Australia's Future Tax System

Final Report: Detailed Analysis

Chapter G: Institutions, governance and administration

G3. Local government

G3–2 Reform directions for own-source and grant revenue arrangements

Recommendation 120:

States should allow local governments a substantial degree of autonomy to set the tax rate applicable to property within their municipality.

Recommendation 121:

Over time, State land tax and local government rates should be more integrated. This could involve:

  1. moving to a joint billing arrangement so that taxpayers receive a single assessment, but are able to identify the separate State and local component; and
  2. using the same valuation method to calculate the base for local government rates and land tax (with this method being consistent across the State).

Own-source revenue: towards more autonomy, accountability and integration

If local governments are to be accountable to ratepayers for their expenditures, it follows that they should have full (or at least greater) autonomy over the setting of the tax rate applied to properties in their jurisdictions (see Recommendation 120).

Unless there are genuine policy reasons for doing otherwise and these reasons provide greater benefits than the associated costs, land-based taxes should make use of the same valuation method as this is likely to reduce administration costs. Therefore, as State governments make more use of the land tax base over the long term (see Section C2 Land tax and conveyance stamp duty), there should be one valuation method across the State used to calculate the base for both rates and land tax (see Recommendation 121). That is, land valuation would be the same for both taxes. However, local governments could continue to charge a fixed charge to ratepayers and there should not be a low land value threshold for local government rates, as even those who own land with a low per square metre value receive benefits from local government services.

If land tax and council rates can be better integrated with landowners receiving one bill per year covering both, it may be possible to have a single point of contact for enquires, debt management and compliance of both taxes.

Such a reform could see taxpayers receive one tax assessment notice for both taxes, with each tax rate and tax liability clearly identified. In some States this change would substantially alter some rate assessments — a long transitional arrangement may be appropriate in these cases.

Integrating and sharing this tax base may also facilitate a reassignment of tax responsibilities within the federation, as it is relatively simple to alter the rate of tax charged by each level of government (leaving overall revenue collected unchanged) to alter the amount of revenue received by each level of government. This may be necessary if there are major changes to user charging. As outlined in Section E1, governments in Australia should contemplate opportunities to expand user charging for the provision of private goods. This is highly relevant for local governments and may offer the opportunity to lower local government rates and other charges.

The road and transport reforms outlined in Section E3, for example, may offer local government a significant opportunity to recover from heavy vehicles the maintenance costs they impose on local government road assets. In its May 2009 submission to the Review, the Australian Local Government Association highlighted that local governments own and manage around 80 per cent of Australia's road network, and roads expenditure is the largest expenditure for most local governments. If road reforms result in heavy vehicle road-wear charges flowing to the owner of the road, local governments are likely to receive significant amounts of additional revenue from these reforms (as they presently do not collect motor vehicle taxes). Of course, substantial parts of the local road system would not be fully funded from road-wear costs and would continue to require funding assistance. Consideration would need to be given to the revenue and grant implications at the appropriate time.

Reviewing the minimum grant principle

Local governments are generally established under State legislation and deliver services that would otherwise be delivered by State governments. As such, it may be more appropriate for State governments, rather than the Australian government, to be responsible for ensuring that local governments have access to enough revenue — including through untied financial assistance — to provide local services. The ability of the States to fund untied financial assistance is contingent on the States themselves having access to sustainable tax revenue.

Whichever level of government is responsible for funding untied financial assistance, there is a strong case to review the principles for the distribution of untied financial assistance, particularly the minimum grant principle. If the minimum grant principle was removed, the overarching principle for untied assistance could simply be horizontal equalisation within the relevant jurisdiction. The other principles could be considered when determining the distribution needed to achieve horizontal equalisation.

Payments to local government for specific purposes — either from the Australian government or State governments — are likely to have an ongoing role, as intergovernmental cooperation involving local government is often necessary to deliver reforms of national or State significance. Other levels of government can use these payments to purchase the delivery of goods and services from local government. Given the expertise that local governments have in the delivery of some goods and services, these payments can represent value for money for higher levels of government.