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Municipal Association of Victoria

Submission to the Ministerial Committee on Rate Differentials

Date: March 2013

© Copyright Municipal Association of Victoria, 2013.

The Municipal Association of Victoria is the owner of the copyright in the publication Submission to the Ministerial Guidelines on Differential Rates.

No part of this publication may be reproduced, stored or transmitted in any form or by any means without the prior permission in writing from the Municipal Association of Victoria.

All requests to reproduce, store or transmit material contained in the publication should be addressed to Owen Harvey-Beavis on 9667 5584 or [email protected].

The MAV can provide this publication in an alternative format upon request, including large print, Braille and audio.

mailto:[email protected]

mailto:[email protected]

Table of Contents

1 Introduction..................................................................................................................3

2 Local government rates...............................................................................................3

2.1 Tax mix in Australia..................................................................................................3

2.2 Previous analysis of property taxes.........................................................................6

2.3 The case for property taxes.....................................................................................7

2.4 Common criticisms of rates......................................................................................9

3 Draft Ministerial Guidelines.......................................................................................11

3.1 Effect of guidelines.................................................................................................11

3.2 Intent of the Draft Guidelines.................................................................................12

3.3 Timing of any prohibition from making a declaration of a differential rate..............16

4 Rating Strategy Development Best Practice.............................................................16

2 Differential Rates Ministerial Guidelines Submission

1 Introduction

The MAV welcomes the opportunity to provide a submission to the Differential Rates Ministerial Committee on the draft Ministerial Guidelines.

This submission aims to accomplish three objectives:

provide a rationale for property taxes and rates and identify the context in which the rating system operates

examine the draft Ministerial Guidelines and identify serious deficiencies as they stand, and

emphasise the importance of ‘best practice’ in the development of rating strategies which may to some extent reduce the concerns held by different parties.

The MAV is supportive of efforts to provide more guidance to councils in their application of differential rates. However, if the State Government wishes to deliver guidance to councils, the Ministerial Guidelines should focus on best practice rating strategies. This submission will argue that how councils approach their overall pricing and rating strategies is far more important in assessing how councils distribute rates across their communities rather than confine attention to differential rates.

Differential rates are one tool which can achieve equity and efficiency outcomes for the community and operate alongside the municipal charge, user charges and other fees and fines. If the objective of the Government is to achieve best practice rating outcomes, more guidance on pricing policy including rating strategies should be provided. The MAV is happy to work cooperatively with the Victorian Government to achieve this objective.

2 Local government rates

Local government has access to a single tax: rates. There are many misconceptions of rates and it is important to understand the overall tax mix in the country. There are arguments in favour of using a variety of taxes that apply on income, profits, property and consumption (among others) in order to provide an appropriate mix of taxes in the economy.

2.1 Tax mix in Australia

Australia’s tax system is complex and relies of a variety of taxes to fund public services. The Commonwealth collects a vast majority of taxation revenue and this has remained relatively stable.

Local government raised only 3.5 per cent of total taxation revenue in Australia in 2010-11 and this represented an historical highpoint due to recent falls in corporate taxation receipts and GST,1 which has reduced the share of taxation collected by the Commonwealth. The data confirm that in terms of the overall tax burden across Australia, rates remains relatively minor

Figure 1: Taxation Revenue in Australia, by level of government, 2001-02 to 2010-11

1 GST revenue is considered a Commonwealth tax in these data. While a majority of the tax is provided to the states and territories as a general purpose grant, it is established and collected by the Commonwealth.


Source: Australian Bureau of Statistics (2012) Taxation Revenue, Australia, 2010-11 Catalogue 5506.1.

The Australian Government collects a majority of its taxation revenue through income and corporations tax, as well as consumption taxes (predominantly) in the form of the Goods and Services Tax (GST). The states and territories collect a majority of their tax revenue through stamp duty (including land transfer duties), land tax, gambling taxes and payroll taxes. Local government, on the other hand, has a single tax in the form of rates.

