Are Australian car buyers getting ripped off?

Our headline is one of the most frequently asked questions by CarAdvice readers, and one of the biggest debates in our forums.

If we take an example of a high-end vehicle such as the Porsche 911 Carrera, which costs $94,700 (US$84,300) in America but $206,500 in Australia, it�??s perhaps understandable.

By popular demand, then, CarAdvice has sought to shed light on the situation, which is far from straightforward and involves a number of factors.

But first the biggest factor contributing to Australia�??s higher prices compared with most markets around the world: the Luxury Car Tax (LCT).

The Howard Government introduced LCT in 2000 at the same time as it brought in the Goods and Services Tax (GST). As it stands today, LCT is a tax of 33 per cent imposed on the GST-inclusive value of �??luxury cars�?? over the relevant LCT threshold.

The government�??s definition of a �??luxury car�?? is one that costs more than $60,316. For vehicles deemed �??fuel efficient�?? �?" those that consume no more than 7.0 litres of fuel per 100km on the combined cycle �?" the threshold is $75,375.

We�??ll spare you the calculations, but it effectively means that for every dollar you pay over the relevant threshold, the government claims 23.1 cents in LCT.

On that 911 Carrera, of which $146,184 falls over the threshold, $33,735 of that is LCT. Without LCT, the same 911 would cost $172,765.

The more expensive the car, the more painful the equations become.

It�??s not fair to use Porsche as a lone example, though.

A new Ferrari 458 Italia costs $526,950 in Australia. A whopping $107,685 of that is LCT. Without it, the price falls to $419,265.

Australia�??s most expensive new car, the Rolls-Royce Phantom Drophead Coupe, costs $1,019,000. For each one sold, the government claims $221,235 in LCT, meaning that without LCT the flagship Phantom would cost $797,765.

An economic statement released by the Federal Government in August estimated that it would rake in more than $1.5 billion from LCT alone over the next four financial years, with projections increasing to $400 million in the final year of that period (July 2016 �?" June 2017).

Unsurprisingly, Australia�??s luxury car manufacturers are unanimous in their opposition to LCT.

Porsche Cars Australia public relations manager Paul Ellis labels it �??unfair�?� and �??discriminatory�?�.

�??If it�??s a luxury tax, why is it only cars?�?� he questions. �??There�??s not luxury tax on high-end boats, high-end jewellery, high-end home entertainment systems�?� why just cars?�?�

�??The cars are the most innovative on the road; it�??s a tax against safety and technology if you look at it that way.�?�

Mercedes-Benz Australia corporate communications senior manager David McCarthy echoes Ellis�?? criticisms.

�??The justification for it is slim,�?� he says. �??The Henry Tax Review recommended its abolition. It does make bringing the technology and the safety and the low-emission cars to Australia more expensive, so we don�??t see it as a positive thing.�?�

Rolls-Royce Asia Pacific regional director Paul Harris describes LCT as �??wholly unfair�?�.

�??As a car company, we don�??t like being picked on particularly,�?� he says. �??For us it�??s unfair �?� because at the end of the day the car is expensive enough already.

�??I think the fundamental principle that is difficult to get your head around is tax on tax.�?�

BMW Australia managing director Phil Horton agrees with German rivals Mercedes and Porsche that LCT should be scrapped and replaced by a fuel consumption or emissions-based tax.

Horton, who has lived and worked in the UK, believes implementing a system similar to Europe�??s road tax initiatives �?" in which owners of lower-emission vehicles are charged less than owners of higher emitters to use certain roads �?" would be a more appropriate alternative.

�??[That] would be one way to do it,�?� Horton suggests. �??And I think [the government would] probably earn more money through that.

�??At least then you�??re trying to change behaviour. When does luxury car tax change behaviour? It changes behaviour by encouraging people not to buy more expensive cars.

�??And actually it clearly doesn�??t do that anyway because the [premium] segment is growing.�?�

Official industry sales data reveals in the first eight months of 2013 combined sales across eight premium segments increased 10 per cent �?" almost two and a half times the growth rate of the market as a whole �?" compared with the same period in 2012.

Sales of upper-large passenger cars (+50 per cent), $55K-plus people-movers (+24 per cent), $100K-plus upper-large SUVs (23 per cent) and $200K-plus sports cars (+25 per cent) in particular have led the way, suggesting that Australians�?? hunger for luxury cars is growing rather than waning.

Our tables (below) reveal that LCT can only explain so much, however.

Despite costing $67,900 in Australia, the Mercedes-Benz C250 sedan is exempt from LCT as it qualifies as a fuel-efficient vehicle, consuming just 6.8L/100km combined.

Yet a C250 costs the equivalent of $40,200 in the States, as well as $52,500 in South Africa and $56,200 in the UK.

McCarthy emphatically refutes the suggestion that luxury car brands in Australia take advantage of customers because of the well-known perception that cars are more expensive here.

�??We work to a similar margin to every other market in the world,�?� says McCarthy.

