Thats what bugs me also, even with 1 car on track it still uses the low gameplay lod even on PS5. If they could do it like older Forza games where if you play with only 1 car on track it uses the photomode lod even on Xbox 360 and base Xbox One. On some models its not that bad but some models are ridiculous for a PS5 game. Its not a power issue if you can't do it for 1 car on track. Im not expecting it when there is a full grid, just time trail and other 1 car on track mode should be doable.
I have just tested it on the PS4 and PS5 versions of the GT7.
PS4 uses only LOD changes with quite low LOD model (let's say LOD2) during gameplay and LOD1 in Photo Mode (and when we pause the game).
PS5 uses LOD1 model with tesselation, which is set more or less agressively, depending on car. LOD1 is used also in Photo Mode, but with tesselation working from longer distance from the camera (but only exterior of the car, interior and parts "inside" the car like engine on some cars are separate models, that are switched to high quality models only in Photo Mode and only for the car that camera was focused on during replay when turning on Photo Mode).
Unfortunately for some cars tesselation works kind of too close to the camera.
Also some cars have broken LOD1 model without tesselation, which is in fact low quality LOD2 model from the PS4 version (thankfully though there are only a couple of cars like that, e.g. Jaguar and Subaru mentioned before).
There are also LOD0 models, which are used only in Garage, Scapes, real-time cut-scenes and other Menus, that sometime have some additional small details or better textures.