The following table presents these data and indicate that a vast majority of government taxation revenue in Australia is derived from taxes on income (salaries and corporations tax) and consumption.


Figure 2: Australian taxes by type, 2010-11

Source: Australian Bureau of Statistics (2012) Taxation Revenue, Australia, 2010-11 Catalogue 5506.1.

Notes: Income tax includes income taxes paid by superannuation funds. Taxes on goods and services include excises and levies. Vehicle registration excludes stamp duty on vehicle registration.

The vast majority of taxation revenue is derived from income (income taxes and company taxes) and consumption taxes (goods and services taxes and excises). All these taxes are collected by the Australian Government.

It is short-sighted to restrict the view of benefits or limitations of a single tax in isolation of the broader tax system. When a single tax is considered, it may appear to have poor characteristics – such as being regressive or inefficient, however, this may change when that same tax is considered within the broader context of the overall Australian tax system. When Australia’s taxes are grouped into income, consumption and wealth taxes, rates and land taxes are the only form of taxation that can be considered a wealth tax.

Table 1: Rates by household gross income quintile, 2009-10

Unit Household Gross Income Quintile Total1 2 3 4 5

Rates (total)a $ 13.31 14.24 15.65 19.55 24.57 17.46Rates NFDb $ 2.79 3.29 3.26 4.75 4.59 3.73Local government rates

$10.52 10.95 12.39 14.80 19.98 13.73

Proportion of household expenditure

%2.38 1.75 1.34 1.32 1.14 1.41

Source: ABS Household Expenditure Survey 2009-10, Catalogue 6530.0, 2011.

Notes: a Excludes rates on investment properties and land taxes. b No Further Description.


The Australian Bureau of Statistics (ABS) collects data on household expenditure, which provides information about the overall burden of rates on households. The last survey from 2009-10 indicated that across all households, rates cost households on average $17.46 per week, or 1.41 per cent of household expenditure.

When the data are examined based on household income quintiles, it is evident that rates are indeed regressive for residential households: while the amount of rates paid by households increases with income, it is not proportionate to the growth in household expenditure. This means that rates consume less household expenses as income increases.

However, while the data indicate that rates are regressive, the overall burden arising from rates is small relative to other taxes and as a proportion of household expenditure.

2.2 Previous analysis of property taxes

2.2.1 Henry Tax Review

Australia has had a major review (the Henry Review) of its taxation system and a comprehensive analysis of how our taxation system compares to other countries (the Hendry and Warburton review) in the previous decade.

The Henry Review contemplated the role property taxes should play in the overall taxation system while the Hendry and Warburton Review considered how Australia’s use of property taxes compares to other jurisdictions.

The Henry review made specific recommendations which favour local government rates and indicate that they have good attributes as taxes. These strengths relate to the geographically bounded nature of rates, which make it a suitable tax for local government, as well as the high level of economic efficiency that rates exhibit due to the taxation of a fixed asset.

Specific recommendations about rates arising from the Review are as follows:

Recommendation 120: States should allow local governments a substantial degree of autonomy to set the tax rate applicable to property within their municipality.Recommendation 121: Over time, State land tax and local government rates should be more integrated. This could involve:(a) moving to a joint billing arrangement so that taxpayers receive a single assessment, but are able to identify the separate State and local component; and(b) using the same valuation method to calculate the base for local government rates and land tax (with this method being consistent across the State).

The Review also considered the role that land taxes play in the tax mix at the state and territorial level. The Review recommended the abolition of stamp duties over time, with their replacement by land tax which would apply to the broadest possible base (that is, exemptions based on the primary place of residence and primary production would be abolished) (Henry Review, p90). Over time, land tax rates based on square metre values would be applied, with the lowest rate set at zero, which would result in some agricultural land being exempted.


The Henry Review emphasises the potential role of property-based taxes in improving the taxation system in Australia, primary through transitioning from inefficient taxes (such as stamp duty on property) to efficient taxes (such as land tax and rates).

