Australia's Luxury Car Tax (LCT) threshold will increase from July 1st, 2026, by its smallest margin in up to 18 years, ahead of planned changes in 2027 that could reduce tax liabilities for electric vehicle buyers by up to AUD 8,500 (US$ 5,950).

From July 1st, 2026, the threshold for Luxury Car Tax - a 33% levy applied to the value of a vehicle above a specified amount - will rise by AUD 274 to AUD 91,661 for fuel-efficient vehicles and by AUD 242 to AUD 80,809 for all other vehicles.

The increase equates to a maximum tax reduction of AUD 82.20 for fuel-efficient vehicles and AUD 72.60 for other vehicles compared with the previous thresholds. It also represents the smallest increase in the fuel-efficient threshold since 2016 and the smallest rise in the standard threshold since 2008.

Fuel-efficient vehicles are currently defined as those with fuel consumption ratings of 3.5 litres per 100 km or less, including battery electric vehicles, following changes introduced in 2025.

Annual adjustments to Luxury Car Tax thresholds are linked to the Consumer Price Index (CPI), which measures inflation and changes in the cost of goods and services.

Although inflation has increased in recent months, stronger economic conditions during the middle of last year limited the threshold adjustment to 0.3%. When the CPI declines, the thresholds remain unchanged rather than being reduced.

The 2026 revision is expected to maintain the current structure until the planned introduction of a dedicated AUD 120,000 threshold for zero-emission vehicles. The measure forms part of a free trade agreement recently signed between Australia and the European Union.

The proposal has not yet been enacted into law and therefore does not have a confirmed implementation date. However, Federal Government documentation indicates that it is expected to take effect from July 1st, 2027.

If the 2026-27 fuel-efficient vehicle threshold remains unchanged into the following financial year, the introduction of a dedicated threshold for electric vehicles could reduce Luxury Car Tax liabilities by as much as AUD 8,502.

The proposed concession for electric vehicles follows longstanding criticism of the Luxury Car Tax, with critics arguing that the tax no longer serves its original purpose following the closure of Australia's domestic vehicle manufacturing industry.

Introduced in 1999, the Luxury Car Tax replaced a series of earlier taxes on high-value vehicles. Despite ongoing criticism, the tax remains a significant source of government revenue.

Luxury Car Tax revenue is projected to reach AUD 1.13 billion during the current financial year, compared with AUD 1.09 billion in 2024-25 and AUD 688 million in the 2018-19 financial year.