The QPR Blog

Rarely are residents’ interests in council activities piqued as consistently as they are with the issue of the annual rates notices. This year has been no exception and with the recent release of the report from the Independent Pricing and Regulatory Tribunal (IPART) on their review of the NSW rating system it seemed like an entirely appropriate subject for discussion.

I did cover the basic principles that apply to the ‘making of a rate’ some years ago (QPR Blog, Nov 2013; The Whisper, Dec 2013) but there are two issues that may be of particular interest in the present context.

The first involves the way in which ‘rating categories’ are used. As an amalgamated council, we have not hitherto been permitted to change the rating structures that existed in the two former Local Government Areas (LGAs) prior to the amalgamation. The current situation and the ultimate harmonisation of the rating system are complicated somewhat by the fact that each of the former council areas had adopted a different approach to the use of rating categories.

The former Palerang Council had adopted only the four mandatory rating categories of farmland, residential, mining and business (refer to the NSW Council Rating and Revenue Manual for more details on the use of rating categories). As a result, residential rates in our rural residential areas, for example, were levied in exactly the same way as those for Braidwood or Bungendore.

The former Queanbeyan City Council, however, made use of subcategories (subgroups within the four mandatory categories, providing finer granularity in the distribution of the rates burden) to levy different rates, essentially based on locality but which generally reflected the standard of facilities that were available to residents in the respective localities. The result was that different formulae were used to determine rates in different parts of Queanbeyan, Googong, Tralee and its rural residential areas.

As a consequence of the way in which rural residential areas are defined in the Local Government Act (see Dictionary definition therein), all ‘rural residential’ areas in an LGA must be treated in the same way. The two rating structures are therefore incompatible as they stand and there will have to be a change, one way or the other, when the rating system freeze on amalgamated councils is lifted and the two systems are harmonised. This must currently occur no later than 2021, but could occur as soon as next year. Exactly what impact this might have on rates in rural residential areas, and it may well be minimal, is entirely in the hands of the Council as it adopts the necessary changes during the harmonisation process.

The second issue is perhaps more relevant at the other end of the scale—in more built-up, urban areas. Historically, property valuations used in rates calculations in NSW LGAs have been based on what is known as the Unimproved Value (UV) of a parcel of land. The IPART Review has recommended that, in future, the use of Capital Improved Value (CIV) be mandated for land valuations used by metropolitan councils and that this alternative be available for use in other LGAs. It should be noted that CIV is used quite widely in other jurisdictions in Australia.

The use of CIV takes into consideration the full value of a property, not just that of the land, and is generally considered a better indication of a property owner’s ‘ability to pay’, even though it is recognised that owning a valuable property does not always equate with the availability of cash assets. Nonetheless, to illustrate the impact of the two different valuations, consider the example of a rate spread across two, otherwise identical lots, one hosting a single dwelling, the other a block of five flats.

Under a rating system based on UV, since the unimproved elements of the lots are identical, the UV of the two lots would be the same and the rate burden would be distributed evenly between the two properties. The owner of the single dwelling would thus carry 50% of the rate burden. The owners of the five individual flats, however, would share the 50% burden imposed on the second lot, with the result that each would carry only 10% of the rate burden.

Under a rating system based on CIV, the rate burden would be distributed based on the relative values of the properties as they stood, one with a single dwelling the other with a block of flats. The property containing the block of flats would generally be valued substantially higher than the one containing a single dwelling. To further the present example then, if the block of flats were valued at three times that of the single dwelling, the rates burden would be distributed 25% to the owner of the single dwelling and 75% to the owners of the block of flats. The owner of each individual flat would then carry 15% of the rates burden, still not as high as the owner of a single dwelling, but a more equitable distribution nonetheless.

Of course, when the distribution of the rates burden is considered across an entire LGA, the reduction in rates levied on lots with a single dwelling versus the increase for multi-dwelling developments would be entirely dependent on the mix of developments within a given rating category. If all the developments are of a similar character, there will be little change. The more significant changes would occur in areas where there is a mix of higher and lower density development styles, as is more common in metropolitan areas, which is why IPART has recommended that CIV be mandated for a fairer distribution of the rates burden in these areas.

Note that the rates yield to council will be the same, regardless of whether or not subcategories are used and no matter what method of property valuation is adopted. The use of subcategories, or the choice between UV and CIV, will only [potentially] change the way in which the [capped] rates burden is distributed across rateable properties.