2.2.2 Warburton and Hendry Review

Warburton and Hendry undertook an international comparison of Australia’s taxation, which considered the role of property-based taxes. The two Australian taxes captured by this definition are rates and land tax.

The review found that while Australia collected high property taxes relative to the OECD-30 countries,2 when compared to similar countries (OECD-10 countries3), its tax collection on property taxes was below average.

Further, the review found that other wealth taxes were underweight in Australia in comparison to other jurisdictions, with Australia being the only country without some form of wealth tax. The review therefore implied there was scope to increase property-based taxes in Australia when similar OECD countries were considered.

2.3 The case for property taxes

2.3.1 Characteristics of good taxes

Several criteria are relevant for judging taxes including equity, efficiency, administrative complexity, transparency and revenue sustainability.

Equity is perhaps the most contested characteristic as it is an inherently value-laden concept. Equity can be defined in terms of capacity to pay – so progressive taxation arrangements can be viewed as equitable since they place a greater burden in relative and percentage terms on those with the highest income and wealth. Flat taxation system could also be considered equitable since they apportion the same amount to each taxpayer. A tax system that matches benefits with tax liability may also be argued by some to be equitable as may an approach that adopts elements of all three. The MAV would tend to argue that the former interpretation would seem to accord with the mostly widely-held view. It tends to be the starting point for any independent and objective review.

Efficiency relates to the economic efficiency of the tax – which effectively measures the extent to which a tax changes behaviour.4 In general, broad-based taxes are more efficient than narrowly based taxes. Similarly, taxes on goods or services that are not easy to avoid are typically more efficient than those with ready substitutes. In terms of increasing the productive capacity of the economy, transiting from relatively inefficient taxes to more efficient taxes is an important reform and was one of the key themes running through the Henry Review.

2 All OECD countries.3 The US, UK, Canada, Japan, New Zealand, Australia, Netherlands, Spain, Ireland, Switzerland. This group was used for a comparison group due to the similarity between the economies and Australia.4 Taxes which change behaviour to recognise externalities may enhance efficiency. For example, taxes on alcohol, cigarettes or carbon may increase efficiency by recognising a cost borne by society that is not included in the price of these goods.


The sustainability of the tax base relates to the consistency of the tax take and the resilience of the tax. The economic cycle frequently influences how much tax can be collected, with many taxes (such as income, company, consumption and stamp duties) being pro-cyclical (i.e. increasing in real terms during periods of economic growth and reducing in times of economic contraction). While there may be very important macroeconomic reasons for utilising taxes that are influenced by the economic cycle, it is also important for governments that they have a steady source of taxation revenue to fund their infrastructure and services.

Transparency relates to the ease with which a tax is understood by the community. Transparency relates to understanding how a tax is calculated as well as how much an individual contributes in tax.

Administrative simplicity reflects the costs of collecting and administering the tax system. Administratively simple taxes typically have low costs relative to revenue they collect and are also difficult to avoid.

2.3.2 Evaluation of rates against these principles

The table below summarises the MAV’s view of council rates measured against the above characteristics.

Table 2: Evaluation of rates against the principles of good taxes

Characteristic Rating DiscussionEfficiency High The broad tax base, along with the immobility of land,

means rates are a tax which has significant efficiency benefits. The addition of differential rates and varied rates across council areas moderate the efficiency of the tax. Overall, it remains extremely efficient.

Equity Moderate As suggested by the Household Expenditure Survey data, rates appear to be regressive against household income quintiles. However, rates are difficult to avoid and ensure that in addition to income and consumption, some form of wealth is also subject to tax.

Major concerns about equity relate to income poor, asset rich households, vacant land and capital intensive industries (such as farms). In the former category, while there are technical challenges to ensuring that rates do not place an unnecessary burden on a household, there may be strong equity grounds to retain their current contribution, but provide greater flexibility for payments to be made when a property is sold.

