments treated as "third party consideration" for a retail sale will result in a higher amount of LCT because the "price" for LCT purposes adopts the same definition as the "price" for GST purposes.  The Court's decision that certain fleet rebates and run-out bonuses form part of the price for GST purposes therefore automatically flows to the LCT calculation.

It seems unlikely that LCT was ever intended to apply to incentive payments between distributors and dealers but rather limited to the amount agreed by the retail customer for the purchase of the vehicle.  It also seems unlikely that LCT was intended to be a different amount for essentially the same transaction owing to matters such as how dealers organise the financing of their stock.  

This is, however, the outcome because, absent the third party finance company, it is expected that the ATO will treat these incentive payments as a discount for GST purposes, resulting in no change to the LCT calculation.

Without a change to the definition of "price" in the LCT Act the outcome will be as set out above

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Do the LCT changes only apply to fleet rebates and run-out bonuses?

No, the Court's decision concerned only fleet rebates and run-out bonuses but the principles need to be applied to all incentive payments you receive.  Any payments that are 'third party consideration' for the retail sale of the vehicle for GST purposes will automatically be included in the 'price' for the purposes of determining whether a vehicle attracts LCT and, if so, how much.

Deloitte has produced a decision tree to assist with understanding how to apply the principles from the Court's decision to the incentive payments you receive.  The starting point is that only 'car specific payments' need to be considered, being payments in respect of an individual vehicle.  The ATO has confirmed that holdback payments are not to be treated as third party consideration and therefore holdback payments will not be included when calculating LCT.  This leaves other car specific payments that are triggered by a retail sale to a customer (as opposed to triggered by the wholesale purchase or simply holding inventory). 

In addition to fleet rebates and run-out bonuses a major category that may impact the LCT position is demonstrator bonuses.  Deloitte has discussed this category with the ATO. The ATO is currently undecided as to the GST treatment of demonstrator bonuses.  While some aspects of some demonstrator bonus programs appear to fit into third party consideration other aspects might continue to be for a supply by the dealer to the distributor or outside the scope where linked to the wholesale purchase.  Until the GST treatment becomes clear, the LCT position cannot be determined, since one follows the other.

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Why does this produce an absurd outcome?

The Court's decision means that LCT will result in differential retail pricing (or dealer margins) between marques and, in some cases, within the same marque merely as a result of how incentive payments, mechanically, get passed through to the dealers.

The decision itself neatly illustrates the absurd result.  The case considered the Toyota fleet program under which two identical Toyota vehicles sold by the same dealer on the same day to the same fleet customer would be subject to different LCT merely because one vehicle was ordered as a fleet vehicle (meaning the wholesale price was reduced by the rebate) and the other was sold from existing inventory (meaning the rebate was paid as a separate amount direct from the distributor to the dealer). 

It seems illogical that two transactions that are in substance and reality the same should attract different amounts of LCT.  It also seems absurd that the fleet customer should be expected to pay two different retail prices for these vehicles (assuming the dealer passes on the LCT as they usually would) merely as a result of how a 'hidden payment' between the distributor and dealer was paid out.  Even if the dealer chooses to absorb some or all of the additional LCT it seems absurd that two transactions that are essentially the same should produce a different profit margin solely as a result of LCT.

It should also be stressed that were it not for the existence of a third party finance company it is expected that the ATO would treat the fleet rebates in exactly the same way as the actual discounts through the supply chain, i.e. with no change to the LCT.  This means that dealers who purchase vehicles direct from distributors (i.e. not bailment) will secure a competitive advantage through lower LCT calculations.

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Can the distributors do anything to avoid this LCT outcome?

We understand that some distributors are in discussions with the ATO about changes to their incentive programs although the details are not known.  There are strong grounds for expecting the ATO to be amenable to suggestions from the distributors to change their incentive programs to maintain the status quo on LCT, including:

  1. The situation whereby LCT leads to a competitive advantage or disadvantage between dealers merely as a result of how incentive payments are mechanically passed through to dealers (i.e. as a discount to the vehicle or as a separate rebate)
  2. The fact that, absent the third party finance company, the incentive payments will be treated as a discount for GST purposes resulting in no change to the LCT calculation (and therefore dealers who buy cars direct without a third party finance company have a competitive advantage on LCT)
  3. The ATO's acknowledgment that this LCT outcome was an unintended consequence of their arguments in court.

Any changes would, after all, merely reflect the commercial reality of fleet rebates and run-out model payments in the eyes of the distributors and dealers as discounts to the underlying vehicle prices (see for example the Federal Chamber of Automotive Industries' submission to the Board of Taxation). 

The most obvious change for the distributors to adopt would be to follow the guidance of the Court when it considered the Toyota fleet program. A fleet rebate paid as a discount to the sale of the vehicle to the finance company and, in turn, to the dealer is not third party consideration for GST purposes and therefore there is no change to LCT.  The Court seemed to distinguish between a situation where a separate (prospective) payment is made in return for selling a vehicle on particular terms from that where the vehicle price was actually discounted through the supply chain (even though the discount would be reversed if the car was not sold on particular terms).  It seems to us that, following the Court's decision, it may be possible to amend the terms and conditions such that all fleet rebates and run-out bonuses (and demonstrator bonuses if applicable) for all marques are treated as a discount to the underlying vehicle by the distributor issuing an adjustment note to the finance company and, in turn, to the dealer.  This would mean that the LCT remains unaffected and the level playing field continues. 

