The QPR Blog

Following on from the previous post on rating categories, the definition of rural residential land that is provided in the Local Government Act 1993 (the Act), the explicit size requirement in particular, provides a bit of a problem in the present context.

The former Palerang LGA was somewhat of an anomaly in that it was the only LGA in NSW where the majority of the population did not reside in an ‘urban’ environment—the villages and towns accounted for only around one third of the population, with the majority residing in ‘rural residential’ areas along the ACT border. In the eastern part of our LGA, there are also a significant number of lots in excess of 40 hectares in area that are used primarily for residential purposes and would be rated accordingly. Under the Act, however, these are not defined as rural residential lots (because they are larger than 40 hectares in area) and so cannot be included in a rural residential rating category.

The former Palerang rating system avoided this problem by using the same rating formula for all residential properties—i.e. it did not use subcategories at all. Because the rural residential population was the dominant population, and the towns and villages were relatively much smaller, this was a workable arrangement.

Adding a significant urban population into the mix, where infrastructure, and thus expenditure, is very much more focused on the urban population, creates a little more of a problem. There is a significant difference, between urban and rural ratepayers, in the benefit to be derived from this infrastructure and this will invariably have a bearing on how the ‘benefit principle’ is applied within any applicable rating system. The new QPRC residential rating structure will invariably involve the use of subcategories (different rating structures) based on appropriate population centres, but the ‘rural residential’ subcategory [as defined by the Act] is unlikely to find a place in the new order of things. That’s not to say there won’t functionally be a rural residential subcategory, it just won’t carry that name.

Subcategories can also be used within the other three rating categories—farmland, business and mining—although locally they have never been used in either the farmland or mining categories.

One other point to note is that, regardless of how rating subcategories may or may not be used, the actual amount of money that any council can raise through rates in NSW is fixed by the State government through a system of rate capping. The use of rating categories and subcategories has no impact on the rate cap or the overall size of the rates pool, it is simply a mechanism that is used to distribute the rates burden within a council area.

Apart from the annual rate cap or special rate increases approved by the Independent Pricing and Regulatory Tribunal (IPART), however, the rates pool can also increase in line with property development. This is, in effect, a retrospective increase because such increases are annual and relate to development that has occurred in the previous year. Unfortunately, this is no great windfall for council or relief for existing ratepayers. The increase is simply the amount that new properties would have contributed in the last year under the system in place at that time.

The attentive reader will recall our earlier discussion on the subject of Unimproved Value (UV) vs Capital Improved Value (CIV) as the basis for levying rates. In high growth areas, the use of CIV rather than UV will have a significant impact on a council’s ability to increase the value of the rates pool. When using CIV, increases resulting from new development will be directly tied to the value of the new development, not just the land involved. Once again, this is especially relevant in the case of medium and high density residential development.

Unfortunately, however you dice it under the current system, local government rates and charges don’t cover the associated operating expenses, particularly in rural areas. Obviously, infrastructure in new development areas will be new, but the broader cost of supporting increased population numbers simply can’t be covered by the additional rates that councils are allowed to collect—25–30% of a typical regional council’s annual budget consistently comes from grants and funding from higher levels of government. Put another way, while new development contributes to the council purse, the resulting increase in operating costs is 25–30% more than any increase in associated revenue. It’s a sobering thought and, just quietly, the deficit would be a lot more obvious locally if we weren’t fortunate enough to live in a marginal [State government] electorate (if you get my drift…).

This is a big part of the reason why there is a constant push to reform the funding model for local government in NSW, particularly in the rural areas, but I’ll leave that discussion for another day.