Further discussion on these matters will be presented in subsequent sections of the report

Tax sustainability High Rates are not subject to variations based on economic cycles, like almost all other taxes (including land tax) as the tax rate is adjusted annually based on the revenue needs of the council. This means that rates will not grow with property prices nor shrink if property values decline. As such, it can be considered a highly resilient tax.


Characteristic Rating DiscussionTransparency Mixed The overall quantum of rates levied by a council is highly

transparent.

However, many of the choices made by councils in developing a rating strategy — such as differential rates or municipal charges — are not always clear. There may be a lack of transparency in the event that a council adopts a complex rating structure that includes multiple differential rates plus a municipal charge and does not adequately explain the reasoning for and impacts of those choices.

Administrative simplicity

High Rating systems are relatively simple, with the greatest administrative complexity relating to establishing the value of rateable land. As the legislation provides comprehensive powers for unpaid rates to be recouped, evasion is extremely difficult and therefore enforcement costs are low.

Council rates have many highly desirable characteristics against the objective criteria used to assess a taxation system.

2.4 Common criticisms of rates

2.4.1 Asset rich, income poor households

One of the most frequent criticisms of rates is that it places too high a burden on households with high assets but low income (the ‘asset rich, income poor’ cohort). These households typically have limited current income, but high property values and it is therefore argued that rates impose an unequal taxation burden on these property owners.

Rates payments on ‘asset rich, income poor’ households may consume a very large proportion of household income. Several councils offer rebates for pensioners and the Victorian Government also offers a pensioner rebate to reduce the cost of rates on these households.

There are several arguments that may be offered in mitigation:

Concern is often expressed about the capacity of specific groups of property owners — primarily pensioners — to pay rates. However, financial hardship may occur across different property owner groups and may not relate only to low income households. A single income family with multiple children and a large mortgage may have greater financial hardship than a pensioner, despite having a higher income.

There is a high likelihood that higher property values correlate with higher income over the life of the individual.

Where a householder has a high valued property and a high lifetime income, there is no significant equity concern, but there may be concerns about the appropriateness of requiring immediate payment.

The purpose of a property tax is to tax land and development, not income or consumption. Alternative taxes are used for these purposes.

There are sufficient powers under the Local Government Act 1989 for councils to defer payments and apply a discounted interest rate to ensure that low current income properties are not placed under unnecessary hardship.


The MAV has undertaken substantial research on the distributional consequences of rates on residential households.5 This research indicated that there were no statistically significant differences between household types in terms of their rating burdens. In short, this analysis indicated that although there were instances of high rates for individual household types, it could not be concluded that they faced significantly higher rates (as a proportion of household income) than other groups. This indicated that any issues arising from ‘asset rich, income poor’ households could not be solved by pensioner rebates and that more comprehensive responses were required.

The MAV has established a working group which will examine rating affordability issues. Its aim will be to establish a common policy promoting consistent and compassionate responses to payment difficulties that can be adopted by the sector. It is intended that this cooperative approach will result in tools being available to councils that reflect best-practice in managing financial hardship with respect to council rates.

2.4.2 Capital intensive businesses

Rates have been criticised by owners of capital intensive businesses, arguing that due to their capital intensity, they pay more rates than other businesses. This is an argument often raised by primary producers and it is argued strongly by some that this sector requires the application of differential rates and municipal charges to reduce rates to acceptable levels.

It is arguable that to assess the paying capacity of any group of ratepayers, including primary producers, councils might reasonably reflect on the wide range of costs and factors that have influence. For example, capital intensive industries may face higher taxes on properties but their overall taxation burden may be much lower due to less exposure to labour-based taxes (such as payroll tax, WorkCover premiums) and exemption from land tax, as in the case of farms.

The equity of a tax can only be argued following examination of the range of factors that may influence households and businesses, including farms. There is considerable diversity within broad property classes and a wide range of competing arguments concerning their equitable treatment.

