The QPR Blog

This subject comes up from time to time, in various forums. It can be a complex issue, and I can’t possibly cover everything in just one post.

While it’s probably less of an issue for rural residential properties, a rates notice generally includes several line items: typically ordinary rates and a list of applicable charges.

Under current legislation, councils may levy specific charges to cover all reasonable costs associated with the delivery of waste, water and sewerage services, but most other functions that council performs must be funded primarily through the levying of ordinary rates. While waste services charges apply to varying degrees in rural areas, water and sewer charges generally do not, and on this occasion I would like to focus only on so-called ordinary rates.

Ordinary rates are a tax that must be based on a property owner’s ability to pay and/or the relative derived benefit associated with the functions of council. Most NSW councils, including Palerang Council, rely solely on the first principle, a property owner’s ability to pay, in the levying of ordinary rates. Moreover, this ability to pay is measured, for better or worse, by the unimproved land value of a ratepayer’s property, as determined by the NSW Valuer General.

As a result, ordinary rates can change via several mechanisms:

1. Annual CPI Increase
   Determined using the Local Government Cost Index calculated by the Independent Pricing & Regulatory Tribunal (IPART). This is typically 2.5-3.5% p.a.
2. Special Rate Variation
   Under the rate pegging regime that exists within NSW, any rate increase greater than the Annual CPI Increase must be approved by IPART. Any application for such a rate increase must be supported by, amongst other things, a demonstrated need and community support.
3. Change in relative property value
   The NSW Valuer General values properties periodically and issues that information to councils, who then use this to update their rating policy. It is important to note that, largely due to the rate pegging policy that exists in NSW, an increase in land valuation does not necessarily lead to a rate increase. If all property values change by the same percentage, there will be no resulting change in individual rates. Only when the value of one property changes relative to another will there be a resulting change, and this may be an increase or a decrease.
4. Change in council rating policy
   Due to the large range of property values within Palerang, council currently levies the ordinary rate based on a combination of unimproved land value and a fixed amount per property, within four rating categories: residential, business, farmland and mining. This basic policy has remained essentially unchanged since 2006.

Rate Pegging

Under the Local Government Act 1993, the total amount of income that a council can raise from certain rates and charges is limited. Introduced in 1977, the rate peg is determined on an annual basis. As a result of rate pegging, a council’s overall rates revenue cannot increase by more than the approved percentage increase. If overall land values rise, councils may have to reduce or otherwise adjust the amount of rates levied per dollar so that total income does not grow by more than the approved percentage increase.

IPART determines the rate peg that will apply to all councils for the year using a Local Government Cost Index. The Index assists in calculating the operational costs of councils in New South Wales.

The 3.4% rate peg for 2013/14 was calculated by:

• taking the increase in the LGCI for the year to September 2012 of 3.7%
• deducting a productivity factor of 0.2%, and
• deducting 0.1% to remove part of the carbon price advance of 0.4% that was included in the rate peg last year.

Under the Local Government Act 1993, councils are able to apply for additional increases in general income beyond the annual rate peg amount. This is referred to as a ‘special rate variation’.

Under the LGA, councils may apply for a single year increase under section 508(2), or a multi-year increase (of between two and seven years) under section 508A.

In 2010, the Government delegated to IPART the responsibility for assessing and determining special rate variation applications, effective from 2011/12 onwards. Previously, the Minister was responsible for determining special rate variations.

While IPART has been delegated responsibility for assessing and determining special variations, the NSW Government has retained responsibility for setting the policy framework under which applications will be assessed. This is reflected in the Government’s Special Rate Variation Application Guidelines, which sets out the assessment criteria that IPART must use when assessing applications.

Councils may seek a special rate variation in order to undertake environmental works, fund town improvements, redevelop community and civic facilities, address maintenance backlogs and maintain or improve existing service provision.

Local councils that are seeking special variations to general income above the rate peg amount are required to submit applications to IPART for review and assessment. The council must include details of its intention to apply for a special variation in its draft delivery program and operational plan and must consider any submissions received from the public. If a council’s application is approved, IPART will specify the percentage by which the council may increase its general income.

Rating Categories

As noted above, rates in the Palerang LGA, are levied within four rating categories: residential, business, farmland and mining. Note that these rating categories, and thus rates, are entirely independent of LEP land use zones. Properties are included in one of the four rating categories based on the actual primary land use practiced on an individual property, not on the prevailing land use zone.

Further, rates can be calculated in one of three ways:

1. based entirely on the land value of the property;
2. on a combination of the land value of the property and a fixed amount per property;
3. entirely on the land value, but subject to a minimum amount.

Palerang Council uses the second method, with 49% of the rate in each category levied as a fixed amount for each property. The remaining 51% is levied based on land values.

The land value is currently determined by the NSW Valuer General, formerly part of the Land and Property Information Division of the Department of Finance, Services and Innovation.

Total rates are effectively fixed at any point in time, so variations in land valuation simply result in redistribution of the rate burden. When land values change, the rate burden simply moves to the land holders with the higher valued lots. Changes in land valuations do not improve or deteriorate council’s rates bottom line—i.e. council’s rate revenue doesn’t increase just because land values rise.

Further Reading

For any local government tragics, or general insomniacs, the general guidelines for the development of rating policy are presented in the Council Rating and Revenue Raising Manual, available from the DLG website.

Additional information is available in the NSW Local Government Rating and Charging Systems and Practices document and the Rates and charges FAQ, also on the DLG website.