Tariffs on European cars scrapped in Australia, but Luxury Car Tax lives on – with revisions

Prime Minister Anthony Albanese announced a new Australia-European Union Free Trade Agreement today, with big changes set to impact the new-car industry – and Australian buyers.

According to the Federal Government, negotiations have resulted in the establishment of a new category under the Luxury Car Tax (LCT) for zero-emissions vehicles, with the tax threshold to be set at $120,000.

Under the outgoing rules for the 2025-26 financial year, fuel-efficient vehicles – which includes all cars with a combined fuel consumption rate under 3.5 litres per 100 kilometres, as well as zero-emissions vehicles – would be taxed 33 per cent for each dollar above $91,387.

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Additionally, a broadstroke five per cent tariff on all European cars imported to Australia will also be axed under the new trade deal, resulting in cheaper models from the bloc – no matter what the powertrain.

However, European automakers aren’t the only ones to benefit, with the new LCT mandate believed to extend to all electric vehicles (EVs).

“The removal of the five per cent tariff on EU-sourced vehicles will improve affordability and increase competition in the Australian market,” said James Voortman, CEO of the Australian Automotive Dealer Association.

“While the introduction of a higher LCT threshold for electric vehicles provides some benefit, it is a narrow change that will only affect less than one per cent of vehicles sold and does not address the fundamental flaws of the tax,” he said in a written statement.

It’s understood negotiators from the European Union were pushing for the LCT to be scrapped entirely, according to the Australian Financial Review.

Exact details of the comprehensive free-trade agreement have yet to be published, however the government claims the accord “means tradies and buyers of European vehicles will benefit from cheaper European cars”.

Under the Australia-European Union Free Trade Agreement, the Australian Government says 98 per cent of the current value of Australia's exports will now enter the EU duty free with tariffs eliminated on almost all agricultural products, and tariff rate quota volumes expanded for various exports such as beef and rice.

"Almost all" manufactured goods and mineral resources exported to the EU will also face zero import tariffs, while in Australia most tariffs will be removed on EU imports such as wine and chocolate.

While negotiations have been finalised – after formally beginning in 2018 – the deal must now undergo formal ratifications through Australian and European authorities before it is implemented.

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