Australia: It's that time of year again - a pre-budget reminder of the legal risks for setting differential and special rates in local government

As the end of the financial year approaches, local governments will be busy finalising their 2015/16 budgets before the 1 August deadline.

A key budget challenge for local governments each year is determining the rates and charges that form an essential part of Council revenue.

Two key areas of risk for local governments are the levying of differential and special rates.

Local governments must ensure they comply with the Local Government Act 2009 and the Local Government Regulation 2012 when deciding these rates.

Improperly levying differential or special rates can lead to legal challenge which, if successful, may result in the rate being invalidated.

DIFFERENTIAL RATES

Differential rating is, in part, a response to the fact that different land uses will generate different levels of demand for community services. For example, a major retail centre will place much greater demands on a local government's roads than an ordinary residential dwelling.

However, differential rating is also commonly perceived as being justified on equity grounds. For example, it can generally be assumed that owners of commercial or industrial land will have a greater financial capacity than residential landowners and they typically are able to claim rate expenses as a tax deduction.

While this political justification for differential rating is widespread, it carries significant legal risk. The LG Act only allows differential rates to be applied in relation to different categories of land.¹ For this reason, courts have held that it is unlawful for differential rates to be levied by reference to characteristics of the landowner, rather than characteristics of the land itself.² Accordingly, it is unlawful to levy a differential rate on the basis that the landowner has a greater financial capacity.

While this principle may sound straightforward, it can be very difficult to apply in practice.

At the extreme end, it would clearly be unlawful for a differential rate to be imposed on a specific landowner by name.

However, the principle extends much more broadly.

XSTRATA AND PATON CASES

In the Xstrata case,³ the Council had imposed higher differential rates on land used for coal mining. On its face, this might appear lawful, since it ostensibly relates to a characteristic of the land (namely, its use for coal mining).

Unfortunately, the Council's revenue statement, and oral evidence given during the course of the proceeding, indicated that the Council had based its decision on the financial capacity of ratepayers.

As a result, the Court held that the differential rate was unlawful, because it was based on the perceived capacity of one class of landowners (ie coal mining companies) to pay an increased rate compared to other ratepayers.

A similar outcome arose in the subsequent decision of Paton.⁴ In that case, the Council had imposed a higher differential rate on properties that were not used as the owner's principal place of residence, with the intent of obtaining higher rates from investors as opposed to owner-occupiers. On the basis of Xstrata, the Court held that the differential rate was unlawful.

The decision in Paton threatened many local governments, which had adopted the same differential rating approach. As a result, the Queensland Parliament passed retroactive amendments to the LG Act to confirm that local governments have (and "always have had") the power to impose differential rates "according to whether or not the land is the principal place of residence of the owner."

While these limited amendments provide some certainty to local government, they do not otherwise affect the approach taken in Xstrata.

For this reason, in preparing their 2015/2016 budgets, local governments should carefully consider any proposed differential rates, and the justifications provided for those rates in the local government's revenue statement and supporting reports.

They must ensure that (apart from the statutory exception for non-primary residences) their financial documents clearly justify any differential rating on a basis that does not relate to the landowner.

SPECIAL RATES

Special rates are also frequently subject to legal challenge.

This is due to the legal requirement that a special rate only be imposed for services, facilities or activities that have a special association with particular land. Local governments must ensure that the special rate is properly related to a service, facility or activity that has a particular connection with land that is subject to the rate.

The case of Australand Land and Housing No 5 (Hope Island) Pty Ltd v Gold Coast City Council⁵illustrates the risks associated with special rating. In that case, a group of landowners constructed a canal to enhance the drainage of their land. However, the landowners did not construct a bridge over the land (to replace a road that had been severed), or a connection from the canal to nearby tidal water.

Instead, the Council constructed the bridge and connection and attempted to impose a special rate to recover its costs. However, the Court held that because other land in the area also benefited from the works, the special rate was unlawful.

The legislative restrictions on special rates have become even more stringent in recent years.

Previously, under the legislation that applied in Australand, a special rate would be justified if "in the local government's opinion" the land derived a special benefit from the service, facility or activity.

While there was an implicit requirement that the opinion be "reasonable", the wording of this legislation meant that there was a degree of flexibility.

Now, however, there is no reference to "opinion". This means that the question of whether or not a special rate is appropriate is one of objective fact. Even if a local government reasonably formed the view that a special rate was appropriate, it may now be open to the Court to reach the opposite view and invalidate the rate.

Given this, where there is a possibility that services, facilities or activities to be funded by a special rate may benefit land that is not subject to the rate, local governments should be very careful to ensure that the special rate is justified. It may be necessary to obtain legal advice to ensure the special rate is lawful.

Footnotes

¹ See LG Act, section 94(1A); LG Regulation, section 91.

² See Xstrata Coal Queensland Pty Ltd v Council of the Shire of Bowen [2010] QCA 170.

³ Xstrata Coal Qld Pty Ltd v Council of Shire of Bowen [2010] QCA 170.

⁴ Paton v Mackay Regional Council [2014] QSC 75.

⁵ [2008] 1 Qd R 1.

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.

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