3.2 Implementation of the Local Government (Rating) Act 2002

Local government: Results of the 2004-05 audits.

The purpose of this article is to discuss 2 rating issues that came to our attention during the 2004-05 audits.

Setting rates in accordance with the Long-Term Council Community Plan

Section 23 of the Local Government (Rating) Act 2002 (the Rating Act) provides that rates set by a local authority must:

  • relate to a financial year or part of a financial year; and
  • be set in accordance with the relevant provisions of the local authority’s Long-Term Council Community Plan (LTCCP) and funding impact statement for that financial year.

The funding impact statement, in either the LTCCP or the annual plan, must include information about revenue and financing mechanisms to be used by the local authority. It must also include certain information about general and targeted rates, and activities that will be funded from those rates.11 If a targeted rate is to be set differentially, the funding impact statement must state the total revenue sought from each category of rateable land, or the relationship between the rates set on rateable land in each category.

The following example illustrates the difficulties that may arise in complying with section 23 of the Rating Act where a decision that is inconsistent with a current policy is made late in the financial year.

A local authority decided to introduce a differential to a targeted rate for land transport for the 2005-06 rating year. The local authority wanted to do so to avoid potential litigation from an energy company that was paying a large amount of the rate but was not a major user of roads in the district.

In its draft annual plan, the local authority said that it intended to introduce a differential to the rate. The effect of the differential was to significantly decrease the rate payable by the energy company, but to increase the rate for other ratepayers by about 5%. However, as the local authority’s revenue and financing policy did not provide for a differential land transport rate, the proposed rate was inconsistent with the revenue and financing policy.

The Local Government Act 2002 (the 2002 Act) recognises that councils will from time to time make decisions that are inconsistent with policies or plans, including the LTCCP. Section 80 of the 2002 Act provides that, if a decision is significantly inconsistent with a policy or plan, a council must, when making the decision, identify:

  • the inconsistency;
  • the reasons for the inconsistency; and
  • any intention to amend the policy or plan to accommodate the decision.

In this case, the local authority did not consider that the decision was significantly inconsistent with its revenue and financing policy, but followed the section 80 process in its draft annual plan in any case. The local authority said that it would change the revenue and financing policy as part of the 2006-16 LTCCP. The revenue and financing policy forms part of the LTCCP, so a local authority could adopt a new policy with a new LTCCP or amend an existing policy during the period of the LTCCP by using the formal amendment process.

We discussed with the local authority whether or not it could meet the requirements of section 23 of the Rating Act, which are that rates must be set in accordance with relevant provisions of the funding impact statement and the LTCCP. The proposed differential land transport rate was in accordance with the funding impact statement for the financial year, as outlined in the draft annual plan, but was inconsistent with the revenue and financing policy in the LTCCP. In our view, the revenue and financing policy is likely to be a “relevant provision” of the LTCCP for the purpose of setting rates.

We considered that the local authority faced some risk in setting the land transport rate without amending the revenue and financing policy. However, we did not consider that the matter was of significant concern, as the local authority had clearly signalled its intended action in the draft annual plan for the year. We therefore did not consider that ratepayers had missed out on relevant information, because they had the opportunity to comment on the proposed rate during consultation on the annual plan.

Separately used properties

Since the Rating Act was enacted, we have received several enquiries about how local authorities are applying section 15(1)(b) of the Rating Act. Section 15 concerns uniform annual general charges (UAGCs). It provides that–

(1) A local authority may set a uniform annual general charge for all rateable land within its district, being—

(a) a fixed amount per rating unit; or
(b) a fixed amount per separately used or inhabited part of a rating unit.

Our understanding is that section 15(1)(b) was included in the Rating Act to address difficulties that had arisen under the now-repealed Rating Powers Act 1988. These difficulties concerned levying separate charges, such as UAGCs, on separately used or separately inhabited parts of a single property. While separate charges for water supply or waste removal could be levied on separately used or inhabited parts of a rateable property under section 24 of the Rating Powers Act, there was no authority to levy UAGCs on such parts.

We have received enquiries from ratepayers concerned about:

  • a council policy of levying separate UAGCs on dual-use properties with a single inhabitant; and
  • a council policy of levying a UAGC on a part of a property that was capable of separate inhabitation, but was not in fact separately inhabited and where separate inhabitation would have been in breach of building standards.

In the first case, the owner of the property lived in the property and operated a part-time business in the other part. The property was purpose built for business use in one part and residential use in the other part. The owner was concerned about paying 2 UAGCs for the property. The owner was also concerned that the Council was not applying rates consistently within the district, as he believed that other properties with more than one use were not subject to more than one UAGC.

The Rating Act does not define “separately used or inhabited”, and the Council uses the following “working definition” –

any part of a rating unit separately used or inhabited by the ratepayer, or by any other person having a right to use or inhabit that part by virtue of a tenancy, lease, license, or other agreement.

Whether a part of a rating unit is separately used or whether it is separately inhabited is a question of fact. After the Rating Act was enacted, the Council had surveyed ratepayers about separate use and separate inhabitation. The Council had determined that the ratepayer’s property had 2 separately used parts (one business, one residential) and therefore charged the ratepayer 2 UAGCs.

The ratepayer considered the Council’s approach to be illegal and unfair. They referred the Council to other councils that had a policy of not applying a second UAGC on a dual use property where there is a single inhabitant.

The Council considered the ratepayer’s concerns in detail but did not change its policy. The Council considered a remission policy for rating units designed for dual use where one of the uses is of a minor nature and where there is a single inhabitant, but found it impossible to word a policy in such a way as to prevent unintended application to a wide range of rating units. The Council had legal advice that a court would be likely to uphold the Council’s approach to rating the ratepayer’s property. We advised the ratepayer that the Council was entitled to rely on its legal advice and that its approach did not appear to us to be unlawful or unreasonable.

In the second case, a Council levied a second UAGC on a part of a property that the ratepayer asserted was not in fact separately inhabited. While the part had a separate entrance and a separate kitchen, the ratepayer did not believe that the property would meet building regulations requirements for separate inhabitation. This was because the 2 parts of the property were not separated by a fire wall that would comply with building regulations and was therefore not legally capable of separate inhabitation.

While we could not make a legal determination on the matter, we advised the Council of our view that section 15(1)(b) requires councils to undertake factual enquiries about separate use or separate inhabitation, rather than levy UAGCs based on a property’s capacity for separate inhabitation. We also considered that the Council’s rating policy and practice should be aligned with the requirements of the Building Act 1994.

Information relevant to rating

We have also considered complaints about rating exemptions. In particular, we considered how local authorities ensure that properties that are exempt from rates based on specified exempt uses are in fact being used in accordance with the exemption. Those cases, and the case discussed in paragraphs 3.219 and 3.220, raise questions about how local authorities gather and use information about properties, including information available from within a council (such as about the application of building regulations to a particular property), and how they maintain their rating information databases. Councils need to ensure that they are imposing rates on the best available current information and that rates are applied consistently, to ensure that like properties are treated in a like manner.

11: Local Government Act 2002, Schedule 10, clauses 10 and 13.

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