Australia

Local Government Rating System Review: a missed opportunity?

Summary

  • In this briefing, LGiU Associate Mark Davies provides an overview of the Victorian Government’s response to the Ministerial Panel review of the local government rating system in Victoria.
  • A Ministerial Panel was appointed in 2019 by the Local Government Minister to undertake a review of the local government rating system in Victoria. The key focus of the review was the equity and fairness of the current application of rates and charges, along with its interaction with the taxation, valuation, and other related systems of the Victorian Government’s exemption and concession arrangements, the autonomy of local governments to apply the system, the quality of their rates planning and engagement with their communities, and the extent to which the application of the system aligns with commonly accepted principles of taxation policy.
  • The report was submitted to the Minister in March 2020 and contained 56 recommendations. The Victorian Government responded to the report in December 2020, supporting 36 recommendations in full, either in principle or in part.
  • This briefing provides an overview of the panel’s recommendations that were accepted by the Victorian Government and how they will impact the rates and charges levied on the different types and classes of properties. It will be relevant to councillors and officers who are involved in the preparation of Revenue and Rating Plans in Victoria, as well as for those more generally interested in current reforms of rating systems.

Briefing in full

The review

The Terms of Reference of the Review Panel (the Panel) were focused on understanding the application of the existing Victorian rating system, and determining how to improve its fairness and equity. The Panel studied reports from the Auditor-General in Victoria, reviews commissioned in other jurisdictions, other related research and academic reports, and submissions to many other government inquiries. In addition, the Panel reviewed over 200 submissions and travelled around Victoria talking to ratepayers, council staff, councillors and representatives from peak bodies about the Victorian rating system.

In recent years, some individuals and groups of ratepayers in Victoria have been affected differentially on a geographic basis, within and across LGAs, by increased volatility in property valuations leading to volatility in their rates. This has caused these groups to challenge the assumptions underpinning the conventional economic view that basing council rates on property value at its highest and best use is an efficient and fair source of council revenue, and to question the method by which the value is estimated. Farmers have been particularly impacted by recent valuation changes due to the increasing aggregation of farmland, which has pushed up market prices and increased famers’ share of the rate burden.

The Victorian Farmers Federation (VFF) has long argued that the current model of using land valuations for striking rates places undue financial stress on farming businesses as the value attributed to farmland does not reflect farm business revenue generation, nor the average farmer’s capacity to pay. In fact, it was the VFF’s advocacy prior to the 2018 Victorian State Election that forced the Government to commit to undertaking this independent review of the local government rating system after the Government’s Opposition committed to the review as part of their election commitments. In continuing to advocate for a complete overhaul of the rating system, the VFF wrote to all Victorian local governments in 2020 seeking their acknowledgement of the rating inequity faced by Victorian farmers, and to ensure that local governments did not implement unfair rate increases for farmers.

Despite their success with some councils not increasing rates above the state government’s rate cap of 2.5 per cent, and a few local governments actually cutting rates, a number of councils increased rates for the average farm by more than 10 per cent as a result of disproportionate valuation increases between farming properties and other properties within their municipalities.

The VFF has also argued that the rate cap implemented by the government in the 2016-2017 year has not provided any great relief to rural and regional ratepayers due to inequities in the current rating system. While the introduction of the rate cap succeeded in limiting rate increases in total, it has not dealt with the impact of valuation changes on individual properties – as it is possible for properties to have appreciated in value but with different consequences on rates. For example, one property may see its rates increase above the cap while the other may see its rates rise by less than the cap (or even decrease).

In addition to these concerns, rates are generally not viewed as simply a tax by ratepayers. Rather, ratepayers generally view their rates as payment for the services their local governments deliver.

Panel report and government response

The report submitted to the Minister in March 2020 contained 56 recommendations. The recommendations covered a range of matters, including:

  • making general rates more transparent
  • better targeting rate relief
  • unpaid rates and payment difficulty
  • making rate payments fairer
  • improving confidence in the rating system
  • reforming alternative rating arrangements.

