Part 5: Rates issues

Local government: Results of the 2015/16 audits.

In this Part, we discuss a 2016 High Court interim judgment (the judgment) on the rating practices of Northland Regional Council and Kaipara District Council, and how the judgment might affect other local authorities.

A local authority's power to set rates is essentially a power to tax people for the cost of the services that the local authority provides. The judgment reflects the strict approach that the courts take to interpreting legislation that gives entities the power to tax, and reinforces the extreme care that local authorities need to take to set and collect rates correctly.

A public entity is responsible for ensuring that it complies with its legal and accountability obligations. In the context of setting rates, local authorities are responsible for ensuring that they comply with all aspects of the Local Government (Rating) Act 2002 when they set, assess, invoice, collect, and recover rates.

Rates are a significant part of a local authority's revenue. This is reflected in the audited financial statements. The purpose of an audit is to increase the confidence that the public can have in the reported information. In our audits, we seek reasonable assurance that rates revenue has been properly calculated and that there is no major risk to the rates revenue reported.

We have previously reported on rating matters, including some problems that local authorities were having and our audit approach.19

Northland Regional Council case

On 15 September 2016, the High Court gave an interim judgment in a judicial review proceeding, Mangawhai Ratepayers' & Residents' Association Inc. vs Northland Regional Council and Kaipara District Council.

The judicial review considered arrangements between Northland Regional Council and Kaipara District Council to collect Northland Regional Council's rates. The High Court found problems with those arrangements.

The judgment was given when the auditors were finalising the 2015/16 local authority audits. The judgment has potential implications for rating-collection arrangements between other regional councils and territorial authorities in their regions.

Auditors needed to quickly consider which local authorities were potentially affected by the judgment, for both current and previous rates, and whether the audit or management reports should refer to any matters arising from the judgment.


The judgment makes findings on an application for judicial review brought by the Mangawhai Ratepayers' and Residents' Association and two individuals (the claimants).

The judgment addresses the legal challenge to the rates, but the High Court reserved the decision on whether to grant the further relief sought pending further evidence and submissions from the parties. Final judgment had not been given at the time of writing.

The legal challenge

The claim alleged that the rates set by Northland Regional Council for the 2011/12 to 2015/16 rating years and collected by Kaipara District Council were unlawful. The claimants also challenged aspects of the rates set by both local authorities, including whether rates can be set on a GST-inclusive basis and whether penalties imposed for late or unpaid rates were valid. The claimants sought orders to quash the rates and penalties applied to them and refunds of those rates and penalties.

The claim succeeded on three matters: Northland Regional Council not specifying payment dates, Northland Regional Council delegating the assessment of rates or recovery of unpaid rates to Kaipara District Council, and Northland Regional Council delegating the authority to impose penalties on unpaid rates.

Specifying payment dates

Northland Regional Council had not specified actual calendar dates for payment of its rates in its rating resolution for three of the challenged years. Instead, Northland Regional Council's rating resolution said that payment dates would be those set by the territorial authorities that collected the rates on its behalf.

The High Court found that this did not meet the requirements of section 24 of the Local Government (Rating) Act 2002, which requires a rates resolution to state the date on which the rate must be paid/or the instalment dates if payable by instalments. Therefore, the High Court found that Northland Regional Council's rates resolutions were not made lawfully, because they did not specify the days/dates that the regional council's rates would be payable.

Delegating the assessment of rates or recovery of unpaid rates

The High Court found that Kaipara District Council could not assess and recover unpaid rates on Northland Regional Council's behalf. The High Court found that, although one local authority can collect rates on another's behalf, the regional council could not delegate the power to assess rates to another local authority or person, or the power to recover unpaid rates to Kaipara District Council without explicit authority in the Local Government (Rating) Act 2002 to do so. Therefore, although Kaipara District Council could collect Northland Regional Council's rates, it could not sue a ratepayer in its own name to recover unpaid rates.

Imposing penalties on another council's unpaid rates

The High Court found that there is no power in the Local Government (Rating) Act 2002 for a local authority to delegate the power to impose penalties on its unpaid rates. Therefore, Northland Regional Council's penalty resolutions that delegated authority to the three territorial authorities in its region to assess and recover penalties on its rates were unlawful.

Northland Regional Council's response

As a result of the judgment, Northland Regional Council included disclosures in its 2015/16 financial statements about the judgment. These disclosures summarised the High Court's findings but noted that, because the High Court had yet to determine any relief to be granted, it was not possible to quantify any potential financial liability to Northland Regional Council.

In our view, the disclosures were adequate and we did not need to draw attention to the matter in our audit report.

Other affected regional councils

We established that four other regional councils used territorial authorities to collect their rates. We suggested that those local authorities should consider whether they were potentially affected by the judgment and, if so, disclose in their 2015/16 financial statements that they were considering the implications.

One regional council had adopted its annual report shortly after the judgment and before it had considered any implications of the judgment. The other three regional councils made appropriate disclosures in notes to their financial statements.

The issue of setting precise dates

The High Court's finding that a rates resolution must state the calendar dates for payment of rates could potentially affect other councils, not just regional councils that have collection arrangements with territorial authorities.

Our auditors established that some territorial authorities that charge for water by consumption do not specify actual payment dates in the rates resolution. Instead, they refer to payment by reference in the resolution to invoicing – for example, stating that these rates will be payable on receipt of a monthly invoice or by the 20th of the month following the invoice.

We suggested that, although the High Court did not consider the dates issue in relation to water consumption rates, the relevant local authorities should consider the implications of the judgment on their approach to setting payment dates for water consumption rates.

We estimate that about 16 territorial authorities need to consider their approach to setting water consumption rate payment dates. Local authorities should also ensure that rating assessments include these water consumption rates, even though it is not possible to state the total amount of the rate that will be charged during the year at the start of the year.20

The judgment reinforces that rate-setting processes and arrangements require care and precision. Some established arrangements might need to be reconsidered for lawfulness.

Our auditors for the relevant local authorities will follow this matter up in the next audit. They will look for evidence that the local authorities have followed a reasonable process for setting and charging these rates and that the local authorities have had regard to the judgment.

We encourage all local authorities, under the leadership of Local Government New Zealand and the Society of Local Government Managers, to consider the risks arising to local authorities in rating and raise any concerns with the Department of Internal Affairs.21

19: Office of the Auditor-General (2014), Local government: Results of the 2012/13 audits.

20: The rating assessment must include the amount and a description of each rate. See the Local Government (Rating) Act 2002, section 45(1)(f).

21: The Department of Internal Affairs is responsible for administering the Local Government (Rating) Act 2002.