A change in automotive taxation policy is under consideration in Australia, as the Luxury Car Tax (LCT) moves closer to abolition while negotiations with the European Union on a Free Trade Agreement approach their final stages.

The proposed agreement would also remove the 5% import tariff applied to most European vehicles sold in Australia, a measure not imposed on vehicles manufactured in Japan, Thailand, South Korea or China.

The removal of the LCT - a 33% levy applied to the value of a new vehicle above a specified threshold and generating AUD 1.2 billion (US$ 850 million) annually for the government - has been linked to the free trade negotiations. The measure has been considered in exchange for expanded access for Australian beef and dairy exports to European markets.

Following the resumption of Free Trade Agreement discussions between Australia and Europe in 2025, a deal is reported to be close.

The Australian Broadcasting Corporation (ABC) cited sources "from the EU and Australia" stating that "the deal was now close", after Federal Minister for Trade, Senator Don Farrell, met with European Union Trade Commissioner Maros sefcovic and EU Agriculture Commissioner Christophe Hansen in Belgium last week.

A joint statement issued after the meeting stated that the discussions "allowed the two sides to converge positions on a range of issues".

"Good progress was achieved in narrowing gaps on a small number of outstanding matters," the statement said, adding that the parties would "now report back to their leaders".

The removal of the Luxury Car Tax has been used as a negotiating measure by Australian trade representatives in discussions with the EU, in exchange for expanded access for Australian agricultural exports to Europe.

Other matters under discussion have included the enforcement of geographical indicators for food products. For example, such measures would prevent feta cheese from being labelled as such unless it originates from Greece.

The LCT is a 33% levy applied to every dollar of a new vehicle's value exceeding a threshold of AUD 91,387 for models with a claimed fuel consumption of 3.5-litre /100km or less - including electric vehicles and most hybrids - or AUD 80,567 for all other vehicles.

Although most new vehicles sold fall below these thresholds, the LCT is estimated to generate AUD 1.15 billion in tax revenue for the Federal Government this year, partly due to its application to high-specification models such as the Toyota Prado 4WD.

It has been reported that the LCT would be phased out gradually rather than removed immediately, in order to limit the impact on the residual values of luxury vehicles already in circulation.

The ABC also reported that Prime Minister Anthony Albanese and European Commission President Ursula von der Leyen have "one outstanding issue" remaining to resolve before the agreement can be signed. According to the report, this issue is "connected to red meat exports".

The broadcaster further stated that President von der Leyen is planning to travel to Australia, potentially in the coming weeks, to conclude the agreement.