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Close your eyes and think of a luxury car (just make sure you open them again to read the rest of this story).

What did you picture? A BMW X5? Mercedes-Benz S-Class? A Range Rover? Chances are it was something big. But a few years ago luxury car makers had a revelation that they didn’t have to build just big cars and could, in fact, build smaller ones.

This allowed them to expand their line-up to new levels of affordability, attracting new customers and growing sales. In 2023 Australian snapped up more than 22,500 small cars costing more than $40,000, which is the figure used to determine the difference between mainstream small cars and luxury small cars.

We’ll go into detail below about the best luxury small cars and the biggest sellers, but before we do it’s important to explain the defining characteristics of the small luxury cars Australia currently offers.

That’s because inflation, price rises and other business decisions have pushed some mainstream nameplates into the same ‘small car under $40K’ official segment as the genuine luxury compact cars from the likes of Audi, BMW and Mercedes-Benz.

For example, the Honda Civic, Peugeot 308 and Volkswagen Golf all fall into the same sector of the market as the Audi A3, BMW 1 Series and Mercedes-Benz A-Class, despite not being direct competitors.

While often there isn’t much to split these different types of cars on features, there is a clear demarcation between them in terms of brand prestige and often the ownership experience.

The likes of the A3, 1 Series and A-Class can all be considered small luxury vehicles rather than just fancy hatchbacks, and they play a key role in attracting new owners who can then potentially graduate through the ranks of whatever premium brand they choose.

It’s the same reason small luxury SUV models are so popular. They act as gateways into the brand at a price more comparable with a high-grade mainstream model.

The top 5 small luxury cars*

*Based on 2023 VFacts registration data

1. Audi A3

Arriving into the world in 1996, the A3 is a prime example of why luxury car makers, and their larger parent companies, love small cars.

That first A3, and every model that followed, uses largely the same underpinnings (‘platform’ in car-speak) as the Volkswagen Golf, which allows for the expensive engineering work to be shared and then charging more for the finished product.

In 2023 Audi sold 3319 examples of the A3, while Volkswagen Australia sold 3592 Golfs, which means nearly 7000 sales of a largely similar car for different prices. The A3 range begins at $50,600 and stretches all the way to $99,300 for the RS3 Sedan.

In fact, the sedan is another way luxury car makers have continued to grow the small car market. Audi now offers a hatch and sedan, expanding the appeal of the A3 and extending its reach across the smaller segment.

2. Mercedes-Benz A-Class

The three-pointed star brand was one of the first to enter the true compact luxury car market, announcing the A-Class way back in 1994. After a difficult beginning, mainly because of the now-infamous ‘Elk Test’ that saw the car roll over during a Swedish magazine test, the A-Class has gone on to become a Mercedes staple.

In 2023 Mercedes Australia sold 2392 A-Class, which not only made it second on this list but also the brand’s fourth best-selling model here, behind only the GLC and GLE SUVs and the stalwart C-Class sedan and wagon. 

3. BMW 1 Series

While Audi and Mercedes jumped into the small car space in the ‘90s, BMW waited until the mid-2000s, launching the first generation 1 Series in 2004. Not only did the brand arrive late to the party, but showed up with a different take on the concept - a rear-wheel drive hatchback.

The first 1 Series used a modified version of the 3 Series platform, allowing for the unconventional but very sporty and dynamic layout.

It meant sacrificing space, though, and for the third (and current) generation, BMW has swapped to a more conventional front-wheel drive layout.

It hasn’t hurt sales, with the latest model notching 1755 sales in 2023 to claim third on this list - which is only the beginning for BMW’s small luxury cars…

4. BMW 2 Series

The Bavarian brand may have been a slow starter, but it’s not only caught up but become a major small car brand with a second entry in the top five sellers. The 2 Series was spun-off from the 1 Series Coupe and Convertible models, although the current line-up features the four-door Gran Coupe instead of the drop-top.

Between the 1 and 2 Series line-ups, BMW Australia sold 2887 small cars in 2023, making the duo the second best-sellers after the Audi. 

Despite being small, the 2 Series also showcases how this end of the market has evolved to a more premium level over time, with the latest high-performance M2 Coupe starting at $121,700.

5. Mini Hatch

One of the key reasons for BMW’s switch to a front-wheel drive 1 Series was because it allowed the German giant to take advantage of the platform it had already developed for the Mini Hatch.

While the original Mini was an affordable and very mainstream small car, when BMW took control of the brand it decided to reinvent it as a premium compact model, starting in 2001.

Since then it has continued to evolve and grow to the point that there are currently six variants of the Mini on offer in Australia. This includes the standard Cooper three-door hatch, a largely five-door model, the even larger Clubman, an electric version and a convertible, plus the Countryman SUV (which is stretching the meaning of the word mini).

Still, last year Mini managed to sell more than 4200 cars in Australia, of which 2011 were the hatch and thus putting it on our list.

Stephen Ottley
Contributing Journalist
Steve has been obsessed with all things automotive for as long as he can remember. Literally, his earliest memory is of a car. Having amassed an enviable Hot Wheels and Matchbox collection as a kid he moved into the world of real cars with an Alfa Romeo Alfasud. Despite that questionable history he carved a successful career for himself, firstly covering motorsport for Auto Action magazine before eventually moving into the automotive publishing world with CarsGuide in 2008. Since then he's worked for every major outlet, having work published in The Sydney Morning Herald, The Age,, Street Machine, V8X and F1 Racing. These days he still loves cars as much as he did as a kid and has an Alfa Romeo Alfasud in the garage (but not the same one as before... that's a long story).
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