On 24 March 2026, Prime Minister Anthony Albanese and European Commission President Ursula von der Leyen signed the Australia-European Union Free Trade Agreement in Canberra. For Australian car buyers, the most immediate effects are a rise in the Luxury Car Tax threshold to $120,000, exemption of 75% of EU electric vehicles from LCT entirely, and the scrapping of a 5% import tariff on all European vehicles. If you have been waiting for a European EV or premium European car, the timing of your purchase decision just changed.
The EU pushed hard to abolish the Luxury Car Tax entirely during negotiations. They did not get that. What was agreed is more targeted but still significant for certain buyers.
The other major change is the removal of the existing 5% import tariff on all European-built vehicles. This tariff applied to every car built in the EU regardless of price — a Volkswagen Golf and a Porsche 911 both attracted it equally. That tariff is gone under the new deal.
What did not change: the LCT itself was not abolished. The rate remains 33% on the value above the threshold. Petrol and diesel vehicles continue to face the lower standard threshold (currently $80,567). The deal is specifically targeted at fuel-efficient vehicles, EVs, and EU-sourced vehicles.
This figure refers to approximately three quarters of EU-built EV models being priced below the new $120,000 threshold, making them fully exempt from LCT. It does not mean a blanket exemption for all EU EVs regardless of price — vehicles above $120,000 will still attract LCT on the amount above that threshold.
The Luxury Car Tax is a federal tax applied at 33% on the portion of a vehicle's GST-inclusive price above a set threshold. It applies to new vehicles and some demonstrators imported within the last two years. It does not apply to commercial vehicles designed primarily to carry goods.
There are two thresholds. The standard threshold ($80,567 in FY2025-26) applies to most petrol and diesel vehicles. The fuel-efficient threshold ($91,387 in FY2025-26) applies to vehicles consuming less than 7L/100km, plug-in hybrids, and battery EVs. Under the new deal, the fuel-efficient and EV threshold rises to $120,000.
The formula is: LCT payable = ((price / 1.1) - (threshold / 1.1)) x 0.33. Dividing by 1.1 removes GST before applying the LCT rate, because LCT is calculated on the GST-exclusive price.
Australia currently applies a 5% import tariff on vehicles built in the European Union. This is a cost not faced by vehicles from Japan, South Korea, Thailand, China, or the USA — all of which either have free trade agreements with Australia or zero-tariff treatment. European carmakers have long argued this created an uneven playing field.
Under the new agreement, that 5% tariff is eliminated for all EU-built vehicles, not just EVs. This applies to BMW, Mercedes-Benz, Volkswagen, Audi, Porsche, Volvo, Peugeot, Citroen, Renault, and every other brand that builds its vehicles in Europe.
Not every car sold by a European brand is built in Europe. BMW builds some models in South Africa and the USA. Volvo builds in China and Sweden. Mercedes has plants in several countries. The tariff exemption applies to the country of manufacture, not the brand's country of origin. Check where your specific model is built before factoring in tariff savings.
For an Australian buyer of a European EV priced between the old threshold and the new one, the combined saving from tariff removal plus LCT elimination could be substantial. Here is how it stacks up across a few real-world scenarios.
| Vehicle (indicative) | Price | Tariff saving | LCT saving | Total saving |
|---|---|---|---|---|
| European EV at $95,000 | $95,000 | $4,750 | $1,094 | $5,844 |
| European EV at $105,000 | $105,000 | $5,250 | $4,124 | $9,374 |
| European EV at $115,000 | $115,000 | $5,750 | $7,154 | $12,904 |
| European EV at $118,000 | $118,000 | $5,900 | $8,062 | $13,962 |
These savings represent the maximum benefit for vehicles priced close to but under the new $120,000 threshold. In practice, whether manufacturers pass on the full saving depends on their pricing strategies, demand, and exchange rates — but competitive pressure should ensure most of it flows to buyers over time.
Under the new $120,000 threshold, a wide range of European EVs that previously attracted LCT will now fall below it. Some examples of models that were previously above the old $91,387 threshold but should fall under $120,000:
Models likely to remain above $120,000 and continue attracting LCT on the excess include the BMW iX, Mercedes EQS, Audi e-tron GT, and Porsche Taycan. For these vehicles, the new threshold still reduces the LCT payable compared to the old rules, but does not eliminate it.
Verify with your dealer that the specific model and variant you are considering is EU-built. Some European brands source certain models from plants in China, South Africa, or the USA — those vehicles would not benefit from the tariff removal, though they would still benefit from the higher LCT threshold if they are EVs.
For PAYG employees considering a novated lease on a European EV, the trade deal changes the maths in two meaningful ways.
First, the FBT exemption threshold. The FBT exemption for eligible EVs under a novated lease currently applies to vehicles priced at or below the fuel-efficient LCT threshold. With that threshold rising from $91,387 to $120,000, a wider range of European EVs will now qualify for the FBT exemption. A vehicle priced at $105,000 that previously attracted both LCT and FBT is now potentially both LCT-free and FBT-exempt under a novated lease.
Second, the base vehicle price is lower. The removal of the 5% import tariff should reduce the drive-away price of EU-built vehicles over time. Since novated lease payments are calculated on the vehicle price, a lower purchase price means lower lease payments and a lower FBT base value — compounding the saving further.
The FBT exemption for EVs under novated leases is currently linked to the fuel-efficient LCT threshold. Whether the new $120,000 threshold automatically updates the FBT exemption ceiling or requires separate legislation is not yet confirmed. Check the ATO's position once implementing legislation is passed. This article will be updated when that is clear.
The agreement was signed on 24 March 2026 but it does not take effect immediately. Free trade agreements require ratification by both parliaments and implementing legislation before they become law. Based on Australia's process for previous trade agreements, this typically takes 12 to 18 months from signing.
Key milestones to watch:
While the deal is signed and the direction is clear, committing to a purchase purely on the expectation of imminent savings carries risk. The current LCT rules apply until implementing legislation passes. If you are buying in the next six months, use the current thresholds in your calculations and treat any future savings as a potential bonus rather than a certainty.
The tariff removal is the main benefit here. The vehicle was already LCT-exempt. Once the deal is implemented, the 5% tariff should reduce the purchase price. There is no urgent reason to rush your purchase for LCT reasons — you are already under both old and new thresholds.
This is the sweet spot where the deal creates the most significant benefit. You are currently paying LCT plus a 5% tariff. Once implemented, both disappear entirely for EU-built vehicles. Combined savings in this band could reach $5,000 to $14,000. It is worth understanding the implementation timeline and deciding whether to buy now at current pricing or wait.
You will still benefit from the tariff removal and from a lower LCT bill because the threshold has risen. But LCT does not disappear entirely. A $150,000 EU EV will still attract LCT on the $30,000 above the new threshold, generating approximately $9,000 in LCT. Better than before, but not zero.
The triple benefit of tariff removal, higher LCT threshold, and FBT exemption (pending confirmation) makes the novated lease the most powerful structure available for eligible EU EV buyers at salaries of $80,000 or more. Model this carefully with your specific vehicle and salary before committing.
Dealers who have ordered vehicles under the current tariff structure may not immediately reduce prices once the deal passes. Ask explicitly whether the quoted price includes the current import tariff, and negotiate on the basis that that cost will be removed. Transparent dealers will price accordingly — others will need to be pushed.
The Veercal calculator lets you compare cash, personal loan, dealer finance, and novated lease side by side using your vehicle price, salary, and state. Update the LCT threshold once implementing legislation passes.
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