As we approach budget season, now is a good time for councils to consider the appropriate use of differential rates as part of their rating strategy.
Generally, councils have broad and flexible powers in distributing the rate burden equitably having regard to their objectives and the needs of the community. However, this flexibility is not without limits.
The power to levy differential rates has long provoked tensions between the Victorian State Government and councils. The introduction of Ministerial Guidelines for Differential Rating in 2013 (Guidelines) followed amendments to the Local Government Act 1989 (LG Act) in 2012 prompted by a perception on the part of the State Government that some councils were using differential rates improperly to discriminate against particular industries. This was regarded as being beyond councils’ facilitating objectives under the LG Act.
As a result, in addition to specifying the objectives of the differential rate and defining the types and classes of land to which it will apply, the LG Act now also requires a council to have regard to the Guidelines before declaring the differential rate.
The Guidelines adopt a three-tier hierarchy in assessing the suitability of a differential rate: those that are appropriate; those that require careful consideration; and those that are not appropriate. The second category requires the council to undertake a detailed strategic analysis of the proposed differential rate. Apart from the categories of rates that are deemed not appropriate, the Guidelines do not disturb councils’ flexibility in declaring rates so as to ensure their individual financial needs and policy objectives are met.
If the Minister considers a proposed differential rate would be inconsistent with the requirements of the Guidelines, the Governor in Council is empowered under s 161(4) of the LG Act to publish an order prohibiting a council from declaring it. Although relatively rare, such orders have been made.
The attendant power to prohibit a differential rate where a council fails to comply with the Guidelines must be considered in the context of a longstanding approach on the part of the courts to avoid merits reviews of councils’ rating policies. Questions of policy are generally beyond the reach of the courts, which have recognised that there is ‘no objective standard’ against which to judge a particular declaration of rates.
In Victoria, there have been recent stirrings in rural and regional municipalities about the imposition of differential rates on farming properties. This issue was canvassed in the State Government’s ‘Inquiry into the sustainability and operational challenges of Victoria’s rural and regional councils’ final report, published in March 2018.
These tensions are a feature of differential rating powers in other jurisdictions as well. Recent proceedings commenced against Port Pirie Regional Council in the District Court of South Australia by the lead smelter Nyrstar, with the differential rate under review being some 10 times that applied to residential properties and applying only to the Nyrstar land.
Although we do not comment upon the proceedings, it is important to note the general principle that the fact a differential rate applies only to one landowner or property is not of itself a ground for invalidity.
It can be seen that although differential rates are a valuable tool in distributing the rates burden, particularly in a rate-capping context, they can often be controversial and must be used carefully. This means getting the declaration process right.
In our experience, most of the pitfalls a council is likely to encounter in declaring a differential rate are in its observance of the Guidelines. This is particularly the case where the rate falls into the second, ‘careful consideration’ category, and the requisite strategic work has not been done. The necessary strategic work can take varying forms, but should be reflected in key strategic documents – for example, the Council Plan and Strategic Resource Plan and other documents in which a council commits to its objectives.
If your Council is contemplating declaring a differential rate, or would like any assistance with rating powers more generally, please contact us.
 By the Local Government Legislation Amendment (Miscellaneous) Act 2012.
 For example in 2013, to prohibit differential rates in respect of land used for electronic gaming machines or non-residential land with a liquor licence.
 See, e.g. Xstrata Coal Qld Pty Ltd and Ors v Council of the Shire of Bowen  QCA 170; Marrickville Metro Shopping Centre Pty Ltd v Marrickville Council (2010) and Tarong Energy Limited v South Burnett Regional Council  QSC 74.