This part of the Court's decision dealing with the difference between paying a fleet discount upon order of a vehicle (which has to be paid back if certain retail sale conditions are not met) and paying a subsequent fleet rebate upon sale of a vehicle has led to a lot of debate in the GST market and is widely considered to be wrong.  It seems to us that a discount – provided it does actually alter the vehicle price to both the third party finance company and, in turn, to the dealer – is a discount for GST purposes irrespective of whether it is given at the outset or at a later event.  This is also consistent with the ATO's published views on things like volume rebates. 

Ultimately this would have to be driven by the distributors in consultation with the ATO but it seems to us that the ATO would not want an outcome where LCT is different on an actual discount through the supply chain based solely on timing.  The ATO's concern has always been limited to 'third party payments' where a third party finance company exists in the supply chain and payments are made direct from distributor to the dealer. 

It should be noted that some distributors already pay fleet rebates as a discount to the vehicle through the supply chain.  Importantly, this includes situations where the vehicle was not ordered as a fleet vehicle but rather sold from existing inventory and thus re-invoicing of the vehicle price through the supply chain was performed sometime after the vehicle was ordered.

It seems to us that distributors will be very keen to avoid a situation whereby LCT becomes a competitive advantage or disadvantage among their own franchises merely as a result of how incentive payments get passed through to dealers.  Distributors and dealers are likely to want an outcome where taxes are a level playing field across all of their franchises. 

Distributors will also be keen to ensure that LCT does not create a competitive disadvantage in the fleet and run-out business compared to rival marques.  If one distributor pays fleet rebates and/or run-out model payments as discounts through the supply chain and another does not then LCT could result in a material price differential that would perhaps otherwise not have been the case.  This could be particularly so in run-out campaigns being run at the same time between competing marques, potentially leading customers to make decisions to buy rival marques that they would not otherwise have done.

In summary, if all distributors (of vehicles that exceed the LCT threshold) alter their programs such that fleet payments and run-out bonuses (and potentially demonstrator bonuses) are always passed through the supply chain as adjustments to the vehicle price then there will be the level playing field on LCT that currently exists.

It should also be noted that treating payments as third party consideration for the retail sale of the vehicle leads to changes to the GST paperwork that would also not be required if the above changes can be adopted.  Furthermore, the ATO has indicated that distributors can claim input tax credits on the third party consideration they pay through Division 134 of the GST Act but they have yet to provide a definitive ruling on this point.  Again, if affected incentive payments can be paid as actual changes to the price of the vehicle through the supply chain any uncertainty on input tax credits for the distributors goes away.  Therefore restructuring produces administrative benefits and more certainty, to all parties, as well as resolving the LCT problems.

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Can the distributors do anything?

What are other dealers doing?

Most dealers are well aware of the potentially unintended consequences resulting from LCT and, as a result, there appears to have been an expectation that the distributors would change the way incentives are paid in order to avoid the distortion of competition. 

Whilst this may well be the outcome, we stress the importance of being in a position to change your LCT calculations by the deadline (sometime later than 1 March 2014) in the event that incentive programs do not change.  Failure to do so would lead to assessments and potentially penalties and interest for the dealers as the responsibility to account for GST and LCT rests with them.

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What are other dealers doing?

What do the dealers need to do now?

We suggest that the first step is to speak to your Dealer Council(s) and/or distributor(s) to understand whether they intend to alter their incentive programs in order to maintain the status quo on LCT. 

If they do not then the dealer will be responsible for calculating LCT on the higher amount and taking a view about whether this is to be passed onto the retail customer along with the usual government charges. 

In order to identify which incentives will be the subject of a new LCT calculation dealers will have to identify which payments, as at March 2014, are:

  1. In respect of cars that exceed the LCT threshold (or will exceed the LCT threshold as a result of including the payment)
  2. Third party consideration for GST purposes following the Court's decision. 

Deloitte has produced a decision tree to assist with applying the Court's decision to your incentives.

The main classes of incentive payments affected by the decision will be fleet rebates where the rebate is paid directly to the dealer after notification of the retail sale, and run-out model payments where the payments are triggered by the retail sale.  A review will be required as not all of these payments will necessarily be third party consideration. Other categories such as demonstrator bonuses remain less clear – some demonstrator bonuses could be third party consideration but these could also be seen as continuing to be for a supply by the dealer to the distributor.

A way to obtain certainty on the LCT treatment will be to obtain private binding rulings from the ATO on the GST treatment (from which the LCT treatment follows). The ATO has indicated to Deloitte that if dealers choose to adopt this approach, the ATO may entertain issuing 'class rulings' for each payment on behalf of a group of clients, to expedite the process.

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What do the dealers need to do now?

Are there any other options to resolve the LCT problem?

Lobbying to change the definition of "price" in the LCT Act is another option available. As stated above, it is unlikely that the intention of LCT was for it to attach to hidden payments between distributors and dealers but rather to be limited to the deal agreed between the retail customer and the dealer. This, together with the unintended results flowing from the use of the GST definition of "price" may warrant a legislative change.

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Are there any other options to resolve the LCT problem?

Who should I contact about LCT changes for my business?

Please contact one of the specialists below, or your usual Deloitte Motor Industry Services contact, if you require advice on the LCT position for your particular business.  In the meantime Deloitte intends to contact the Dealer Councils to offer our assistance more broadly to the industry.

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