2.4.3 Benefit

Questions are often raised about certain segments of the municipality not receiving sufficient benefit from the council rating system. However, this misunderstands the purpose of rates. They are a tax used to fund services and infrastructure for public benefit. In practical terms it is difficult to clearly identify the relative values and recipients of council services. For example, a service may have different cost structures across different geographical areas and a decision to not use a service may not reflect the absence of a benefit from this service.

A tax is appropriate for collecting revenue to provide goods and services for public benefit. A user charge is more appropriate when the services and infrastructure provide a private rather than public benefit. Questions of benefit from rates should be

5 This research has not been released and remains confidential. The MAV can provide a briefing on this research to the Committee if required.


broadened to consider the council’s pricing and rating strategy, rather than only attempting to apply this concept through the use of differential rates.

2.4.3 Municipal Charges

A municipal charge is allowed under the Local Government Act 1989 with the purpose of defraying the administrative costs of council. The current cap on the quantum of rates and charges revenue able to be recouped through a municipal charge is 20 per cent. “Administrative costs” are not defined in the Act and many councils do not utilise a municipal charge.

The MAV understands that there is a proposal from an interest group seeking the Government to amend the Local Government Act and allow the collection of up to 50 per cent of the rates and charges through a municipal charge. While this is an issue outside of the scope of the draft Ministerial Guidelines, the MAV believes it is appropriate to comment on the proposal given that it has been raised during the consultation process.

The municipal charge is an instrument that increases the regressiveness of the rating system. It causes higher valued properties to pay less in rates and charges and increases the contribution of lower valued properties. For this reason many consider a (high) municipal charge inequitable.

While the MAV believes that councils should be afforded considerable flexibility to tailor their rating systems, it does not support this proposal. Presently, there is no onus on councils to explain the levels at which they set the municipal charge. Any such change could result in rates no longer being fundamentally a property-based tax, but a mixture of a poll and property tax. In practical terms the municipal charge is seen by some as a solution to achieve an outcome for a specific property class. However, when applied at high levels it may be considered a blunt instrument because its impacts are property rather than class specific and may have unintended or collateral consequences.

3 Draft Ministerial Guidelines

3.1 Effect of guidelines

The MAV has received legal advice on the effect the guidelines would have on councils’ rating strategies in the event they were adopted. The legal advice noted that there are errors in the draft Guidelines insofar as the ‘primary’ AVPCCs are listed as ‘tertiary’. Since the tertiary codes are available at finely identified property types, if the Guidelines were applied in their current form, they would have little or no influence on the capacity of councils to adopt differential rates for finely identified property types.

As is discussed further below, the Guidelines state that councils must define land in terms of the ‘tertiary’ [primary] AVPCC. This non-discretionary language implies that councils have no option in how they construct their differential rating land definitions.

However, the advice noted that the language in s.161(2A) of the Local Government Act 1989 only requires councils to ‘have regard to’ the Guidelines:


Part b) of the draft Guidelines appears to proceed on the assumption that the Minister for Local Government (the Minister) may prescribe the types or classes of land that may be the subject of a declaration of a differential rate. We regard it as clear that such power has not been conferred on the Minister. The statutory obligation of a council to 'have regard to' guidelines is incapable of being enlarged so as to empower the Minister to constrain the types or classes of land to a certain species.

As such, the Guidelines can be no more than advisory, yet the draft Guidelines use non-discretionary language.

This results in a situation where a council must give consideration to the Ministerial guidelines only. Given the brevity of the draft Guidelines and error of terminology used in identifying the ‘tertiary’ codes, the MAV would argue for new guidelines to be developed, from scratch, which will provide guidance to councils about the construction of a rating strategy and how any classifications of land use should be defined. The draft Guidelines do not achieve this aim.

3.2 Intent of the Draft Guidelines

Despite the error identified above which renders the draft Guidelines inoperable, their intent is worth exploring further to examine whether constraints on the power of councils to specify differential rate categories is beneficial.

