Part 4: Rates issues

Local government: Results of the 2016/17 audits.

In this Part, we give an update on how local authorities have responded to a High Court judgment about how Kaipara District Council assessed and collected rates for Northland Regional Council.

In 2016, in an interim judgment, the High Court found some of the rates-collection arrangements between Northland Regional Council and Kaipara District Council to be unlawful, but it did not consider what remedy should be given.10

In August 2017, the High Court's final judgment addressed the issue of remedy. The High Court set aside Northland Regional Council rates and penalties imposed in the Kaipara district for five rating years (from 2011/12 to 2015/16).11

The High Court found that a regional council:

  • cannot lawfully delegate to territorial authorities in its region the power to assess its rates, recover unpaid rates, or add or remit penalties; and
  • has to specify calendar dates for payment of its rates in its rating resolution, rather than leave this for territorial authorities to do.

Although the High Court set aside the rates and penalties, it did not direct Northland Regional Council to refund the rates or penalties.

Northland Regional Council appealed the High Court judgment. The Court of Appeal heard the appeal in November 2017. The Court of Appeal had not given its decision at the time of writing.

Although the matter is still before the courts, we look at how local authorities have responded to the issues raised in the judgment. We also report on some rating matters we considered during the 2016/17 audits.

The High Court judgment's effect on local authorities

The High Court's finding that a regional council cannot delegate certain tasks to territorial authorities was not consistent with some established arrangements between regional councils and territorial authorities.

The High Court's finding that a local authority must specify a calendar date for payment of rates could have a wider effect in the sector. Local authorities that charge water rates on the basis of the amount of water used usually specify payment due dates on invoices, rather than calendar dates.

In April 2017, we reported to Parliament about how local authorities had responded to the interim High Court judgment, including what they disclosed in their 2015/16 annual reports.12

Because the High Court made its final judgment before local authorities finalised their 2016/17 annual reports, we asked our auditors to look at how local authorities responded to the final judgment and any related annual report disclosures.

Northland Regional Council's response

Northland Regional Council disclosed information about the final High Court judgment in a note to its 2016/17 financial statements, including the following:13

  • The High Court set aside the Council's rates and penalties for 2011/12 to 2015/16 (inclusive) for the Kaipara district, but the High Court did not order any refunds of rates.
  • The Council could not take enforcement action for uncollected rates from the Kaipara district for 2011/12 to 2015/16. The Council had made appropriate provision for this in the financial statements.
  • The Council had a contingent liability in relation to rates collected from the Kaipara district for 2011/12 to 2015/16. The relevant amount of rates collected was $16.3 million.
  • No challenge had been made to the rates in the Far North and Whangarei districts.
  • The Council was appealing the final judgment, so it cannot make a final assessment until the Court of Appeal gives its decision.

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

Other regional council responses

In 2016, after the interim judgment was given, we found that four regional councils used territorial authorities to collect their rates. We suggested that those regional councils should consider whether the High Court judgment would affect them and, if so, disclose that they were considering the implications in their 2015/16 financial statements. Three of the regional councils did this, but one regional council had already adopted its annual report before it had considered the implications of the High Court judgment.

Since then, the four regional councils have considered their rating-collection arrangements and are paying attention to developments with the Northland Regional Council case.

None of the four regional councils have received challenges to their rating-collection arrangements, but they have all reviewed them. Three of the four have made some adjustments to those arrangements. These include:

  • making it clear that the territorial authorities are doing things on behalf of the regional council, not in their own right;
  • the regional council reviewing and authorising any additional regional council penalties imposed by the territorial authorities on ratepayers;
  • including the regional council logo on any arrears letters issued by territorial authorities that apply to penalties on regional council rates; and
  • the regional council setting payment dates for its rates in its rating resolution.

The fourth regional council has not identified any issues with its current arrangements, but, along with other regional councils, is working with government and sector agencies to prompt a change to rating legislation if needed.

Any need for change will become clearer when the Court of Appeal gives its decision. We support local authorities' efforts to get clarity in rating legislation and practices.

The issue of setting precise dates

In its interim judgment in 2016, the High Court found that a rates resolution must specify a calendar date for payment of rates. We considered that this could affect other local authorities. During the 2015/16 audits, we were aware of the following:

  • Some local authorities did not set calendar dates for payment of water use that is charged by the amount consumed (water-by-meter rates). Instead, payment of these rates is on receipt of an invoice or by the 20th of the month following the invoice.
  • Some rating assessments did not include these water-by-meter rates, because it is not possible to state at the start of the year how much the total amount of the water rates will be, which is what the rating legislation requires.

Update on setting precise dates

For the 2016/17 audits, we asked our auditors of territorial authorities to update us on any changes made to setting calendar dates for water-by-meter rates.

We estimate that, of the 67 territorial authorities:

  • 43 set calendar payment dates for water-by-meter rates, and 17 authorities changed their approach after the High Court judgment;
  • 10 did not set calendar dates for payment of water-by-meter rates; and
  • 14 did not set water-by-meter rates.

Therefore, most territorial authorities now specify calendar dates for payment of all rates.

Other rates matters arising from the 2016/17 audits

After our audits of local authorities in 2012/13, we reported on rating practices and the issues we found.14 Disappointingly, we are still seeing some of the same issues. Problems we noted during the 2016/17 audits included the following:

  • Confusion about terminology – some local authorities are still using incorrect terminology either from previous rating legislation or from mixing old and new concepts, such as "uniform annual charge" or a "targeted uniform annual charge". Under current rating legislation, these would be more correctly described as targeted rates set on a uniform basis.
  • Some of the required content for the funding impact statement (a prerequisite for setting rates) is missing.
  • Using different terminology in the rates resolution and the funding impact statement to:
  • describe matters and factors for targeted rates; and
  • specify the basis for liability for payment of a uniform annual general charge.
  • Using matters to differentiate targeted rates that are not listed in Schedule 2 of the Local Government (Rating) Act 2002, so are not a valid basis on which to differentiate targeted rates.

The High Court judgments reinforce that rate-setting processes and arrangements require care and precision. Local authorities that could be affected have responded appropriately by reconsidering some established arrangements and practices.

However, local authorities cannot be complacent when setting rates. Although the current rating legislation has been in place since 2002, it is technical and has some complexities. We still see local authorities having problems with getting it right.

Regardless of the outcome of the legal proceedings, we continue to encourage local authorities, under the leadership of Local Government New Zealand and the Society of Local Government Managers, to consider the risks arising in their rating-collection arrangements and raise any concerns with the Department of Internal Affairs.15

We also continue to encourage local authorities to get external legal advice to provide assurance about their rate-setting practices.

10: Mangawhai Ratepayers' & Residents' Association Inc. v Northland Regional Council and Kaipara District Council [2016] NZHC 2192 .

11: Mangawhai Ratepayers' & Residents' Association Inc. v Northland Regional Council and Kaipara District Council [2017] NZHC 1972.

12: Office of the Auditor-General (2017), Local government: Results of the 2015/16 audits.

13: Northland Regional Council (2017), Annual Report 2016/17, page 139.

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

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