While the review was being undertaken, the Victorian Parliament passed the Local Government Act 2020, excluding the proposed reforms to the rating provisions pending the outcomes of the Panel review. The Government noted in its response that, due to the potential for increased uncertainty and risk, significant reforms to arrangements for general rates would not be progressed and are not supported. This included recommended reforms to exemptions and alternative rating arrangements for power generators and cultural and recreational land which were also seen to have the potential for significant impact on the economy and community.

It also noted that as Victoria begins its recovery from the COVID-19 pandemic, the Government would not support recommendations for changes to general rates, or exemptions and alternative rating arrangements, that could increase risks to business, limit investment certainty, or that could negatively impact on the broader community.

The Government noted that, although while further work was required on many of the proposed reform areas, the Government was committed to a local government rating system which:

  • provided local governments with the autonomy to raise sufficient tax revenue to meet the needs and capacity of their community
  • was based on a proportion of the value of the property, (i.e. higher-valued properties usually contribute more in rates than lower-valued properties in the same municipality)
  • was simple to understand and allows for meaningful community engagement to make informed and transparent decisions about rate distribution and rating levels
  • provided transparent and flexible ways for councils to treat ratepayers facing financial hardship fairly
  • was set out in primary legislation and in line with the principles-based approach of the Local Government Act 2020.

The Government also believed local governments must take responsibility for their own rating decisions and levels, reflecting their obligations as a distinct and essential tier of government.

The Government supported 36 of the recommendations in full, in principle, or in part. A summary of the more significant recommendations and their impact on local government rating is set out below.

Recommendation 1: That the Local Government Act describe rates as a tax for local government purposes

Designating local government rates as a tax in legislation will elevate their status and legitimacy, and clarify that rates do not constitute a fee for service, and that paying more in rates does not entitle a ratepayer to greater service levels.

Recommendation 4: That the Valuer-General improve communication about the mass valuation system, including how it deals with unusual sales, and consider publishing valuation methods online

Improving the transparency of the valuation system and process will increase the confidence of ratepayers and reduce confusion, misunderstanding and dissatisfaction with the method of valuation – especially for those with more complex or unusual properties such as farms, shopping centre etc.

Recommendation 6: That the Victorian Government undertake further analysis, and consultation on the merits of shifting from levying rates on occupancy to levying rates on the basis of land titles (through Certificate of Title)

This reform has the potential to significantly reduce costs and simplify administration, especially for complex properties with multiple occupants (such as office buildings or shopping centres) or an occupant having several titles (such as farms).

Recommendation 7: That the Victorian Government examine the merits of a valuation-averaging mechanism to reduce the impact of large changes in valuations on rates

This reform has the potential to address the uncertainty caused by rate volatility arising from large movements in valuation year-on-year. A valuation-averaging mechanism could reduce the impact of a large increase or decrease in valuation on rates payable in the year of that large valuation movement. For example, the impact could be spread over 3-4 years (depending on the length of the averaging period).

Recommendation 16: That the maximum amount that may be raised in general rates by way of a fixed charge remain at 20 per cent

The proposed changes to the Local Government Act 1989 included reducing the maximum amount that could be raised by way of a fixed charge from 20 percent to 10 per cent. This would have meant a significant redistribution of municipal charges to general rates for those councils with high municipal charges. It would also have had a negative impact on farm properties which pay municipal charges on a business entity basis as confirmed by recommendation 17, which was not supported.

Recommendation 28: That the criteria for a rebate or concession under the Act be expanded to include properties providing a public benefit. Such benefits could be defined by the public benefit test for exemptions in Recommendation 22 of this report

While providing local governments with the enhanced ability to provide rate concessions and rebates will provide flexibility and autonomy to local governments to offer their own rate relief has merit, defining what constitutes a public benefit will be challenging, and likely be costly for councils to implement.

