Vijay Raj explains the law pertaining to rates imposed by local authorities.
Rates are a type of tax imposed by local authorities in Malaysia. It is commonly referred to by its Malay name, cukai taksiran. In Peninsular Malaysia, the power to impose rates is found in Part XV of the Local Government Act 1976 ("Act"), specifically Section 127.
Section 2 of the Act defines a "local authority" to be, inter alia, any City Council, Municipal Council or District Council, as the case may be. Section 39(a) of the Act recognises rates to be one of the sources of revenue for local authorities, and as can be imagined, local authorities would need adequate funds to discharge their wide-ranging duties and responsibilities such as carrying out sanitary services, managing markets, maintaining lavatories, preventing the spread of diseases and providing suitable burial grounds and crematoria.
Generally speaking, the amount of rates payable by a person to a local authority would depend on the value of the lands and buildings, if any, held by the person within the administrative area of the local authority concerned. The term used in the Act to refer to a rateable land and its buildings is "holding". Every land held under a separate document of title and all buildings thereon is regarded as a separate holding. In the case of subdivided buildings, the holding comprises every parcel and the common property. The Federal Court had recently, that is on 26 April 2018, held that a local authority does not have the power to impose rates upon a mere occupier of lands who did not own or hold the lands under a document of title. The occupation in the said case arose by virtue of the occupier's underground pipelines that crossed, inter alia, State land or lands whose owners could not be traced.
Certain holdings or parts thereof may be exempted from the payment of rates or may be charged rates that are reduced, as may be the case in respect of holdings that are used for religious worship, public schools, charitable or recreational purposes and not for pecuniary profit: Sections 134-135 of the Act.
BASIS OF ASSESSING RATES
Section 130 of the Act provides the basis for computing rates. Rates may be assessed either upon the "annual value" or "improved value" of a holding. Broadly speaking, Section 2 of the Act defines "annual value" to be the estimated gross annual rent at which the holding might reasonably be expected to let from year to year, with the landlord paying the expenses of repair, insurance, maintenance or upkeep and all public rates and taxes. On the other hand, "improved value" refers to the market value of the holding in question. In Majlis Perbandaran Seberang Perai v Tenaga Nasional Berhad  1 MLJ 1, the Federal Court held that power generation units within a power station, including the generating plant and machinery, should not be taken into account when determining the annual value of the relevant holding. It would therefore be important to understand the nature of the holding that is subject to rates, so as to exclude from its value items that should not be taken into account under the law. Although this task may seem straightforward, it can be demanding for holdings such as large factories and production or processing plants.
Section 130(2) of the Act provides that if rates are assessed upon the annual value of holdings, such rates shall not exceed 35% of the annual value of those holdings. In contrast, if rates are assessed upon the improved value of holdings, Section 130(3) of the Act provides that such rates shall not exceed 5% of the said value. The rates imposed by a local authority may only endure for a period not exceeding twelve months and it is required to be paid half-yearly in advance: Section 133 of the Act.
THE VALUATION LIST
Before a local authority is able to impose rates, it must first prepare a list, known under the Act as a "Valuation List", of all holdings within its administrative area that are not exempted from the payment of rates. The Valuation List must identify each and every such holding, its owner and (if known) its occupier, as well as its annual value or improved value: Section 137 of the Act. Section 137(3) requires local authorities to prepare a new Valuation List once every five years or within such extended period as the State Authority may determine. However, it is often the case that the 5-year time period is not followed. At times, the same Valuation List can continue to apply for ten to twenty years or longer. As the preparation of a new Valuation List would entail considerable time, effort and cost, it is perhaps not surprising for Valuation Lists to continue to apply for far longer than the envisaged 5-year period. Instead, local authorities tend to prefer to amend existing Valuation Lists as and when circumstances justify. In this regard, Section 137(2) of the Act specifically provides that a Valuation List together with the amendments to it shall remain in force until superseded by a new Valuation List.
The power to amend a Valuation List is found in Section 144 of the Act and may be exercised if one of the grounds set out under subsection (1) of that provision is established. For example, a local authority may amend a Valuation List where by reason of a mistake, oversight or fraud, the name of any person or the particulars of any rateable holding is omitted from the Valuation List, or any rateable holding has been insufficiently valued. Amendments may also be justified if the value of a holding has increased by reason of any new building being erected, modified or altered after the preparation of the Valuation List in question.
