Senator Steve Fielding voted with the Opposition to defeat the bill at the second reading stage. He made no attempt to amend it.

The bill was defeated by 34 votes to 33.

It followed last night's embarrassment when Liberal Senator Sue Boyce failed to show for the planned vote to kill the tax measure.

The Opposition moved first thing this morning to have the vote recommitted.

The Government wanted to increase the luxury car tax from 25pc to 33pc on vehicles worth more than $57,180.

The defeat of the bill will cost the Government an estimated $555 million in lost revenue over four years.

Tax already collected by car dealers since July 1 will have to be refunded to buyers.

Senator Fielding had wanted to exempt farmers and those in the tourism industry who use cars worth more than the tax threshold of $57,180 as tools of trade.

But it was explained to him by Treasurer Wayne Swan that this was non-constitutional and would be a compliance nightmare.

Farmers and tourist operators could claim their vehicle costs as a tax deduction anyway.

The two men are understood to have had a heated meeting yesterday morning.

Senator Fielding has now sided with the Opposition to defeat three budget bills in the past week and he has the Government worried.

"I just tend to think that maybe the Rudd Government thinks they can get away with slugging farmers and tourism operators," Senator Fielding said of the luxury car tax.

Mr Swan said before today's vote that Senator Fielding's requests had been unreasonable.

"His request simply couldn't be implemented. It would have been a compliance nightmare," he said.

"But it's not too late for the Liberal Party to actually demonstrate some economic responsibility in the Senate today.

"Essentially, what the Liberal Party is doing is supporting a tax cut for owners of luxury cars."

The Australian Greens and independent Nick Xenophon sided with Labor to allow the bill to proceed to its final stage.

Greens leader Bob Brown criticised Senator Fielding for opposing the bill, saying opposition would prevent any further debate on the issue.

"The Government ... simply doesn't know what Senator Fielding's doing, nor does anyone else in the Senate,'' he told ABC Radio.

"I don't even know if Senator Fielding knows what he's doing."