Recommendation 31: Ensure that the regulations require that all Victorian ratepayers have access to consistent billing, debt recovery and payment difficulty assistance and that the use of council’s coercive powers (e.g. legal action and debt collection) are only ever measures of last resort

Greater consistency will lead to better outcomes for ratepayers facing financial hardship especially in the context of the COVID-19 pandemic. This work will also be informed by the outcomes of the Victorian Ombudsman’s ‘Investigation into council responses to ratepayers in financial hardship’, expected to be completed in 2021.

Recommendation 45: That the Victorian Government facilitate the development of a template for rates notices to be used across councils, which is consistent with best practice written communication principles

This proposal will improve transparency and clarity for ratepayers. Current rate notices are crowded with statutory information, rate payment options and other general information about rates that some ratepayers find difficult to understand.

Addressing equity and fairness

Most problems with the current rating system arise from the large and sudden shifts that often occur in individual rate bills, and the relative shares of local government costs borne by different ratepayer categories. These sudden and large changes in rate bills cause considerable community angst, and the shift in rate burden distribution bears no discernible relationship to the benefits enjoyed by the ratepayer groups impacted. The large and sudden valuation shifts can be brought on by broader economic and property market conditions, but also by very localised factors. This is particularly true of farmland, where there are often limited sales evidence in a valuation year, or localised demand pushes property prices well above market.

The current differential rating structure provides some useful policy tools for local governments to respond to this issue, but does not address more localised (and often extreme) shifts. The only measures available to councils seeking to ‘cushion’ or transition the impact of such changes are rebates – however, these result in ‘lost’ revenue under the rate cap total revenue calculation.

Another problem with the current rating system is the inequity of rates across LGAs for analogous properties. All local governments have different cost bases reflecting the number and level of services delivered to its community, and the assets used to deliver those services. However, the cost base of each council has been established over many years based on local council decisions, and has effectively been locked in by rate capping.

In its submission, the VFF put forward a number of recommendations to improve the equity and fairness of the current rating system, suggesting:

  • An Equalised Funding System: Implement a local government equalisation funding system where the State would set a general rate for all property, and redistribute funds collected from rates on the basis of equity and need.
  • Minimum Rates: Allow local governments to apply minimum rates (by property class) up to a maximum total amount from minimum rates of 50 per cent of general rates.
  • Compulsory Differential Rates: Require a local government to use differential rates (including a compulsory differential rate for farmland) and that the rate burden for each class of land be maintained for at least four years.
  • Valuation Averaging: Valuation averaging be introduced whereby local governments would strike rates based on a moving average valuation calculated for each property over the past 5 years.
  • House and Curtilage: The house and curtilage for farmers be charged a municipal rate similar to that of all other homes in the LGA. Farmland would be separated into a separate assessment, for which local government retains the ability to rate at the farm differential rate.

Despite the Panel’s 56 recommendations, only recommendation 7 (regarding valuation averaging) was proposed by the Panel.

Comment

In many respects, the fundamentals of the current rating arrangements in Victoria are similar to those established in the 19th century, and local government’s power to levy rates has been prescribed by the Local Government Acts of 1874, 1903, 1958, and 1989, with no significant changes other than the introduction of differential rates and a municipal charge in the 1989 Act.

While the Panel recommendations supported by the Government do go some way to addressing the issues of fairness, they do not address in any substantial way the issue of equity. Existing rate burdens have effectively been locked in by the rate cap, and future rate fluctuations will continue to be driven by annual property valuation changes – fluctuations only slightly smoothed by the opportunity to average valuations over a number of years.

It would seem that the Government has missed a real opportunity to address the shortcomings of the current rating system, and it is likely that we will be waiting for another three decades before a new Local Government Act is considered again.

Related LGiU briefings include:

For more information on this briefing contact LGiU Australia by emailing mzierke@sgsep.com.au