�??[With the] C-Class in America, they sell at least 10 times the volume we do. The cars are not as highly equipped as they are here, [and] shipping to Australia, import duty, luxury car tax �?� they all add to the price.�?�

McCarthy�??s point on Australia�??s luxury cars being better specified than other markets is a valid one.

Compared with the US-spec C250 sedan, our car gets: larger 18-inch alloy wheels; leather upholstery; reversing camera; Comand infotainment system with seven-inch display, satellite navigation, voice control, DVD player, SD card reader, 10GB music storage; and Pre-Safe accident anticipatory system, among other features.

He says the reality is that premium and luxury cars have never been more affordable in Australia than they are today.

�??Look at the price of an E-Class or a C-Class 10 years ago and you look at the equipment in the car now. In most cases the car in pure dollar terms is cheaper, and that�??s without adjusting for inflation.�?�

Supporting his claim, a 2003 Mercedes-Benz C240 sedan cost $74,900, making it $7000 more than today�??s C250.

Prices of the entry-level 911 range from the equivalent of $94,700 to $131,000 in the US, UK, South Africa and Japan.

Ellis admits Porsche�??s prices vary from country to country but insists their positioning relevant to their competitors is consistent across the globe.

�??If Porsche has a premium over another German brand in Italy and that premium is five or seven per cent then that premium has to exist in markets like Australia,�?� he says.

�??Even though cars in the US are significantly more affordable than they are here, you will find that the market positioning is still the same, the Porsche will still cost more than the German competitor. It�??s all relative.

�??In our case, we feel we have a superior product, engineering integrity, and that�??s got to have a value. You can�??t just price cars on features; there�??s a premium to be paid for the best built.�?�

The validity of those premiums was thrown into question in April, however, when Porsche Cars Australia took the knife to its Boxster, Cayman, 911 and Cayenne model lines, slashing prices by up to $36,300 and 13 per cent.

The cut was swiftly followed by British rival McLaren, which cut more than $100,000 from the MP4-12C Spider in May, reducing its price to $441,780, and at the same time criticising rival super luxury sports car manufacturers for �??employing premium pricing policies�?� in Australia.

The most dramatic cuts came from Rolls-Royce in November 2012, however, when it lopped more than a quarter of a million dollars from select models in its flagship Phantom range �?" a result of a stronger Australian dollar, it said at the time.

While a strong local currency is good news for importers, both McCarthy and Ellis say their rates are locked in with their parent companies at least 12 months in advance, ensuring pricing stability and consistency.

�??[Currency fluctuations are] not an issue,�?� Ellis says. �??We�??re not selling whitegoods, we�??re selling cars.

�??You can�??t one day price you�??re car at $100,000 and a week later price it at $93,000 because there�??s been an adjustment in the exchange rate, then the following month price it at $104,000 when the dollar�??s weakened. You can�??t do that.

�??You�??ve got to be consistent with your pricing because the resale values of these cars is also important, and as soon as you start adjusting the purchasing price of the car it does have a knock-on effect to resale value.

�??No one cares about a fridge after it�??s 10 years old; you throw it away. You can�??t throw away a 911.�?�

McCarthy�??s parting advice for consumers is succinct and simple.

�??If peoples�?? view is that the car is too expensive, don�??t buy it,�?� he says.

�??We�??re comfortable with where the cars are priced. We work really hard on pricing them as sharply as we can and putting in as much equipment and as much technology in.

�??If people want to complain about it, fine, that�??s their right.�?�

There�??s little doubt Australia is an attractive and highly profitable market for luxury car brands to operate in, though, with most finding ways to introduce seemingly every new model their parent companies launch, no matter how niche.

Consumers and manufacturers may largely disapprove of LCT, but while sales of luxury cars continue to rise, and with them the government�??s income estimates, don�??t expect it to disappear in a hurry.

Mercedes-Benz C250 sedan

• Australia: $67,900
• USA: $40,200 (US$35,800)
• UK: $56,200 (£32,285)
• Japan: $67,400 (5,890,000 yen)
• South Africa: $52,500 (478,995 ZAR)

Lexus RX450h 4�?4

• Australia: $82,900
• USA: $53,700 (US$47,810)
• UK: $77,500 (£44,495)
• Japan: $67,100 (5,860,000 yen)
• South Africa: $89,200 (814,900 ZAR)

Porsche 911 Carrera coupe manual

• Australia: $206,500
• USA: $94,700 (US$84,300)
• UK: $127,800 (£73,413)
• Japan: $131,000 (11,450,000 yen)
• South Africa: $113,800 (1,039,000 ZAR)

Ferrari 458 Italia

• Australia: $526,950
• USA: $251,100 (US$233,509)
• UK: $310,700 (£178,451)
• Japan: $323,900 (28,300,000 yen)
• South Africa: $405,200 (3,700,000 ZAR)

Rolls-Royce Phantom Drophead Coupe

• Australia: $1,019,000
• USA: $533,600 (US$474,900)
• UK: $509,400 (£292,600)
• Japan: $638,600 (55,800,000 yen)
• South Africa: Price on application