Local authorities are struggling to manage rising costs and the demands on rating revenue, making decisions about setting rates more contentious and potentially open to challenge. But last year the courts issued two important decisions which should give councils comfort on that score.
The first decision was the high-profile Supreme Court decision in Auckland Council v CP Group Ltd, concerning the accommodation providers’ targeted rate introduced in 2017 and known as the “bed tax”. The Supreme Court upheld the targeted rate and reaffirmed that the bar for successfully challenging a local authority’s rating decision is high.
Then came the Court of Appeal’s decision in New Zealand Forest Owners Association Incorporated v Wairoa District Council, which has opened the door for local councils to make an upward adjustment to rates based on the perceived “community disbenefits” of a particular land-use activity. The court held that there does not need to be any rational connection between the benefits enjoyed by targeted ratepayers and the rates they must pay.
The Forest Owners decision has attracted less commentary, perhaps because it concerns one of the least populated districts in the country. But it represents a significant development in the law and provides all councils with a mandate to target rates increases if that’s what is needed to balance the books.
Auckland Council v CP Group
In this case, the Supreme Court was primarily concerned with the interpretation of s 101(3)(a) of the Local Government Act 2002 (LGA). This provides (among other things) that the distribution of benefits from an activity is a relevant consideration for councils when setting rates.
The Supreme Court reaffirmed the longstanding Court of Appeal judgment in Wellington City Council v Woolworths NZ Ltd (No 2), which held that, as the democratically elected decision-makers, councils have a wide discretion to set rates as they see fit. The decision firmly established “that a rating system…remains primarily a taxation system and not a system inherently based on the principle of user-pays”. Councils do not need to undertake a user-pays analysis when setting rates. The Supreme Court rejected the submission that for targeted rates there must be a “close correlation” between an activity and its benefits for the targeted group. But the court found there was a “rational connection” between targeted rates and benefits received.
Forest Owners
The forest owners were challenging the Wairoa District Council’s decision to impose a higher rating differential for the general rate on forest owners in the district. The primary reason given by the council was to recover the estimated roading costs attributed to forestry by the council’s working group. However, the revenue raised by the differential rate was almost 300% more than was needed to cover the roading costs.
What is the relevant law?
Under s 101(3)(a) of the LGA, when setting rates, a local council must consider (among other things):
- the distribution of council benefits between the community as a whole, any identifiable part of the community, and individuals; and
- the extent to which the actions or inaction of particular individuals or a group contribute to the need to undertake the activity.
Accordingly, while rates do not have to be allocated on a userpays system, the rates paid and benefits received are matters that must be considered by a local authority.
The Forest Owners case turned on the second mandatory consideration for local councils when allocating rating liability. In particular, it concerned the interpretation of s 101(3)(b) of the LGA, which says a local council, when allocating rating liability, must consider “the overall impact of any allocation of liability for revenue needs on the current and future social, economic, environmental and cultural well-being of the community”. The Wairoa District Council relied on this section to make an upward adjustment to the rating burden on forest owners from $1,594,248 to $2,795,097. Invoking s 101(3)(b), the adjustment was made to reflect the perceived “community disbenefits” of forestry.
Legal developments
No requirement for any rational connection between the benefits enjoyed by targeted ratepayers and the rates they must pay
The Court of Appeal upheld the council’s rating decision. It held that there is no requirement that rates paid by targeted owners bear any relationship to benefits received from council services. But what of the Supreme Court’s reference to “rational connection”?
What the Supreme Court meant, according to the Court of Appeal, is that the decision must be justified by reference to the mandatory considerations under s101(3) of the LGA. In other words, a rating decision will be lawful, provided that councils refer to the statutory criteria when making the decision, regardless of whether there is any correlation or rational connection between the rating quantum and the mandatory considerations.
Rates can now reflect perceived community disbenefits of land-use activities
The forest owners said s 101(3)(b) allowed councils to consider the impact of proposed rates on ratepayers (for example, the affordability of the rates), but not the impact of ratepayers’ activities on the community. This was especially the case when the perceived community disbenefits had no impact on the council’s revenue needs.
The Court of Appeal disagreed. It held that the wellbeing of the community would ultimately affect the council’s revenue needs. Accordingly, councils can now upwardly adjust rates to reflect the view that certain land-use activities are bad for the community.
Ultimately, the courts have made it clearer that rating decisions made by elected representatives are better tested at the ballot box than through judicial review proceedings.
Linda Clark is a partner and Jeremy Bell-Connell is a senior associate at Dentons Kensington Swan.
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