The State Government’s Draft Ministerial Guidelines for Differential Rates appears to intend to apply a restriction on the autonomy of local government in its approach to raising rate revenue. The restriction relates to the requirement for classes of land on which differentials are levied by councils to reflect the primary AVPCC. This proposal attempts to restrict councils from levying differential rates on “finer” classes of land use – an approach adopted by a relatively small number of councils. It is unclear how this requirement accords with the achievement of equity, which is the primary consideration related to the use of differential rates. In fact the proposal is at odds with this objective as the greater discrimination afforded councils, the greater will be their ability to tailor a rating system which achieves its equity objectives. Further, the material provided does not argue or demonstrate in any way how this restriction has any relationship with other tax design principles. In fact there appears no connection between the discussion paper and the Draft Ministerial Guidelines at all.

The imposition of the primary AVPCC appears6 the only difference when comparing the Draft Guidelines with the present legislation. The accompanying Discussion Paper offers nothing new in assisting councils to structure their rating systems, offering up material to which councils have been serially exposed over the years, namely text book taxation principles and a description of the rating instruments which councils have at their disposal, rather than providing anything additional.

One can only interpret the exercise by the State as one to appease sectional interests rather than being based on reality. There is no basis for the State Government’s cited reasoning for this review which is “to reduce the complexity and inconsistency in the use of differential rates by Victorian councils”. A review of the differential rates struck by Victorian councils indicates a situation quite

6 While the draft guidelines make reference to ‘tertiary’ AVPCCs, it is apparent, based on the list of allowable property types, that the guidelines intended to define allowable properties to the primary AVPCCs. It is assumed that this is an error and as such, this paper uses the accurate ‘primary’ terminology.


different from the rhetoric – councils generally use a small number of differential rates. In 2011-12 close to 80 per cent of councils used five or fewer differential rates.7

Table 3: Number of differential rates used by councils, 2011-12

No. Effective Rates/Differentials No. Councils % Councils

1 16 20%2 17 22%3 8 10%4 11 14%5 10 13%6 7 9%7 2 3%8 3 4%

>8 5 6%

The data also show that very few councils employ differentials at a finer level than the primary AVPCC, with the vast majority of those striking more than a uniform rate adopting combinations of residential, farm and commercial and/or industrial rates. Rather than adopting “finer” land use classifications councils have tended to combine locational, zoning and size criteria with broad levels (i.e. primary AVPCCs) of land use. The data indicate the following list8 of fine level (below primary AVPCC) land use categories being differentiated by councils:

Liquor Licence/Late Night Gaming Machines Mixed Use Automotive Manufacture, Aluminium, Petroleum, Petrochemical, Public/Not for Profit Housing Dryland Farming Development Land Social Clubs Vacant Non-Developable Large Commercial/Industrial Timber Plantation Special Accommodation Tourism/Holiday/Rental

The rating systems adopted by the vast majority of councils are therefore not complex. Whether they are inconsistent, or not, is a different issue. Inconsistency has not been defined or discussed by the State at all. There is no rationale for councils’ approaches to differential rating to be consistent. Councils are separate democratically elected entities, hence the factors at play and the views about what is equitable will vary and this will be reflected in their approaches to differential rating. There should be an expectation of differences in councils’ approach to spreading the revenue burden, just as there are across State Governments with respect to taxes and levels of tax.

7 Excluding Rates Declared under Cultural and Recreational Lands8 This list covers most of those levied but may not be exhaustive


The State’s focus of consistency is also selective. There is at least as great an inconsistency across councils’ use of the municipal charge which, under the current and proposed legislation, is not required to be justified as is the case with differential rates. It is unclear why differential rates are being singled out when the effects of the municipal charge may be as significant in their own right and in reinforcing or offsetting impacts of general rates. Complexity and inconsistency in approaches to differentials is not exclusively, or even predominantly, attributable to the application of “fine” land use categories. Arguably, more complexity is associated with the application of locational, zoning and size criteria to broad land use classes, for example differentials applying to farms of different dimensions and to residential and business properties in different parts of a municipality. These approaches and the use of differentials for broad classes of vacant land (e.g. residential vacant, commercial vacant and/or industrial vacant) tend to be reflected in those councils having the highest number of differential rates.

