An increasing threat facing Australian shopping centres is rate gouging by local councils.
Even though these shopping centres already are often the largest rate-paying entity in the local government area, as well as a major source of local jobs, councils are increasingly treating their local shopping centres simply as cash cows.
These centres are being singled out for massive increases in rates – increases which have no demonstrable link to the provision of, or the cost of, council services. Indeed, often the services which local governments are supposed to provide to ratepayers are already being provided by, and funded by, the shopping centre.
Local politicians, too scared of upsetting their electors with even minimal rate increases, are instead slugging their local shopping centres with substantial rate hikes, well above levels that can be justified by indices such as the consumer price index or the local government cost index.
For some shopping centres, the council rate bill now far exceeds their land tax bill, yet while there are plenty of calls from industry bodies for reductions in land tax, there is often silence on the need for local government reform.
The most recent round of rate gouging probably began in Queensland but is now spreading to other states, including NSW. In Queensland, the long fight over land valuation methodology had the effect of dramatically increasing council rate revenue (and land tax revenue) from shopping centres because of the unrealistic land valuations assessed for the centres.
Local councils became used to these rate windfalls. When these were finally denied to them by the courts – and legislative attempts to get around the court decisions were defeated – councils responded by imposing ‘minimum rates’ and ‘differential rates’ for shopping centres in order to keep this unjustified windfall.
Not only are the local councils not providing additional or better services to justify these rate increases, they are effectively being levelled simply on a ‘capacity to pay’ basis, even though the courts in Queensland have found the ‘capacity to pay’ approach is illegal.
Unfortunately in other states the law does not prevent councils simply deciding that the shopping centre (or any other industry) can afford to pay more. There is no standard test that needs to be applied or needs to be applied consistently.
The ‘capacity to pay’ approach is not, as some councillors seem to believe, a ‘Robin Hood’ approach to rating i.e. taking from the wealthy and redistributing to the poor. Local councillors, and the council officers who recommend these increases, don’t understand, or just don’t care, that much of the burden of these council rate hikes fall on retail tenants, either directly in centre outgoings or indirectly in rent.
There have been naïve claims that this is a problem caused by so-called ‘rate pegging’, whereby some State Governments set a ‘ceiling’ or ‘peg’ on the rates to be paid by residential ratepayers. If this peg was removed, this argument goes, the burden could then be lifted off commercial properties because councils could then lift the rates levied on residential properties.
This is simply wishful thinking. Where is the evidence that local politicians would feel emboldened to increase rates on the very people who vote in local government elections and reduce rates on commercial properties?
There is an obvious and drastic need to overhaul local government. In many cases these are bloated organisations, excessively staffed and excessively paid, thanks to the power of the municipal unions.
In some states there is still a need for fewer local councils to eliminate the duplication of staff and services and to achieve greater economies of scale. The Property Council-driven business campaign in Tasmania to force local council amalgamations is a worthy campaign. Tasmania has 29 councils for a population of around half a million people, working out at around one council for every 17,000 people.
But real local government reform has to mean more than just council amalgamations.
State Governments also need to do more than simply capping residential rate revenue. Local councils have got around this by slugging commercial properties and shifting more and more costs and services on to the private sector.
The next step must be to prohibit unjustified rate increases for commercial properties, such as shopping centres, through devices such as differential rate categories and minimum rating.
Only then will local councils be forced to drive efficiency measures which will reduce costs and limit expenditure increases, thus taking the pressure off their incessant demands for more and more revenue.
By Milton Cockburn, Executive Director, Shopping Centre Council of Australia
