Property investors have had a significant win with the Supreme Court ruling that the charging of higher rates on investment properties compared to owner occupied property is unlawful.  This decision has significant implications for property owners and local governments across Queensland.

Paton & Ors v Mackay Regional Council

Mackay Regional Council in its 2013/14 budget adopted a new system of differential rates which included setting different rates for residential property depending upon whether the property was the owner’s principal place of residence or not. 

Under the Council’s rating system, residential land that was the not the owner’s principal place of residence was placed in an ‘investor’ category and was subject to a higher level of rates than equivalent land that was the owner’s principal place of residence.

A group of investment property owners took legal action against the Council challenging the lawfulness of the new investor rating categories on the basis that the Council took irrelevant considerations into account, including the capacity of owners to pay rates.

Issues

Local governments have a broad power to charge rates under the Local Government Act 2009 (LGA) including adopting different categories for land for the purpose of applying differential rates.  The categorisation of land for rating purposes must however be based on some attribute or characteristic of the land which includes:

  • the use to which the land might be put, including its highest and best use;
  • the burden imposed on the Council’s budget by the land or its use;
  • the value of the land, including its potential to earn income for the owner;
  • the capacity of the land to produce a capacity to pay rates.

It is unlawful to take into account the capacity of individual owners to pay rates.

The Council argued that whether residential property was owner occupied or not was a characteristic of the use and therefore a lawful basis to use to set the differential rating categories.

The Court however rejected this argument and found that the distinction was one based on the character of the land owner and not the land itself.  The Court noted that there were many examples where the use of a property would be exactly the same and the only change would be the identity of the owner.

In considering the various budget and other documents adopted by the Council and statements of various Council officials in relation to the budget, the Court was satisfied that in adopting the investor categories the Council took into account the capacity of investor owners to pay higher rates than non-investor owners.

Ultimately, the Court found that in adopting the investor categories the Council impermissibly took into account characteristics personal to the owners of the land and failed to restrict itself to characteristics of the subject land itself.

The adoption of the investor differential rating categories was thus declared by the Court to be an improper exercise of powers by the Council under the LGA and set aside the Council’s resolution adopting those categories and the various rates notices issued to the applicants based on those categories.

Implications

The decision has profound impacts for local government rating with many councils across Queensland basing their rating categories on whether property is owner occupied as a principal place of residence or not.

Mackay Regional Council alone has indicated that the decision affects the rating of almost 8,000 properties in the Council area with a financial impact of about $1.6 million.

With around 12 local governments in Queensland similarly setting differential rates on the basis of owner occupied and investor owned property and new budgets soon to be adopted for the next financial year, the Court’s decision will need to be carefully considered by councils setting their new rates.

Future Action

Mackay Regional Council has stated that is will appeal the decision to the Court of Appeal with the Local Government Association of Queensland (LGAQ) indicating that it will support the Council’s appeal.