Notwithstanding the fundamental issue of the rationale for any change to differential rating provisions, there are some technical considerations worth noting with respect to the requirement to align differential rating categories with the AVPCC. These, and the practical implications for councils based on some existing differentials, are exampled in the table below. The examples clearly show a conflict between the AVPCC classifications (i.e. the use) and the purpose for which a property is exists (i.e. whether it is principally commercial by nature).

Table 4: Existing differential rate categories affected by a transition to a primary AVPCC classification

Type AVPCC Primary Level

Sub-level/s Issue/s

Boarding Houses, Private Hotel, Dormitory Accommodation, Residential Investment Flats, Nursing Home

Residential 13 Investment Residential

Not owner occupied, run for profit so more akin to commercial operations but must be treated as residential

Shop & Dwelling, Office & Dwelling etc.

Commercial 211 Multiple Occupancies &212 Mixed Use

Both residential and commercial uses but must be treated as commercial. Councils required to levy a differential on all commercial properties or dispense with mixed use differential

Licenced premises, nightclubs

Commercial Liquor Licence, Late Night

Must be treated as commercial. Councils required to levy a differential on all commercial properties or dispense with liquor licence/late night use differential


Type AVPCC Primary Level

Sub-level/s Issue/s

Gaming Venues Commercial 241 Hotel Gaming242 Club-Gaming243 Member Cub244 Casino

Must be treated as commercial. Councils required to levy a differential on all commercial properties or dispense with gaming differential

Commercial/Industrial Below $6m CIV

Commercial/Industrial

Large Commercial/Industrial

Councils required to levy a differential on all commercial properties regardless of size

Automotive, Aluminium,Petroleum, andPetro-chemical Manufacturing

Industrial 312 Major Industrial Complex334 Oil Refinery335 Petrochemical

Must be treated as industrial. Councils required to levy a differential on all industrial properties or dispense with sectoral manufacturing differentials

Agroforestry Primary Production

570 Softwood Plantation571 Hardwood Plantation

Must be treated as Primary Production or dispense with timber plantation differential

Airports Infrastructure and Utilities

67 Air Transport

Councils required to levy a differential on all Infrastructure and Utilities

Various Sporting and Cultural Facilities

Sport, Heritage & Culture

81 State/Regional Sports Complex82 Local Sporting Facilities83 National/State/Regional Cultural Heritage Centres

In the case of some facilities especially smaller local ones profit may not be the primary purpose while others are run fundamentally as commercial enterprises. Councils required to levy a differential on all Sport, Heritage and Cultural properties and cannot levy the commercial rate selectively on any properties.

Social Clubs Community Services Land

750 Halls and Service Clubrooms

Councils required to levy a differential on all Community Services Land properties or dispense with social clubs differential

Councils employing finer differentials will be required to “aggregate up” in order to capture land currently rated differentially or dispense with the finer differentials they have in place. They may also attempt to artificially maintain the status quo via the use of rebates or by adding the criterion of geographic location to a primary AVPCC. The redistributive effects of the first two for individual councils are largely unknown at this stage and would require further investigation but are potentially significant. The legislation never intended the use of rebates as a means of skirting around the differential rating provisions (S.169) and there may also be a question related to the


efficiency of rebate schemes9. It is unclear why the use of the latter two would not result in greater complexity and inconsistency across councils.

Interestingly, State Governments have shown that they are not averse to discriminating in favour of finer classes of property being taxed differently, specifically land involved in electricity generation.

