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On 26 March 2026, the Australia-European Union Free Trade Agreement (“AEUFTA”) was secured after 8 years of negotiations. The new AEUFTA, which is yet to come into effect, marks a major milestone and step forward in Australia’s trade relationship with the EU.
From a tax and tariff perspective, central to the agreement are reforms to the luxury car tax (“LCT”) threshold and the abolition of Australian tariffs on the import of most EU goods. Taken together, these measures are designed to lower trade barriers, improve market access, and deliver practical benefits across a range of industries.
Under the AEUFTA, 98 percent of the current value of Australia’s exports will enter the EU duty free and, in return, Australia will remove the import tariffs on most European imports including European made vehicles and adjust the LCT threshold for certain models.
LCT
LCT threshold changes for EU EVs
The AEUFTA will look to improve affordability and consumer choice while encouraging an increase in uptake for low-emission vehicles. Treasurer Jim Chalmers welcomed the deal as a win for consumers and exporters. "This agreement delivers cheaper European cars for Australian families while protecting revenue and supporting our transition to cleaner vehicles," he said in a statement recently.
As part of the new trade deal, Australia will scrap the five percent import tariffs on European made vehicles. In addition, the LCT threshold for European made EVs will rise from $91,387 to $120,000 but only for “zero-emission” models and not petrol-electric hybrid models or “fuel-efficient” vehicles.
Under the outgoing rules for the 2025-26 financial year, “fuel-efficient vehicles” (i.e., all cars with a combined fuel consumption rate under 3.5 litres per 100 kilometres including “zero-emissions vehicles”) would be taxed 33 per cent for each dollar above $91,387.
For example, once the new AEUFTA is operational, it will mean that prospective buyers / importers of a Hungarian-made battery-electric BMW iX3 priced from $109,900 will be exempt from a $6,109 LCT.
In contrast, German-made plug-in electric hybrid BMW 330e, priced at $97,400, do not qualify for any LCT relief despite its fuel consumption of 2.1 litres for every 100km falling within the 3.5 litre threshold for fuel efficient cars under the Australian LCT rules.
Ongoing LCT treatment of other vehicles
Petrol, diesel and hybrid vehicles will not benefit from the new increase LCT threshold. These vehicles will continue to be subject to the standard LCT threshold of $80,567 for the 2025-26 financial year.
LCT is calculated on the GST-inclusive value of the vehicle before on-road costs, stamp duty or registration. The LCT rate of 33 percent tax applies only to the portion of the vehicle’s value above the threshold limit. For example, a non-fuel-efficient car priced at $100,000 would continue to attract LCT of 33 percent on the $19,433 above the $80,567 threshold — adding roughly $6,413 to the cost.
Important to note that the LCT applies to both new locally delivered vehicles and imports. Dealers must quote the tax correctly, and buyers cannot claim GST credits on the LCT portion even for business use.
Abolition of import tariffs for most EU origin goods
The AEUFTA will remove duties on nearly all EU goods exported to Australia (worth €37 billion in 2025). 97.6 percent of EU exports will be duty free when entering Australia when the AEUFTA comes into force, while close to two percent of exports to Australia will have duties removed over a transition period of up to five years.
For example, under the new AEUFTA, Australia will remove duties on the following industrial products imported from the EU, such as:
- Cars, trucks and motor vehicle parts (tariffs of 5%)
- Machinery (tariffs of up to 5%)
- Chemicals (tariffs of up to 5%)
- Textiles, clothing & footwear (tariffs of 5%)
- Plastics (tariffs of 5%)
- Most articles of steel (tariffs of 5%)
- Wood & furniture (tariffs of 5%)
Consumer impact in Australia
Australian consumers are likely to see tangible benefits from this new agreement. The removal of most of these tariffs on imports of EU produce is expected to reduce the prices on a range of European goods. These products are likely to become much cheaper at Australian checkouts reflecting the positive changes to this newly reached agreement.
In practice
Conclusion
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