Australia: Queensland local governments will have more confidence in differential rating after new Court decision

Queensland's Supreme Court has dismissed a landowner's challenge to a differential rate levied by the Western Downs Regional Council. The decision has important implications for Queensland's local governments and ratepayers.1

Differential rating

Differential rating allows local governments to levy different general rates on different categories of land.

For example, commercial or industrial land uses will often be charged higher rates amounts than residential uses.

One of the benefits of differential rating is that it allows local governments to ensure that uses which generate increased demands for local government services and infrastructure pay an increased share of the total rate revenue.

However, differential rating is also commonly used as a form of progressive taxation. Local governments can and do charge higher rates on categories of land that are perceived as being owned by wealthier landowners. 

For example, rates on investor-owned residential land are often higher than the equivalent owner-occupied residential land. The assumption is that investors generally can pay more.

Uncertainty – the Xstrata and Paton cases

The difficulty faced by local governments is that, under Queensland's local government legislation, it is not lawful to impose a differential rate based on any attribute of the landowner (eg "land owned by a corporation"). Differential rates can only be imposed on different categories of land (eg "land used for a commercial use"). 

In recent years, two significant Court decisions created a cloud of uncertainty for local governments around the scope of this legal restriction.

In the Xstrata case,2 a differential rate on land used for coal mining was invalidated, because the Council's revenue statement (the document supporting the Council's rates) indicated that the rate was based on the perceived financial capacity of coal miners to pay increased rates.

Subsequently, in the Paton case,3 a differential rate imposed on residential land that was not owner-occupied was invalidated because it related to a characteristic of the landowner.

The type of differential rate that was invalidated in Paton is widespread across Queensland, and Queensland's Parliament intervened to override the Paton decision by a specific legislative amendment.

However, because that amendment was very limited in scope (it only applied to the specific type of rate challenged in Paton), it still left uncertainty regarding the broader implications of Xstrata and Paton.

In particular, to what extent was it lawful for a local government to charge more for a land use because of that use's perceived income-generating capacity, in circumstances where the use did not generate increased infrastructure demands?

On one view, the rate could be said to be lawful, because it relates to a use of land rather than the characteristics of the landowner. 

Alternatively, it could be argued that targeting a use because of its income-generating capacity alone is, in fact, an indirect means of targeting the landowner and should be invalidated.

This uncertainty placed local governments in a difficult position. Apart from the inherent undesirability of legal challenges (and costs), a successful challenge to a differential rate could result in a loss of revenue for the local government.

Clarity – the Ostwald decision

The Supreme Court's recent decision in Ostwald provides new clarification.

The key outcome from the case is a recognition by the Court that decisions underlying the levying of differential rates are ultimately political.

While there are legal parameters that local governments must comply with, the Ostwald decision confirms that the Court's role is limited to ensuring compliance with those parameters, rather than broader political issues regarding whether a differential rate is reasonable, proportionate or "fair".

The Xstrata and Paton decisions had suggested a possible willingness by the Court to adopt an interventionist approach and closely scrutinise a local government's reasons for levying a differential rate. 

However, the decision in Ostwald confirms the Court's oversight role is relatively limited and it will not intervene unless there is clear evidence (as in Xstrata) the Council has acted unlawfully.

Importantly, the judgment also confirms that local governments can lawfully take the income-generating capacity of land into account in levying differential rates. 

Provided that a differential rate targets a use of land (eg "land used for coal mining") rather than a class of landowner (eg "land owned by coal miners"), the differential rate will generally be lawful. (The exception is where, as in Xstrata, there is evidence proving that the rate was intended to target a class of landowners, despite ostensibly targeting a land use).

While this outcome may be disappointing to some landowners, it resolves the lingering confusion over differential rates. 

The Ostwald decision provides a clearer legal test than the Xstrata and Paton cases.

Local governments can now more confidently levy differential rates. While care must still be taken in the decisions and explanatory material around differential rates (to avoid the outcome in Xstrata), local governments can take greater comfort in a reduced risk of legal challenge.

We have prepared a more detailed summary of the background to the decision, available here.


1The decision is Ostwald Accommodation Pty Ltd v Western Downs Regional Council [2015] QSC 20. 2Xstrata Coal Qld Pty Ltd v Council of Shire of Bowen [2010] QCA 170.

3Paton v Mackay Regional Council [2014] QSC 75.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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