As the power to amend a Valuation List is the more common method of keeping a Valuation List current, it would be important for ratepayers to understand their rights of objection in order to avoid being subject to excessive rates as a result of such amendments, particularly where the value of a rateable holding is large as in the case of petroleum refineries, hydroelectric dams, factories, plants, gas pipelines, etc. Additionally, a successful challenge to a proposed unwarranted or excessive increase in the annual value or improved value of a large holding will result in savings on an annual basis, rather than a saving which is one-off.
The scope for savings should not be underestimated because the holding in question may often be such that its market value or annual value cannot be ascertained through sale or rental transactions involving comparable holdings. For example, the market value of a petroleum refinery is likely to be difficult if not impossible to ascertain through an attempt to shortlist sales of petroleum refineries that are comparable in terms of size and capacity. The paucity of such comparable transactions may be due to there being no other comparable refinery existing within Malaysia, or because of the lack of purchasers interested in refineries. In such circumstances, other approaches to or methods of valuation have to be applied and it is in these instances that scope for large differences of opinion regarding values may exist. Under the Malaysian Valuation Standards, there are three primary approaches to valuation that are recognised, namely the Comparison Approach (discussed above), the Income Approach and the Cost Approach. Additionally, under the Income Approach, there are subsets known as the Investment Method, the Residual Method, the Profits Method and the Discounted Cash Flow Method.
An example of an approach to valuation which can potentially assist when there are insufficient comparable transactions (under the Comparison Approach) is the Cost Approach mentioned above. The Cost Approach involves the process of ascertaining the value of a property by reference to the cost of constructing a similar property. Even so, the exercise may not be straightforward. For example, a factory may have been built many years before the date of valuation, hence there may be no similar factories built since then for the purpose of gauging the current cost of constructing a similar factory. This issue not only raises matters of valuation, but is intertwined with questions of law. As courts need to be satisfied that valuations are correct and consistent with principles of law, it would be important for valuation reports to be well-reasoned, substantiated and presented in a manner that can be understood without undue effort. Experts who prepare valuation reports should also be prepared to answer questions regarding their report under cross-examination in court.
PROCEDURE FOR AMENDING A VALUATION LIST
The procedure for amending a Valuation List can be found in Sections 144(2)-144(6) of the Act. Before a local authority can exercise its power to amend a Valuation List, it has to first give 30 days' notice of the amendment to all persons interested in it. Any person aggrieved by the proposed amendment on any of the grounds set out in Section 142(1) of the Act may make an objection in writing to the local authority not less than 10 days before the amendment is made. The usual grounds of objection are that the holding in question is valued beyond its rateable value and that the holding sought to be charged with rates is not rateable. The new rate resulting from an amendment to a Valuation List becomes payable from the commencement of the next half year or such earlier date as the local authority may determine: Section 144(6) of the Act.
In two recent cases that were argued at the High Court, the local authorities that were involved attempted to retrospectively charge the new rates resulting from their amendments to the applicable Valuations Lists through reliance placed on, inter alia, the said provision (Section 144(6) of the Act) and a Court of Appeal decision which they contended permitted rates to be charged retrospectively. However, the High Court decided in favour of the ratepayer, holding that local authorities do not have the power to charge rates retrospectively.
Any person who is dissatisfied with the decision made by a local authority in respect of his objection may appeal to the High Court. However, it is important to bear in mind that the time limited for an appeal to the High Court is only 14 days. It is therefore imperative for the ratepayer to be vigilant of the local authority's decision regarding his objections and to act promptly against it if the decision is unacceptable. Notwithstanding the right of appeal to the High Court, the ratepayer must nevertheless pay the local authority the amount of rate appealed against prior to the commencement of the appeal. The appeal procedure is set out in Section 145 of the Act. In the event the High Court decides in favour of the ratepayer, the excess amount paid to the local authority may either be set off against future rates due to the local authority or refunded to the ratepayer.
CONSEQUENCES OF FAILURE TO PAY RATES
The local authority may, in order to recover the arrears of rates, attach and sell by public auction the moveable properties belonging to the owner or occupier liable to pay the arrears, and in certain circumstances, the local authority may even commence legal proceedings to attach and sell the holding or holdings in respect of which the arrear has accrued. The provisions of the Act relating to the recovery of rates in arrears are Sections 146- 156.
There appears to be a lack of awareness among ratepayers about their rights and this is probably due to the amount of rates payable in most cases being low. However, as discussed earlier, the potential savings annually from a successful challenge to rates that appear excessive can be large in holdings that are high in value and it is imperative to be alert so that an appropriate objection can be raised within the relatively short time frames prescribed under the Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.