There are other things much worthier of attention than the restrictions foreshadowed in the Draft Ministerial Guidelines - these include focussing on potential improvements to councils’ development of rating strategies and greater clarification and guidance of what is allowable legally under differential rating.

In the case of the former this includes the use by councils of more comprehensive research and data review that underpins decision-making. Council rating strategies will often quote taxation principles in support of their rating structures but could be strengthened in presenting the detailed case. Similarly, there is scope for council rate modelling to be improved. With respect to legal issues clarity on the following would do much more for the cause of improving differential rating:

separate rating of land components included in a single property; the levying of differential rates based on valuation tiers i.e. progressive tax

rates; issues concerning harmony between sections of the Valuation of Land Act

and LG Act; and attributes that may be taken into account when considering the capacity of

land (ratepayers) to bear rates and whether capacity to pay may be taken into account at all when setting differential rates (decision Xstrata Coal Qld v. Bowen Shire Council 2010).

3.3 Timing of any prohibition from making a declaration of a differential rate

The Local Government Act 1989 appears to indicate that the Minister only has power to request the Governor in Council from disallowing a proposed differential rate. As s.161(4) states:

On the recommendation of the Minister, the Governor in Council may by Order in Council prohibit any Council from making a declaration of a differential rate in respect of a type or class of land, if the Minister considers that the declaration would be inconsistent with any guidelines made under subsection (2B). [Emphasis added]

The legal advice indicates that the prohibition should be made by the Governor in Council before the differential rate has been declared.

Any moves to enforce a prohibition after a differential rate was declared may result in a failure of councils to collect adequate rate revenue for the year. The MAV seeks confirmation from the Victorian Government that they intend to use this power only during the draft budget process to ensure that any prohibition does not influence the overall quantum of rates collected by the council.

9 Rebates schemes are likely to be useful only in situations where properties were subjected to discounted differential rates due to the restriction of a rebate to no more than one third of the rateable properties in a municipal district.


4 Rating Strategy Development Best Practice

The best approach the State Government could take with respect to council rating is to continue to provide them with the flexibility afforded under the current system and provide greater encouragement of rating strategy development best practice.

The recent review of rating strategies by the Victorian Auditor General has indicated that work needs to be done in this area. Best practice will not be encouraged by constraining in any way the use of differential rates, but by cooperatively improving and enhancing the development of rating strategies. .

Areas that would offer improvements to the rating strategy development process include but are not limited to:

Obtaining the level of councillor input and a realistic time frame for completion;

Establishing a strategic process with milestones, commencing from where rates sit as part of pricing policy and ending at the choices made with respect to the rating system;

Discussion in fora comprising councillor/s, council officers and independent advisors of the fundamental rating (tax) principles, both generally and with respect to local circumstances;

Developing an understanding of relevant concepts including income, wealth, profit, returns and of basic statistical interpretation (frequency distributions and measures of central tendency);

Developing an understanding of data sources that exist, both at a local level or higher, that may assist including understanding their limitations and shortcomings and the need for locally generated information to assist decision making;

The development of an understanding of local circumstances with respect to wealth, income and disadvantage and with respect to property values, business types/sizes and the specific economic and other circumstances that they (may) face;

Improvement in the level of sophistication of modelling rating options focussing on presenting whole-of-municipality effects and “litmus” properties rather than average increases for classes;

Property/rate system interrogation and audit to confirm quality of correct and required coding (e.g. grouping of farm assessments to farm enterprises);

Tailoring the most appropriate public consultation process including the material to be disseminated and opportunities for public comment;

Educating and informing constituents about the impacts of changes to the rating system; and


Resourcing, in particular the training or enlisting of personnel that can undertake the above requirements.

The MAV provides consultancy assistance to councils with respect to the development of rating strategies having developed this expertise over a number of years. The Association would welcome the opportunity to work cooperatively with the Victorian Government to deliver a package of guidance material to assist councils to achieve best practice rating strategies.


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